IN RE DOLATA

subcontractor for installing fire protection systems at these jobs. Nor do the parties dispute whether the majority of the funds the owners paid were for improvements — specifically, materials provided by the plaintiff. Plaintiff's Exhibits 1, 2 and 3, as well as Defendant's Exhibit 140, listed the jobs that were the "improvements" for which the supplies the plaintiff provided Quality were to be used.

The issue the parties disputed with regard to some of the 42 jobs was whether the owners paid monies to the defendant, or to someone else, for those materials.

The forty-two jobs in question fall into five categories: (1) twenty-three jobs for which the defendant admitted that Quality received full payment from the general contractor or owner; (2) eleven jobs for which the defendant maintained that Quality received only partial payment from the general contractors or owners; (3) three jobs for which the parties dispute whether the plaintiff received payments directly from the owners, or whether those payments went through Quality; (4) four jobs for which there was no information about how the owners made the payments; and (5) one "job" that doesn't appear to have been a job at all, but appears to have been an invoice for supplies ordered directly from the plaintiff for Quality's own use.

a. The plaintiff has proven that a trust existed for each of the twenty-three jobs for which Quality received full payment from the general contractor.

The defendant conceded that Quality received payment in full from the respective general contractors for twenty-three jobs. See, e.g. docket no. 22 at 98, Plaintiff's Exhibit 21; docket no. 23 at 95, Defendant's Exhibit 140. Therefore, because (1) general contractors/owners (2) paid monies to (3) the subcontractor (Quality) (4) in full for improvements, the funds Quality received for these twenty-three jobs constituted trust funds.

The twenty-three payment-in-full jobs were: ACM-Mulehide, Arch Aluminum, Beck Container, Bob Jewell, Cabinet World/Richco Retail, Caravilla, City Wide Recycling, Endeavor/Froggie Day Care, Fond du Lac Center, Fruitcrown, Goff Auto/Collision, ITT Flygt, Kohl's, Lefleur Gymnastics, Malacara, Maxies, Medovations, Milwaukee Antique Center, Plaza Court, Rodian Insurance, Siemans, Trans Pak, and Vitthoa Market. Docket no. 23, at 95, Defendant's Exhibit 140.

b. The plaintiff has proven that a trust existed for each of eleven partial-payment jobs, to the extent that Quality received partial payments for those jobs.

Under § 779.02(5), a trust exists only to the extent that an owner paid money to the prime or subcontractor. The defendant indicated in Exhibits 21 and 140 that for eleven of the forty-two jobs, Quality received only partial payments from the respective general contractors. (Although the plaintiff offered Exhibit 21 into evidence, Mathwig testified that it was created by Quality, and introduced by Quality at Steiner's Western District trial.) According to Exhibit 21, Quality received $479,338.34 in partial payments for the eleven jobs. Docket no. 22 at 98, Plaintiff's Exhibit 21. To the extent that the defendant, through Quality, received payments — even if only partial payments — from an owner or contractor for improvements, a trust existed. Thus, the $479,338.34 in partial payments Quality received for eleven of the jobs were trust funds.

The eleven partial payment jobs were: ABC Catalog, Capital Crossing, Goodyear, Green Lake Lodge, Ixonia State Bank, Larry Webb, Luxury Apartments, Pick-N-Save, Southern Oaks, Village Square North, and W. Center.

c. The plaintiff has proven that a trust existed for the three disputed jobs.

The plaintiff contended that the defendant received payments from the owner for three more jobs — Camp Douglas ($923.39), Waunakee Police ($5,936.24), and YMCA ($466.66). Docket no. 23, at 95, Defendant's Exhibit 140. The defendant responded that the owners of those jobs paid the plaintiff directly, and that the money never passed through Quality.

Scott Mathwig testified for the plaintiff that if the plaintiff was aware of an owner-direct payment arrangement before it shipped supplies, it would set up a separate account with the owner or general contractor and apply payments to that separate account. He further testified that if the plaintiff learned that the owner planned to pay it directly after it already had shipped the supplies, it would accept the direct payment from the owner, but then would credit the payment to Quality's account for the corresponding job. Finally, Mathwig testified that the $97,158.81 figure the plaintiff claimed as a nondischargeable debt was the amount of the debt Quality owed after the plaintiff accounted for any owner-direct payments it had received.

In contrast, Steiner, testifying for the defendant, stated that the $97,158.81 which the plaintiff claimed was past due did not account for $7,306.29 in owner-direct payments to the plaintiff for the three above-referenced jobs.

