In re Lee

PAPPERT, J.

PAPPERT, J. MEMORANDUM

Defendant Whole Foods Market Group, Inc. moves to dismiss Plaintiff Herbert J. Nelson's employment discrimination Complaint against it. (ECF Nos. 17 and 18.) Nelson, representing himself, filed two documents in response to the motion. (ECF Nos. 19 and 20.) The Court grants Defendant's motion and dismisses Nelson's Complaint.

I

In the Complaint Nelson filed with the Court, prepared on the Court's form for a plaintiff filing an employment discrimination action, he complains he was terminated, retaliated against and denied equal pay. (Compl., ECF No. 1, at ECF p. 4-5.) He alleges that it is his best recollection that the alleged discriminatory acts occurred or began on or about December 23, 2015. (Id. at ECF p. 5.) By checking appropriate locations on the form, he asserts claims for discrimination under Title VII of the Civil Rights Act of 1964, 42 U.S.C. §§ 2000e to 2000e-17; the Age Discrimination in Employment Act, 29 U.S.C. §§ 621-634; the Americans With Disabilities Act, 42 U.S.C. §§ 12112-12117; and the Pennsylvania Human Relations Act, 43 Pa. Cons. Stat. §§ 951-953. (Id. at ECF p. 3, 5.). He alleges that he was born in 1945. (Id. at ECF p. 5.) In a Pennsylvania Human Relations Commission ("PHRC") Intake Information Form attached to his Complaint, he alleges that his race/color is black. (Id. at ECF p. 12.) With respect to disability, Nelson's PHRC Employment Discrimination Questionnaire identifies "anxiety" and stress," states that he is "visiting doctor for conditions," his condition is "very new" and it is "difficult to determine" how much longer he expects to have the disability. (Id. at ECF p. 16.) He wrote that he is "on medication" but that his employer had not learned about his disability. (Id. ("They haven't.").)

Nelson served Whole Foods with a document that is different from the Complaint he filed with the Court. (ECF No. 18.) Whole Foods does not, however, move to dismiss for Plaintiff's failure to comply with Federal Rule of Civil Procedure 4(c)(1), which requires the service of a summon "with a copy of the complaint." Fed. R. Civ. P. 4(c)(1).

Because of inconsistent pagination, the Court cites the Complaint using page numbers from the ECF docket entry.

Nelson's Equal Pay Act claim relates to a 44 cent per hour pay raise which he contends he was owed but never received. (Id. at ECF p. 36.) His retaliation claim also appears to arise out of the denied 44 cent pay raise. He alleges that he objected to having been denied the pay raise and that sometime thereafter, he was summoned to the management office and asked whether he had touched two Caucasian females. (Id. at ECF p. 23.) He was discharged after that, allegedly because he "told [management] off about [his money] and treatment, which they didn't like!" (Id. at ECF p. 23.) Nelson alleges that he did not touch anyIt 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 by Chapter 53.

(c) It is also an affirmative defense to prosecution or other action brought under Subsection (a) that the trustee paid the beneficiaries all trust funds which they are entitled to receive no later than 30 days following written notice to the trustee of the filing of a criminal complaint or other notice of a pending criminal investigation.

        TEX. PROP. CODE ANN. § 162.032 (Vernon 1995) states:

(a) A trustee who misapplies trust funds amounting to $500 or more in violation of this chapter commits a Class A misdemeanor.

(b) A trustee who misapplies trust funds amounting to $500 or more in violation of this chapter, with intent to defraud, commits a felony of the third degree.          DISCUSSION

        Standing

         The statutes make payments to a contractor trust funds for the benefit of any laborer or materialman who furnishes labor or material on the project. TEX. PROP. CODE. ANN. §§ 162.001-.003. The obligations protected by the statute are those incurred by the contractor for labor or materials furnished in the direct prosecution of the work. TEX. PROP. CODE. ANN. § 162.005. Defalcation occurs when the contractor intentionally, knowingly, or with intent to defraud, diverts the trust funds without paying the obligations. TEX. PROP. CODE. ANN. § 162.031. Therefore, the beneficiaries of the statute are the unpaid laborers and materialmen, not the owners who paid funds to the contractor. In this case, the Lampmans, as the owners who paid funds to the contractor, have no claim under the trust fund statutes.

        Even if the Lampmans could stand in the shoes of the laborers and materialmen to whom they testified they paid $7,000, there was insufficient evidence elicited for the court to tell whether the Lampmans' $7,000 was paid because Mr. Lee failed to pay the subcontractors, or because the Lampmans requested further upgrades to the property.

        Diversion of Trust Funds

         The Lampmans cite the court to Capital Aggregates, Inc. v. Waters (In re Waters), 20 B.R. 277 (Bankr.W.D.Tex.1982). The bankruptcy court heard that case in 1982, prior to the time the Texas Legislature passed the statute now cited by the Lampmans. However, TEX. REV. CIV. STAT. ANN. art. 5472e, the statute in use at the time the bankruptcy court decided Waters, is now codified at TEX. PROP. CODE ANN. § 162.001 et seq. TEX. PROP. CODE ANN.§ 162.001 historical notes (Vernon 1995) [Acts 1967, 67th Leg., art. 5472e,§ 1].

