Wilcoxon Construction, Inc. v. Woodall (In Re Woodall)Wilcoxon Construction, Inc. v. Woodall (In Re Woodall)
MEMORANDUM OPINION
Thomas Woodall, Jr. (hereinafter “Debt- or”) filed a petition under Chapter 7 of the United States Bankruptcy Code on March 12,1992. On October 9,1992, Wilcoxon Construction, Inc. (hereinafter “Wilcoxon”) filed a Complaint to Determine Dischargeability of Debt pursuant to 11 U.S.C. § 523(a)(2) and (a)(6). On March 8, 1993, Wilcoxon filed a Motion for Leave to Amend the Complaint to add a count pursuant to 11 U.S.C. § 523(a)(4). After disposition of various pretrial motions, the only remaining count of the complaint seeks non-dischargeability of Wil-coxon’s debt pursuant to 11 U.S.C. § 523(a)(2).
The parties have filed Cross Motions for Summary Judgment. Summary judgment is appropriate upon a showing that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. F.R.B.P. 7056(c);
Miller v. Federal Deposit Ins. Corp.,
UNDISPUTED FACTS
On or about December 4, 1989, Wilcoxon and Woodall Corporation entered into a sub-subcontractor agreement whereby Wilcoxon agreed to complete the insulation and finish system for Woodall Corporation at an elementary school site. The Gassman Corporation was the general contractor. The Debtor herein was president of Woodall Corporation. The contract price was $51,000.00, payable through monthly requisitions. By June 1990, Wilcoxon had completed its contract but had not received the full contract price. Woodall Corporation owed Wilcoxon an outstanding balance of $21,422.00 for services rendered.
Debtor repeatedly told Wilcoxon that Woo-dall Corporation had not been paid by the Gassman Corporation for Wilcoxon’s work and that Wilcoxon would be paid as soon as such monies were received by Woodall Corporation. Actually, Gassman Corporation had paid Woodall Corporation all amounts due for services rendered. Woodall Corporation had used the monies to pay third parties. In reliance, Wilcoxon took no action against Woodall Corporation.
In January 1992, Wilcoxon initiated an action against the Debtor in the Circuit Court for Prince George’s County for “Breach of Contract and for Fraud under Real Property § 9-201 et seq. of the Annotated Code of Maryland.” Wilcoxon filed an Amended Motion for Summary Judgment requesting judgment on the fraud count of the complaint pursuant to the Maryland Construction Trust Statute. In its motion, Wilcoxon cited to Maryland Code Annotated Real Property § 9-201 et seq. and asserted that because “the monies paid to Woodall Corporation have not been paid over to Wilcoxon Construction, Inc. Thomas Woodall, Jr.’s liability to the plaintiff under. Real Property § 9-201 et seq. is patent.” Mr. Woodall, Debtor herein, did not oppose the motion and on January 31, 1992, an Order granting plaintiffs motion for summary judgment was entered in the amount of $21,422.00 (hereinafter referred to as the “Judgment”).
ARGUMENT
A discharge under Section 727 does not discharge an individual debtor from any debt for money, property, services, or an extension, renewal, or refinancing of credit,
(1) the debtor made the representations;
(2) that at the time the debtor knew the representations were false;
(3) that debtor made the representations with the intention and purpose of deceiving the creditor;
(4) that the creditor relied on such representations, and
(5) that the creditor sustained loss and damage as the proximate result of the .representations having been made.
In re Shipe,
Preliminarily, Plaintiff argues that the Judgment is
res judicata
and thus, the Debtor is precluded from x*elitigating those issues necessary and already decided. The doctrines of collateral estoppel and
res judi-cata
are applicable to dischargeability claims where there is a final judgment from a state court proceeding in which relevant facts and issues have been actually litigated by the state court and were necessary to the state court decision.
In re Piercy,
Plaintiff was awarded summary judgment against the Debtor upon a finding of liability pursuant to the Maryland Construction Trust Statute, Md.Code Ann.Real Prop. § 9-201 et seq. (1988 & Supp.1993). These statutory provisions provide as follows:
§ 9-201: Moneys to be held in trust; commingling.
