MEMORANDUM DECISION
Introduction
Plaintiffs — local labor unions and trustees of various union benefit funds — filed this adversary proceeding to determine the dischargeability of debts incurred by Schultz while engaged in the business of construction contracting. The dispute centers principally on the proper interpretation on Nevada’s “contractor embezzlement” statute — Nev.Rev.Stat. § 205.310 — and its relationship to Bankruptcy Code § 523(a)(4), which excepts from discharge certain debts incurred in a fiduciary capacity, for embezzlement, or larceny. A trial was held on May 8, 1984, and the matter submitted for the Court’s decision. For the reasons set forth below, the Court concludes that the subject debts are discharge-able. 1
Facts
The facts recited below are derived from the stipulations of the parties, uncontro-verted testimony, ánd documentary evidence. Disputed issues are expressly identified as such.
William H. Schultz, the debtor defendant, is a licensed construction contractor, and has operated through several business entities during past years. At various times, he employed members of the Teamsters Local 533, Laborers Local 169, and Operating Engineers Local 3. The employment agreements obligated Schultz inter alia to report the number of hours worked by union members and to make certain payments for fringe benefits to union trust funds, represented in this action by their Trustees. Audits were performed when delinquencies in payments were discovered.
The fringe benefits unpaid to Teamsters and Laborers trust funds total $1,428.80 and $5,237.61 respectively, plus liquidated damages, interest and audit fees. These figures represent delinquencies for the months of April through October of 1981. During that time Schultz owned and operated W.H. Schultz Construction Company, and was involved in the Warren Estates project, for which Laborers and one Teamster — the debtor’s brother — supplied labor. Although Schultz was paid in full on his approximately $1 million bid, expenses ran much higher, and the project showed a $200,000 loss.
The benefits due the Operating Engineers trust funds total $1,018.13 in principal amount. The delinquencies in payments occurred during 1979 and mid 1980 in connection with the Mount Rose project, for which the bid was approximately $4.5 million. At that time, Schultz was associated with Mr. Hedlund and operated through a corporation, Hedlund & Schultz Construction Co., Inc. Sometime in the Fall of 1980, Schultz sold all of his stock to Hedlund, and dissociated himself from the corporation. The Mount Rose job was completed by the corporation in the summer of 1981; the corporation received at least some payments on its own contract after the split of Hedlund and Schultz.
The only contested factual issue involves this debt to the Operating Engineers. Schultz claims that the debt is a corporate liability, rather than his own personal obligation, alleging that it was the corporation which hired the workers and contracted with the union. The Operating Engineers contend that the only Collective Bargaining Agreement in effect during the relevant time period was signed by Schultz in 1977 in his individual capacity. They allege that Schultz failed to notify the union of his
Discussion
Plaintiffs contend that the debts at issue are nondischargeable under Bankruptcy Code § 523(a)(4) as they arise from defalcation in a fiduciary capacity, or alternatively, from embezzlement. 2
Dischargeability provisions are to be strictly construed against the creditor and in favor of the debtor, so as to effectuate the Congressional policy of providing the honest debtor with a fresh start.
Gleason v. Thaw,
A. Fiduciary Capacity
The meaning of “fiduciary” in § 523(a)(4) is an issue of federal law which limits its application to express or technical trusts.
Davis v. Aetna Acceptance Co.,
Although the concept of fiduciary is to be narrowly defined as a matter of federal law, state law is to be consulted to determine when a trust in this strict sense exists.
Pedrazzini,
Plaintiffs here have conceded that the parties’ contracts do not create the requisite trust, but merely establish an ordinary commercial relationship between the debtors and the trust funds. 4 Plaintiffs’ Trial Statement at 11. Instead, Plaintiffs urge that the “fiduciary capacity” referred to in § 523(a)(4) is imposed by statute, in particular Nev.Rev.Stat. § 205.310:
Contractor failing to pay for labor or material. Every person having entered into a contract to supply any labor or materials for the value or price of which any lien might lawfully be filed upon the property of another, who shall receive the full price or consideration thereof, or the amount of any account stated thereon, or part payment thereon, shall be deemed to receive the same as the agent of the party with whom such contract was made, his successor or assign, for the purpose of paying all claims for labor and materials supplied, insofar as the money so received will pay such claims.
This statute appears in the embezzlement section of Chapter 205 which concerns “Crimes Against Property.” The general definition of embezzlement is found at Nev. Rev.Stat. § 205.300, which imposes criminal liability on an agent who uses or appropriates property for any purpose other than that for which it was deposited or entrusted. 5 According to Plaintiffs, § 205.310, along with other Nevada statutes pertaining to the duties of employers generally to pay agreed upon compensation, 6 creates a special relationship between the contractor and the union members, analogous to that found by other courts to give rise to a statutory trust within the purview of § 523(a)(4).
