In re Grosso, Bankruptcy No. 80 00263

• Decision Date: 16 March 1981
• Docket Number: Adv. No. 80 0056.,Bankruptcy No. 80 00263
• Citation: 9 BR 815
• Parties: In re Joseph Frank GROSSO, f/d/b/a Gro-Co Utility Installation & formerly partner in GroCo Const. & Rigging, Debtor. TRUAX & HOVEY, LTD., Plaintiff, v. Joseph Frank GROSSO, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of New York

9 B.R. 815 (1981)

In re Joseph Frank GROSSO, f/d/b/a Gro-Co Utility Installation & formerly partner in GroCo Const. & Rigging, Debtor TRUAX & HOVEY, LTD., Plaintiff, v. Joseph Frank GROSSO, Defendant.

Bankruptcy No. 80 00263, Adv. No. 80 0056.

United States Bankruptcy Court, N.D. New York.

March 16, 1981.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Welch, Welch & Carr, Syracuse, N.Y., for plaintiff; Anthony P. Adorante, Syracuse, N.Y., of counsel.

Robert S. Walczyk, Syracuse, N.Y., for defendant.

MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

LEON J. MARKETOS, Bankruptcy Judge.

Statement of the Case

On March 6, 1980, Joseph Frank Grosso (hereinafter, the Debtor) filed a Chapter 7 petition in bankruptcy. Pursuant to Rules 701(7) and 409(a)(2) of Bankruptcy Procedure, 11 U.S.C., Truax & Hovey, Limited (hereinafter, the Plaintiff) timely commenced an adversary proceeding on May 19, 1980. The complaint seeks to have a particular debt it holds against the Debtor declared nondischargeable, and judgment entered for the amount of the debt, plus interest, costs, and disbursements. The dischargeability complaint is premised on Section 523(a)(4) of the Bankruptcy Code, 11 U.S.C. § 523(a)(4).

The complaint's allegations read that: Between January of 1974 to August 9, 1974, the Plaintiff supplied to the Debtor insulation and drywall materials and labor for its installation in an improvement of real property located on Pangborn Road in the Thirteenth Township of Scriba's Patent, Oswego, New York. The total materials and labor had a billed value of $3,800.00. There still exists an outstanding unpaid balance of $1,857.12.

The complaint further alleges that: The Debtor, as defined under the New York Lien Law, was a general contractor. The Debtor is said to have received both mortgage proceeds and payments for the improvements. These proceeds are alleged to be impressed with a statutory trust under Article 3-A of the New York Lien Law; that said funds were never timely disbursed to the Plaintiff pursuant to an independent statutory duty imposed on the Debtor by Article 3-A of the New York Lien Law.

The Debtor filed an answer on June 23, 1980; he denied generally the allegations of the complaint. As separate and distinct affirmative defenses barring recovery to the asserted claims, the Debtor invokes the statute of limitations of (a) six (6) years under the New York Civil Practice Law and Rules, Section 213, and (b) one (1) year period under the New York Lien Law, Article 3-A, Section 77(2). The Debtor seeks to have judgment dismissing the Plaintiff's complaint. A trial on the pleadings was held.

FINDINGS OF FACT

The facts of the case established by testimony and documents at the trial are, in substantial part, undisputed. They are as follows:

1. During the years 1973 to early 1974, the Debtor was Vice President of Gro-Co Construction and Rigging Company. The Debtor left this position when a new corporation, Gro-Co Utility, was formed. Yet, the Debtor continued with the Gro-Co Construction operations.

2. The Gro-Co business concern was operated by the Debtor and his brother. It commenced to build houses on a farm lot parcel delineated as "lot 27B" located on Pangborn Road, Thirteenth Township of Scriba\'s Patent, Oswego County, New York. This large parcel had been owned by the Debtor\'s father and transferred to the Debtor and his brother piecemeal. The smaller parcels, themselves, were not assets of the business concern, but were owned individually. The Gro-Co concern was to build houses on the smaller lots. According to the Debtor\'s testimony, this business concern ultimately filed for bankruptcy.

3. The Merchants National Bank & Trust Company made construction loans to the Debtor, taking as collateral, mortgages on each of his piecemeal lots. For example, one loan and mortgage between the Debtor and the Bank was in the amount of thirty-three thousand ($33,000.00) dollars, dated November 1, 1973. It covered "lot # 1". There was a "lot # 2" also with a deed in the name of the Debtor. The Debtor testified that these loans and mortgages were borrowed to do the necessary house construction on the lots. Both of the aforesaid lots were subsequently transferred out by deed to purchasers as completed houses.

4. The Debtor testified that the proceeds of these loans were to be drawn on as the stages of work progressed and were completed on each lot.

5. The Debtor testified that all Gro-Co\'s construction efforts stopped in late July or August of 1974. Two houses, lots # 1 and # 2, had been completed. Other houses, e.g., lots # 3 and # 4, were incomplete. This cessation of work was said to be due to the Merchants Bank "taking over" by foreclosure on the latter houses. In the Debtor\'s belief, a general contractor was hired by the Bank to complete the sites. The Debtor stated that the Bank, prior to take over, refused to release any further progress payments under the building loans to Gro-Co. The reason was that lots # 3 and # 4 were not being completed on schedule.

