Carey Lumber Co. v. Bell

• Citation: 615 F.2d 370
• Decision Date: 11 April 1980
• Docket Number: No. 79-3361,79-3361
• Parties: CAREY LUMBER COMPANY, a corporation, Plaintiff-Appellee, v. Thomas Hugh BELL, Defendant-Appellant. Summary Calendar. *
• Court: U.S. Court of Appeals — Fifth Circuit

Page 370

615 F.2d 370

6 Bankr.Ct.Dec. 247

CAREY LUMBER COMPANY, a corporation, Plaintiff-Appellee, v. Thomas Hugh BELL, Defendant-Appellant.

No. 79-3361

Summary Calendar. ^*

United States Court of Appeals, Fifth Circuit.

April 11, 1980.

Smith & Rector, Donald R. Rector, Dallas, Tex., for defendant-appellant.

Spradling, Stagner, Alpern & Friot, Stephen P. Friot, Oklahoma City, Okl., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before AINSWORTH, FAY and RANDALL, Circuit Judges.

PER CURIAM:

The summary judgment entered by the bankruptcy court and affirmed by the district court is affirmed based upon the well reasoned and clearly stated Memorandum Opinion entered by the Honorable Patrick E. Higginbotham on August 22, 1979, appended hereto.

APPENDIX

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

THOMAS HUGH BELL, Appellant )

)

V. ) CA-78-1053-G

) On Appeal in Bankruptcy,

CAREY LUMBER CO., Appellee ) No. BK-76-603-G

MEMORANDUM OPINION

I.

This is an appeal from a summary judgment entered by the bankruptcy court in favor of Carey Lumber Co. ("Carey") holding that certain debts owed to Carey by the bankrupt, Thomas Bell ("Bell") and evidenced by seven Oklahoma state court judgments are not dischargeable in bankruptcy under section 17(a)(4) of the Bankruptcy Act, 11 U.S.C. § 35(a)(4) (1976). ¹

Prior to his bankruptcy and at all times relevant to the issues presented here, Bell was engaged in the residential construction business as the managing officer of Tom Bell Homes, Inc. In 1975, seven construction mortgages executed by Tom Bell Homes, Inc. were the subject of foreclosure actions instituted in the District Court of Oklahoma County, Oklahoma by construction lenders, in which actions several creditors, including Carey, (which had supplied materials for the homes on credit) holding mechanic's and materialmen's liens were joined as parties. In each of the seven Oklahoma actions, Carey asserted claims against Bell seeking to hold him personally liable under the Oklahoma Lien Trust Statutes, 42 O.S. §§ 152, 153 (1971) ² for debts owed Carey by Tom Bell Homes, Inc. As to each of these claims judgments were entered in favor of Carey reciting that Bell received construction funds in his capacity as managing officer of Tom Bell Homes, Inc.; that Bell held those funds as trust funds; that Bell misapplied those funds; and that, consequently, Bell was personally liable to Carey under the Oklahoma Lien Trust Statutes. The Oklahoma judgments were reduced to judgment in Texas following Bell's move to Texas.

Several months after Bell filed a voluntary petition in bankruptcy in Texas in October, 1976, Carey filed this suit to determine the dischargeability of the debts evidenced by the Oklahoma judgments. In its consideration of Carey's motion for summary judgment, the bankruptcy court considered three issues: 1) whether the debts in question were created by fraud, embezzlement misappropriation or defalcation; 2) if so, whether they were incurred by Bell while acting as "an officer or in any fiduciary capacity"; and 3) whether the question of dischargeability could be determined on motion for summary judgment without a specific finding of conscious and willful wrongdoing other than the finding of "misapplication" contained in the Oklahoma judgments. All of these issues were resolved in favor of Carey, and Carey's motion for summary judgment was granted. On appeal, Bell challenges the bankruptcy court's resolution of each of these issues, and urges in addition the following points of error: 1) that the bankruptcy court erred in granting the motion because the alleged trust created was not an express trust and hence not covered by section 17(a)(4) of the Bankruptcy Act; 2) that the bankruptcy court should have required proof of the true character of the indebtedness; 3) that Carey was not a proper beneficiary under the Oklahoma Lien Trust Statutes; and 4) that summary judgment should not have been granted because genuine issues of material fact existed as to the dischargeability of debts owed to Carey by Bell.

II.

Bell's argument that Carey is not a party that may claim the protection of the Oklahoma Lien Trust statutes may be quickly dispatched. Bell argues that, despite a line of decisions by Oklahoma courts to the effect that the lien trust statutes benefit subcontractors and materialmen, the statutes should properly be read as benefiting only lenders and owners, who do not enjoy the statutory liens provided for subcontractors and materialmen. Whatever abstract merit this argument may have, it has no legal merit here, as this is an issue of state law that has been settled by the state courts of Oklahoma. See, e. g., Bohn v. Devine, 544 P.2d 916 (Okl.App.1975); United States Fidelity & Guaranty Co. v. Sidwell, 525 F.2d 472 (10th Cir. 1975). This court may not overturn this line of decisions with its own view of the proper scope of the Oklahoma lien trust statutes.