By now, many courts have had an opportunity to consider whether particular state statutes give rise to an “express trust” in the owner-contractor-subcontractor context. Although it may appear at first that the courts are in substantial disagreement,
Generally, those courts which have found the requisite trust were dealing with statutes which expressly designate the funds received by the contractor as “trust funds”, and impose specific duties on the contractor for the disposition of the funds.
7
See,
e.g. Cary Lumber v. Bell,
On the other hand, when dealing with general statutes which only impose criminal or other penalties for failure of a contractor to make a certain disposition of funds, the vast majority of courts, including the Court of Appeals for the Ninth Circuit, have refused to find the requisite “fiduciary capacity”. See,
e.g. Pedrazzini, supra
(9th Cir.) (California law)
9
;
Thornton, supra
(9th Cir.) (Oregon law);
Angelle, supra
(5th Cir.) (Louisiana law);
Wilson v. Mettetal (In re Mettetal),
Plaintiffs urge that the Court follow the Tenth Circuit’s decision in
Allen v. Romero (In re Romero),
Unfortunately, the instant matter does not fit neatly within one or the other main lines of cases discussed so far. Statutes construed in both groups prescribe criminal penalties for a contractor who diverts funds to an unauthorized purpose, as does Nev.Rev.Stat. § 205.310 when read in conjunction with § 205.300. As in the
Pedraz-zini
group, the funds received are not declared to be trust funds, nor the contractor a trustee, and no typical fiduciary duties are imposed, such as the duty to segregate and account for funds. However, § 205.-310 does deem the contractor to be an agent of the payor of the funds, for the purpose of paying the claims of laborers and suppliers. Arguably, this language gives rise to a special relationship independent of the parties’ contractual agreement, imposed at the time funds are paid to the contractor, thus prior to any claim of wrongdoing, and which requires a specific disposition of funds. The
Romero
problem is avoided because, one might argue, the relationship does not arise in the abstract, but between particular individuals — the payor of the funds and the contractor— since the contractor is “deemed to be an agent” only after he has received payment. Although the general rule is that the defalcations of agents do not create nondis-chargeable debts,
see
3 Collier on Bankruptcy ¶ 523.14 at 523-100;
Great American Insurance Co. v. Storms (In re Storms),
In
Hensel v. Barker,
Judge Hill reconciles the “agency” cases by noting that one acts as a fiduciary in the strict sense only when the money or property he handles is not his own or for his own benefit but for the benefit of another.
11
Applying these principles to the matter
sub judice,
the Court is not con
Moreover, in order for a debt to arise from a default in a fiduciary capacity, the fiduciary duty must be owed directly to the complaining creditor.
Intercontinental Life Insurance Co. v. Good (In re Good),
The Court’s interpretation of § 205.310 does not render meaningless the language which deems the contractor to be an agent. Since § 205.310 does not itself describe any crime, the apparent purpose of that troublesome provision is solely to bring the contractor within the definition of one who may be liable for embezzlement under Nev.Rev.Stat. § 205.300. 12 Thus, the statute creates an “agency” only for the purpose of criminal liability. 13
Plaintiffs here have offered no evidence at all that the debtors received a personal benefit from the misapplication of corporate funds; thus no debt arises to corporate creditors for any wrongdoing by Schultz acting as a corporate officer. Of course, Operating Engineers insist that their debt is a personal liability of Schultz, and not a liability of his corporation. Even assuming this is true, the debtor’s liability arises solely by virtue of a contract obligation, and not from a defalcation in a fiduciary capacity.
B. Embezzlement
Plaintiffs also proceed on the theory that their claims are nondischargeable in that they arise from the debtors’ embezzlement. Unlike former § 17(a)(4) of the Act, § 523(a)(4) does not require that embezzlement be committed while acting in a fiduciary capacity; the sole question under the Code is whether embezzlement occurred.
Great American Insurance Co. v. Graziano (In re Graziano),
The federal definition of “embezzlement” for dischargeability purposes is the fraudulent appropriation of property of another by a person to whom such property has been entrusted or into whose hands it has lawfully come.
Graziano, supra
at 594;
Great American Insurance Co. v. Storms (In re Storms)
Plaintiffs have failed to prove the elements of embezzlement. As discussed above, when the contractor receives pay
This principle applies as well to the corporation which received payment as the contractor on the Mount Rose project. Ownership of the funds passed upon transfer to the corporation. Since the corporation cannot embezzle its own property, Schultz as a corporate officer cannot be held liable for causing or participating in any corporate wrongdoing. In addition, as noted above, there is no evidence at all that Schultz misappropriated or diverted corporate funds to any use other than for a corporate purpose.