The documentary evidence disputes Steiner's version of events. Plaintiff's Exhibit 13, contains Starfire's invoices for the three disputed jobs — Camp Douglas, Waunakee Police, and YMCA. Each of the invoices for each of those jobs indicates, "Sold To: Quality Fire Protection." Each one indicates, "Ship To: Quality Fire Protection." In addition, Plaintiff's Exhibit 13 contains "Customer QuickReports" from Quality's QuickBooks records for each of those jobs. The "Customer QuickReports" for each job indicates that Quality received payments for that job. Further, for each of those jobs, there's a QuickBooks "Profit Loss by Job" page. On the YMCA page, there is an income category entitled "Sales — Owner Direct — Starfire." The amount listed is in that category is "$0." Finally, attached to Plaintiff's Exhibit 1 (the demand letter from the plaintiff to Quality) is a QuickBooks document entitled "Quality Fire Protection Job Detail," updated December 13, 2007. That document lists every invoice by date and invoice number, as well as by the job number Starfire gave it, the job name, and the job total. It shows the Camp Douglas Starfire debt of $923.39 under the job total. It shows the YMCA Starfire debt of $466.66 under the job total. It shows the Waunakee Police Starfire debt of $5,936.24 under the job total.

Oddly, this category does not appear on any other "Profit Loss by Job" statements for any other jobs.

The invoices show that the plaintiff sold goods for these jobs to Quality, and shipped them to Quality. The defendant's own records show that the defendant was paid by the owners for these jobs, and that Quality had accrued debts to the plaintiff for the jobs. The only evidence indicating that the owners paid the plaintiff directly for these jobs is Steiner's trial testimony, and that testimony simply does not comport with Quality's records.

Accordingly, the plaintiff has proven that Quality received funds from the owners on those three jobs (full payment), and that those funds constituted trust funds.

d. The plaintiff did not prove that a trust existed for each of the four jobs on which the defendant did not either concede or deny payment.

The plaintiff alleged that the defendant owed it money for the following four jobs: Aromi Café ($266.58), Beneficial Finance ($189.14), Rockwood ($349.31), and Walgreens ($3,187.97). Docket no. 20 at 14, Plaintiff's Exhibit 2. Plaintiff's Exhibit 13, which consisted of individual invoices for each of the forty-two jobs, included invoices from the plaintiff to Quality for each of these jobs. Docket no. 21. Neither party produced any testimony regarding how the owners/general contractors paid for these jobs.

See docket no. 21 at 66-7 for Aromi Café invoices; docket no. 21 at 73-4 for Beneficial Finance invoices; docket no. 21-1 at 117-121 for Rockwood invoices; and docket no. 21-1 at 161-170 for Walgreens invoices.

The QuickBooks "Job Summary" updated December 13, 2007 does not show these four jobs. Docket no. 20 at 9, Plaintiff's Exhibit 1. It should, given the invoice dates: the Aromi Café invoice showed a ship date of May 23, 2007 and a due date of June 22, 2007; the Beneficial Finance invoice showed a ship date of May 15, 2007 and a due date of June 14, 2007; the Rockwood invoice showed a ship date of May 31, 2007 and a due date of June 30, 2007; and the Walgreen's invoices, of which there were several, showed ship dates in May 2007 and due dates in June, 2007.

The second page of the QuickBooks "Job Summary" attached to Plaintiff's Exhibit 2, updated September 9, 2008 — nine months later — reflects all four of these jobs, but does not show anything in the "partial payments received" column. This implies that Quality had not received payments from owners for these jobs as of September 2008. The first page of the QuickBooks "Job Summary" in Exhibit 2, updated September 8, 2008 and containing a handwritten notation stating, "This is a summary of the unpaid amounts due to Starfire," shows all four jobs. Again, however, all this document demonstrates is that Quality owed Starfire the money — it does not show that owners gave Quality funds for the Starfire supplies.

Accordingly, the plaintiff did not meet its burden of proving that the funds Quality received for these jobs were trust funds.

e. The plaintiff did not prove that a trust existed for the one job that appeared to be supplies purchased for Quality.