(a) Moneys to be held in trust. — Any moneys paid under a contract by an owner to a contractor, or by the owner or contractor to a subcontractor for work done or materials furnished, or both, for or about a building by any subcontractor, shall be held in trust by the contractor or subcontractor, as trustee, for those subcontractors who did work or furnished materials, or both, for or about the building, for purposes of paying those subcontractors. § 9-202: Liability for fraudulent retention or use of moneys held in trust under § 9-201 of this subtitle.
Any officer, director, or employee of any contractor or subcontractor, who, with intent to defraud, retains or uses the moneys held in trust under § 9-201 of this subtitle, or any part thereof, for any purpose other than to pay those subcontractors for whom the moneys are held in trust, shall be personally liable to any person damaged by the action.
§ 9-203. Misuse of funds prima facie evidence of intent to defraud.
The use by a contractor or subcontractor or any officer, director, or employee of a contractor or subcontractor of any monies held in trust under § 9-201 of this subtitle, for any other purpose than to pay those subcontractors who did work or furnished materials, or both, for or about the building, shall be prima facie evidence of intent to defraud in a civil action.
The Subtitle outlined above entitled “Trust Relationships in the Construction Industry” became effective on July 1, 1987. In 1993,
after
the Judgment was obtained by Plaintiff, the Court of Appeals of Maryland, in a case of first impression, rendered a decision that clarified the statute and its application. Pri- or to that decision, only the federal bankruptcy courts had interpreted the statute. This court will briefly outline the state of the law at the time the Plaintiff obtained its
The bankruptcy courts interpreted the statute as it related to dischargeability complaints brought pursuant to 11 U.S.C. § 523(a)(4). Section 523(a)(4) excepts from discharge any debt for fraud or defalcation while acting in a fiduciary capacity. In several proceedings, plaintiffs argued that liability under the Maryland Construction Trust Statute conclusively established the non-dis-chargeability of their debts.
“In order for a debt to be non-dischargea-ble under Section 523(a)(4) arising from a breach of fiduciary duty, the debtor must have been acting as a trustee of an express or technical trust.”
In re Holmes,
The court also defined the standard of fraud necessary for imposition of liability under the Maryland Construction Trust Statute. “Fraud under [the statute] can be viewed as implied fraud or fraud in law.”
In re Piercy,
As interpreted by the written opinions of the court, at the time of the entry of the Judgment, Md.Code Ann.Real Prop. § 9-203 imposed personal liability under Md.Code Ann.Real Prop. § 9-202 predicated on prima facie evidence of intent to defraud by the mere showing that the monies were used for a purpose other than to pay the subcontractors. As evidenced by the pleadings filed in state court, the Plaintiff did not have to prove, and indeed, did not even plead, actual fraud. At the time that the Plaintiff brought the action, it had the burden of proving only that the monies earmarked for Plaintiff were used for another purpose. Because the issue of actual fraud was neither necessary to nor actually decided by the state court at the time the Judgment was obtained, the doctrine of res judicata is inapplicable. As a result, the burden remains upon the Plaintiff to prove all necessary elements of its § 523(a)(2)(A) action.
In an attempt to circumvent this effect, Plaintiff argues that because of the Court of Appeals’ subsequent decision in
Ferguson Trenching Co., Inc. v. Kiehne,
The first issue addressed by the Court of Appeals was whether Md.Code Ann. Real Prop. § 9-201 imposed a fiduciary duty on Kiehne.
Id.
Citing with favor the decisions of the bankruptcy courts, the Court of Appeals held that Md.Code Ann.Real Prop. § 9-201 “creates a trust relationship between the contractor or subcontractor that has received payment from an owner and the subcontractor for whose performance the owner has paid. Nothing in the statute makes a corporate officer, director, or employee a fi-dueiary with respect to a party that has entered into a contract with the corporation.” Id.
The second issue was whether
proof of
diversion of funds for a purpose other than paying the subcontractor constitutes conclusive proof of an intent to defraud. Ferguson argued that “prima facie evidence” constituted conclusive proof of an intent to defraud. The Court of Appeals bifurcated the issue, defining both “prima facie evidence” and “intent to defraud”.
Id.
The Court of Appeals rejected Ferguson’s argument that proof of diversion of trust funds equals proof of intent to defraud. Such reading of “prima facie evidence” would create an irrebuttable, or conclusive presumption, for which no authority exists.
Id.
