Hensley v. Margolis et al

Filing 7

MEMORANDUM OPINION AND ORDER ON APPEAL. The Court finds no error in the findings of the Bankruptcy Court in the above-numbered and captioned case, and its judgment is hereby AFFIRMED. Signed by Judge Michael H. Schneider on 9/22/15. (cm, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
SHERMAN DIVISION
IN RE:

§
§
BARRY IRWIN HENSLEY
§
______________________________________ §
§
§
HARRY (SONNY) MARGOLIS, et al.
§
§
v.
§
§
BARRY IRWIN HENSLEY
§

Case No. 4:14-cv-770

MEMORANDUM OPINION AND ORDER ON APPEAL
Currently before the Court is Appellant Barry Irwin Hensley’s appeal of the
Bankruptcy Court’s orders entering judgment against Appellant in its ruling on, and denying
evidentiary objections raised in response to, Appellees’ Second Motion for Summary Judgment
disposing of all claims of the parties. Jurisdiction over this matter is proper in this Court as
an appeal from a final judgment of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a).
After reviewing the parties’ briefs, the record in this case, and the applicable law, the
Court AFFIRMS the order of the Bankruptcy Court.
I.

PROCEDURAL AND FACTUAL BACKGROUND
On November 26, 2012, Appellees Harry Margolis and Dana Margolis filed their original

complaint in Adversary Proceeding No. 12-4180 in the United States Bankruptcy Court for the
Eastern District of Texas. On March 26, 2014, Appellees (Plaintiffs in the adversary action)
filed their Second Motion for Summary Judgment (Doc. No. 24 in USBC Case No. 12-4180 1),

1

The Court will refer to docket entries in the adversary action as “USBC Doc. No. XX” and to
docket entries in the instant case as “Doc. No. XX.”
1

which is at the core of the instant appeal. On October 1, 2014, the Bankruptcy Court entered
four documents: (1) an Order Granting Plaintiffs’ Second Motion for Summary Judgment
(USBC Doc. No. 33); (2) an Order Denying Defendant’s Evidentiary Objections Contained in
Defendant’s Response to Plaintiffs’ Second Motion for Summary Judgment (USBC Doc. No.
34); (3) a Judgment (USBC Doc. No. 35); and (4) a Memorandum of Decision Regarding
Plaintiffs’ Second Motion for Summary Judgment (USBC Doc. No. 36). On October 14, 2014,
Appellant filed a Notice of Appeal in the Bankruptcy Court (USBC Doc. No. 41) from “the
judgment, order, or decree of the bankruptcy judge entered in this adversary proceeding on the
1st day of October 2014.” The same Notice of Appeal, with a Bankruptcy Cover Sheet, a copy
of the docket of the Bankruptcy Court adversary proceeding, a copy of the Judgment and a copy
of the Memorandum of Decision attached, was then filed in this Court on November 25, 2014
(Doc. No. 1). The Appellant’s Brief was filed on December 2, 2014 (Doc. No. 2) and the
Appellees’ Brief was filed on December 30, 2014 (Doc. No. 4). On July 14, 2015, Appellees
filed Notice (Doc. No. 6) of the Bankruptcy Court’s Order in Bankruptcy Case No. 15-40508, a
Chapter 13 proceeding, lifting the automatic stay to permit litigation to proceed.
This case revolves around a contract between Appellees, a couple who wished to have a
home built, and Appellant, a contractor who wished to build the home. Although the parties
often disagree about what was promised, for how much, and what happened at the time the
contract fell apart, the main thrust of the matter is that Appellees claim they entered into a
contract with Appellant and paid him substantial sums of money in his role as a contractor.
Appellant then allegedly diverted some of that money to other uses and ultimately could not
complete the project. The parties then proceeded to litigate in state court; arbitrate before a statecourt-ordered Arbitrator; and, on Appellant’s filing for Chapter 7 relief, in the Bankruptcy Court.