According to Plaintiff's Exhibit 2, Quality owes the plaintiff $648.38 for "Stock." Docket no. 20 at 14, Plaintiff's Exhibit 2. Plaintiff's Exhibit 21, prepared by the defendant but introduced into evidence in this case by the plaintiff, indicates that Quality owes the plaintiff $648.38 for the "Shop Account." Docket no. 22 at 136. Based on the description of this "job," it appears to be a debt that Quality owes the plaintiff for materials that Quality purchased, not for any particular job, but for Quality's general use. Neither party presented any evidence proving that an owner or general contractor provided monies to Quality for this "job," or indeed, that it even was a "job." See, e.g. docket no. 22 at 98, Plaintiff's Exhibit 21; docket no. 23 at 95, Defendant's Exhibit 140. Because the plaintiff did not prove that this debt involved monies paid by an owner to a prime contractor for improvements, no trust exists as to this debt.

f. Conclusion

Accordingly, the Court concludes that the plaintiff has met its burden of proving that a trust existed for thirty-seven out of the forty-two jobs. The plaintiff did not meet its burden of proving that a trust existed as to the remaining five jobs.

2. The plaintiff has proven that the defendant was a fiduciary of the above-described trust funds.

The second element of a theft-by-contractor claim is that the defendant must be a fiduciary of the trust. Chase Lumber Fuel Co. v. Koch, 197 B.R. at 656. The plaintiff has proven this element.

As noted above, § 779.05 creates a trust "in the hands of the prime contractor or subcontractor" who receives the money from the owner. The evidence demonstrated that Quality was the "prime contractor or subcontractor" who received the monies from the owners to pay for materials purchased from the plaintiff. The Seventh Circuit has held that the "beneficiaries of such a trust are the laborers, suppliers and materialmen," as well as "owners and contractors." See Matter of Thomas, 729 F.2d at 506. There is no dispute that the plaintiff was one of the "materialmen" supplying materials for the jobs Quality was performing. Quality, therefore, was a "fiduciary" of the trusts described above.

The defendant in this case is not Quality, but one of its two majority owners. Section 779.02(5) provides that "[i]f the prime contractor or subcontractor is a corporation, such misappropriation also shall be deemed theft by any officers, directors or agents of the corporation responsible for the misappropriation." Wis. Stat. § 779.02(5). See also, Romes Design, Inc. v. Dinkins (In re Dinkins), 327 B.R. 918, 923 (Bankr. E.D. Wis. 2005) ("If an individual debtor is an officer, director, or agent responsible for misappropriation by an entity, the debt will be excepted from the discharge of the individual.").

Quality Fire Protection, Inc. was a corporation. Not only did the defendant testify at trial that he was the 46% owner of Quality, but he admitted in his answer to the complaint that he was an officer and/or director of the corporation until the time it ceased operating in March 2008. Docket no. 5, at 1, para. 2. Therefore, because Quality was a fiduciary of the trust funds, the defendant in his capacity as officer and/or director of Quality also was a fiduciary of the trust.

3. The plaintiff has proven that the defendant committed "fraud or defalcation" while acting as a fiduciary of that trust.

The third element of a theft-by-contractor claim is that the defendant committed fraud or "defalcation" while acting in a fiduciary capacity. Chase Lumber Fuel Co. v. Koch, 197 B.R. at 656. The plaintiff proved at trial, by a preponderance of the evidence, that the defendant committed defalcation by using the funds Quality received from owners for purposes other than paying the plaintiff.

A fiduciary commits defalcation when he uses trust funds for something other than paying the subcontractors whose supplies are used to make the improvements. See, e.g., Bastian v. Roy, 20 Wis.2d 470, 482-3 (Wis. 1963); Capen Wholesale, Inc. v. Probst, 280 Wis.2d 354, 363 (Ct. App. 1993); Matter of Thomas, 729 F.2d at 505-6. The Seventh Circuit, in its 1994 decision in Meyer v. Rigdon, held that

a mere negligent breach of a fiduciary duty is not a "defalcation" under section 523(a)(11). "It is a well recognized principle in bankruptcy law that exceptions to discharge are strictly construed against the objecting creditor and in favor of the debtor. This is based on the strong policy of the Bankruptcy Code of providing a debtor with a `fresh start.'" In re Marvin, 139 B.R. 202, 205 (Bankr. E.D. Wis. 1992) ( citing Gleason v. Ihaw, 236 U.S. 558, 35 S.Ct. 287, 59 L.Ed. 717 (1915)). Given this well-recognized principle, and the split of authority concerning whether a "defalcation" may result from negligence, we cannot say that Congress intended for a debt arising from a mere negligent breach of fiduciary duty to be excepted from discharge under section 523(a)(11).

Meyer v. Rigdon, 36 F.3d 1375, 1385 (7th Cir. 1994).

