Adam L. Monaco & Hope Elaine Monaco, , Ltd. v. Monaco (In re Monaco)
| Decision Date | 01 August 2014 |
| Docket Number | C/W ADVERSARY NO. 10-5027-RBK,CASE NO. 09-54204-RBK,ADVERSARY NO. 10-5026-RBK,CASE NO. 09-54772-RBK |
| Parties | IN RE: MARTHA L. MONACO, DEBTOR ADAM L. MONACO AND HOPE ELAINE MONACO, DEBTORS TAG INVESTMENTS, LTD., v. MARTHA L. MONACO AND ADAM MONACO |
| Court | U.S. Bankruptcy Court — Western District of Texas |
Martha L. Monaco and Adam L. Monaco (collectively "Debtors") were officers of an entity named Building by Monaco, Inc., d/b/a Monaco Homes ("BBM"), which specialized inresidential construction. BBM filed a Chapter 7 case on August 14, 2009 (Case No. 09-53104). Martha L. Monaco filed a Chapter 7 case on October 27, 2009 (Case No. 09-54204), and her son, Adam L. Monaco, filed a Chapter 7 case on December 1, 2009 (Case No. 09-54772). Thereafter, Tag Investments, Ltd., ("Tag") initiated separate adversary proceedings against both Martha and Adam Monaco. Tag sought nondischargeability of a debt stemming from construction of a residence and the adversary proceedings were consolidated.
This Court has jurisdiction to render a final judgment in this core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is appropriate under 28 U.S.C. §§ 1408 & 1409(a).
Tag as owner and BBM as general contractor entered into a construction contract to build a home in San Antonio, Texas. During construction, financial disputes arose between the parties and Tag terminated BBM from the project. Tag's claim against the Debtors is based on Chapter 162 of the Texas Property Code, which creates a construction trust fund and imposes criminal liability on owners and officers of an entity who misappropriate trust funds. Because Debtors were owners and officers of BBM, Tag invoked section 523(a)(4) of the Bankruptcy Code to obtain a judgment declaring the debt nondischargeable "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny."
After a bench trial, this Court determined that Tag's claim against Adam Monaco was nondischargeable pursuant to section 523(a)(4). (ECF No. 61). The Court awarded judgment against Adam Monaco in the amount of $171,942.00 and a take-nothing judgment in favor of Martha Monaco. Findings of fact and conclusions of law were stated on the record following the close of the evidence pursuant to FED. R. BANK. P. 7052. Adam Monaco filed an appeal and Tagcross-appealed to the United States District Court for the Western District of Texas. (ECF No. 72 & 75).
On March 1, 2013, the Honorable Harry Lee Hudspeth, United States District Court, Western District of Texas, issued a memorandum opinion that vacated the judgment and remanded the proceeding for additional findings of fact and conclusions of law. (ECF No. 87 & 88). The district court directed this Court to address three specific issues: "(1) whether Tag has standing to recover for payments made by San Antonio Release [sic] Management; (2) if so, whether Monaco is entitled to a setoff for amounts withheld as retainage; and (3) the basis for the calculation of actual damages owed to Tag." (ECF No. 87 at 8). The Court will address each of those points in turn and hereby makes additional or amended findings and conclusions.
Adam Monaco was president and sole shareholder of BBM and Martha Monaco served as its secretary. Tag is a limited partnership in which Theresa and Gabriel Khodr are the limited partners. Liacom, Inc. is Tag's general partner, and Theresa Khodr serves as the president of Liacom, Inc.
On April 22, 2004, Tag entered into a contract ("Prime Contract") with BBM for the construction of a luxury residence in San Antonio, Texas ("the Project"). BBM agreed to serve as general contractor, and the Prime Contract detailed the scope of the general contractor's work and described in detail the methods for obtaining payment from Tag. (Pl.'s Ex. 1). To receive payment, BBM was required to submit an application for payment to the project architect, Roy Braswell, for evaluation, review, and certification. Mr. Braswell would then review the progress of the work and certify the amount Tag owed to BBM up to the date of the inspection. Upon approval by BBM, Mr. Braswell then issued certificates for payment to Tag for all amounts that were due to date, less the contractual eight percent retainage. The parties referred to thesecertificates for payment as draw requests. As a condition of these payments, BBM was required to present sworn statements to Tag that all subcontractors and suppliers had been paid and lien releases had been obtained. (Id.).
Tag paid BBM all amounts certified by Mr. Braswell until the thirteenth draw request, which Mr. Braswell certified in a lesser amount than what BBM requested. This led to a series of disputes between the parties over whether BBM had actually paid the subcontractors and suppliers as Adam Monaco had verified in the lien release affidavits. BBM submitted its fourteenth draw request for $138,553.08. (Tr. 134, Nov. 2, 2011). Tag refused to pay any of the fourteenth draw request.