Even if a contractor could be said to “embezzle” in this context, the Code requires clear and convincing evidence of fraud.
Graziano,
The evidence presented to the Court militates against a finding of fraudulent intent or moral turpitude. On the Warren Estates job, the debtor sustained a $200,000 loss on his $1 million bid, while the delinquencies in the payments to the Teamsters and Laborers total less than $7,000. In addition, the only Teamster working on that project was the debtor’s brother. These circumstances suggest a totally innocent default.
As for the Operating Engineers, their claim of little more than $1,000 in principal amount arises from the Mount Rose project, for which the bid was $4.5 million. The small amount of the delinquency compared to the total project cost could easily have been the result of an innocent mistake. Moreover, the debtor was only one corporate officer with access to corporate funds; there is no evidence that he had sole access or sole responsibility for payment of business expenses. Again, Operating Engineers insist that their claim against Schultz represents his personal liability, and not that of the corporation. However, they have failed to connect this liability to any wrongful diversion of funds, or any intent to déprive, deceive or defraud: The debt “arises from” a contract obligation, not from any conduct evidencing moral turpitude.
With no proof of any default other than the fact of nonpayment, the Court cannot find these debts nondischargeable. It hardly needs saying that the failure to pay a debt, without more, does not constitute clear and convincing evidence of fraud.
See Spurgeon v. Adams,
Plaintiffs contend that the Court should look to state law concerning embezzlement by contractors in order to find the subject debts nondischargeable. The relevant statutes, discussed above, are Nev.Rev.Stat. § 205.300, which declares it to be embezzlement when an agent uses property entrust
Plaintiffs have misconceived the applicability of state law in this context. Exceptions to discharge are a matter of federal bankruptcy law; state law may be consulted only to the extent that it is not in conflict with the Congressional policy of providing a fresh start to the honest debt- or.
See Local Loan Co. v. Hunt,
The federal nature of bankruptcy law which grants the right of discharge, requires that the Court apply federal definitions and standards to the terms found in § 523(a)(2), (4), (6), as these sections are within the exclusive jurisdiction of the Bankruptcy Court. § 523(c). This has not always been the case. Prior to 1970, the dischargeability of individual debts was within state court jurisdiction. The 1970 amendments to the Bankruptcy Act which gave the Bankruptcy Court exclusive jurisdiction over the question of discharge of these types of debts (formerly found in § 17(a) of the Act) have been interpreted by many courts as creating a new federal right of action entirely distinct from any state cause of action. See,
e.g., Brown v. Felsen,
the grant of exclusive jurisdiction over matters of dischargeability found in the 1970 amendments coupled with the interest in uniformity which prompted their passage, and in light of their failure to make any reference to state law, justifies a finding that federal law governs both substance and procedure of § 17 cases
Crea, supra, at 243. As one court concluded:
[s]ince the passage of the Dischargeability Act, we are no longer sitting as a state court interpreting state law ... Rather, we sit today as a federal court interpreting a federal statute which provides the exclusive relief for a bankrupt and the exclusive remedy for a creditor
Huff, supra, at 356, quoting In re Campbell, No. 56018 (S.D. Ohio 1972) aff'd on appeal (S.D. Ohio, Feb. 12, 1973).
In
Storms,
the court considered the relationship between § 523(a)(4) and a state statute which deems it to be larceny for an insurance agent to fail to remit premiums collected to the insurance company. Applying the above principles, the court held the statute inapplicable in the dischargeability context, reasoning that the federal definition of “larceny” requires that the original taking itself be unlawful, a situation obviously not present in that case.
In
Crea,
the court dealt with a state statute which prescribes criminal penalties for “theft” when a contractor fails to pay for labor and materials after receiving payment himself. Since the statute lacks any requirement of intent to defraud, the court held that its violation does not give rise to a
per se
nondischargeable debt.
Therefore, since dischargeability is a matter to be determined by federal law, the violation of a state statute is relevant only where the state and federal definitions, and standards of liability and proof, are the same. 16 Under federal law, “embezzlement” requires that the debtor misappropriate property of another, and do so with fraudulent intent, with the burden on the creditor to offer affirmative, clear, and convincing evidence of fraud. The Nevada statutes at issue here require much less in the contractor-supplier context. Thus, even if Plaintiffs evidence were sufficient to show a violation of state “embezzlement” law, it would be subversive of federal policy for the Court to find that this is determinative of the dischargeability issue. As the court in Crea observed in a similar context:
Such a holding would return this court to the position of a federal court interpreting state law. It would allow individual states to dictate the terms of discharge-ability. If this were the case, the granting of a discharge would be far from uniform. These were the problems the 1970 amendments were designed to eliminate.