III.

Equally unavailing is Bell's argument that the trust created by the Oklahoma statutes was a trust ex maleficio that is not within the application of section 17(a)(4) of the Bankruptcy Act. The major premise of Bell's syllogistic argument namely, that section 17(a)(4) does not apply to fiduciary relationships arising out of equitable or implied trusts but only to true trusts is correct. See In re Thornton, 544 F.2d 1005 (9th Cir. 1976); Matter of Kawczynski, 442 F.Supp. 413 (W.D.N.Y.1977). The minor premise of the syllogism, however that the trust created by the Oklahoma lien trust statutes is a trust ex maleficio is incorrect. The trust created by the lien trust statutes is an express trust. The statutes expressly and clearly impose a trust relationship upon construction mortgagors. Like the New York statute involved in Matter of Kawczynski, supra, the Oklahoma statutes clearly define the trust res and charge the trustee with affirmative duties in applying the trust funds. See also Allen v. Romero, 535 F.2d 618 (10th Cir. 1976); United States Fidelity & Guaranty Co. v. Sidwell, 525 F.2d 472 (10th Cir. 1975); Swan v. Crest Construction Corp., 568 P.2d 1330 (Okl.App.1977); Nuclear Corp. of America v. Hale, 355 F.Supp. 193 (N.D.Tex.), aff'd (mem.), 479 F.2d 1045 (1973); In re Angelle, 425 F.Supp. 823 (W.D.La.1977) ^*; In re Ketchum, 409 F.Supp. 743 (S.D.N.Y.1975). Thus while created by statute and lacking a trust agreement executed by the parties, the trust created by the Oklahoma lien trust statutes is an express trust that effected a fiduciary relationship between Tom Bell Homes, Inc. (and its managing officer, Bell) and Carey.

Virtually identical to this issue, though phrased in different language and characterized by a slightly different analytical focus, is Bell's argument that any fiduciary relationship between himself and Carey is not within the coverage of section 17(a)(4) because it arose only, if at all, upon misappropriation of the funds and not earlier. Again, the major premise of the argument is correct but the minor premise is not. It is true that, in order to fall within the ambit of section 17(a)(4) a fiduciary relationship must have arisen before and not as a result of misappropriation of trust funds. See In re Ketchum, supra; Allen v. Romero, supra. Here the fiduciary relationship between Bell and Carey established by the statute came into being upon receipt by Tom Bell Homes, Inc. of funds under the construction mortgages. The statutes make clear that these funds are to be held in trust even though there may be no beneficiary at the time they are received (the funds are to "be held as trust funds for the payment of all valid lienable claims due and owing or to become due and owing "). Thus the trust and the consequent fiduciary duties came into being upon receipt by Tom Bell Homes of construction funds and not, as contended by Bell, upon their later misappropriation.

IV.

Bell's next argument is that his debt to Carey was not "created" by any act of misappropriation or defalcation, but rather was created when Tom Bell Homes purchased materials on credit from Carey. This literal reading of section 17(a)(4) was considered and rejected by the court in In re Ketchum, Jr. and Associates, 409 F.Supp. 743 (S.D.N.Y.1975) in circumstances similar to those in this case. The court in Ketchum reasoned that, while a contractual debt was indeed created when the bankrupt contractor purchased services from the plaintiff subcontractor, another obligation, defined largely by a New York law similar to the Oklahoma lien trust statute, was created when the contractor received funds from a third party that it was legally required to hold in trust for persons holding, or who later would hold valid lienable claims. That reasoning is persuasive and it is applicable here; it has apparently received tacit approval in many of the cases cited in this discussion. The Fifth Circuit also rejected such a literal reading of section 17(a)(4) in John P. Maguire Co. v. Herzog, 421 F.2d 419 (5th Cir. 1970) with the following language:

Appellant contends that the debt due appellee was purely contractual, and not created by a misappropriation. This novel contention has little merit. Although it is true that the debt due appellee originally arose out of (the bankrupt's) contractual obligation to appellee, it is the direction and application of (funds) to creditors other than appellee, to whom the payments were due, that is the basis of the present suit. If appellant's contention were upheld, § 17(a)(4) would be rendered almost totally useless for the majority of debts originally arise from some sort of contractual agreement.

The debt owed by Bell to Carey was thus "created" by Bell's misappropriation of construction funds for purposes of section 17(a)(4).

V.

Bell next argues that a holding of nondischargeability under section 17(a)(4) requires a finding, not made by ...