2

Appellees filed the adversary action in the Bankruptcy Court and obtained a lift of the automatic
stay in the Chapter 7 proceeding to allow the matter that is the subject of this appeal to continue.
The Bankruptcy Court’s Memorandum of Decision contains a succinct Factual and
Procedural Background of the case as it was determined in the adversary action (referring to
Appellant as Defendant and Appellees as Plaintiffs):
In mid-2008, the Plaintiffs began discussions with the Defendant with
regard to the proposed construction of a residence for the Plaintiffs in the
Shaddock Creek Estates development near Frisco, Texas. After having received
an estimate from the Defendant regarding the costs of constructing the home, the
Plaintiffs contracted with the Defendant in the summer of 2009 to construct the
residence. The construction process was a contentious one, with each side now
contending that various actions of the other precluded the successful construction
of the house as contemplated.
On September 10, 2010, the Plaintiffs filed a state court lawsuit against the
Defendant for breach of fiduciary relationship before the 219th Judicial District
Court of Collin County, Texas (the “State Court”) under case no. 219-03753-2010
(the “State Court Litigation”). On February 24, 2012, the State Court entered an
order abating the prosecution in state court and submitting the matter to
arbitration by the agreement of the parties. Richard Abernathy, Esq. was
appointed as the Arbitrator by the State Court.
Before that arbitration could take place, on October 15, 2012, the
Defendant filed a voluntary petition for relief under Chapter 7 of the Bankruptcy
Code in this Court under Case No. 12-42785, the Hon. Brenda T. Rhoades,
presiding. After a contested hearing in the bankruptcy case, the Court modified
the stay in order to allow the arbitration hearing to take place and for a final
judgment to be entered. FN5.
FN5. Meanwhile, the Plaintiffs had timely filed a complaint to
determine dischargeability of a debt on November 26, 2012,
seeking to except their claims from the scope of any discharge
granted to the Defendant. The prosecution of this adversary
proceeding was subsequently abated to allow that state court
process to be completed. That abatement was terminated on
August 16, 2013.
On April 17, 2013, the Arbitrator ruled that the Defendant, jointly and
severally with other parties, owed the sum of $98,737.99 to the Plaintiffs “for
violations of Chapter 162, Texas Property Code, FN6 including Section 162.005,
Texas Property Code.” The Arbitrator also awarded to the Plaintiffs attorney’s
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fees in the sum of $75,000, court costs of $4,204.57, and denied all of the
counterclaims filed by the Defendant. That arbitration award was finalized into a
Final Judgment issued by the State Court on April 19, 2013 (the “State Court
Judgment”). In interpreting the arbitration award and granting final judgment, the
State Court confirmed the award in favor of the Plaintiffs and against the
Defendant for “$98,737.99 for violation and fraud under Chapter 162, Texas
Property Code, including a finding of fraudulent conduct under 162.005 of said
Texas Property Code.” No other findings of fact or conclusions of law were
entered. The Final Judgment also confirmed the attorney’s fee award, the court
costs assessment and the denial of the Defendant’s counterclaims. It further
ordered that post-judgment interest would accrue on the judgment at the rate of
5% per annum. No appeal was taken from the entry of the State Court Judgment.
FN6. See 5 TEX. PROP. CODE ANN. § 162.001(a) et. seq.
(Vernon 2011 and Vernon Supp. 2014). The provisions of Chapter
162 are often referenced collectively as the Texas Construction
Trust Fund Act (hereafter referenced as the “CTFA”).
After the parties renewed the prosecution of this adversary proceeding, the
Plaintiffs filed this Second Motion for Summary Judgment. FN12. They assert
that there are no genuine issues of material fact pertaining to the CTFA award and
that, under such uncontested facts, they are entitled to a determination as a matter
of law that the sum of $98,737.99 awarded for violations of the CTFA, together
with other ancillary awards, as evidenced by the State Court Judgment, are
collectively nondischargeable as a debt for fraud or defalcation while acting in a
fiduciary capacity under §523(a)(4). FN13.
FN12. A first motion for summary judgment had been filed by the
Plaintiffs after the abatement of this lawsuit had been terminated,
but it was dismissed by the Court as premature since the postabatement management conference resulted in certain clarifying
directives being issued to the Plaintiffs.
FN13. As stated earlier, the Plaintiffs’ amended complaint also
contains asserted causes of action under 11 U.S.C. §523(a)(2)(A)
and §523(a)(6). The (a)(6) claim was not addressed by the Second
Motion for Summary Judgment. The Second Motion for Summary
Judgment did address the same portion of the award under the
State Court Judgment under §523(a)(2)(A). However, because of
the summary judgment granted herein under §523(a)(4), the Court
need not adjudicate those claims under either subsection.
Memorandum of Decision (USBC Doc. No. 36) at 2-5 (footnotes referring to the parties’ exhibits
before the Bankruptcy Court omitted; substantive footnotes retained). The Bankruptcy Court

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went on to grant Appellees’ Second Motion for Summary Judgment and found the $98,737.99 in
actual damages from the State Court Judgment to be nondischargeable, along with $54,750.00 in
attorneys’ fees and $3,069.34 in court costs from the State Court Judgment, with an additional
$293.00 in courts costs incurred in the adversary proceeding. Memorandum of Decision at 1922.

In sum, the total amount found nondischargeable from the State Court Judgment is

$156,557.33, along with $293.00 from the adversary proceeding.
Appellant appeals these findings, as they are memorialized in the Bankruptcy Court’s
Judgment (USBC Doc. No. 35) and the Memorandum of Decision (USBC Doc. No. 36). Those
two documents are listed in Appellant’s Notice of Appeal. Appellant added the Bankruptcy
Court’s Order Granting Plaintiffs’ Second Motion for Summary Judgment (USBC Doc. No. 33)
and its Order Denying Defendant’s Evidentiary Objections Contained in Defendant’s Response
to Plaintiffs’ Second Motion for Summary Judgment (USBC Doc. No. 34) to his Appellant’s
Brief before this Court, though they are not mentioned in the Notice of Appeal. Specifically,
Appellant summarizes the issues he raises on appeal as:
1.

