Matter of Thomas

Decision Date30 June 1982
Docket NumberBankruptcy No. 81-01379,Adv. No. 81-0753.
Citation21 BR 553
PartiesIn the Matter of Paul E. THOMAS, Charlene S. Thomas d/b/a Thomas Landscaping Company, Thomas Landscaping Company, Inc., Debtors. JOSEPH LORENZ, INC., Plaintiff, v. Paul E. THOMAS, Charlene S. Thomas, d/b/a Thomas Landscaping Company, Thomas Landscaping Company, Inc., Defendants.
CourtU.S. Bankruptcy Court — Eastern District of Wisconsin

John T. McCann, Milwaukee, Wis., for plaintiff.

Richard H. Bussler, Jr., Milwaukee, Wis., for defendants.

DECISION

JAMES E. SHAPIRO, Bankruptcy Judge.

Plaintiff ("Lorenz") commenced an action to declare its claim against debtors-defendants ("Thomas Landscaping") as non-dischargeable pursuant to § 523(a)(4) of the Bankruptcy Code (defalcation while acting in a fiduciary capacity) and, alternatively, pursuant to § 523(a)(6) of the Bankruptcy Code (malicious injury to property).1

Lorenz was a general contractor on a City of Milwaukee public improvement commonly referred to as the "Green Market Project". Thomas Landscaping was a subcontractor for Lorenz on this particular job and was, pursuant to a contract dated April 2, 1980 and thereafter modified on December 16, 1980, to furnish material and labor for landscaping, including the installation of trees, at a total subcontracting price of $24,700.00. During the course of work on this project but prior to completion, Lorenz issued three separate checks to Thomas Landscaping in partial payment totalling $22,730.00 which were paid as follows:

                     DATE                TO WHOM           AMOUNT PAID
                December 23, 1980    Thomas Landscaping
                                     and Pioneer Turf
                                     Nursery               $ 4,925.46
                December 23, 1980    Thomas Landscaping     15,774.54
                January 6, 1981      Thomas Landscaping      2,030.00
                                                           __________
                                              TOTAL        $22,730.00
                                                           ==========
                

The first check for $4,925.46 was endorsed by Thomas Landscaping and turned over to Pioneer Turf Nursery, one of its suppliers on the Green Market Project, as replacement for a previously issued "non-sufficient funds" check. The second check was deposited in a checking account in the name of "Charlene Thomas" at the First Wisconsin-Milwaukee Bank, and the third check was deposited in a savings account in the names of "Paul E. Thomas or Charlene Thomas" at Mutual Savings and Loan Association.

Paul Thomas testified that the deposits were made in this fashion because the business accounts of Thomas Landscaping had been closed out, due to a series of overdrafts.

Lorenz alleges that most, if not all, of the funds from the $15,774.54 and $2,030.00 checks were used for the payment of personal expenses of defendants Paul and Charlene Thomas or for the general business expenses of Thomas Landscaping and were in no manner related to or used for the Green Market Project.

A trial was conducted before this Court on June 8, 1982. Prior to the commencement of the trial, the parties filed a joint final pre-trial report in which certain facts were stipulated to and made a part of the record.

ISSUES INVOLVED

Four separate issues must be resolved in order to fully dispose of this case. They are as follows:

1. Was the role of Charlene Thomas in Thomas Landscaping so limited as to preclude Lorenz\' claim of non-dischargeability against her?
2. Is Wis.Stats. 779.16 (theft by contractor) applicable so as to make defendant Paul Thomas a "fiduciary" within the meaning of 11 U.S.C. § 523(a)(4)?
3. If the answer to "2." is in the affirmative, does the evidence establish a claim of defalcation against Paul Thomas while acting in a fiduciary capacity?
4. If the answer to both "2." and "3." are in the affirmative, what is the appropriate measure of the non-dischargeable damages?
CLAIM AGAINST CHARLENE THOMAS

At the conclusion of plaintiff's case, counsel for Thomas Landscaping moved to dismiss as against defendant Charlene Thomas ("Charlene"), and a ruling on this motion was reserved pending the taking of all testimony.

