819 F.2d 583 (5th Cir. 1987), 86-1802, Matter of Boyle
|Citation:||819 F.2d 583|
|Party Name:||In the Matter of Christopher Wallace BOYLE, Debtor. Christopher Wallace BOYLE, Plaintiff-Appellant, v. ABILENE LUMBER, INC., Defendant-Appellee.|
|Case Date:||June 19, 1987|
|Court:||United States Courts of Appeals, Court of Appeals for the Fifth Circuit|
Charles Dick Harris, Abilene, Tex., for plaintiff-appellant.
Brian Cutbirth, Gary M. Brown, Abilene, Tex., for defendant-appellee.
Appeal from the United States District Court for the Northern District of Texas.
Before CLARK, Chief Judge, GARWOOD and HILL, Circuit Judges.
GARWOOD, Circuit Judge:
Appellant Christopher Boyle ("Boyle") appeals a bankruptcy court decision, affirmed by the district court, holding that Boyle was personally liable on debts for supplies incurred by two Texas corporations Boyle controlled and that these debts were not dischargeable in bankruptcy. The courts below ruled that a Texas statute addressing the use by contractors of construction funds created a trust for bankruptcy purposes and that Boyle, who had used funds advanced for specific projects on other projects, but was not found to have done so fraudulently, could not discharge debts owed to unpaid creditors. Because we conclude that the Texas statute does not suffice to constitute Boyle's conduct a fiduciary defalcation for purposes of the nondischargeable debt exception of the Bankruptcy Code, we reverse.
Appellant owned and operated two corporations in the Abilene, Texas area. Christopher Boyle Builder, Inc. ("Boyle Builder"), was engaged in the residential construction business and at times had several construction jobs underway simultaneously. Boyle's other corporation, Abilene Home Energy, Inc. ("Home Energy"), evaluated the insulation and other weatherproofing in existing homes and installed insulating materials to make homes more energy efficient. Both corporations purchased materials on credit from, inter alia, Abilene Lumber, Inc. ("Abilene Lumber"). The courts below found that Boyle executed a personal "guaranty agreement" in favor of Abilene Lumber for purchases made by each corporation.
Beginning in late 1981, Boyle Builder began to encounter financial problems. In September 1982, Abilene Lumber filed mechanic's and materialman's liens on four houses built by Boyle Builder, but later released two of these liens. In 1983, Boyle's primary lender, Abilene National Bank ("the Bank") instituted foreclosure proceedings and attempted to collect a deficiency. Boyle and his businesses filed this bankruptcy proceeding on June 7, 1984.
Abilene Lumber had supplied but not been paid for materials it identified through invoice job descriptions as having been purchased (1) by Home Energy, without describing any specific projects for which the supplies were acquired, and (2) by Boyle Builder for four houses it had constructed, with specific invoices traceable to each building project. Abilene Lumber filed a complaint requesting the bankruptcy court to determine the dischargeability of these five debts, and the issue came to trial on March 14, 1985.
The court held that none of the debts were dischargeable. In evaluating the Boyle Builder purchases, the court focused on four houses constructed by that firm and concluded that Boyle Builder had financed building three with loans from the Bank and the fourth with construction payments from the individual for whom the house was being built. 1 The court concluded Boyle was personally liable for $15,528.33 in credit purchases from Abilene Lumber made by Boyle Builder and for $1,851.31 in credit purchases by Home Energy.
The bankruptcy court found, and the district court agreed, that Boyle Builder had deposited all loan proceeds and construction contract payments into a single business checking account, into which it also deposited the proceeds of other work, and that Boyle Builder had not used any system to segregate loan or construction contract payment funds in order to ensure that they were used only on the construction project for which the corporation received them but, instead, had merely drawn checks on its account as bills fell due without regard to the source of the funds.
