Michaels Electrical Supply Corp. v. Castagnola
8-15-08163
Bankr. E.D.N.Y.Apr 11, 2017Background
- Michaels Electrical Supply sold materials on credit to subcontractor Javier Castagnola for multiple home-improvement jobs between Dec. 2007 and Apr. 2008 and alleges $36,939.83 remains unpaid.
- Michaels contends payments Castagnola received for those jobs were Article 3-A trust funds under New York Lien Law, making Michaels a trust beneficiary entitled to payment and accounting.
- Michaels alleges Castagnola diverted or used trust funds for other purposes and failed to maintain required trust records, raising a presumption of diversion.
- Castagnola filed Chapter 7; Michaels sued under 11 U.S.C. § 523(a)(4) (defalcation in a fiduciary capacity and alternatively larceny) seeking nondischargeability.
- Castagnola moved to dismiss under Fed. R. Civ. P. 12(b)(6); the court treated factual allegations as true for the motion and addressed pleading standards for defalcation and larceny.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Article 3-A created an express/statutory trust and fiduciary duty making the debt nondischargeable for defalcation | Michaels: Article 3-A imposes statutory trust duties (receipt, accounting, payment to suppliers) when contractor receives job payments; Castagnola violated those duties | Castagnola: (argued motion to dismiss) factual allegations insufficient to show statutory trust + culpable state of mind | Court: Denied dismissal as to defalcation — Article 3-A can create an express statutory trust and Michaels’ allegations plausibly plead defalcation (including reckless or conscious disregard under Bullock) |
| Whether Castagnola committed larceny under § 523(a)(4) | Michaels: Misappropriation/failure to pay suppliers constitutes larceny under NY Lien Law § 79-a and § 523(a)(4) | Castagnola: Payments were lawfully received under contract; no unlawful original taking or intent to steal | Court: Granted dismissal of larceny claim — original possession was lawful and complaint fails to plead facts showing unlawful taking or fraudulent intent |
| Pleading standard for larceny (mens rea) | Michaels: Allegations suffice to show conversion/intent | Castagnola: Rule 9(b) and Twombly/Iqbal require particularized facts showing fraudulent intent | Court: Agreed with Castagnola — larceny allegations fail Rule 9(b) (must raise strong inference of fraud) and also fail Rule 8(a) |
| Overall motion to dismiss outcome | N/A | N/A | Court: Motion granted in part and denied in part — larceny claim dismissed; defalcation claim survives; defendant ordered to answer and status conference set |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for Rule 12(b)(6))
- Ashcroft v. Iqbal, 556 U.S. 662 (legal conclusions not assumed true; pleading must state plausible claim)
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (defalcation requires intentional or reckless conduct; conscious disregard standard)
- DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104 (materials courts may consider on motion to dismiss)
- Lerner v. Fleet Bank, N.A., 459 F.3d 273 (strong-inference standard for scienter under Rule 9(b))
- Hyman v. IRS (In re Hyman), 502 F.3d 61 (fraudulent intent for larceny must exist at time of taking)
- Kramer v. Time Warner Inc., 937 F.2d 767 (courts may take judicial notice of public records on motions to dismiss)