Adam Monaco v. TAG Investments, Limited , 839 F.3d 413 ( 2016 )

Case: 15-51085 Document: 00513707592 Page: 1 Date Filed: 10/06/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
October 6, 2016
No. 15-51085
Lyle W. Cayce
Clerk
In the Matter of: MARTHA L. MONACO; ADAM L. MONACO;
HOPE ELAINE MONACO,
Debtors
ADAM L. MONACO,
Appellant
v.
TAG INVESTMENTS, LIMITED,
Appellee
Appeal from the United States District Court
for the Western District of Texas
Before REAVLEY, DAVIS, and JONES, Circuit Judges.
EDITH H. JONES, Circuit Judge:
This appeal arises out of a construction contract gone awry and
subsequently complicated by bankruptcy. The district court opinion held that
Monaco individually owes TAG Investments, Ltd. (“TAG”) $171,942.03, a non-
dischargeable debt under bankruptcy law (11 U.S.C. § 523(a)(4)) arising from
the Texas Construction Trust Fund Act (“CTFA”), Tex. Prop. Code Ann.
§ 162.001. Monaco appeals on several bases, most notably for our purposes
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No. 15-51085
relying on the affirmative defense built into the CTFA (§ 162.031(b)). Based
on that defense, we reverse and remand with directions to discharge the debt.
BACKGROUND
In 2004, TAG entered into a stipulated sum contract with Buildings by
Monaco, Inc. (“BBM”). The contract called for the construction of a luxury
home in San Antonio, Texas. BBM served as the general contractor on the
project and the contract called for progress payments which required BBM to
submit an application to the architect for approval and swear that all
subcontractors and supplies had been paid and lien releases had been obtained.
Despite BBM’s certifications, TAG began to receive lien notices from
BBM’s subcontractors and suppliers in 2005 and fired BBM. At that time, TAG
had paid BBM $1,783,662.40, and BBM had dispensed $1,600,377.78 to its
subcontractors and suppliers.
TAG hired a new contractor, San Antonio Realease Management, Inc.
(“SARMECO”), to assume BBM’s subcontracts and to pay off the liens. TAG
then reimbursed SARMECO in the amount of $171,942.03, and TAG
demanded payment from BBM.
Four years later, Monaco individually and BBM filed Chapter 7
bankruptcy cases. Neither had paid TAG the $171,942.03 that TAG had paid
SARMECO and that TAG believed it was due. TAG filed an adversary
proceeding against Monaco for his misapplication of trust funds, Tex. Prop.
Code Ann. § 162.031 (extending liability to officers of the “trustee”), and
alleged that the debt Monaco owed was nondischargeable under 11 U.S.C.
§ 523(a)(4), which excepts from discharge debts for “for fraud or defalcation
while acting in a fiduciary capacity, embezzlement, or larceny.” The
bankruptcy court agreed and rendered judgment in favor of TAG and against
Monaco in the amount of $171,942.03.
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On appeal, the district court initially vacated the bankruptcy court’s
judgment and remanded the case with instructions to address: (1) whether
TAG has standing to recover for payments made by SARMECO; (2) if so,
whether Monaco is entitled to a setoff for amounts withheld as retainage; and
(3) the basis for the calculation of actual damages owed to TAG. On remand,
the bankruptcy court concluded that TAG has standing, via equitable
subrogation, to recover for payments made by SARMECO and that Monaco is
not entitled to a setoff for amounts withheld as retainage, and it clarified the
debt calculation. The district court then affirmed the bankruptcy court’s
judgment on October 21, 2015.
On appeal, Monaco raises several issues. He disputes that the CTFA
authorizes TAG’s standing via equitable subrogation and complains that
TAG’s recovery would violate the one satisfaction rule. Monaco contends he did
not violate the CTFA, but in any event, CTFA § 162.031(b) provides an
affirmative defense that relieves Monaco of the judgment. Because we hold
that the affirmative defense is applicable in this case, we need not rule on the
other three bases for Monaco’s appeal.
STANDARD OF REVIEW
We review de novo a district court's decision affirming a bankruptcy
court's application of the law and review its findings of fact for clear error.
Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1307–08 (5th
Cir.1985).
DISCUSSION
The CTFA holds liable any “trustee who, intentionally or knowingly or
with intent to defraud, directly or indirectly retains, uses, disburses, or
otherwise diverts trust funds without first fully paying all current or past due
obligations incurred by the trustee to the beneficiaries of the trust funds.” Tex.
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Prop. Code Ann. § 162.031(a). The bankruptcy court concluded that “Monaco
acted intentionally to obtain further payments from TAG despite not paying
the subcontractors and suppliers in violation of the CTFA.” In re Monaco,
514 B.R. 477, 481 (Bankr. W.D. Tex. 2014).
Monaco contests this conclusion, arguing that both the bankruptcy court
and the district court misinterpreted the certifications he attested to as a
condition of payment. We need not determine whether the lower courts erred
on this issue, as the statutory scheme of the CTFA also contains two
affirmative defenses, one of which resolves the present case.
Section 162.031(b) of the CTFA holds that “[i]t is an affirmative defense
to prosecution or other action . . . that the trust funds not paid to the
beneficiaries of the trust were used by the trustee to pay the trustee's actual
expenses directly related to the construction or repair of the improvement.”
Tex. Prop. Code Ann. § 162.031(b). This affirmative defense raises two
questions: (1) were the activities Monaco claims to have spent the money on
within the scope of the affirmative defense, and (2) has TAG made a sufficient
showing that Monaco is not eligible for the affirmative defense?