Whether the Bankruptcy Court can grant a motion for summary judgment
based upon collateral estoppel where such assertion or affirmative defense
is not plead and was not a ground upon which the movant relied for
summary judgment.

2.

Whether the Bankruptcy Court erred in granting Plaintiffs’ Second Motion
for Summary Judgment [ ] in its order dated October 1, 2014 [ ] and
through the reasoning set forth in the Judgment [ ] and the Memorandum
of Decision [ ], because of the following issues:
a.

Sub-issue 1: Whether, as a matter of law, a state court
judgment against Appellant containing the word “fraud” is
sufficient to create a preclusive effect such that the debt
liquidated therein is nondischargeable pursuant to 11
U.S.C. § 523(a)(2)(A).

b.

Sub-issue 2: Whether the Texas Construction Trust Fund
Act creates a fiduciary relationship so as to deny the
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discharge of Appellant’s debt to Plaintiffs pursuant to 11
U.S.C. § 523(a)(4), for fraud or defalcation while acting in
a fiduciary capacity.
3.

Whether the Bankruptcy Court erred in denying Defendant’s evidentiary
objections in Defendant’s Response to Plaintiffs’ Second Motion for
Summary Judgment and Brief in Support [ ], especially in light of the
evidentiary deficiencies noted in the Order Authorizing the
Supplementation of the Summary Judgment Record [ ] to which Plaintiffs
failed to adhere.

Appellants Brief (Statement of the Issues) (Doc. No. 2) at 6-7 (citations to the USBC docket
omitted). The Court will address each issue in turn.
II.

STANDARD OF REVIEW
A.

Bankruptcy Appellate Review

This Court reviews the Bankruptcy Judge’s findings of fact for clear error. Robertson v.
Dennis (In re Dennis), 330 F.3d 696, 701 (5th Cir. 2003). A finding of fact is only clearly
erroneous if the reviewing court has a definite and firm conviction that the finding was in error.
Id. The Court conducts a de novo review of the Bankruptcy Judge’s conclusions of law. Id.
B.

Summary Judgment

Rule 56(a) requires the issuance of summary judgment “if there is no genuine issue as to
any material fact,” and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(a). The movant bears the initial burden of informing the court of the basis for its motion and
identifying those portions of the record it believes demonstrate the absence of a genuine issue of
material fact. Celotex Corp. v. Catrett, 447 U.S. 317, 323 (1986). Only when the moving party
has discharged this initial burden does the burden shift to the non-moving party to demonstrate
that there is a genuine dispute of material fact. Id. at 322. A dispute is “genuine” if the evidence
is such that a reasonable jury could return a verdict for the nonmoving party. See Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Cooper Tire & Rubber Co. v. Farese, 423 F.3d
6

446, 454 (5th Cir. 2005). A dispute is “material” if its resolution could affect the outcome of the
action. Anderson, 477 U.S. at 248. The Court must view the evidence and draw inferences in the
light most favorable to the nonmoving party. Id. at 255; Tolan v. Cotton, 134 S. Ct. 1861, 1862
(2014) (per curiam); Richardson v. Monitronics Int’l, Inc., 434 F.3d 327, 332 (5th Cir. 2005).
III.

DISCUSSION AND ANALYSIS
Appellees generally argue in response to the same issues Appellant raises, though

somewhat differently in form and order.

The Court will address each point as the Court

interprets the parties’ arguments.
A.

Invoking The Doctrine Of Collateral Estoppel Sua Sponte

Appellant argues that the Bankruptcy Court improperly granted summary judgment in
favor of Appellees based in part on the doctrine of issue preclusion, because that doctrine was
not pleaded or otherwise raised in Appellees’ summary judgment papers. Appellant does not
complain that the Bankruptcy Court’s collateral estoppel analysis was incorrect; instead, he
simply claims that “the Bankruptcy Court reversibly erred in granting summary judgment by
relying upon a basis not asserted in Plaintiffs’ Second Motion for Summary Judgment or
pleadings.” Appellant’s Brief at 10-11.
Appellant’s argument is without merit. Even if the Appellees did not explicitly use the
words “collateral estoppel” or “issue preclusion” in their pleadings on summary judgment before
the Bankruptcy Court, that is not a bar to the Bankruptcy Court raising the doctrine sua sponte.
First, collateral estoppel applies in the bankruptcy context, including in bankruptcy
appeals to the United States District Court on the issue of nondischargeability and the effect of
collateral estoppel on a prior state court judgment:
Collateral estoppel, or issue preclusion, “means simply that when an issue of
ultimate fact has once been determined by a valid and final judgment, that issue
7