Judge Martin analyzed the Meyer case two years later in Chase Lumber Fuel Co. v. Koch, conceding that the Seventh Circuit case was imprecise regarding the proper standard of care that bankruptcy courts should apply. 197 B.R. at 658. He concluded that the Meyer case suggested "that something akin to `reckless' may be the appropriate standard," and in his case, found that "more than mere negligence" was the correct standard. Id. This Court agreed with his reasoning in Ganther Constr., Inc. v. Ward (In re Ward), 417 B.R. 582, 592 (Bankr. E.D. Wis. 2009), and again in Levine v. Ward (In re Ward), 425 B.R. 507, 526 (Bankr. E.D. Wis. 2010).

Here, the defendant's use of the trust funds for purposes other than paying the plaintiff constituted defalcation. There were forty-two jobs in question. A trust existed, and the defendant was a fiduciary of that trust, for thirty-seven of the forty-two jobs. Those thirty-seven jobs fall into two categories: (1) twenty-six jobs where the defendant received full-payment; and (2) eleven jobs where the defendant received partial payments.

The twenty-six payment-in-full jobs consisted of ACM-Mulehide, Arch Aluminum, Beck Container, Bob Jewell, Cabinet World/Richco Retail, Caravilla, City Wide Recycling, Endeavor/Froggie Day Care, Fond du Lac Center, Fruitcrown, Goff Auto/Collision, ITT Flygt, Kohl's, Lefleur Gymnastics, Malacara, Maxies, Medovations, Milwaukee Antique Center, Plaza Court, Rodian Insurance, Siemans, Trans Pak, Vitthoa Market, Camp Douglas, YMCA and Waunakee Police Station. Docket no. 23 at 95, Defendant's Exhibit 140; docket no. 21 at 102, docket no 21-1 at 172, 186.

The eleven partial payment jobs were: ABC Catalog, Capital Crossing, Goodyear, Green Lake Lodge, Ixonia State Bank, Larry Webb, Luxury Apartments, Pick-N-Save, Southern Oaks, Village Square North, and W. Center.

The defendant's failure to pay the plaintiff the entire amount owed it for the twenty-six full-payment jobs constituted "more than mere negligence." The defendant admitted that Quality received full payment from owners for twenty-three of these jobs. The documentary evidence proved that Quality received full payment from the owners of an additional three jobs. The defendant testified at trial, however, that in spite of the fact that Quality owed the plaintiff on these jobs, he and Steiner each took $70,000 paychecks. And, as the Court will discuss below, the evidence demonstrated that Quality used the funds the owners had given it to pay its own overhead expenses — exactly the kind of behavior that § 779.02(5) was enacted to prevent.

a. Payments to the defendant and Steiner.

The defendant and Steiner each took a payment of $85,000 — later reduced to $70,000 — to pay themselves. In his closing statement at trial, counsel for the defendant argued that the Wisconsin Supreme Court's decision in State v. Keyes, 750 N.W.2d 30 (Wis. 2008) allowed this, standing for the proposition that a contractor could pay itself before paying other subcontractors. The Court disagrees.

State v. Keyes involved two general contractors, Angela and Matthew Keyes, who contracted to build a home for a couple. Id. at 33. The couple financed the project through a bank construction loan, and the Keyes drew from that loan seven times, for a total of $417,647. Id. Lien releases indicated that they paid $217,155.43 of that to subcontractors. Id. Problems arose when the couple learned that some subcontractors had not been paid, and that Angela Keyes was doing some of the subcontracting work herself. Id.

The evidence eventually revealed that Angela Keyes "had paid herself $75,000 for materials, with approximately $35,000 of that amount unaccounted for." Id. at 33. The Keyes argued that Angela "was acting as a subcontractor," and that the payments she received did not include her "profit," but were for materials she provided for the project. Id. They further argued that as long as the money had gone toward the project, they had not violated § 779.02(5). Id. at 36-37.

The Supreme Court disagreed with the Keyes' reading of the statute. The court found that even if it were to assume that Angela Keyes was a subcontractor, and was entitled to payment pursuant to her agreement with the couple, the Keyes' actions "conflict[ed] with the language of the statute." Id. at 37. The Court pointed out that § 779.02(5) prohibits a fiduciary from using trust funds for any other purpose until all claims have been paid in full "or proportionally in cases of a deficiency."Id., quoting Wis. Stat. § 779.02(5). The court found that there was a deficiency, and that "the unpaid subcontractors were not compensated proportionally to Angela." Id. The court concluded, therefore, that for the Keyes to "[u]s[e] the money to pay themselves in full while other subcontractors have not been paid proportionally constitutes using money for a non-statutory purpose." Id. at 38.