The courts below held that all five debts were nondischargeable because, first, a Texas statute 2 treats funds loaned or paid under a construction contract to finance an improvement on specific real property as funds the builder holds in trust for the benefit of those unpaid creditors who contributed labor or material to the project, and, second, because provisions of the Bankruptcy Code state that an individual's debts "for fraud or defalcation while acting in a fiduciary capacity" cannot be discharged. 3 There was no finding, and indeed no evidence, that Boyle or either of his corporations acted fraudulently, or that there were any agreements with Abilene Lumber, the Bank, or the homeowner which either required segregation of the funds, or otherwise by force of their own terms, and apart from the Texas statute, made Boyle or his companies fiduciaries of the funds. Indeed, there is no finding or evidence that Boyle or his corporations breached any of their agreements in any way other than by failing to pay the amounts claimed.
Appellant challenges the conclusions of the district court on three grounds, substantially as follows: (1) that the Texas statute does not suffice to constitute Boyle's conduct a fiduciary defalcation for purposes of the Bankruptcy Code debt discharge exception; (2) that the courts below erred in finding the entire claim of Abilene Lumber was nondischargeable rather than only an amount equal to appellant's actual "misapplication" on each particular project; and (3) that the claim against Home Energy did not in any event fall within the scope of the Texas statute.
We agree with appellant's first contention. Because it is dispositive of this dispute, we need not decide and do not reach his remaining claims.
The Texas construction funds statute
We examine first the Texas construction funds statute, 3 Tex.Prop.Code Ann. Secs. 162.001 to .033 (Vernon 1984), which provides in pertinent part as follows:
"(a) Construction payments are trust funds under this chapter if the payments are made to a contractor or subcontractor or to an officer, director, or agent of a contractor or subcontractor, under a construction contract for the improvement of specific real property in this state.
"(b) Loan receipts are trust funds under this chapter if the funds are borrowed by a contractor, subcontractor, or owner or by an officer, director, or agent of a contractor, subcontractor, or owner for the purpose of improving specific real property in this state, and the loan is secured in whole or in part by a lien on the property.
"A contractor, subcontractor, or owner, or an officer, director, or agent of a contractor, subcontractor, or owner, who receives trust funds or who has control or direction of trust funds, is a trustee of the trust funds.
"An artist, laborer, mechanic, contractor, subcontractor, or materialman who labors or who furnishes labor or material for the construction or repair of an improvement on specific real property in this state is a beneficiary of any trust
funds paid or received in connection with the improvement.
"(b) The Texas Trust Act ... does not apply to any trust created under this chapter....
"(a) Except as provided by Subsection (b), a trustee who, with intent to defraud, directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all obligations incurred by the trustee to the beneficiaries of the trust funds has misapplied the trust funds.
"(b) A trustee may use trust funds to pay the trustee's reasonable overhead expenses that are directly related to the construction or repair of the improvement.
"(a) A trustee who misapplies trust funds amounting to less than $250 commits an offense punishable by confinement in jail for not more than two years and by a fine of not more than $500 or by the confinement without the fine.
"(b) A trustee who misapplies trust funds amounting to $250 or more commits an offense punishable by imprisonment in the Texas Department of Corrections for not more than 10 years."
Applying the statute to the facts of this case, the courts below correctly concluded that section 162.001 reached the funds loaned by the Bank for three projects and paid by the owner under a construction contract on the fourth project and that Abilene Lumber's credit sales to Boyle Builder for these four homes, by which Abilene Lumber furnished building materials for "an improvement on specific real property," placed the creditor within the class of beneficiaries described by section 162.003. While we are inclined to view the sales to Home Energy as not addressed by the Texas statute, we treat this fifth claim arguendo as though it also were within its coverage, although our discussion will be only in terms of the Boyle Builder claims. 4
The actual language of the Texas statute, we emphasize, provides only for a criminal penalty and then only if the holder of construction funds "retains, uses, disburses, or otherwise diverts trust funds without first fully paying all obligations" to the named classes of creditors "with intent to defraud." The statute contains no provision requiring the fund holder to segregate funds by source and project; it does not prohibit the commingling of funds; it does not bar use of funds provided for one project to pay bills incurred on another project if this is done without an "intent to defraud"; and it does not prohibit a fund holder...
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