cannot again be litigated between the same parties in any future lawsuit.” Schiro
v. Farley, 510 U.S. 222, 232 (1994) (internal quotations omitted). “Under
collateral estoppel, once an issue is actually and necessarily determined by a court
of competent jurisdiction, that determination is conclusive in subsequent suits
based on a different cause of action involving a party to the prior litigation.”
Montana v. United States., 440 U.S. 147, 153 (1979) (citing Parklane Hosiery Co.
v. Shore, 439 U.S. 322, 326 n.5 (1979)). Where the factual issues for the
creditor’s theory of nondischargeability have been actually litigated in a prior
proceeding, neither the creditor nor the debtor may relitigate those grounds.
RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1294 (5th Cir.1995).
When a party is asserting collateral estoppel regarding a state court judgment, the
court applies the collateral estoppel law of that state. In re Pancake, 106 F.3d
1242, 1244 (5th Cir.1997). Under Texas law, collateral estoppel occurs when:
“(1) the facts sought to be litigated in the second case were fully and fairly
litigated in the first; (2) those facts were essential to the prior judgment; and (3)
the parties were cast as adversaries in the first case.” Id. (citing in re Garner, 56
F.3d 667 (5th Cir.1995); Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 806
(Tex.1984)).
Whitaker v. Moroney Farms Homeowners’ Ass’n, No. 4-14-CV-700, 2015 WL 3610306, at *3
(E.D. Tex. June 5, 2015) (appeal of bankruptcy adversary action).
In addition, a federal court may raise the issue of collateral estoppel sua sponte:
Finally, the State parties argue that even if they earlier failed to raise the
preclusion defense, this Court should raise it now sua sponte. Judicial initiative
of this sort might be appropriate in special circumstances. Most notably, “if a
court is on notice that it has previously decided the issue presented, the court may
dismiss the action sua sponte, even though the defense has not been raised. This
result is fully consistent with the policies underlying res judicata: it is not based
solely on the defendant’s interest in avoiding the burdens of twice defending a
suit, but is also based on the avoidance of unnecessary judicial waste.” United
States v. Sioux Nation, 448 U.S. 371, 432, 100 S. Ct. 2716, 65 L. Ed. 2d 844
(1980) (REHNQUIST, J., dissenting) (citations omitted).
Arizona v. California, 530 U.S. 392, 412 (2000). The “special circumstances” the Supreme
Court discussed above is consistent with the situation here, where the Bankruptcy Court was
wholly aware of the judgment and the issues raised in the State Court Judgment, developed out
of the final decision in arbitration. The United States Court of Appeals for the Fifth Circuit has
ruled similarly:
8

This circuit also recognizes two instances in which the district or appellate court
can sua sponte dismiss an action on issue preclusion grounds. Nagle v. Lee, 807
F.2d 435, 438 (5th Cir. 1987). One exception allows a court to raise the issue
preclusion defense on its own when all the relevant data and legal records are
before the court and the demands of comity, continuity in the law, and essential
justice mandate judicial invocation of the principles of issue preclusion. See id. at
439 n.2 (citing American Furniture Co. v. International Accommodations Supply,
721 F.2d 478, 482 (5th Cir.1981)
Williams v Midwest Employers Cas. Co., 34 F. App’x 152, 2002 WL 496395, at *6 (5th Cir.
Mar. 21, 2002). The Fifth Circuit’s reasoning directly supports the Bankruptcy Court’s decision
to apply collateral estoppel sua sponte in this case.
Accordingly, the mere fact that the Appellees did not specifically plead collateral
estoppel is no bar to the Bankruptcy Court’s sua sponte application of the doctrine. Appellant’s
first issue thus fails as a matter of law.
B.

The State Court Judgment And Effect Of The Texas Construction Trust
Fund Act

Appellant next makes a two-pronged argument that, first, the mere use of the word
“fraud” in the State Court Judgment was insufficient to render the debt that judgment imposed
nondischargeable under federal bankruptcy law; and, second, that the CTFA does not create a
fiduciary relationship in this circumstance so as to support a finding of nondischargeability.
1.

The State Court Judgment’s Finding Of “Fraud” As A Basis For
Nondischargeability In Bankruptcy

Wholly aside from the issue whether the Bankruptcy Court could properly apply
collateral estoppel, Appellant also argues that there was insufficient information in the State
Court Judgment on which to meet the standard of nondischargeability in the federal bankruptcy
proceeding.
The Fifth Circuit has noted that “the determination of whether a debt is nondischargeable
under [§ 523] has been a matter of federal bankruptcy law, not state law.” Matter of Dennis, 25
9

F.3d 274, 277 (5th Cir. 1994) (citations omitted). The Fifth Circuit went on:
Bankruptcy courts must therefore look beyond the labels which state courts – and
even parties themselves – give obligations which debtors seek to have discharged.
***
The reason for these well-settled principles is that parties and state courts, as a
general rule, do not label obligations with federal bankruptcy standards in mind.
Even if a state court reviews an issue which is similar to one created by the
nondischargeability provision in the bankruptcy code, the state-law concept will
likely differ from the specific federal bankruptcy doctrine in question.
***
Hence, in only limited circumstances may bankruptcy courts defer to the doctrine
of collateral estoppel and thereby ignore Congress’ mandate to provide plenary
review of dischargeability issues. Collateral estoppel applies in bankruptcy courts
only if, inter alia, the first court has made specific, subordinate, factual findings
on the identical dischargeability issue in question – that is, an issue which
encompasses the same prima facie elements as the bankruptcy issue – and the
facts supporting the court’s findings are discernible from that court’s record.
Id. at 277-78 (citations and footnote omitted).

