Angelle, Matter of
| Decision Date | 06 February 1980 |
| Docket Number | No. 77-2522,77-2522 |
| Citation | 610 F.2d 1335,5 B.C.D. 1355 |
| Parties | , Bankr. L. Rep. P 67,334 In the Matter of Simon ANGELLE, d/b/a Angelle's Lumber Co., et al., Bankrupts. Simon ANGELLE, Appellant, v. Dr. Kenneth P. REED et al., Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Bennett Boyd Anderson, Jr., Lafayette, La., for appellant.
David S. Cook, Eunice, La., for Kenneth P. Reed.
Larry C. Dupuis, Crowley, La., for Joseph M. Trahan.
Frederic Hayes, Lafayette, La., for Roy Lee Bergeron.
Clement Story, III, Lafayette, La., for Joseph and Rita Sylvester.
Peter Piccione, Sr., Lafayette, La., for Moses Dyes.
Appeal from the United States District Court for the Western District of Louisiana.
Before BROWN, TJOFLAT and GARZA, Circuit Judges.
Simon Angelle was formerly engaged in the business of constructing homes and selling lumber and building supplies. The forces of spiraling inflation and rainy weather made it increasingly difficult for Angelle to carry out his home building contracts, so on February 14, 1974, he filed a voluntary petition of bankruptcy. To use a shop-worn legalism, he sought a "fresh start."
Quite predictably, the prospective home owners were irate. Five parties, each of whom had advanced considerable funds and were left with partially completed homes, filed objections to discharge of their claims against Angelle. All of these parties relied on § 17a(4) of the Bankruptcy Act, 11 U.S.C.A. § 35(a)(4), which forbids discharge of debts "created by (the bankrupt's) fraud, embezzlement, misappropriation or defalcation while acting . . . in any fiduciary capacity." And at least some of the parties relied on § 17a(2) of the Act, 11 U.S.C.A. § 35(a)(2), which forbids discharge when the bankrupt "obtain(ed) money or property under false pretenses or representations," and on § 17a(8) of the Act, 11 U.S.C.A. § 35(a)(8), which forbids discharge when the bankrupt's liabilities are "for willful and malicious injuries to the person or property of another" other than conversion as excepted under (§ 17a(2)). 1
Three of the five cases were consolidated for hearing by Bankruptcy Judge Alex Andrus, who found the three debts non-dischargeable. The other two cases were consolidated for hearing by Bankruptcy Judge Leroy Smallenberger, who found the two debts dischargeable. All five cases were appealed to the District Court. Angelle appealed Judge Andrus's decisions and the losing parties before Judge Smallenberger appealed those two decisions. The five cases were consolidated at the District Court level. The District Court found that Angelle had misappropriated funds while acting in a fiduciary capacity and held that none of the five debts were dischargeable. Without reaching the § 17a(2) and § 17a(8) questions, it reversed the judgments by Judge Smallenberger and affirmed the judgments by Judge Andrus. Reed v. Angelle (In Re Angelle ), 425 F.Supp. 823 (W.D.La.1977). Angelle then appealed to this Court.
We hold that although Angelle may have misappropriated funds, he was not acting in a fiduciary capacity as required by § 17a(4). Accordingly, we reverse the decision of the District Court, but remand for consideration of the § 17a(2) and (8) issues.
The circumstances of the five suits seeking to prevent discharge of the claims against Angelle are in all essential respects the same. The creditors, Roy Lee Bergeron, Dr. Kenneth P. Reed, Joseph Trahan, Joseph and Rita Sylvester, and Moses Dyes, each entered into a contract with Angelle for the construction of a home. Each of them advanced funds to Angelle to be used for the construction of his particular home. At the time Angelle declared bankruptcy, none of the five homes had been completed. All of the creditors were forced to expend amounts in excess of their contract price to complete their homes. 2
Angelle admits that he had only one bank account, made all deposits into that account, and made no effort to segregate funds advanced by the individual parties who contracted for the construction of homes. He also admits that he did not always apply funds advanced by a particular contracting party to that party's construction job, frequently using such funds to pay his general business debts. However, he contends that he was not acting in a fiduciary capacity. Moreover, he does not concede that he made any false representations or otherwise acted maliciously or in bad faith.
