### IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

No. 15

- 51085

In th e Matter of: MA RTHA L. MONACO; ADAM L. MONACO; HOPE ELAINE MONACO,

Debtors
ADAM L. MONACO,
Appellant

v.
TAG INVESTMENTS, LIMITED,
Appellee

Appeal from the United States District Court for the Western District of Texas

Before REAVLEY, D AVIS, and JONES, Circuit Judges

. EDITH H. JONES, Circuit Judge : This appeal arises out of a construction contract gone awry and subsequently complicated by bankruptcy. The district court opinion held that
Monaco individually owes TAG Investments, Ltd. (“ TAG ”) $171,942.03, a non
dischargeable debt under bankruptcy law (11 U.S.C. § 523(a)(4)) arising from the Texas Construction Trust Fund Act (“CTFA”) , Tex. Prop. Code Ann. § 162.001 . Monaco appeals on several bases, most notably for our purposes United States Court of Appeals Fifth Circuit 

### FILED October 6, 2016

Lyle W. Cayce Clerk Case: 15-51085 Document: 00513707592 Page: 1 Date Filed: 10/06/2016No. 15

- 51085

2 relying on the affirmat ive defense built into the CTFA (§ 162.031(b )). Bas ed on that defense, we reverse and remand with directions to discharge the debt

. BACKGROUND
In 2004, TAG entered into a stipulated sum contract with Buildings by Monaco, Inc. (“BBM”). The contract called for the construction of a luxury home in San Antoni o, Texas. BBM served as the general contractor on the

p roject and the contract called for progress payments which required BBM to submit an application to the architect for approval and swear that all subcontractors and supplies had been paid and lien rel eases had been obtained

. Despite BBM’s certifications, TAG began to receive lien notices from BBM’s subcontractors and suppliers in 2005 and fired BBM. A t that time, TAG had paid BBM $1,783,662.40, and BBM had dispensed $1,600,377.78 to its
subcontractor s and suppliers. TAG hired a new contractor, San Antonio Realease Management, Inc. (“SARMECO”), to assume BBM’s subcontracts and to pay off the liens. TAG then reimbursed SARMECO in the amount of $171,942.03 , and TAG demanded payment from BBM

. F our years later, Monaco individually and BBM filed Chapter 7 bankruptcy cases . Neither had paid TAG the $171,942.03 that TAG had paid SARMECO and that TAG believed it was due. TAG filed an adversary proceeding against Monaco for his misapplication of trust funds , Tex. Prop. Code Ann. § 162.031 (extending liability to officers of the “trustee”) , and alleged th at the debt Monaco owe d was nondischargeable under 11 U.S.C. § 523(a)(4 ) , which excepts from discharge debts for “ for fraud or defalcation while acting in a fi duciary capacity, embezzlement, or larceny

. ” The bankruptcy court agreed and rendered judgment in favor of TAG and against Monaco in the amount of $171,942.03. Case: 15-51085 Document: 00513707592 Page: 2 Date Filed: 10/06/2016No. 15

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3 On appeal, the district court initially v a cated the bankruptcy court’s judgment and remanded t he case with instructions to addres s: (1) whether TAG has standing to recover fo r payments made by SARMECO; (2) if so, whether Monaco is entitled to a setoff for amounts withheld as retainage; and (3) the basis for the calculation of actual damages owed to TAG

. On remand, the bankruptcy court concluded that TAG has standing , via equitable subrogation, to recover for payments made by SARMECO and that Monaco is not entitled to a setoff for amounts withheld as retainage, and it clarified the
debt calculation. The district court then affirmed the bankruptcy court ’s judgment on O ctober 21, 2015

. On appeal, Monaco raises several issues. He disputes that the CTFA authorizes TAG’s standing via equitable subrogation and complains that TAG ’s recovery would violate the one satisfaction rule. Monaco contends he did

n o t violate the CTFA, but in any event, CTFA § 162.031(b) provid es an affirmative defense that relieves Monaco of the judgment. Because we hold that the affirmative def ense is applicable in this case , w e need not rule on the other three bases for Monaco’s appeal. STANDARD OF REVIEW
We review de novo a district court's decision affirming a bankruptcy court's application of the law and review its findings of fact for clear error