Accordingly, Appellant argues that the

Bankruptcy Court improperly based its grant of summary judgment on the State Court Judgment,
which Appellant contends did not contain specific findings on the identical dischargeability issue
before both the state court and the Bankruptcy Court.
However, the Fifth Circuit has held that specific findings of the nature Appellant would
require are not necessary in a state judgment so long as the state judgment’s intent vis a vis the
similar terms in the federal bankruptcy code are the same and can be discerned from the
available record. Matter of Davis, 3 F.3d 113, 116 (5th Cir. 1993) (state court findings that the
appellant’s “receipt of informal dividends by making profit sharing contributions for his own
benefit and to the exclusion of” the appellee was a willful breach of a fiduciary duty, and
therefore was “sufficient to prevent discharge of both debts under section 523(a)(4).”).
Here, the Bankruptcy Court provided a detailed rendition of its reasoning based on the
10

existing Arbitrator’s proceedings and the State Court Judgment, including a specific definition of
the term “fraud,” comparing its meaning under the Texas CTFA to the federal bankruptcy code.
The Bankruptcy Judge stated in part,
The summary judgment record clearly demonstrates that the fact of the
Defendant’s misconduct was essential to the entry of that portion of the State
Court Judgment for which the Plaintiffs seek a determination of
nondischargeability under § 523(a)(4). The State Court Judgment contains a
finding that the Defendant violated the CTFA by explicit reference to its statutory
location and it specifically finds that the actions of the Defendant, resulting in the
CTFA violation, constituted fraudulent conduct as defined by § 162.005 of the
CTFA. The summary judgment record is also clear that the facts as reflected in
the State Court Judgment were fully and fairly litigated in the first action, as
initially determined by the Arbitrator, and as subsequently affirmed by the 219th
Judicial District Court in the State Court Judgment. An actual evidentiary hearing
was conducted by the Arbitrator. Upon consideration of the admitted evidence,
the Arbitrator issued the award to the Plaintiffs which was subsequently
confirmed by the State Court pursuant to § 171.087 of the Texas Civil Practice &
Remedies Code.
Memorandum of Decision (USBC Doc. No. 36) at 11-12 (emphasis added, footnotes omitted).
The Bankruptcy Judge also provided the state definition of fraud under the CTFA:
Section 162.005(1) of the Texas Construction Trust Fund Act states that:
(1) A trustee acts with “intent to defraud” when the trustee:
(A)
retains, uses, disburses, or diverts trust funds with the intent to
deprive the beneficiaries of the trust funds;
(B)
retains, uses, disburses, or diverts trust funds and fails to establish
or maintain a construction account as required by Section 162.006 or fails
to establish or maintain an account record for the construction account as
required by Section 162.007; or
(C)
uses, disburses, or diverts trust funds that were paid to the trustee
in reliance on an affidavit furnished by the trustee under Section 53.085 if
the affidavit contains false information relating to the trustee’s payment of
current or past due obligations.
5 Tex. Prop. Code Ann. § 162.005 (Vernon 2007).
See Memorandum of Decision at 11 n.14 (emphasis added).
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In comparison, the Fifth Circuit has addressed the meaning of fraud for the purposes of §
523(a)(4):
Under 11 U.S.C. § 523(a)(4), a debt “for fraud or defalcation while acting in a
fiduciary capacity, embezzlement, or larceny” may not be discharged in
bankruptcy. In construing this section, this court has stated that this discharge
exception “was intended to reach those debts incurred through abuses of fiduciary
positions and through active misconduct whereby a debtor has deprived others
of their property by criminal acts; both classes of conduct involve debts
arising from the debtor’s acquisition or use of property that is not the
debtor’s.” In re Boyle, 819 F.2d 583, 588 (5th Cir.1987).
Matter of Miller, 156 F.3d 598, 602 (5th Cir. 1998) (emphasis added), cert. denied, 526 U.S.
1016 (1999).
The language of § 162.005 compared with the Fifth Circuit’s interpretation of the
meaning of § 523(a)(4) reflects that each statute defines “fraud” and “fraudulent conduct” in the
same manner. Accordingly, the Bankruptcy Court was perfectly able to discern the meaning of
“fraud” as used in the State Court Judgment for the purposes of determining nondischargeability
in federal bankruptcy law. Appellant’s contention is without merit.
2.

Fiduciary Duty Under The CTFA And 11 U.S.C. § 523(a)(4)

Aside from the argument above, Appellant contends that the CTFA does not create a
fiduciary relationship cognizable under federal bankruptcy law.
(a)

The September 1, 2009, Amendment To The CTFA

First, Appellant contends that the current version of the CTFA, upon which Appellees
based their arguments, was not yet effective until September 1, 2009, the month after Appellees
entered into their construction contract with Appellant. 2

2

Therefore, Appellant argues, that

Although he does not spell out the nature of the amendment in his Appellant’s Brief, his
Answer to the Complaint in the bankruptcy adversary action fleshes out his argument that the
September 1, 2009, amendment allegedly allowed for a private right of action by a homeowner
under the CTFA, which allegedly had not previously existed. (USBC Doc. No. 22 at 6-7.)
12

version of the CTFA could not have been applied retroactively so as to give Appellees’ assertion
of a “fiduciary duty” effect. Nonetheless, the 219th Judicial District Court of Collin County did
apply that version of the CTFA, and awarded Appellees money damages thereupon in the State
Court Judgment.
Unfortunately, this federal Court is not the proper forum for reviewing the application or
interpretation of a state law by a state court.