        In Waters, the bankruptcy court found that funds received by a contractor under a construction contract covering specific real property must be held in trust for any entity or party who has furnished labor or material under the contract, and that the statutory trust would be considered an express trust for § 523(a)(4) purposes. Id. at 278 (citing art. 5472e; Carey Lumber Co. v. Bell, 615 F.2d 370, 374 (5th Cir.1980)). The bankruptcy court held that "intent is not an essential element of defalcation and that an innocent or simple failure to account for funds received under a construction contract to improve specific real property pursuant to Article 5472e will render the ensuing debt non-dischargeable under Section 523(a)(4) of the Bankruptcy Code." Id. at 280. However, the court declined to hold the debt nondischargeable under a state court default judgment and ordered a hearing held for the plaintiff to prove its case under § 523(a)(4) and art. 5472(e). Id.

        Additionally, the Lampmans cited the court to Coburn Co. v. Nicholas (In re Nicholas), 956 F.2d 110 (5th Cir.1992). In Nicholas, Coburn was an unpaid subcontractor on four Nicholas projects. Id. at 111. The bankruptcy court found that Nicholas was a trustee for Coburn of the funds received on the projects to which Coburn supplied materials. Id. However, the court held that Nicholas did not intend to defraud Coburn, saying that while the evidence was "rather sketchy on exactly what happened to the money that was received," all money from the projects went into Nicholas's business. Id. The court also found no evidence that funds received from the owners of the project were used for anything other than to pay the bills of the corporation and found neither fraud nor defalcation by Nicholas. The district court affirmed. Id.

        On appeal to the Fifth Circuit Court of Appeals, Coburn complained that the bankruptcy court did not apply the Texas Trust Fund Statute properly and erred when it found the debtor established an affirmative defense under the statute. Id. Nicholas relied on Boyle v. Abilene Lumber, Inc., 819 F.2d 583 (5th Cir.1987) in which the Fifth Circuit found the statute created a fiduciary relationship under § 523(a)(4) only if the funds were diverted with "intent to defraud." Id. Therefore, the circuit court considered whether post-Boyle amendments to the statute created a fiduciary duty. Id.

        The Fifth Circuit found that funds received on construction contracts are "trust funds," that the recipient is "trustee" pursuant to § 162.001-.002, and that the subcontractors are the beneficiaries under § 162.003. Id. at 111-12. The court noted that the only significant change made by the 1987 amendments was to explain in more detail what constitutes "misapplication" of the funds. Id. at 112. In Boyle, the trustee misapplied the funds only if he acted "with intent to defraud" the beneficiary. The amendment, which is broader in scope as to the scienter requirement, states that "[a] trustee who, intentionally or knowingly or with intent to defraud, directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries of the trust funds has misapplied the trust funds." Id.

        The court stated: "The essential element of our inquiry continues to be 'determining what fiduciary duties are imposed on the fund holder and the manner in which the state's statutory construction funds "trust" interacts with the Bankruptcy Code debt discharge exception for these debts arising from fiduciary activities' ". Id. at 113 (citing Boyle, 819 F.2d at 586-87 (emphasis in original)). The amended statute criminalizes knowing or intentional as well as fraudulent misapplications of trust funds, subject to three affirmative defenses. Id. at 113.

        The court stated that no criminal penalty attaches if the trustee pays the trustee's actual expenses directly related to the construction or repair of the improvement--whether or not such expenses were owed to beneficiaries. Id. However, if the trustee knowingly or intentionally paid for more than actual expenses, or for expenses not directly related to the construction project, criminal sanctions could be imposed, and Boyle holds such actions subject to nondischargeability under § 523(a)(4). Id.

         Coburn objected to the bankruptcy court's finding that even if Coburn did not get paid, the trustee did not take money and divert it for his own use or for some use not connected with the operation of the business. While federal law requires the debtor to make a prima facie showing that he is entitled to discharge, ultimately the creditor bears the burden to prove that the debt falls within the § 523(a)(4) exception. Id. at 114. The court concluded:

We are bound by Boyle's conclusion that the Texas Construction Trust Fund Statute creates fiduciary duties encompassed by 11 U.S.C. § 523(a)(4) only to the extent that it defines wrongful conduct under the statute. Because the scope of such wrongful conduct has been broadened by the legislature's amendments to the statute, § 162.031, the potential grounds for nondischargeability have also broadened. Nevertheless, Coburn did not demonstrate that it could take advantage of this expansion, inasmuch as it was unable to persuade the bankruptcy court that Nicholas's plumbing company paid trust funds receipts to nonbeneficiaries for items other than "actual expenses directly related" to the construction projects on which Coburn worked.

        Id. at 114.

        In the case at bar, the court is faced with a situation directly analogous to that in Nicholas. The court was presented with no evidence or, at the very most, insufficient evidence to show that Mr. Lee misappropriated any funds for his own use. Indeed Mr. Lee presented evidence and testimony of estimates, varying from day to day as the Lampmans added upgrades, showing that total construction costs on the house would range from $83,000 to in excess of $86,000. See Ex.D-7.

        CONCLUSION

        For two reasons, the Lampmans' claim against Mr. Lee must be denied. First, the Lampmans are not beneficiaries under the trust fund statute under which they claim recovery. Second, from the testimony and evidence before it, the court cannot find that trust funds were diverted at all, much less intentionally or knowingly. Therefore, the court finds that any debt of Mr. Lee to the Lampmans is dischargeable.

Page 815.

        ORDER ACCORDINGLY.

This Memorandum shall constitute Findings of Fact and Conclusions of Law pursuant to FED. R. BANKR. P. 7052 which is made applicable to Contested Matters by FED. R. BANKR. P. 9014. This Memorandum will be published.