In re Silba
| Decision Date | 03 August 1994 |
| Docket Number | Bankruptcy No. 888-81146-20. Adv. No. 889-0017-20. |
| Parties | In re Paul SILBA, Debtor. BURT BUILDING MATERIAL CORPORATION, Plaintiff, v. Paul SILBA, Defendant. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York |
COPYRIGHT MATERIAL OMITTED
A. Pergament, Levine, Weinberg, Kaley & Pergament, P.C., Garden City, NY, Pryor & Mandelup, Mineolo, NY, for plaintiff.
George Nager, Mineola, NY, for defendant/debtor.
C. Steven Hackeling, Chapter 7 Trustee, Macco, Hackeling & Stern, Huntington, NY.
Stan Y. Yang, Office of the U.S. Trustee, Garden City, NY.
DECISION, ORDER AND JUDGMENT
The Court is called upon to determine1 the debt of Paul Silba ("Debtor") to Burt Building Material Corporation ("Plaintiff") nondischargeable pursuant to section 523(a)(4) of the title 11, United States Code ("Bankruptcy Code"), and Article 3-A of the New York Lien Law. For the reasons set forth below, the Court holds that Debtor defalcated funds within the meaning of section 523(a)(4), and therefore the debt is non-dischargeable. 11 U.S.C. § 523(a)(4) (1994).
We make the following findings of fact from all papers filed with the Court.
As of the time of trial, Plaintiff was a retail lumber yard which was in the business of selling building materials. Debtor had been doing business as a general contractor under the name of Paradise Construction. On or about July 1, 1983, Plaintiff commenced business dealings with Debtor by supplying him with building materials. Debtor used the materials to remodel homes. Debtor had previously purchased materials on an open credit line, though by March 25, 1987, all materials were paid for in full.
Between April 2 and June 25 of 1987, Plaintiff again supplied materials to Debtor, which were purchased through Debtor's credit line. The materials were used to remodel five homes. Debtor received full payment from four homeowners. One homeowner still owes Debtor $250 as construction was never completed. The parties dispute whether Debtor paid Plaintiff for any of the materials.
On November 2, 1988, Debtor commenced the within case by the filing of a voluntary petition for bankruptcy relief under chapter 7 of the Bankruptcy Code. Debtor's petition lists Plaintiff as a creditor holding an unsecured, non-contingent, non-disputed, liquidated claim for $19,700 against Debtor's estate for the cost of materials sold and alleged to be unpaid. On February 6, 1989, Plaintiff filed the within Adversary Proceeding, seeking determination that Debtor's obligation is non-dischargeable as being one which derives from (i) a fraudulent act by Debtor, and/or (ii) Debtor's defalcation while acting in a fiduciary capacity. (Bankruptcy Code sections 523(a)(2)(A) and (4) are the statutory bases, and are discussed in the Legal Discussion below). Plaintiff's complaint alleges that the amount of its claim is $17,582.99.
The Court subsequently conducted a trial of the issues. The following additional facts were adduced.
Debtor testified that he had various telephone conversations with Mr. Jeffrey Marino ("Marino"), vice president of Plaintiff, between August and September of 1987. In those conversations, Debtor and Marino discussed the outstanding debt and a time for payment. Then, in October of 1987, Debtor and Marino signed a written agreement which provided that the balance of the debt was to be paid in full by "year's end." (Letter Agreement, dated October 23, 1987, between Debtor and Plaintiff; Plaintiff's Exhibit A.) Also, pursuant to this agreement, Debtor furnished Plaintiff a check for $3,582.81. Debtor's check was returned, however, for having been drawn on an account with insufficient funds. Debtor's testimony is that he instructed Marino to refrain from depositing the check for a certain time because he knew he did not have sufficient funds in his account. Marino denies ever having been told this by Debtor.
Marino testified that he then informed Debtor that he intended to file one or more mechanic's liens upon the homes built or improved by Debtor. A mechanic's lien would secure payment for the outstanding debt. But, Marino testified, Debtor dissuaded him from filing a mechanic's lien by his promises of imminent payment. Debtor's testimony is that he does not recall any such discussions, and Debtor denies either asking or encouraging Marino to refrain from filing any mechanic's lien.
As stated, Plaintiff's claim was scheduled by Debtor in his bankruptcy petition; however, a lower amount was demanded by Plaintiff in its complaint. Debtor did not demonstrate at trial that any part of the amount demanded by Plaintiff was satisfied or that such amount should be reduced. Accordingly, the Court finds that Plaintiff's claim is, as demanded, $17,582.99.