As Appellees appropriately point out, the

Rooker/Feldman doctrine requires that, “[a]bsent specific law otherwise providing,
[Rooker/Feldman] directs that federal district courts lack jurisdiction to entertain collateral
attacks on state court judgments.” Liedtke v. State Bar of Texas, 18 F.3d 315, 317 (5th Cir.
1994) (citing Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923) and District of Columbia Court
of Appeals v. Feldman, 460 U.S. 462 (1983)); see also In re Rabalais, 496 F. App’x 498, 500
(5th Cir. 2012) (finding that “bankruptcy courts may not sit as appellate courts and revisit the
merits of state court decisions,” citing Rooker and Feldman). If a state trial court errs in an
application of its own state law, its “judgment is not void, it is to be reviewed and corrected by
the appropriate state appellate court.” Liedtke, 18 F.3d at 317. “A state court judgment is
‘attacked’ when the losing party in a state court action seeks ‘what in substance would be
appellate review of the state judgment.’” In re Rabalais, 496 F. App’x at 500 (quoting Johnson
v. De Grandy, 512 U.S. 997, 1005-06 (1994)). “Like the bankruptcy court, we lack the authority
to review the decision of the [state] court.” Id. That is the precise situation here.
Appellant contends that the state trial court erred in its State Court Judgment by applying
the version of the CTFA’s September 1, 2009, amendment to the August 2009 contract between
the parties. However, it is undisputed that Appellant did not appeal the state trial court’s
Because this issue is not cognizable on federal review, this Court need not determine whether the
difference is as Appellant alleged.
13

judgment. Accordingly, no Texas appellate court has had the opportunity to determine whether
the trial court applied the CTFA correctly.

Therefore, Appellant’s argument of improper

retroactive application by the state trial court is not cognizable in federal court. 3
(b)

Meaning Of “Fiduciary Duty” Under The CTFA And 11 U.S.C. § 523(a)(4)

Second, Appellant argues that the CTFA does not create a fiduciary relationship in this
instance at all. He contends that the term “fiduciary” does not have the same meaning under 11
U.S.C. §523(a)(4) as under common law. Instead, he asserts, a fiduciary relationship for the
purposes of § 523(a)(4) arises only under express or technical trusts outside of strictly
contractual obligations. However, the very authority upon which he relies also specifies that
“[s]tatutory trusts, by contrast, can satisfy the dictates of § 523(a)(4).” In re Jacobson, 422 B.R.
183, 192 (S.D. Tex. 2010). But, “to meet the requirements of § 523(a)(4), a statutory trust must
(1) contain a definable res and (2) impose ‘trust-like’ duties.” Id. (quoting Tex. Lottery Comm’n
v. Tran, 151 F.3d 339, 342-43 (5th Cir. 1998) (emphasis added in Jacobson)).
The Fifth Circuit has held that the CTFA can meet these requirements under § 523(a)(4).
The Trust Fund Statute is one way in which the relevant “fiduciary capacity”
under Section 523 may be created. In re Nicholas, 956 F.2d 110, 114 (5th Cir.
1992). The statute requires payments for construction contracts for the
improvement of real property to be treated as “trust funds.” Tex. Property Code §
162.001. The recipient of those funds is the “trustee,” and the subcontractors to
whom the funds are owed are the beneficiaries. Id. at §§ 162.001–003. Trustees,
including the officers of companies, who misapply trust funds may face criminal
penalties. Id. at §§ 162.031–032. In Nicholas, this court analyzed the statute and
determined that the requirement of a trust fund, with rules covering how the funds
may be spent, “creates fiduciary duties encompassed by 11 U.S.C. § 523(a)(4).”
Nicholas, 956 F.2d at 114. But the statute only creates a fiduciary duty to the
extent that activity is wrongful under the statute. Id. For purposes of Section
3

The Bankruptcy Judge appears to have addressed this argument, if briefly, in the Memorandum
of Decision. (Doc. No. 36 at 19 n.23.) There, the Bankruptcy Judge noted that “even under
earlier, more restrictive versions of the CTFA, such limited findings would have constituted
grounds for nondischargeability under § 523(a)(4).” Id. (citing Boyle v. Abilene Lumber, Inc.,
819 F.2d 583 (5th Cir. 1987) and Nicholas, 956 F.2d 110 (5th Cir. 1992)).
14