Plaintiff argues that in light of the Court of Appeals’ opinion in
Ferguson,
handed down after the Judgment, in which opinion the Court of Appeals made a finding of actual intent to defraud a necessary element to invoke liability against the officer pursuant to Md.Code Ann.Real Prop. § 9-202, the state court, in rendering the Judgment,
sub silen-tio
must have found that the Debtor actually committed fraud. While it is true that subsequent to the
Ferguson
decision a plaintiff must prove an actual intent to defraud by clear and convincing evidence,
Ferguson, supra
Additionally, even if the Debtor was precluded from relitigating the issue of actual fraud, the Plaintiff still must prove that the Debtor obtained money, property or services from the Plaintiff on account of such fraud. A favorable judgment, post-Ferguson, would aid a creditor on the element of fraud only; it would not automatically render a particular debt non-dischargeable.
The parties agree that the court has before it all relevant facts from which to render its decision. Thus, from the stipulated facts, the court shall determine whether the Plaintiff, has met its burden of proving non-dischargeability.
Plaintiff argues that Debtor committed actual fraud when the Debtor told the Plaintiff that he had not received money from Gassman and instead, paid the money to third parties. The fraud necessary to sustain a non-dischargeability action is positive fraud or fraud in fact, involving moral turpitude or intentional wrong.
In re Shipe,
Even if the uncontroverted facts support a finding that the Debtor knowingly made false representations, the Plaintiff has failed to prov.e that the Debtor obtained money, property or services on account of such false representations. Plaintiff argues that the Debtor obtained money properly belonging to the Plaintiff, in continued reliance upon the Construction Trust Statute. The mere fact that statutory liability arises is not sufficient to invoke § 523(a)(2). Money or services must actually come to the debtor because of the false representation.
In re Burgess,
To invoke § 523(a)(2), the fraud must have existed at the time of, and been the methodology by which, the money, property or services were obtained. “The fraudulent intent must exist at the inception of the debt.”
In re Ethridge,
Rather than deny summary judgment to facilitate further discovery, the court shall rule on the pending motions. Plaintiffs failure to satisfy all necessary elements of § 523(a)(2)(A) demonstrates to this court that no material facts are in dispute. The Supreme Court has held as follows:
“... the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial. In such a situation, there can be “no genuine issue as to any material fact”, since a complete failure of proof concerning an essential element of the nonmoving party’s case necessarily renders all other facts immaterial. The moving party is “entitled to a judgment as a matter of law” because the non-moving party has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof.”
Celotex Corp. v. Catrett,477 U.S. 317 , 322-23,106 S.Ct. 2548 , 2552,91 L.Ed.2d 265 (1986).
In its earlier Order on Debtor’s Motion to Dismiss Complaint, this court ruled that “because the facts asserted demonstrate that the indebtedness under the contract of the Plaintiff with the Defendant arose before any misrepresentation was allegedly made by the Debtor to the Plaintiff, at first blush, it would seem that there is no demonstrated misrepresentation or fraud in the creation of the debt, as required by § 523(a)(2) ... Indebtedness which may be non-dischargeable under § 523(a)(2) by virtue of the alleged fraud, would be the harm or damage occasioned to Plaintiff by the alleged reliance upon the alleged false representation ... Such damage will have to be proven by Plaintiff.” Notwithstanding this court’s specific direction of the Plaintiff to those elements which required further proof, Plaintiff has failed to put forward facts to establish all necessary elements of this claim. Because Plaintiff has failed to make a showing sufficient to establish that the Debtor obtained money, property or services by fraud, false pretenses or false representations, summary judgment shall be entered in favor of the Debtor. An order shall be entered in conformity with this ruling.
Notes
. In dismissing the count brought pursuant to 11 U.S.C. 523(a)(4), this court held that Md.Code Ann.Real Prop. § 9-201 did not create a trust and fiduciary duty upon the individual as required for the applicability of section 523(a)(4) (citing
In re Holmes,
. This holding, however, does not necessarily render 11 U.S.C. § 523(a)(4) inapplicable in every situation wherein a corporate officer diverts monies from a corporate trust in violation of the Maryland Construction Trust Statute. Under general principles of corporate law, corporate officers are personally liable for those torts which they personally commit, or which they inspire or participate in, even though performed in the name of an artificial body.
See generally, In re Pontier,
Further, "an officer who causes a corporate trustee to commit a breach of trust causing loss to the trust administered by the corporation is personally liable to the beneficiaries for the loss.”
In re Baird,