The statement upon which the defendant seizes in support of his contention that Keyes allows him to pay himself before paying the plaintiff can be found in the latter part of the Keyes decision. The Supreme Court noted that the Court of Appeals had asked the parties to brief "whether § 779.02(5) prohibits a prime contractor acting as a subcontractor from paying itself for profit on materials supplied as a subcontractor." Id. at 39. The court concluded, for reasons not relevant here, that § 779.02(5) did not prohibit "prime contractors acting as subcontractors from receiving profit prior to paying other subcontractors for their labor and materials." Id. at 41.

Even assuming that Quality was acting as a subcontractor, there is no evidence that the $70,000 each that the defendant and Steiner paid themselves constituted "profit." Indeed, the defendant testified that in 2007 — when he and Steiner took these payments — Quality was struggling.

Further, the Keyes dicta stated that the statute did not prohibit prime contractors acting as subcontractors from receiving profit "prior to paying other subcontractors for their labor and materials." Id. It did not say that such prime contractors could receive profit instead of paying subcontractors for their labor and materials.

Finally, the Keyes found that Angela Keyes did not pay subcontractors proportionally to what she paid herself. Id. at 37. If one accepts that this is what the "proportionally" language in § 779.02(5) means — that the prime or subcontractor must pay subs proportionally to paying itself, as opposed to proportionally to what it receives from owners — then there was no proof that the $70,000 the defendant paid himself was "proportional" to what Quality paid the plaintiff.

The defendant also argued that § 779.02(5) does not require that the prime contractor wait until every project is completed before paying its officers a reasonable salary. He argued that for the law to require a prime contractor to wait until every job was completed and every subcontractor paid in full before paying its officers' salary would result in prime contractors going out of business. Section 779.05(2), however, specifically states that "[a]ny such misappropriated moneys which have been received as salary . . . shall be a civil liability of that person and may be recovered and restored to the trust fund specified in this subsection by action brought by any interested party for that purpose." So even if the statute does not prevent a prime contractor from paying its officers a salary, the funds used to pay that salary have to be restored to the trust to pay the subcontractors. That did not happen here.

In short, the fact that the defendant and Steiner each took a $70,000 draw without paying the plaintiff what the plaintiff was owed for materials constituted defalcation.

b. Payment of overhead.

The defendant also committed defalcation by paying Quality's overhead, instead of paying the plaintiff what it was owed.

Quality paid the plaintiff $165,344.62 of what it owed the plaintiff. Docket no. 20 at 15, Plaintiff's Exhibit 3. It did not pay the remaining balance of the debt. The Western District court found that funds that should have been used to pay the remainder of that debt went to pay Quality's overhead costs — estimated in Plaintiff's Exhibit 22 (which was produced in that trial) to be some 24% of its total expenses.

In the current case, the defendant argued that at the time of the Western District trial, he and Steiner had miscalculated their overhead, because they'd included in the "overhead" category a number of expenses that really should have been allocated to specific jobs. Accordingly, he argued that if one separated out those job-specific costs, one would see that the remainder of the money the owners had paid Quality had gone into the specific jobs somehow or another, and that under Keyes, that comported with the requirements of § 779.02(5). This Court disagrees with that characterization.

The profit-and-loss statement that Steiner produced at the Western District trial was introduced at this trial as Plaintiff's Exhibit 22. After the Western District trial, the defendant and Steiner went through the numbers in the "overhead" category on that exhibit, and subtracted out any expense that they thought was attributable to a specific job. They then assigned those (allegedly) specific job costs to a new category called "Job Variable Costs," in the "Cost of Goods Sold" section of the income statement. Docket no. 23 at 75, Defendant's Exhibit 133.

This "Job Variable Costs" section lists the following categories: "Automobile" costs (consists of Registration, Designer Mileage, Maintenance, and Fuel); "Insurance" costs (consists of Liability Insurance, 183 Bond, 669 Bond, and Workman's Comp); "Labor" costs (consists of Lead Engineer, Engineering Support, Job Superintendent, and Project Manager); "Print Reproduction" costs; "Job Phoone" (sic) costs; and "Tool Repair" costs. Id. The total amount the defendant and Steiner assigned to this new category was $567,925.33. Id.

The two then calculated the total amount of hours expended for all the jobs Quality had done, and divided the $567,925.33 figure by that total number of hours. See, e.g. docket no. 23 at 8, Defendant's Exhibit 100. They arrived at a "Cost per Hour" of $15.88. Id. Then they calculated how many hours each particular job had consumed, and multiplied the hours per job by the $15.88 figure to arrive at a "Job Variable Cost" figure for each job. They then added this "Job Variable Cost" to their income statement as a component of Cost of Goods Sold. Id. at 7.