523(a)(4), a fiduciary duty only arises if there is a simultaneous wrongful
misapplication of funds.
Matter of Plumber, 892 F. App’x 296, 299 (5th Cir. 2015). 4
Having established the potential for a fiduciary relationship under the CTFA for §
523(a)(4) purposes, the Fifth Circuit went on to discuss the affirmative defenses available to a
contractor/debtor under the CTFA that might negate the creation of a fiduciary duty, including
specifically the “actual expenses” affirmative defense. Matter of Plumber, 892 F. App’x at 301.
Under that affirmative defense, a contractor/debtor may, for example, “use the payments they
receive from construction projects to keep those projects going . . . .” Id. (quoting Nicholas, 956
F.2d at 113). 5

“Therefore, under Nicholas, a creditor claiming Section 523(a)(4)

nondischargeability through the Texas Construction trust Fund Statute must show that (1) the
contractor intentionally, knowingly, or with intent to defraud diverted trust funds and (2) the
affirmative defenses in the statute do not apply.” Id. at 302. 6
Of course, for an affirmative defense to apply, a defendant (in this case, the
contractor/debtor Appellant) must actually assert the affirmative defense. As the Fifth Circuit
has recognized, “[g]enerally, under [Federal Rule of Civil Procedure] 8(c), affirmative defenses

4

Matter of Plumber is an unreported decision issued after briefing was completed in this case.
Nonetheless, it compiles and explains in detail the Fifth Circuit’s past reported decisions in this
area and the Court considers it highly authoritative, if not precedential.
5
Texas Property Code § 162.031(b) specifically states, “It is an affirmative defense to
prosecution or other action brought under Subsection (a) that the trust funds not paid to the
beneficiaries of the trust were used by the trustee to pay the trustee’s actual expenses directly
related to the construction or repair of the improvement or have been retained by the trustee,
after notice to the beneficiary who has made a request for payment, as a result of the trustee’s
reasonable belief that the beneficiary is not entitled to such funds or have been retained as
authorized or required by Chapter 53.”
6
The Fifth Circuit further noted that, “[i]n the bankruptcy context, the burden is on the creditor
to establish that an affirmative defense is inapplicable – rather than on the debtor to establish that
one is applicable – because the creditor has the ultimate burden of proving that a debt falls within
the scope of 11 U.S.C. § 523(a)(4).” Id. at 302 n.2 (citing Nicholas, 956 F.2d at 114).
15

must be raised in the first responsive pleading.” Pasco v. Knoblauch, 566 F.3d 572, 577 (5th
Cir. 2009); see also Talbert v. Am. Risk Ins. Co., Inc., 405 F. App’x 848, 851 (5th Cir. 2010).
Federal Rule of Bankruptcy Procedure 7008 makes Fed. R. Civ. P. 8 applicable to adversary
actions in bankruptcy, as in the instant case. The Fifth Circuit has further observed that, where
an affirmative defense is not raised in the first responsive pleading, “where the matter is raised
by the trial court [or the litigants and] does not result in unfair surprise, technical failure to
comply precisely with Rule 8(c) is not fatal, and in such a situation the court may hold that the
defense is not waived.” Talbert, 405 F. App’x at 851 (internal quotation marks and citations
omitted). In fact, “[a]n affirmative defense is not waived if it is raised at a pragmatically
sufficient time, and the plaintiff was not prejudiced in its ability to respond.” Id.
Here, Appellant did not meet any of these relaxed requirements, even considering “the
overall context of the litigation[.]” Pasco, 566 F.3d at 572. A close review of his Answer and
his Response to Appellees’ Second Motion for Summary Judgment before the Bankruptcy Court
reveals that he (1) did not assert any affirmative defenses at all in his Answer and (2) did not
argue any affirmative defenses under the CTFA in his Response, including specifically the
“actual expenses” affirmative defense. (See generally USBC Doc. Nos. 22 and 25.) Appellant
makes a halfhearted attempt at raising this defense in the Appellant’s Brief, stating:
Further, in both Boyle and In re Swor, the Fifth Circuit held that the funds
obtained under the Texas Construction Trust Fund Act need not be spent only on
the project for which they were received, they may also be spent on other projects
or on expenses related to the general business overhead. It is the absence of a
requirement prohibiting spending trust funds for non-trust purposes that leads to
this result.
Accordingly, even if Appellant applied funds from Appellees on an expense other
than its project, as asserted by Appellees and denied by Appellant, such conduct
does not necessarily violate the Texas Construction Trust Fund Act so as to create
a fiduciary duty.”

16

Appellant’s Brief (Doc. No. 2) at 18. This falls squarely into the category of “too little, too late.”
Appellant simply did not raise this affirmative defense in the time and place in which he should
have – in his pleadings in the adversary action before the Bankruptcy Court. Moreover, to the
extent Appellant might be understood to attempt to raise it now, the statement quoted above is
insufficient to state the affirmative defense and to argue it factually; in fact, Appellant does not
actually assert that he did apply Appellees’ funds as an expense on another project. He merely
states that “even if” he had done so, the affirmative defense would apply. There is no factual
basis there on which to base a reply by Appellees or a determination by this Court. Furthermore,
to allow Appellant to raise such an affirmative defense now, after resolution of the dispute before
the Bankruptcy Court and on appellate review by this Court, would only be prejudicial to
Appellees. Pasco, 566 F.3d at 572; Talbert, 405 T. App’x at 851.
Accordingly, the argument Appellant briefly raises in this regard is without merit.
Returning to the main thrust of establishing § 523(a)(4) fiduciary duty under the CTFA,
the Bankruptcy Court observed that the “two requisite elements for a determination of
nondischargeability under § 523(a)(4) [are] a debt created: (1) by fraud and (2) while acting in a
fiduciary capacity.” Memorandum of Decision at 19. The Fifth Circuit has reaffirmed these
requirements.