First, however, we briefly address the absence of any discussion of the
affirmative defense in the bankruptcy court or district court opinions. Despite
not appearing in the district court’s opinion, both parties briefed the issue
before that court. Brief of Appellant at 4-5, Adam Monaco v. TAG Investments,
LTD, No. SA-14-CA-882 (W.D. Tex. 2015) (“The evidence shows that BBM not
only spent every cent it received for third-party expenses, salaries, overhead
and supervision on the project, but also used approximately $70,000.00 of its
profit to pay for expenses incurred on the project.”); Brief of Appellee at 4-5,
Adam Monaco v. TAG Investments, LTD, No. SA-14-CA-882 (W.D. Tex. 2015)
(“Overhead and profit components of draws are not authorized exceptions
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under § 162.031 of the Act, and are not a basis for offset.”); Appellant’s Reply
Brief at 2-7, Adam Monaco v. TAG Investments, LTD, No. SA-14-CA-882
(W.D. Tex. 2015) (“However, [TAG] insists that the $124,053 paid as salaries
and overhead . . . and the $77,776 paid as contractual profits to BBM were
improper and constituted defalcation on the part of Adam Monaco”).
Further, Monaco raised it from the very beginning before the bankruptcy
court in 2011, when TAG first filed an objection to the discharge of its debt.
TAG Investments, Ltd v. Martha L. Monaco, et al., No. 10-05026 (Bankr. W.D.
Tex. Nov. 23, 2011), ECF No. 52 at ¶ 7 (“Under Fifth Circuit case of In re
Nicholas . . . there is no liability imposed on a Contractor if he uses all the
monies to pay actual expenses directly related to the construction of the
project, whether or not such expenses were owed to ‘beneficiaries’ of the trust
fund.”). As this argument has been properly preserved and raised, we may
address it on appeal.
Turning to the scope of the affirmative defense, this court’s precedent on
what qualifies for “trustee’s actual expenses” under the statute’s affirmative
defense is clear. “Under the affirmative defense to the Texas Construction
Trust Fund Statute . . . general contractors may use the payments they receive
from construction projects to keep those projects going even if, in some
instances, the beneficiaries are not paid first.” In re Nicholas, 956 F.2d 110,
113 (5th Cir. 1992). This includes payment of “expenses such as telephone
bills, salaries, and other overhead.” In re Pledger, 592 F. App'x 296, 302 (5th
Cir. 2015). 1 Nicholas explains that “the Texas statute's affirmative defense for
1 See also In re Swor, 347 F. App’x 113, 116 (5th Cir. 2009) (“Nor must these funds be
spent only on the project for which they were received—they may be spent on other projects
or on expenses related to general business overhead.”). We cite unpublished opinions in this
decision not because they are precedential, which they are not, see 5th Cir. Local Rule 47.5.4,
but to show the consistency of our dispositions.
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payment of actual expenses directly related to the construction or improvement
of the project is . . . open-ended.” Nicholas, 956 F.2d at 113. See also Holladay
v. CW&A, Inc., 60 S.W.3d 243, 248 (Tex. Civ. App—Corpus Christi 2001, pet.
denied). Monaco could assert the affirmative defense for overhead costs of the
project.
TAG requests instead that we rely on a bankruptcy decision holding that
“[t]he affirmative defense at section 162.031(b) for ‘actual expenses directly
related to the construction or repair of the improvement’ is limited to costs
actually and directly tied to the improvement in question and does not include
‘indirect’ expenses, such as overhead to the contractor in question, or ‘profit’
built into the job's price.” In re Coley, 354 B.R. 813, 816 (Bankr. N.D. Tex.
2006) (quoting In re Faulkner, 213 B.R. 660 (Bankr.W.D.Tex.1997)). In re
Faulkner, another bankruptcy court decision, engages in statutory
interpretation, looking at legislative history and Attorney General Opinion
JM-945 (1988), but its ruling on this point is dicta: “[b]ecause we find that the
defendant lacked the requisite level of ‘mental culpability’ to trigger liability
for purposes of section 523(a)(4), we need not decide whether the defendant
could make out a successful defense to liability under section 162.031(b) of the
state statute.” Faulkner, 213 B.R. at 667. What is dispositive, however, is that
Coley postdates Nicholas and directly conflicts with this court’s jurisprudence
interpreting the affirmative defense.
Monaco explains that $124,053.00 went to salaries and overhead and an
additional $50,400.00 went to supervision of this project. Tellingly, payment
of these sums as reasonable was approved by TAG’s architect. These are
expenses allowable under our precedents and qualify as a “trustee’s actual
expenses directly related to the construction or repair of the improvement,” as
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required by the affirmative defense under the CTFA. Tex. Prop. Code Ann.
§ 162.031(b).
Moreover, TAG had the burden to prove that Monaco misapplied the
funds. Nicholas, 956 F.2d at 114 (“[A]lthough initially requiring the debtor to
make a prima facie showing that he is entitled to a discharge, [federal law]
ultimately places the burden on the creditor to prove that the debt falls within
the § 523(a)(4) exception.”). Simply showing that the progress payment
certifications were false is insufficient to overcome the affirmative defense.
“Because the Texas statute permits application of trust fund receipts for ‘actual
expenses directly related’ to the project, . . . a beneficiary seeking to avail itself
of § 523(a)(4) must adduce some evidence that funds were misapplied under
this test.” Nicholas, 956 F.2d at 114. TAG was unable to show that the funds
received by BBM were spent on impermissible expenses under the CTFA.
For the foregoing reasons, Monaco should not have been held liable for
misapplication of construction trust funds under the CTFA and the debt
claimed by TAG should have been discharged. The judgment of the lower
courts holding the debt nondischargeable is REVERSED and we REMAND
with directions to discharge.
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