Conclusion
Plaintiffs have failed to prove that their claims for fringe benefits arise from defalcation in a fiduciary capacity, or any type of fraudulent conduct such as embezzlement or larceny. Accordingly, the debts are dischargeable. Judgment shall be entered for Defendants.
Notes
. Although the complaint was entitled “Objection to Discharge and Complaint to Determine the Dischargeability of Debts”, Plaintiffs at no time addressed any issues other than those raised by § 523. Therefore, debtors will be granted a general discharge pursuant to 11 U.S.C. § 727.
This memorandum decision shall constitute findings of fact and conclusions of law. Bankruptcy Rule 7052.
. 11 U.S.C. § 523(a)(4) provides in pertinent part:
A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(4) for fraud or defalcation while action in a fiduciary capacity, embezzlement or larceny....
"Bankruptcy Code” and “Code” refer to the Bankruptcy Reform Act of 1978, 11 U.S.C. §§ 101 to 151326. "Bankruptcy Act” and “Act" refer to the former federal law, 11 U.S.C. §§ 1 to 1103 (repealed 1979).
. These cases were decided under the predecessor of § 523(a)(4) — Bankruptcy Act § 17(a)(4)— which excepted from discharge debts created by "fraud, embezzlement, misappropriation or defalcation while acting as an officer or in any fiduciary capacity”. Since these provisions are almost identical, the case law construing Act § 17(a)(4) should be followed in interpreting Code § 523(a)(4).
Littlejohn v. Englund (In re Englund),
.
See, e.g. Livolsi v. Johnston (In re Johnston),
. Nev.Rev.Stat. § 205.300:
1. -Any bailee of any money, goods or property, who shall convert the same to his own use, with the intent to steal the same or to defraud the owner or owners thereof and any agent, manager or clerk of any person, corporation, association or partnership; or any person with whom any money, property or effects shall have been deposited or entrusted, who shall use or appropriate such money, property or effects or any part thereof in any manner or for any other purpose than that for which the same was deposited or entrusted, shall be guilty of embezzlement, and shall be punished in the manner prescribed by law for the stealing or larceny of property of the kind and name of the money, goods, property or effects so taken, converted, stolen, used or appropriated.
.Plaintiffs point in particular to Nev.Rev.Stat. § 608.100 which declares it unlawful for an employer to pay lower wages or other compensation than that agreed upon; and Nev.Rev.Stat. § 613.125 which also imposes criminal penalties on an employer who willfully or with intent to defraud fails to make required payments to any employee health, welfare, or benefit fund.
.
Cf. Eau Claire County v. Loken (In re Loken),
. Cited with approval by the Ninth Circuit in
Pedrazzini,
. In
Pedrazzini,
for example, the Ninth Circuit construed a statutory scheme which prescribes disciplinary action for a contractor who diverts funds intended for the completion of a particular project, or who fails to pay subcontractors within ten days of the receipt of a progress payment; and which imposes criminal penalties on a contractor who receives money for the purpose of obtaining or paying for labor and supplies, but wrongfully diverts the funds to some other use.
.See also
Toledo Area Construction Workers Health and Welfare Plan v. Hayden (In re Hayden),
. This is a necessary but not sufficient condition. See,
e.g. Spurgeon v. Adams (In re Adams),
. Quoted at note 5, supra.
. This construction accords with the two Nevada Supreme Court cases dealing with § 205.310. In
Walker Bank & Trust Co. v. Smith,
Under these circumstances, the bankruptcy court should not use § 205.310 as the basis for finding an express or technical trust. Where a criminal statute provides for civil liability, this weighs in favor of using the statute as a predicate for excepting a debt from discharge.
Wilmington Trust Co.
v.
Martin (In re Martin),
. As in the case of Schultz personally, the corporation, as contractor on the Mount Rose project, received payment pursuant to its own contract with the payor of the funds; thus the funds became the property of the corporation, and were not held "in trust” for the benefit of labor and material suppliers.
.
See abo Wachovia Bank & Trust Co. v. Banister (In re Banister), 737
F.2d 225, 228-229 (2nd Cir.1984);
Ealy Campbell Mobile Homes, Inc. v. Whitlock (In re Whitlock),
. The same principle applies in a discharge-ability proceeding when considering whether to give collateral estoppel effect to a prior state court judgment. For the Ninth Circuit’s position on this issue, see
Ozai v. Tabuena (In re Ozai),