The defendant argues that this torturous re-engineering of Quality's profit-and-loss statement demonstrates that he did not use trust funds to pay Quality's overhead, but instead put the money into specific jobs. To the contrary, in this Court's opinion, the defendant's re-engineering of his expenses between the Western District trial and the trial in this case did nothing more than emphasize that, indeed, he'd used the trust funds to pay routine overhead. Automobile expenses and insurance — two of the expenses he and Steiner subtracted out of overhead and moved to "Job Variable Costs" — are, by very definition, overhead expenses. Insurance cost does not vary depending on the number of hours expended on a particular job. Nor do automobile registration and maintenance expenses. The same is true of "tool repair."

Although it is possible to calculate fuel and mileage expenses on a per job basis, there is no relationship between the number of hours a particular job consumes and how much fuel or mileage is allocated to that job. The only way to segregate fuel and mileage expenses by job is to keep a record of those expenses, by job, at the time they are incurred — not to go back after the fact (and after having been told that you can't use trust funds to pay overhead), and somehow try to assign a percentage of fuel cost to a job based on the number of hours it took to complete that job.

As for some of the "Job Variable Costs" the two men segregated that could, under a good accounting system, be allocated to specific jobs — labor, or print reproduction, for example — there is no way to know whether, a year or so after the fact, "labor" that the defendant and Steiner attributed to a particular job actually went into that job. The defendant appears to have tried to reconstruct all forty-two jobs from memory in making these allocations, and the result simply is not reliable or credible.

In short, the entire "Job Variable Cost" section is nothing more than an overhead category with a different name. Maybe some of the "Job Variable Cost" were true, job-specific expenses, but there is absolutely no way to identify them, given Quality's poor record-keeping and the way it conducted its accounting. The Court concludes that whether one looks at Plaintiff's Exhibit 22 (the P L sheet used in the Western District trial) or Defendant's Exhibit 133 (the P L sheet the defendant prepared for this trial), the result is the same — Quality used trust funds to pay overhead.

Even if the defendant had somehow managed to demonstrate that he'd used the trust funds to pay job-specific expenses, he cannot rely on Keyes to prove that this would have absolved him of liability under § 779.02(5). What the Keyes court actually said was this:

. . . [T]he Keyes ignore the proportionality requirement when they claim that so long as money goes toward the project, payments do not violate the statute. While the Keyes are correct that the money cannot be used for purposes outside the project, that does not end the contractors' responsibility under the statute. Using the money to pay themselves in full while other subcontractors have not been paid proportionally constitutes using money for a non-statutory purpose.

State v. Keyes, 750 N.W.2d at 37-38.

Thus, even if the defendant had proven that he used the trust funds to pay job-specific expenses — which, as discussed above, he did not — he would still be in violation of the statute unless he could show that he paid the plaintiff the same proportion on its debt that he paid on the specific expenses of the jobs. The plaintiff did not prove this.

There is another way to look at the proportionality requirement of § 779.02(5) — not whether the defendant paid the plaintiff in the same proportion that he paid himself, but whether the defendant paid the plaintiff the same proportion of its debt as Quality received from the owners. If one looks at the proportionality requirement in this way, one sees that Quality got paid in full on thirty jobs. Quality should, therefore, have paid the plaintiff in full on all thirty of those jobs.

The defendant testified that a deficiency existed for eleven (11) jobs, because on those jobs, Quality did not get paid in full by the owners. Under the above view of the proportionality requirement, Quality should have paid the plaintiff proportionally on those jobs. In other words, if the owner of the Goodyear project paid Quality only 40% of what it owed for the materials the plaintiff had supplied, then Quality should have paid the plaintiff 40% of the plaintiff's invoice. Had the plaintiff done that, then — after doing so — perhaps he might have been justified, had he been acting as a subcontractor, in paying himself proportionally.

Quality did not, however, pay the defendant proportionally on the eleven jobs for which it received only partial payment. Steiner testified that Quality paid the plaintiff in chronological order, because the plaintiff had a "revolving" account. So there could have been no correlation, as far as the Court can tell, between how much an owner gave Quality for materials and how much Quality paid the plaintiff.