Plumber, 892 F. App’x at 299 and supra.

Here, the Bankruptcy Court

appropriately found that the terms “fraud” and “fraudulent conduct” as used in the State Court
Judgment were equivalent to the meaning of “fraud” under the federal bankruptcy code. In
doing so, the Bankruptcy Court also appropriately found that Appellant had committed
fraudulent conduct in misapplying the funds paid by Appellees for the construction of their
home.

Memorandum of Decision (USBC Doc. No. 36) at 11-12.

Under the CTFA, and

controlling Fifth Circuit law, that created the fiduciary relationship necessary for a determination

17

of nondischargeability under § 523(a)(4). There is no genuine issue of material fact remaining
and the Bankruptcy Court was correct in granting summary judgment on the issue that the
amount it identified was nondischargeable.
C.

The Bankruptcy Court’s Denial of Appellant’s Evidentiary Objections On
Summary Judgment

Next, Appellant contends that the Bankruptcy Court erred in denying his evidentiary
objections proffered in his response to the Appellees’ Second Motion for Summary Judgment in
the adversary action. He did not identify this issue in his Notice of Appeal. Nonetheless, his
brief to this Court states in full:
Notwithstanding the other objections which Appellant made, which are
incorporated by reference, the Court’s ruling on Paragraph 13 of the Margolis
Affidavit is clearly erroneous. Without question Paragraph 13 of the Margolis
Affidavit is replete with hearsay, legal conclusions, and contains statements in
direct violation of the best evidence rule. Appellant objected on such grounds,
but the objection was overruled under the assertion that Appellees have “the
ability as an involved party to make characterizations regarding the nature of
documents and the purported actions of the parties involved in the actions leading
to the dispute.” Had the Bankruptcy Court not improperly considered such
statements, the Motion for Summary Judgment could not have been granted.
Appellant’s Brief at 18-19 (footnotes omitted). Appellant has not explained his argument or why
the finding of the Bankruptcy Court was incorrect. Furthermore, he has cited no authority at all
in support of his bare contention (the two footnotes omitted from the passage above were both to
the record – the Margolis Affidavit and the Order of the Bankruptcy Court – not to any legal
authority). Accordingly, he has inadequately briefed any issue presented here, and it is waived.
In re Repine, 536 F.3d 512, 518 n.3 (5th Cir. 2008) (bankruptcy case) (“Therefore, this
evidentiary argument is waived due to inadequate briefing,” which consisted of conclusory
statements and lacked citation to authority supporting the party’s position, citing L & A
Contracting Co. v. Southern Concrete Servs., Inc., 17 F.3d 106, 113 (5th Cir. 1994)); see also

18

MM Steel, L.P. v. JSW Steel (USA) Inc., 771 F.3d 301, 303 n.2 (5th Cir. 2014) (citing and
quoting In re Repine, 536 F.3d at 518 n.5). The Court will therefore disregard Appellant’s
arguments as to his evidentiary objections to the Margolis Affidavit.
D.

The Bankruptcy Court’s Dismissal Of Appellant’s Counterclaims

Finally, Appellant asserts in even more conclusory form that the Bankruptcy Court erred
in dismissing his counterclaims in the adversary action. He did not identify this as an issue in
either his Notice of Appeal or even in the issue statement quoted in Section I above. His
argument in full states:
Inasmuch as the Bankruptcy Court’s ruling was in error with regard to
Plaintiffs’ Second Motion for Summary Judgment, the basis for the relief
requested by Appellant through his counterclaim remains in force. Specifically,
the principles of equity which govern proceedings in the Bankruptcy Court would
support the recovery of attorney’s fees and costs in light of the nature of the
litigation, the respective financial positions of the parties and the false basis of
Appellees’ claims.
Appellant’s Brief at 19. The Court has already affirmed the Bankruptcy Court’s rulings on
summary judgment, above. Appellant has added no argument to his two-sentence assertion that
his .counterclaims survived dismissal and he has cited no authority whatsoever. For the reasons
stated immediately above, he has inadequately briefed this claim and it is waived. In re Repine,
536 F.3d at 518 n.5.
IV.

CONCLUSION
For the reasons stated herein, the Court finds no error in the findings of the Bankruptcy

Court in the above-numbered and captioned case, and its judgment is hereby AFFIRMED.
SIGNED this 22nd day of September, 2015.

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____________________________________
MICHAEL H. SCHNEIDER
UNITED STATES DISTRICT JUDGE