Bankruptcy Judge Andrus found that in the three cases before him, Angelle's debts were nondischargeable. He based his decision on three alternative grounds. First, relying on § 17a(4), he held that Angelle had misappropriated funds while acting in a fiduciary capacity. Second, relying on § 17a(2), he held that Angelle had obtained advances from the contracting parties under false pretenses. Finally, relying on § 17a(8), he held that Angelle's liabilities were created through willful and malicious misappropriation of the funds advanced by the creditors, causing these parties financial injury.
Bankruptcy Judge Smallenberger, on the other hand, in the two cases before him, found the debts dischargeable. In two extremely vague and identically reasoned opinions, Judge Smallenberger held that under Louisiana jurisprudence, Angelle's debts were dischargeable even though Angelle "comingle(d) funds on numerous jobs and fail(ed) to extend the exact equivalent of money received from a particular job for that job." In holding the debts dischargeable, Judge Smallenberger did not explicitly state whether he had even considered § 17a(2), (4), or (8). 3
On appeal, the District Court found that in all five cases Angelle had misappropriated funds while acting in a fiduciary capacity. Since Angelle virtually conceded that he had misappropriated funds, the District Court focused almost exclusively on whether Angelle was a fiduciary. The Court first discussed a Louisiana criminal law, LSA-R.S. 14:202, 4 which makes it a criminal offense for a contractor to use funds advanced by a contracting party for any purpose other than material and labor for the advancing party's project. This law suggested to the District Court that Angelle, when accepting advances from the contracting parties, occupied a position of trust and confidence. 5
The Court then discussed the meaning of "fiduciary." It quoted from an Eighth Circuit case, 6 which defined a fiduciary relationship as:
425 F.Supp. at 826, Quoting Farrow v. Dermott Drainage Dist., 139 F.2d 800, 805 (8th Cir. 1944).
On the basis of this broad definition of fiduciary and the Louisiana criminal statute, the District Court held that all five debts were not dischargeable under § 17a(4). The issue before us is whether the District Court correctly determined that Angelle was a fiduciary for purposes of § 17a(4).
Since this Circuit has not previously discussed the meaning of fiduciary under § 17a(4), and since various courts have taken somewhat different views on the issue, some background discussion is essential.
The Bankruptcy Act of 1841 contained a provision similar to § 17a(4). In 1844, the Supreme Court considered whether a factor who sold property belonging to his principal and failed to pay the principal the proceeds owed him a debt created in a fiduciary capacity. The Court held that a factor was not a fiduciary and made clear that under the Bankruptcy Act, the concept of fiduciary should be narrowly defined:
In almost all the commercial transactions of the country, confidence is reposed in the punctuality and integrity of the debtor, and a violation of these is, in a commercial sense, a disregard of a trust. But this is not the relation spoken of in the (Bankruptcy Act). . . . The act speaks of technical trusts, and not those which the law implies from the contract. A factor is not, therefore, within the act.
Chapman v. Forsyth, 2 U.S. (How.) 202, 207, 11 L.Ed. 236, 238 (1844) (emphasis added).
Subsequently, the Supreme Court refined and narrowed the concept of fiduciary articulated in Chapman. The Court made clear that the technical trust required by Chapman must exist prior to the act creating the debt and without reference to that act. See Upshur v. Briscoe, 138 U.S. 365, 378, 11 S.Ct. 313, 317, 34 L.Ed. 931, 936 (1890). As the Court stated in Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 154, 79 L.Ed.2d 393, 397-98 (1934) (emphasis added):
It is not enough that by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio. He must have been a trustee before the wrong and without reference thereto. In the words of Blatchford, J., "The language would seem to apply only to a debt created by a person who was already a fiduciary when the debt was created." (Quoting Upshur v. Briscoe, supra.)
Thus, a constructive trust is not sufficient to create a fiduciary relationship under the discharge provisions of the Bankruptcy Act.
These Supreme Court cases giving limited meaning to the term fiduciary are entirely consistent with and indeed, serve to promote the Bankruptcy Act's very purpose, which is "to give the debtor a 'new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing...
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