The Court is now satisfied by the testimony that Charlene was little more than a disbursing agent who acted at the behest and direction of her husband, defendant Paul Thomas ("Paul"). She did not receive any salary and, in fact, during the particular time in question, held a full-time job as an assembler in a company having no connection with her husband's work. She did not know where the funds which she deposited came from and was not familiar with the Green Market Project. She never answered business telephone calls, did not keep the books and records, did not send out any business billings and had no role in the hiring or firing of employees. She did not invest any funds in the business, either in the form of loans or by capital contributions. It is true that there were plans in process to incorporate Thomas Landscaping in which Charlene and Paul each would have become 50 per cent stockholders. The business, however, was never incorporated. The parties stipulated that it was Paul and not Charlene who ran the day to day affairs of the business, although Charlene did have some involvement in depositing of funds received by the business and in paying business bills. Notwithstanding Charlene's involvement, this Court is persuaded that her role in the business was minimal. Although it is true that Charlene may have been involved to some extent in depositing funds and in issuing checks and may have even issued some checks for household purposes without her husband's specific instructions, nevertheless, these factors did not subject her to the exceptions to discharge provisions under § 523. In view of the well known purposes of the bankruptcy law, exceptions to the operation of a discharge thereunder should be confined to those plainly expressed therein. Gleason v. Thaw, 236 U.S. 558, 35 S.Ct. 287, 59 L.Ed. 717 (1915). Moreover, the burden of proving that a debt comes within one of the statutory exceptions is upon the party opposing the discharge of the debt. Danns v. Household Finance Corp., 558 F.2d 114 (2d Cir. 1977). This burden was not met with respect to Charlene.

WAS DEFENDANT PAUL THOMAS ("PAUL") A "FIDUCIARY"?

§ 523(a)(4) of the Bankruptcy Code provides:

"A discharge under § 727 — of this title does not discharge an individual debtor from any debt —
(4) for fraud or defalcation while acting in a fiduciary capacity —"

For a debt to be non-dischargeable under this section, the prerequisite fiduciary relationship must rest upon a technical or express trust and not upon a trust implied in law resulting from an act of wrong doing. Further, the fiduciary relationship must be shown to have been in existence prior to the creation of the debt in controversy. Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934). Courts often look to state law in order to determine when a fiduciary relationship exists for purposes of dischargeability. 1 Norton Bankr. L. and Prac., § 27.23 (1981).

In the case at bar, it is for this Court to determine:

1. If Paul was a "fiduciary" by virtue of Wis.Stats. 779.16; and
2. If so, when he assumed his fiduciary obligations — i.e., was it when Paul received payment from Lorenz or when the funds were diverted from Paul\'s suppliers and utilized for other purposes.

If this Court concludes that there was never any fiduciary relationship or that it arose only by virtue of an act of wrong doing, then it must necessarily follow that what was created was a trust implied in law and not an express trust. Section 523(a)(4) would under these circumstances become inapplicable and Paul's debt to Lorenz would be dischargeable.

The settled law followed by bankruptcy courts in Wisconsin is that a misapplication of funds by a contractor or subcontractor amounts to misappropriation of funds while acting in a fiduciary capacity within the meaning and intent of § 523(a)(4) of the Code (formerly § 17(a)(4) of the Act).2 This Court, in accordance with this historical precedence, holds that Paul was a fiduciary within the meaning and intent of § 523(a)(4). Wis.Stats. 779.163 clearly proclaims that any funds paid to a contractor or sub-contractor for public improvements on a pending project or a project which is later commenced, are "a trust fund," and payment to the contractor or sub-contractor creates an express trust. The lack of any requirements within § 779.16 for a trustee to segregate trust funds does not alter this result. If a trustee commingles funds, such trust may be enforced against any part of the commingled trust funds which are able to be traced but the trust is not invalidated. Simonson v. McInvaille, 42 Wis.2d 346, 166 N.W.2d 155 (1969).

This Court is cognizant of a recent decision rendered by its colleague, Judge Ihlenfeldt, in the case of In re Lotto, 81-944 (E.D.Wis. June 28, 1982). It believes that both cases are consistent, and employ the same underlying rationale, notwithstanding opposite results. As Judge Ihlenfeldt pointed out in the Lotto case:

"While the (Wisconsin) cases — indicate that the Wisconsin statute creates the type of fiduciary relationship contemplated by section 523(a)(4) of the Code, the (Lotto) case presents an important factual distinction. Whereas all of the foregoing cases involved claims of unpaid subcontractors and materialmen or of others who were subrogated to such claims, in this case the only work or material furnished has either been paid for by Lotto or was supplied by Lotto himself. Thus there are no unpaid sub-contractors or materialmen, and there will be none."

The facts in the case at bar, unlike Lotto, are similar to those cases Judge Ihlenfeldt referred to and involves a party (Lorenz) as subrogee of the claims of unpaid suppliers.

A comparison with corresponding statutes in other jurisdictions reveals this to be an area replete with much confusion and conflict. Some statutes contain...

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