Plaintiff's complaint is pursuant to sections 523(a)(2)(A) and (a)(4) of the Bankruptcy Code. Section 523(a)(2)(A) excepts from an individual's discharge any debt incurred through false pretenses, a false representation or actual fraud; section 523(a)(4) excepts from discharge any debt arising out of a debtor's "fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny." 11 U.S.C. §§ 523(a)(2)(A), (a)(4) (1994).
Arguing pursuant to section 523(a)(2)(A), Plaintiff alleges that Debtor's obligation was incurred through fraud due to false representations which induced Plaintiff to waive the filing of a mechanic's lien and to forebear from instituting collection litigation against Debtor. Plaintiff alternatively complains under section 523(a)(4), asserting that Debtor was acting in a fiduciary capacity when he received payment from the homeowners, and that Debtor's failure to pay constituted a defalcation while acting in this capacity.
Debtor procedurally argues against the relief requested, asserting the statute of limitations as an affirmative defense. Substantively, Debtor disputes all Plaintiff's contentions that he committed fraud or that defalcation occurred while Debtor was acting in a fiduciary capacity.
In his answer, Debtor asserts that "the complaint . . . is barred by the Statute of Limitations." (Plaintiff's Amended Answer ¶ 14.) Debtor is apparently attacking either the timeliness of Plaintiff's non-dischargeability complaint or the timeliness of Plaintiff's underlying allegation that Debtor diverted the assets of a statutory trust.
As to Plaintiff's non-dischargeability complaint, the Federal Rules of Bankruptcy Procedure provide the time within which this complaint must be filed. Fed.R.Bankr.P. 4007(a) (1994). A complaint to determine the dischargeability of a debt for fraud or defalcation must be filed not later than sixty days following the first date set for the meeting of creditors (held pursuant to section 341 of the Code). Id.; see 11 U.S.C. § 341(a) (1994). Plaintiff's Adversary Proceeding complaint was filed with the Court within this period; accordingly, it was timely filed.
We turn next to the timeliness of Plaintiff's underlying claim that Debtor diverted assets of a statutory trust. The statutory trust to which Plaintiff speaks is created by New York's Lien Law (). Though inarticulately, it appears Debtor intended to assert the statute of limitations as an affirmative defense to Plaintiff's action brought pursuant to New York's Lien Law. This argument is misplaced, however.
Plaintiff has asked the Court to determine the dischargeability of a debt; this is what we are empowered to do. As we discuss below, the New York Lien Law delineates certain funds received by an entity as the assets of a statutory trust. The beneficiaries of the statutory trust are certain persons who contribute to the improvement of real property in New York. The statute of limitations set forth in the Lien Law prescribes the period within which an action may be commenced by such beneficiaries to enforce that statutory trust. N.Y. LIEN LAW § 77(2) (McKinney 1994).
This Adversary Proceeding initiated by Plaintiff, however, is not an action by a beneficiary to enforce a statutory trust; it is an action by a creditor to have its claim determined non-dischargeable. Therefore, the Lien Law limitations period, which applies to actions to enforce statutory trusts, is inapplicable. We have not been asked to enforce a statutory trust. The limitations period is only justiciable before the Court that is asked to enforce Plaintiff's statutory trust claim.2
Debtor's request for dismissal pursuant to the statute of limitations is denied; the Court holds that Plaintiff's Adversary Proceeding is timely.
We turn next to that part of Plaintiff's complaint which is grounded in section 523(a)(2)(A). The Court finds that the pleading and logic are faulty.
Plaintiff alleges that the debt should be non-dischargeable for fraud because Debtor fraudulently induced Plaintiff to refrain from commencing collection litigation or from filing any mechanic's liens to secure its claims for payment. Section 523(a)(2)(A), however, excepts from discharge debts for money, property, services or credit, to the extent obtained by fraud, a false representation or false pretenses. 11 U.S.C. § 523(a)(2) (1994). At bar, Debtor obtained property (building materials) from Plaintiff on credit, and at that point incurred a debt. Plaintiff does not allege that property was obtained through fraud, a contention that is statutorily required. Id.
Plaintiff's allegation, at best, is that its claim remained unsecured and unlitigated by virtue of Plaintiff's reliance upon allegedly fraudulent promises. Plaintiff fails to allege or demonstrate that Debtor obtained any money, property, services or credit through fraud. Plaintiff's complaint accordingly fails to state a claim upon which relief may be granted....
To continue reading
Request your trial