Reshetar Systems, Inc. v. Thompson (In re Thompson)
- Citation:
- Thompson v. Thompson, No. 11-6008 (BAP 8th Cir. 2011)
- Tag(s):
-
- Ruling:
- The BAP affirmed the judgment of the Bankruptcy Court determining the debt owed to Reshetar Systems, Inc. by the debtor was not excepted from discharged under 11 U.S.C. Sections 523(a)(4) or (6).
- Procedural context:
- Reshetar Systems, Inc. ("Reshetar") appealed the judgment of the Bankruptcy Court determining the debt owed to it by the debtor was not excepted from discharge under U.S.C. Sections 523(a)(4) or (6).
- Facts:
- The debtor was the sole owner and president of Construction 70, Inc. ("Construction 70"). Construction 70 had entered into a contract with Applebee's International, Inc. ("Applebee's") in 2003 to build a restaurant in Cambridge, Minnesota. Reshetar agreed to provide Construction 70 the labor and material necessary to perform carpentry and drywall work for the project. Reshetar completed its work in 2004. However, despite Construction 70 being paid most of what it claimed it was owed by Applebee's, failed to pay Reshetar $48,293.81 of the total amount owed to Reshetar. In subsequent State court litigation commenced by Reshetar against Construction 70 and the debtor, the parties settled the lawsuit, with the debtor executing a confession of judgment for $78,000.00. Following the debtor's filing of a petition for relief under chapter 7 in 2009, Reshetar timely filed a complaint under 11 U.S.C. Sections 523(a)(4) and (6) to determine the dischargeability of the debt owed to it by the debtor. Observing that Section 523(a)(4)excepts from discharge a debt for fraud or defalcation while acting in a fiduciary capacity, the BAP held that the express bar against the creation of a fiduciary duty under Minn. Stat. Sec. 514.02 supported the Bankruptcy Court's conclusion that this statute did not create a fiduciary relationship cognizable under Section 523(a)(4). Specifically, under Min. Stat. Sec. 514.02, the contractor's principal, acting on behalf of the contractor, received payment and had an obligation to protect the interest of the subcontractor, but neither the contractor nor its principal had a fiduciary liability to the subcontractor. The Bankruptcy Court also rejected Reshetar's alternative argument that because Construction 70 was insolvent at the time it received its final payment from Applebee's, Minnesota common law created the requisite fiduciary relationship. The BAP observed that under Minnesota common law, when a corporation is insolvent or on the verge of insolvency, its directors and officers become fiduciaries of the corporate assets for the benefit of creditors. However, the Court emphasized that the trust is imposed, not when the corporation becomes insolvent, but only if and when the directors and officers engage in some form of self-dealing to the detriment of other creditors. Trustees of such constructive trusts are not fiduciaries within the meaning of Sec. 523(a)(4). With respect to Section 523(a)(4)'s exception from discharge for embezzlement, the BAP observed that for purposes of this section, embezzlement is the "fraudulent appropriation of property of another by a person to whom such property has been entrusted or into whose hands it has lawfully come." Reshetar argued that Minnesota law - presumably Minn. Stat. 514.02 - and both the contract between Applebee's and Construction 70 and the subcontract between Construction 70 and Reshetar required Construction 70 to deliver the funds it received from Applebee's to Reshetar. The BAP held that the Bankruptcy Court correctly concluded otherwise. While those sources gave Reshetar the contractual right to be paid for its work, nothing in them gave Reshetar specific property rights in the payments Construction 70 received from Applebee's. Turning to Section 523(a)(4)'s exception to discharge for larceny, the BAP noted that for purposes of this exception, larceny the "wrongful taking and carrying away of the property of another with the intent to convert such property to the taker's use without the consent of the owner." Because Construction 70 was contractually entitled to receive the payments from Applebee's, the use of its own money did not amount to larceny. Finally, the BAP observed that Section 523(a)(6) excepts from discharge a debt "for wilfull and mlaicious injury by the debtor to another entity or to the property of another entity." To meet the requirement of wilfull injury, Reshetar argued that Construction 70's failure to pay Reshetar when Applebee's paid Construction 70 amounted to the intentional tort of conversion. Because there was no property of Reshetar in the hands of Construction 70, the BAP agreed with the Bankruptcy Court's finding that Construction 70's use of its own funds did not amount to conversion.
- Judge(s):
- Schermer, Venters, and Nail
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