. Richmond Leasing Co. v. Capi tal Bank, N.A., 762 F.2d 1303, 1307

– 08 (5th Cir.1985). DISCUSSION The CTFA holds liable any “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 .” Tex. Case: 15-51085 Document: 00513707592 Page: 3 Date Filed: 10/06/2016No. 15

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4 Prop. Code Ann. § 162.031(a). The ban kruptcy court concluded that “ Monaco acted intentionally to obtain further payments from TA G despite not paying the subcontractors and suppliers in violation of the CTFA.” In re Monaco , 514 B.R. 477 , 481 (Bankr. W.D. Tex. 2014). Monaco contests this conclusion, arguing that both the bankruptcy court and the district court misint erpreted the certifications he attested to as a condition of payment

. W e ne ed not determine whether the lower courts erred

on this issue, as the statutory scheme of the CTFA also contains two affirm ative defenses, one of which resolves the present case. Section 162.0 31(b) of the CTF A holds that “[i] t is an affirmative defense to prosecution or other action

. . . 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 construc tion or repair of the improvement .” Tex. Prop. Code Ann. § 162.031(b ) . This affirm ative defense raises two questions : (1) were the activities Monaco claims to have spent the money on
within the scope of t he affirmative defense, and (2) has TAG made a suf ficient showing that Monaco is not eligible for the affirmative defense? First, however, we briefly address the absence of any discussion of the affirmative defense in the bankruptcy court or district court opinions. Despite not appearing in the district co urt’s opinion, both parties brief ed the issue before that court. Brief of Appellant at 4

- 5, Adam Monaco v. TAG Investments, LTD, No. SA

- 14

- CA

- 882 (W.D. Tex. 2015) (“The evidence shows that BBM not only spent every cent it received for third

- party expen ses, salaries, overhead and supervision on the project, but also used approximately $70,000.00 of its profit to pay for expenses incurred on the project.”); Brief of Appellee at 4

- 5, Adam Monaco v. TAG Investments, LTD, No. SA

- 14

- CA

- 882 (W.D. Tex. 2015) (“ Overhead and profit components of draws are not author ized exceptions Case: 15-51085 Document: 00513707592 Page: 4 Date Filed: 10/06/2016No. 15

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5 under § 162.031 of the Act, and are not a basis for offset .”); Appellant’s Reply Brief at 2

- 7, Adam Monaco v. TAG Investments, LTD, No. SA

- 14

- CA

- 882 (W.D. Tex. 2015) (“However, [TAG] insists that the $124,05 3 paid as salaries and overhead

. . . and the $77,776 paid as contractual profits to BBM were improper and constituted defalcation on the part of Adam Monaco”). Further, Monaco raised it from the very beginning before the bankrupt cy court in 2011, when TAG first filed an objection to the discharge of its debt. TAG Investments, Ltd v. Martha L. Monaco, et al. , No. 10

- 05026 (Bankr. W.D.
Tex. Nov. 23, 2011), ECF No. 52 at ¶ 7 (“Under Fifth Circuit case of In re Nicholas

. . . there i s no liability imposed on a Contractor if he uses all the monies to pay actual expenses directly related to the construction of the project, whether or not such expenses were owed to ‘beneficiaries’ of the trust fund.”). As this argument has been properly preserved and raised, we may address it on appeal

. Turning to the scope of the affirmative defense, this court’s precedent on what qualifies for “ trustee’ s actual expenses” under the s tatute’s affirmative defense is clear. “ Under the affirmative defense to the Texas Construction Trust Fund Statute

. . . general contractors may use the payments they receive from construction projects to keep those projects going even if, in some instances, the beneficiaries are not paid first. ” In re Nicholas , 956 F.2d 11 0, 113 (5th Cir. 1992) . This includes payment of “expenses such as telephone bills, salari es, and other overhead.” In re Pledger , 592 F. App'x 296, 302 (5th Cir. 2015)

. 1 Nicholas explains that “ the Texas statute's affirmative defense for

1 See also In re Swor, 347 F. App’x 113, 116 (5 th Cir. 2009) (“Nor must these funds be spent only on the project for which they were received

— they may be spent on other projects or on expenses related to general business overhead.”)