6. The Plaintiff, Truax & Hovey, had a history of transactions with the Gro-Co Construction Company. The Plaintiff\'s witness, John Denny, Comptroller, testified that the Plaintiff\'s billings normally are rendered the month after work is supplied. The first billing to Gro-Co was dated on May 22, 1974 for $1,246.00, and the second billing was in June. Each was paid in June and July of 1974, respectively. The third through fifth billings, now in dispute, were billed on August 22, 1974.

7. A mechanic\'s lien was filed by the Plaintiff in November, 1974. Their counsel stated that this lien was cut off by the Merchants Bank foreclosing in October of 1974.

8. The Plaintiff\'s only proof for damages, i.e., (1) where, and (2) to whom services and materials were rendered, are three photocopy invoice billings, each dated August 22, 1974. These billings are addressed to "Gro Co Construction Co.". (Exhibit 2 — invoices Nos. 10554, 10555, and 10556 for the amounts of $539.12, $1,276.00, and $42.00 respectively). Invoice No. 10554 described the work rendered to "# 3 house Pinetree Road", No. 10555 covered work to "House # 4 ??(sic) Pinetree Road", and No. 10556 was work at "# 2 Repair —".

9. The Debtor orally controverted the fact that any installation services were rendered to lots # 1 and # 2, and that any work to lots # 3 and # 4 was authorized or requisitioned by Gro-Co Construction. By a preponderance of evidence presented relative to the commercial billing practices between these parties, this Court finds these billings to be true and accurate representations.

10. In accordance with rights given any trust beneficiary under Section 76, subd. 1. and 2. of Article 3-A of the New York Lien Law, a "DEMAND FOR STATEMENT RESPECTING TRUSTS RELATING TO IMPROVEMENTS" dated May 30, 1980, was sent to the Debtor by the Plaintiff\'s attorneys. The Debtor testified that he did not reply to the demand.

CONCLUSIONS OF LAW

The Plaintiff is seeking to have a debt incurred by the supplying of materials and labor to the Debtor held nondischargeable pursuant to § 523(a)(4) of the Bankruptcy Code, 11 U.S.C. § 523(a)(4). That provision excepts from discharge in bankruptcy any debt proven to be

"(4) for fraud or defalcation while acting in a fiduciary capacity . . ." Id.

Article 3-A of the New York Lien Law (encompassing § 70 to § 79-a.) creates an express statutory trust. The article's provisions create the requisite fiduciary relationship contemplated within the terms of § 17(a)(4)¹ of the Bankruptcy Act of 1898,² 11 U.S.C. § 35(a)(4). See, In the Matter of Kawczynski, 442 F.Supp. 413 (W.D.N.Y. 1977); In re Morris Ketchum, Jr. and Associates, 409 F.Supp. 743 (S.D.N.Y.1975). In accordance with the reasoning of those holdings, this Court considers valid claims under Article 3-A of the New York Lien Law as within the "fiduciary capacity" element delineated in § 523(a)(4) of the Bankruptcy Code. Yet, it should be noted that all claims against fiduciaries are not nondischargeable. § 17(a)(4) and its successor, 11 U.S.C. § 523(a)(4) expresses its concern for limiting non-dischargeability, even in the case of a fiduciary, to the dishonest debtor. In re Harris I. Koritz, 2 B.R. 408, 417, 6 Bankr.Ct.Dec. 47 (Bkrtcy.D.Mass. 1979). It is not applicable to every breach of duty, but only those involving serious misconduct that come under the headings of "fraud,. . . . and defalcation." Id. To promote the policy of "fresh start" to the debtor, the exceptions to dischargeability are to be strictly construed. The burden of proof is on the plaintiff to show that the debt should be excepted from discharge. In re Kriger, 2 B.R. 19, 21, 5 Bankr.Ct.Dec. 1380 (Bkrtcy.D.Oregon 1979).

I.

Presuming the Plaintiff will prove his statutory trust claims under Article 3-A of the New York Lien Law, this Court must first examine the Debtor's asserted statute of limitations defenses.³ Establishing the validity of either affirmative defense to the Plaintiff's claims will require this Court to dismiss the Plaintiff's complaint. In either state or federal courts, a debtor-defendant must bear the burden of proof to establish the elements of an affirmative defense of the statute of limitations. See, Perez v. Costa Armartori, S.P.A., 465 F.Supp. 1211 (S.D.N.Y.1979); Ludger Doyon v. Robert Bascom, 38 App.Div.2d 645, 326 N.Y.S.2d 896 (3rd Dep't 1971); Mead v. Warner Pruyn Division, Finch Pruyn Sales, Inc., 87 Misc.2d 782, 386 N.Y.S.2d 342 (Sup.Ct. Washington Co. 1976), aff'd, 57 App.Div.2d 340, 394 N.Y.S.2d 483 (3rd Dep't 1977).

Upon plaintiff's direct examination of the Debtor, it was shown that building loan agreements and mortgages were acquired for each of the individual lots. Each lot was to have a house constructed on it. Each billing invoice (Ex. 2) of the Plaintiff describes a singular lot to which materials and/or services were rendered. There was no proof at trial that the work...