Nonetheless, in order to determine whether Quality did, in fact, pay Starfire the same proportion of its invoice on each of these jobs as the owner paid Quality, the Court's law clerk engaged in the following exercise: for each of the eleven jobs, she divided the amount of payment Quality received from the owner for the entire job by the total amount due on Starfire's invoice for that job. Next, she calculated for each job the percentage of Starfire's total invoice that the parties agreed Quality had paid to Starfire. She then compared the percentage of each job that Quality had received from the owner with the percentage Quality paid to Starfire.

The result of this mind-numbing exercise, reflected in Exhibit A to this memorandum decision, demonstrates that for each of the eleven jobs, the owner paid Quality anywhere from 49.43% to 99.99% of Starfire's invoice. Yet Quality paid Starfire nothing on the invoices for three of those jobs, as little as 5.4% on one, and in no instance did it pay Starfire the same percentage of its invoice as Quality received from the owner. On three jobs, Quality paid Starfire a larger proportion on its invoice than the owner had paid Quality. In all other instances it paid a smaller proportion.

The defendant tried to argue at trial that he could meet the proportionality requirement if the total amount of money that Quality paid the plaintiff for all jobs was proportional to the total amount of money that Quality received from all owners. In other words, he argued that if one added up all the money that Quality received on all forty-one jobs, and concluded that Quality had received, say, 60% of the total amount the owners should have paid on those forty-one jobs, then Quality was justified in paying the plaintiff 60% of the total amount it was owed. Again, however, the defendant did not demonstrate that Quality received only 60%, or that it then paid the plaintiff 60%. And again, Quality paid Steiner and the defendant, as well as paying its overhead, rather than passing the trust funds on to the plaintiff.

Further, the defendant ignores the fact that materialmen and subcontractors are not the only beneficiaries of the § 779.02(5) trust. The owners and general contractors who gave Quality funds also were the beneficiaries of that trust. See Matter of Thomas, 729 F.2d at 506. Imagine that the owner of Job X pays Quality 100% of the Starfire invoice. The owner of Job Y pays Quality only 40% of the Starfire invoice. Starfire ought to be able to seek the remaining 60% owed on Job Y from the owner of Job Y. But if Quality used the 100% it received from the owner of Job X to pay Starfire in full for the Job Y supplies, what recourse does the owner of Job X have? It paid 100% of its obligation, yet now finds itself holding the bag for another owner's deficiency.

The defendant's argument is the equivalent of saying, "Well, it all comes out in the wash." But when there are a number of owners providing trust funds for a number of jobs, it doesn't all come out in the wash. That is why the statute created the trust — to protect subcontractors and materialmen from the danger of not getting paid, and to protect owners from having their monies used to pay for things other than the materials to be used in their jobs.

c. Conclusion

The defendant's unilateral, conscious decision to pay himself a salary and to pay overhead expenses (poorly disguised for the purposes of the trial in this case as job specific expenses) surpasses the "more than negligence" standard established byMeyer. Paying these expenses before paying the plaintiff constitutes a violation of § 779.02(5), and accordingly, the defendant committed defalcation when he did so.

C. The plaintiff did not prove that the defendant intended to defraud the plaintiff, and thus there is no basis for the Court to award treble damages under Wis. Stat. § 895.446(1).

The plaintiff's prayer for relief asked the Court to find the defendant liable for treble damages under Wis. Stat. § 895.80. Docket no. 1, at 3. Section § 895.80 was renumbered and amended by 2005 Act 155, effective April 5, 2006; the current version is Wis. Stat. § 895.446.

Section 895.446(1) states that "[a]ny person who suffers damage or loss by reason of intentional conduct . . . that is prohibited under . . . § 943.20 . . . has a cause of action against the person who caused the loss." Sections 895.446(3)(a) and (c) state: "If the plaintiff prevails in a civil action under sub. (1), he or she may recover all of the following: (a) Actual damages . . . (c) Exemplary damages of not more than 3 times the amount awarded under para. (a). No additional proof is required under this section for an award of exemplary damages under this paragraph."

In order to obtain treble damages under § 895.446, then, "the victim must prove, by a preponderance of the evidence, the elements of both civil theft by contractor . . . and criminal theft under § 943.20. See [Tri-Tech Corp. of America v.] Americomp [Services, Inc.], 254 Wis.2d 418, ¶ 24, 646 N.W.2d 822 [Wis. 2002]." KBS Const., Inc. v. McCullough Plumbing, Inc., WL 2008AP1867, 779 N.W.2d 723 at *4 (Wis.App. 2009) (unpublished). "The additional element which a victim of civil theft by contractor must prove for purposes of recovery under § 895.446(3) is criminal intent to defraud." Id. at *5, citing Wis. Stat. § 895.446. So, for a plaintiff to recover treble damages in a civil theft-by-contractor action, that plaintiff

must prove by a preponderance of the evidence that [the defendant] violated [the theft by contractor statute], that [the defendant] possessed the requisite intent to defraud as required by Wis. Stat. § 943.20, and that [the plaintiff] has suffered damage or loss by reason of [the defendant's] intentional failure to comply with [the theft-by-contractor statute].

