IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 15-51085

In the Matter of: MARTHA 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, DAVIS, 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 nondischargeable 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: 10/06/2016
No. 15-51085

2

relying on the affirmative defense built into the CTFA (§ 162.031(b)). Based 

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 Antonio, Texas. BBM served as the general contractor on the 

project 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 releases had been obtained.

Despite BBM’s certifications, TAG began to receive lien notices from 

BBM’s subcontractors and suppliers in 2005 and fired BBM. At that time, TAG

had paid BBM $1,783,662.40, and BBM had dispensed $1,600,377.78 to its 

subcontractors 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.

Four 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 that the debt Monaco owed was nondischargeable under 11 U.S.C. 

§ 523(a)(4), which excepts from discharge debts for “for fraud or defalcation 

while acting in a fiduciary 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: 10/06/2016
No. 15-51085

3

On appeal, the district court initially vacated the bankruptcy court’s 

judgment and remanded the case with instructions to address: (1) whether 

TAG has standing to recover for 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 October 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

not violate the CTFA, but in any event, CTFA § 162.031(b) provides an 

affirmative defense that relieves Monaco of the judgment. Because we hold 

that the affirmative defense is applicable in this case, we 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. Capital 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: 10/06/2016
No. 15-51085

4

Prop. Code Ann. § 162.031(a). The bankruptcy court concluded that “Monaco 

acted intentionally to obtain further payments from TAG 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 misinterpreted the certifications he attested to as a 

condition of payment. We need not determine whether the lower courts erred 

on this issue, as the statutory scheme of the CTFA also contains two 

affirmative defenses, one of which resolves the present case.

Section 162.031(b) of the CTFA 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 construction or repair of the improvement.” 

Tex. Prop. Code Ann. § 162.031(b). This affirmative defense raises two

questions: (1) were the activities Monaco claims to have spent the money on 

within the scope of the affirmative defense, and (2) has TAG made a sufficient 

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 court’s opinion, both parties briefed 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 expenses, 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 authorized exceptions 

 Case: 15-51085 Document: 00513707592 Page: 4 Date Filed: 10/06/2016
No. 15-51085

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 $124,053 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 bankruptcy 

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 is 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 statute’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 110, 

113 (5th Cir. 1992). This includes payment of “expenses such as telephone 

bills, salaries, 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 (5th 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 opinions in this 

decision not because they are precedential, 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: 10/06/2016
No. 15-51085

6

payment of actual expenses directly related to the construction or 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 defense at section 162.031(b) for ‘actual expenses directly 

related to the construction 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 contractor 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-945 (1988), but its ruling on this point is dicta: “[b]ecause we find that the 

defendant lacked the requisite level of ‘mental culpability’ to trigger liability 

for purposes of section 523(a)(4), we need not decide whether the defendant 

could make out a successful defense 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 jurisprudence 

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 our 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: 10/06/2016
No. 15-51085

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 that the debt falls within 

the § 523(a)(4) exception.”). Simply showing that the progress payment 

certifications were false is insufficient to overcome the affirmative defense. 

“Because the Texas statute permits application 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 spent on impermissible expenses under the CTFA. 

For the foregoing reasons, Monaco should not have been held liable for 

misapplication of construction trust funds under the CTFA and the debt 

claimed by TAG should have been discharged. The judgment of the lower

courts 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