Rochester Lumber Company v. Millner

Filing 12

ORDER affirming the decision of United States Bankruptcy Judge John C. Ninfo, II finding that the underlying action was not required to be brought in a representative capacity and that Rochester Lumber Company is entitled to an order that Michael Millners indebtedness to it is a non-dischargeable debt. ***CLERK TO FOLLOW UP. Signed by Hon. David G. Larimer on 6/29/11. (EMA)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
_______________________________________________
ROCHESTER LUMBER COMPANY,

Plaintiff-Appellee,
DECISION AND ORDER
10-CV-6490L
v.
MICHAEL G. MILLNER,

Defendant-Appellant.
________________________________________________
This is an appeal from the July 13, 2010 decision of United States Bankruptcy Judge John
C. Ninfo, II (Dkt. #2-12). In that decision and order, Judge Ninfo determined, inter alia, that in
debtor Michael G. Millner’s (“Millner”) Chapter 7 bankruptcy case, an existing money judgment
against Millner and in favor of Rochester Lumber Company (“RLC”) was a non-dischargeable debt.
Judge Ninfo’s decision was entered after he conducted a hearing in an adversary proceeding
brought by the creditor, RLC. RLC contended that the judgment is nondischargeable pursuant to
§523 of the Bankruptcy Code, because its factual basis was Miller’s diversion of building loan funds
in violation of New York Lien Law Article 3-A, which constituted larceny or fraud. See 11 U.S.C.
§ 523(a)(2) and (4); N.Y. Lien Law Art. 3-A.
RLC moved for partial summary judgment for a determination that Millner’s debt of
$112,493.81 to RLC was nondischargeable. Judge Ninfo granted RLC’s motion for partial summary
judgment, determined that Millner’s debt was nondischargeable, and found that RLC was entitled
to judgment in its individual capacity (not in a representative capacity on behalf of trust
beneficiaries) in the requested amount, minus accrued finance charges and mortgage interest

payments made by Millner. After a final hearing on August 9, 2010, the parties stipulated that the
amount of the net trust fund diversion was $48,266.78.
Issues addressed by Judge Ninfo in deciding RLC’s motion for partial summary judgment
included whether the adversary proceeding was defective, because it had been commenced by RLC
to enforce its own rights under a trust fund, rather than in a representative capacity on behalf of all
of the trust fund beneficiaries, as prescribed by N.Y. Lien Law Art. 3-A, Section 77(1) (“Section
77”) for actions to enforce such trusts.
On appeal, Millner argues that because the action was not properly commenced under Section
77, a further hearing is necessary in order to allow any other trust fund beneficiaries to intervene,
appear and assert any claims they might have against Millner, whereupon they would be entitled to
a pro rata share of the recovery against Millner by RLC. RLC argues, and Judge Ninfo decided, that
the action is not governed by the requirements of Section 77, because the proceeding is not one to
enforce a trust, but rather to determine whether a debt to a creditor should be declared
nondischargeable on the grounds of fraud and/or larceny, under the provisions of 11 U.S.C.
§523(a)(4).
I have carefully reviewed the briefs filed with the Bankruptcy Court and here on appeal, and
I reach the same conclusions as Judge Ninfo. The Bankruptcy Court’s decision is thus affirmed.
The applicable standards of review are well settled. A bankruptcy court’s factual findings
are accepted unless clearly erroneous. Fed. R. Bankr. Proc. 8013. However, in reviewing a grant
of summary judgment, the bankruptcy court’s conclusions of law are reviewed de novo, because the
determination that there are no material questions of fact is essentially a legal conclusion. See In re
Assoc. of Graphic Commc’ns, Inc., 2011 U.S. Dist. LEXIS 35702 at *2 (S.D.N.Y. 2011).
It is undisputed that the indebtedness at issue arose after Millner, a general contractor,
diverted trust funds from a statutory trust created pursuant to N.Y. Lien Law Article 3-A (the
“Trust”). The statute requires such funds to be held by a home improvement contractor for the
benefit of materialmen and others involved in a real property improvement project. Rochester
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Lumber, a Trust beneficiary which had supplied building materials to Millner for which it was not
paid, ultimately brought an action against Millner in New York State Supreme Court, Monroe
County, and was awarded a money judgment against Millner in the amount of $272,014.68 on June
20, 2007.
Millner argues that the Bankruptcy Court adversary proceeding by RLC is actually an action
to enforce the Trust pursuant to the New York Lien Law, Section 77, and claims that it is defective
because it does not comply with Section 77's requirements for an action to enforce a trust.
I disagree. I find that the adversary proceeding focused on whether the judgment against
Millner was dischargeable in bankruptcy on the basis of fraud or larceny. See Kovalsky-Carr Elec.
Supply Co. v. Young, 313 B.R. 555, 560 (W.D.N.Y. 2004) (adversary proceeding brought pursuant
to 11 U.S.C. §523(a)(4), by a trust fund beneficiary with an enforceable right to payment such as a
state court judgment, arises under the federal statute and is not subject to Section 77 requirements).
See generally 11 U.S.C. §523(a)(4) (bankruptcy discharge does not apply to a debt arising from
larceny); N.Y. Lien Law §79-a (diversion of Art. 3-A trust funds constitutes larceny, punishable by
penal law).
Millner’s contention that the adversary proceeding arises under Section 77of the Lien Law
is not persuasive, and he points to no legal authority that would extend that section’s provisions in
a proceeding to determine the dischargeability of a debt (in the form of an enforceable money
judgment) on grounds of larceny and/or fraud in an adversary proceeding arising under 11 U.S.C.
§523(a)(4). The cases upon which he relies concern matters explicitly brought pursuant to Section
77, or which are otherwise inapposite.
I therefore reach the same conclusion as Judge Ninfo: that the underlying action in
Bankruptcy Court is not one for enforcement of a trust under Section 77, and is therefore not
required to be brought in a representative capacity. There is no basis for reversal here.

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CONCLUSION
The decision of United States Bankruptcy Judge John C. Ninfo, II finding that the underlying
action was not required to be brought in a representative capacity and that Rochester Lumber
Company is entitled to an order that Michael Millner’s indebtedness to it is a non-dischargeable debt,
is in all respects affirmed.
IT IS SO ORDERED.

_______________________________________
DAVID G. LARIMER
United States District Judge
Dated: Rochester, New York
June 29, 2011.

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