. We cite unpublished opinion s in th is decision not because they are pre cedential, which they are not, see 5th Cir. Local Rule 47.5.4, but to show the consistency of our dispositions. Case: 15-51085 Document: 00513707592 Page: 5 Date Filed: 10/06/2016No. 15

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6 payment of actu al expenses directly related to the construction o r improvement of the project is

. . . open
- ended .” Nicholas , 956 F.2d at 113

. See also Holladay v. CW&A, Inc., 60 S.W.3d 243, 248 (Tex. Civ. App

— Corpus Christi 2001, pet. denied). Monaco could assert the affirmative defense for overhead costs of the project. TAG requests instead that we rely on a bankruptcy decision holding that “[t] he affirmative def ense at section 162.031(b) for ‘ actual expenses directly related to the constructi on or repair of the improvement’ is limited to costs actually and directly tied to the improvement in question and does not include ‘indirect’ expenses, such as overhead to the con tractor in question, or ‘profit’ built into the job's price. ” In re Coley , 354 B.R. 813, 816 (Bankr. N.D. Tex. 2006) (quoting In re Faulkner, 213 B.R. 660 (Bankr.W.D.Tex.1997 )). In re Faulkner , another bankruptcy court decision, engages in statutory interpretation, looking at legislative history and Attorney General Opinion
JM

- 9 45 (1988), but its ruling on this point is dicta: “[b] ecause we find that the defendant lacked the requ isite level of ‘ mental culpability ’ to trigger liabi lity for purposes of section 523(a)(4), we need not decide whether the defendant
could make out a su ccessful def ense to liability under section 162.031(b) of the
state statute .” Faulkner , 213 B.R. at 667. What is dispositive, however , is that Coley postdates Nicholas and directly conflicts with this court’s jurisp rudence interpreting the affirmative defense

. Monaco explains that $124,053.00 went to salaries and overhead and an additional $50,400.00 went to supervision of this project

. Tellingly, payment of these sums as reasonable was approved by TAG’s architect. These are expenses allowable under o ur precedents and qualify as a “trustee’s actual expenses directly related to the construction or repair of the improvement ,” as Case: 15-51085 Document: 00513707592 Page: 6 Date Filed: 10/06/2016No. 15

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7 required by the affirmative defense under the CTFA. Tex. Prop. Code Ann. § 162.031(b )

. Moreover, TAG had the burden to prove that Monaco misapplied the funds

. Nicholas , 956 F.2d at 114 (“[A] lthough initially requiring the debtor to make a prima facie showing that he is entitled to a discharge, [federal law] ultimately places the burden on the creditor to prove t hat the debt fa lls within the § 523(a)(4) exception. ”). Simply showing that the progress payment certifications were false is insuffic ient to overcome the affirmative defense

.

“ Because the Texas statute permits applicat ion of trust fund receipts for ‘ actual

expenses directly related’ to the project,

. . . a beneficiary seeking to avail itself of § 523(a)(4) must adduce some evidence that funds were misapplied under
this test. ” Nicholas , 956 F.2d at 114. TAG was unable to show that the funds received by BBM were spen t on im permissible expenses under the CTF A. For the foregoing reasons , Monaco should not have been held liable for misapplication of constr uction trust funds under the CTF A and the debt claimed by TA G should have been discharged. The judgment of the lowe r
court s holding the debt nondischargeable is REVERSED and we REMAND with directions to discharge

. Case: 15-51085 Document: 00513707592 Page: 7 Date Filed: 10/06/2016