Adam Monaco v. TAG Investments, Limited
2016 U.S. App. LEXIS 18207
| 5th Cir. | 2016Background
- TAG contracted with Buildings by Monaco, Inc. (BBM) to build a home; BBM received $1,783,662.40 and paid subcontractors/suppliers $1,600,377.78.
- TAG received lien notices, fired BBM, hired SARMECO to assume subcontracts and pay liens, and reimbursed SARMECO $171,942.03 to clear liens.
- Monaco and BBM later filed Chapter 7; TAG sued Monaco individually under the Texas Construction Trust Fund Act (CTFA) §162.031 for misapplication of trust funds and sought nondischargeability under 11 U.S.C. §523(a)(4).
- Bankruptcy court found Monaco liable and debt nondischargeable; district court affirmed after remand addressing standing (equitable subrogation), setoff/retainage, and damage calculation.
- On appeal to the Fifth Circuit, Monaco argued (inter alia) that CTFA §162.031(b)’s affirmative defense (permitting use of trust funds for trustee’s actual expenses related to construction) applied.
- The Fifth Circuit reversed and remanded with directions to discharge the debt, holding the affirmative defense applied and TAG failed to prove funds were misapplied outside that defense.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to recover amounts SARMECO paid (equitable subrogation) | TAG: permitted to recover via equitable subrogation for payments made to clear liens | Monaco: contended TAG lacks such standing and recovery might violate one-satisfaction rule | Court did not need to resolve this issue because it resolved case on affirmative defense (left other issues undecided) |
| Liability under CTFA and nondischargeability under §523(a)(4) | TAG: Monaco knowingly misapplied trust funds and debt is nondischargeable as defalcation in a fiduciary capacity | Monaco: certifications were not misapplication or, alternatively, funds were used for permissible project expenses | Lower courts found misapplication and nondischargeable debt, but Fifth Circuit reversed on different ground (affirmative defense) |
| Applicability of CTFA §162.031(b) affirmative defense (actual expenses related to construction) | TAG: overhead/profit/some expenses are not covered; such uses constitute misapplication | Monaco: sums paid (salaries, supervision, overhead) are "actual expenses directly related" to the project and fall within the statutory affirmative defense | Held: affirmative defense applies; salaries, supervision, and overhead (as approved by architect) qualify; TAG failed to prove impermissible misapplication, so debt must be discharged |
Key Cases Cited
- Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303 (5th Cir.) (standard of review for mixed questions of law and fact)
- In re Nicholas, 956 F.2d 110 (5th Cir.) (CTFA affirmative defense is open-ended; actual expenses include salary, telephone, overhead)
- Holladay v. CW&A, Inc., 60 S.W.3d 243 (Tex. App.—Corpus Christi 2001) (supporting broad interpretation of CTFA affirmative defense)
- In re Swor, [citation="347 F. App'x 113"] (5th Cir.) (trust fund receipts may be spent on other projects or general business overhead)