Id.

The plaintiff did not prove, by a preponderance of the evidence, that the defendant exhibited criminal intent to defraud. While, as discussed above, the evidence demonstrated that the defendant used the trust monies for something other than paying the plaintiff, and while the evidence demonstrated that he did so knowingly, the plaintiff presented no evidence that the defendant intended to defraud the plaintiff. The evidence indicated that the defendant was trying to come up with some way to pay the plaintiff. As the defendant testified, he planned to pay off the IRS, which he thought would enable him to get a bank loan, which in turn he planned to use to pay the plaintiff. While his use of the trust monies was more than negligent and thus constituted defalcation, there is no evidence that it was intentionally fraudulent. Accordingly, there is no basis for the Court to award the plaintiff treble damages.

IV. CONCLUSION

For the foregoing reasons, the Court finds that the plaintiff has proven, by a preponderance of the evidence, that the defendant incurred a debt of $92,517.43 (the plaintiff's unpaid balance of $97,158.81, minus the $4,641.38 owed on jobs in which the Court found the plaintiff had failed to prove that a trust existed) by defalcation in a fiduciary capacity, and accordingly, that that sum is nondischargeable in the defendant's bankruptcy pursuant to 11 U.S.C. § 523(a)(4). The Court will enter a separate order to that effect.

Exhibit A Calculation of Amount due to Plaintiff to make Payments Proportional

Total Project Partial Amount Amount Amount Owed Percentage Amount Payments Percentage Estimated to Collected from to Quality from Paid to Quoted to Made to Balance Due to Quality Paid Amount Req'd To Make Job Name Owner Owner ^fn1a Owner ^fn1a Quality Starfire Starfire ^fn3a Starfire ^fn3a to Starfire Pymt Proportional ABC Catalog $ 36,869.57 $ 36,550.54 $ 319.03 99.13% $ 5,150.82 $ 5,031.96 $ 118.86 97.69% $ 74.29 Capital Crossing $ 60,341.82 $ 57,839.71 $ 2,502.11 95.85% $ 3,148.40 $ — $ 3,148.40 0.00% $ 3,017.85 Goodyear $ 36,595.75 $ 32,186.00 $ 4,409.75 87.95% $ 6,005.55 $ — $ 6,354.86 0.00% $ 5,281.89 Green Lake Lodge $ 83,435.00 $ 83,074.58 $ 360.42 99.57% $ 10,713.72 $ 10,602.51 $ 111.21 98.96% $ 64.93 Ixonia State Bank $ 91,956.36 $ 91,946.36 $ 10.00 99.99% $ 1,439.27 $ 77.77 $ 1,361.50 5.40% $ 1,361.34 Larry Webb $ 13,150.00 $ 6,500.00 $ 6,650.00 49.43% $ 4,269.22 $ 4,078.05 $ 191.17 95.52% $ (1,967.79) Luxury Apartments $ 57,600.00 $ 51,600.00 $ 6,000.00 89.58% $ 5,245.95 $ — $ 5,435.09 0.00% $ 4,699.50 Pick N Save $ 52,940.00 $ 43,767.58 $ 9,172.42 82.67% $ 9,724.99 $ 5,861.07 $ 3,863.92 60.27% $ 2,178.96 Southern Oaks $ 15,600.00 $ 14,907.75 $ 692.25 95.56% $ 2,776.45 $ 2,754.95 $ 21.50 99.23% $ (101.70) Village Square N $ 31,505.00 $ 31,265.82 $ 239.18 99.24% $ 6,996.66 $ 6,673.03 $ 323.63 95.37% $ 270.51 W. Center $ 32,200.00 $ 29,700.00 $ 2,500.00 92.24% $ 5,693.73 $ 5,668.39 $ 25.34 99.55% $ (416.72) Total $ 512,193.50 $ 479,338.34 $ 32,855.16 93.59% $ 61,164.76 $ 40,747.73 $ 20,955.48 66.62% $ 14,463.06 THE FOLLOWING ORDER IS APPROVED AND ENTERED AS THE ORDER OF THIS COURT:

DATED: September 30, 2010