On December 7, 2005, BBM filed suit against Tag in state district court to foreclose on a mechanics and materialmen's lien for $308,968.82 that it filed against the residence for sums that Tag allegedly owed to BBM in connection with the Project. Sometime between December 26, 2005, and January 4, 2006, Tag terminated BBM as the general contractor on the Project. (Tr. 176, Nov. 2, 2011). By this point, Tag had paid BBM $1,732,996.18 over the course of thirteen draw requests. (Tr. 132-33, Nov. 2, 2011). On February 7, 2006, Tag filed a counterclaim against BBM in the state court lawsuit, and it later asserted third party claims against the individual Debtors on November 6, 2007. BBM and the individual Debtors all filed Chapter 7 shortly before trial.
During the time following the termination of BBM, multiple subcontractors and suppliers working on the Project filed mechanics and materialmen's liens against the residence. Tag hired San Antonio Realease Management, Inc. ("SARMECO") to replace BBM as the general contractor under the Prime Contract. (Tr. 184-87, Nov. 2, 2011). Theresa Khodr testified that she also held an ownership interest in SARMECO (Tr. 186-87, Nov. 2, 2011), and the checksissued by SARMECO all bear Theresa Khodr's signature as its president. SARMECO paid all of the subcontractors and suppliers to release the liens against the residence. (Id.). Tag then reimbursed SARMECO for the payments it made to the lien claimants. (Tr. 126-27; 185, Nov. 2, 2011). In addition, SARMECO assumed the subcontracts between BBM and the subcontractors because a provision in the original subcontracts allowed a subsequent general contractor to assume the subcontracts in the event of BBM's termination. (Tr. 184-87, Nov. 2, 2011; Pl.'s Ex. 23). In explaining why a subsequent contractor would pay off the liens on Tag's property, Theresa Khodr testified that the "[substitute general] contractor obviously didn't want liens on us . . . from the start." (Tr. 184, Nov. 2, 2011). According to Theresa Khodr, Tag was not allowed to assume the subcontracts itself "[b]ecause the contractor could only assume the contract." (Id. at 186).1 The assumption agreements between SARMECO and the subcontractors provided that both parties agreed to furnish all materials and perform all work necessary to complete the subcontract, and that SARMECO assumed the obligation to make payments in accordance with the assumption agreement. (See, e.g., Pl.'s Ex. 23). The assumption agreements stated that all terms and provisions in the original subcontract remained in full force unless modified or otherwise supplemented. (Id.).
Tag's allegation that the Debtors misappropriated trust funds in violation of the Texas Construction Trust Fund Act ("CTFA") lies at the heart of this nondischargeability proceeding. The CTFA's purpose is to protect laborers and materialmen in construction payment disputes. See Dealers Elec. Supply Co. v. Scoggins Const. Co., 292 S.W.3d 650, 658 (Tex. 2009). Underthe CTFA, construction payments become trust funds "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." TEX. PROP. CODE ANN. § 162.001(a) (West 2014). "A contractor . . . who receives trust funds or who has control or direction of trust funds, is a trustee of the trust funds." Id. § 162.002. In turn, a subcontractor who furnishes labor or material for an improvement on a specific piece of real property "is a beneficiary of any trust funds paid or received in connection with the improvement." Id. § 162.003(a). Construction trust funds are misapplied when a trustee "intentionally or knowingly or with intent to defraud, directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries of the trust funds." Id. § 162.031(a).
The CTFA provides that misapplication of trust funds is a criminal offense. Id. § 162.032. While state law would create a trust fund any time payments are made to a contractor or subcontractor for the construction of improvements on specific real property, federal case law recognizes trust fund property for the purposes of 11 U.S.C. § 523(a)(4) at the time the proceeds are misapplied. Airtron, Inc. v. Faulkner (In re Faulkner), 213 B.R. 660, 666 n.10 (Bankr. W.D. Tex. 1997) (Clark, J.) (citing Coburn Co. of Beaumont v. Nicholas (In re Nicholas), 956 F.2d 110, 114 (5th Cir. 1992)). Texas courts construe the statute broadly to "protect the presumably 'exposed' subcontractor or supplier." Faulkner, 213 B.R. at 668. The Fifth Circuit has recognized that a violation of the fiduciary duty under the CTFA for misapplied trust funds falls within the purview of 11 U.S.C. § 523(a)(4). Nicholas, 956 F.2d at 113.
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