Pursuant to 5 T H C IR . R. 47.5, the court has determined that thi s opinion should not * be publishe d and is not precedent except under the limited circu mstance s set forth in 5 T H C IR . R. 47.5 .4. 

### INTHE UNI TED S TATESCOU RT OFAPPEALS

FORTHEFIFTH CIRCU IT

N o. 09- 20061 Su m m ar y Cal endar
I n t h e M a t t e ro f: DONALD LS W OR, d e c e a s e d ; M YRA L S W OR, D ebtor s

M Y RAL S W OR Appe l l ant
v. BART LE Y T EXAS BUI LDER S HARDW ARE I NC, A pp el l ee A pp ealf

rom t h e U n i t ed S t ates D i st ri ctC ou rt f ort he Sout her n D i st r i c tof Texas U SD C N o. 4: 08- C V

- 644 B ef ore JO N E S , C h i ef

Ju dg e, an d D E N N IS an d H AY N E S , C i rcui tJu dg es. E D ITH H . JO N E S , C h i ef Ju dg e: * Bar t l e y Tex as Bui l de r s H ar dwar e , I nc . (“ Bar t l e y” ) o bj ect e d t o t he di scharge of

a debt i n D on al d an d M y ra S w or’ s (“ t h e Sw ors” ) C h ap t er 7 United States Court of App eals

Fifth Circuit 

### F I L E D October 2, 2009 Cha rl es R. F ulb ru g e II I ClerkN o. 09- 20061

2 ban kru ptcy c a se b e ca u se th e S w o rs im p e rm iss ib ly d ive rte dth e irbu sin ess’ s trust fun d s t o them se lves . The bankrupt c y c our tr ul ed thatt he deb tw as d i sch a rg ea b l e, fi n d i n g th a t th e S w ors w ere all ow edto rep a y l oa n s th eym a d e to t he bus i nes s. T he di st r i c tcour trev er se d, conc l udi ng t hatthi s r epaym entw as n ota val i d u se of

t rust f u n ds. W e a gr ee w i th the distri ct cou rt t h a t th e d ive rsion of tru st f u n d s i n this m an n er w ou l d r en der t h e deb t n on di schargea bl e. B u tbecau se t h e accoun tf rom w hi c h t he paym en ts w ere m ade i ncl uded both t r ustand non- t r ustf und s ( as al l ow ed u n der T exas l aw ) , i ti s un cl ear w h et h er B art l ey m eti t s burd en t o t race t h e pa ym en t s t o t rust f u n ds. W e t h eref

ore reverse t h e deci si on o f th e d ist ri ct court an d rem an d f

or th i s det erm i n ati onan d f u rt h er app ropri ate proc eedi n gs. I . B A CK GRO UND S w or’ s G l ass & M i rror , I n c. (“ S w or’ s G l ass” ) , t h e deb t ors’ sm al lbu si n ess, f i l ed f orc hapt er11 b ankrupt c y (l at erc onver t ed to c hapt er7) i n O c t obe r2005. Th e Sw or s l at erf

i l ed a vol untary c hapt er7 pe t i t i on t o di sc harget hei rper so nal deb t s, w h i ch i n cl u ded D on al d S w or’ s gua ran t ee of t h e bu si n ess’ s debts. I ti s und i sput ed t hat t he Sw or s m ade exe m pl ar y e f f or t s i nvolvi ng per so nal sacrif i ce t o m ai n t ai n t h e bu si n ess. Th e ban kru ptcy c ou rtdescribedt h ese: M r s. Sw o rt e s t i f

i e dt ha to nc e Swo r ’ s Gl a s s b e g a n ha v i ngf i na nc i al di f f i cul t y, i n order t o conti n u e operati n g t h e bu si n ess, sh e a n d h er hus ba nd i nf

us e d o ve r$ 10 6, 00 0 o f t h ei r p e r s o nalf

unds i nt o t he bu si n ess. Th eyr e fi n an ced t h ei r hom e, cashedi n l i fe i n suran ce pol i ci es, an d M r. S w or sol d a sm al lp l an e h e ow n ed. Th e f u n ds f rom a ll o f th e s e s o u r c e s w e r e p u t in to th e b u s in e s s ino r d e rto m a in ta in ope r at i ons and at t em ptt o a voi d havi ng t o f i l e b ankrupt c y.

. . . T h e Sw ors h on orabl y ran t h ei r busi n ess f or over t h i rty years, de vo t e d a l lo f

t he i re ne r gyi nt o m ai n t ai n i n g t he i rb us i ne s s a nd t ryi n g t o provi de f

or th ei r em pl oyees. A ltho u gh [t h e Sw ors] i n vest ed t h ei r li fe savi n gs i n t o t h e bu si n ess, t ook m eager sal ari es, an d l ivedN o. 09- 20061

3 m o de s t l y, l at e i n t he i rl ive s t he y w e r e una bl e t o c o nt i nue o pe r at i ng Sw or ’ s G l as s suc c es sf ul l y. D u ri n g t h i s peri od of t h e bu si n e ss’ s f

i n an ci aldi f

f i cul t y, how ever, t h e Sw ors w rot e checks t o t h em selves f rom cor porate acc ou n t s. W h en Sw or’ s G l ass enter ed ba n kru ptcy, itow ed $8 , 883 . 08 to B art l ey f or com m erci alconstruc tion h a rd w a re . A lth o u g h S w o r’s G la ss re ce ive dp a y m e n tf or c ons t r uct i on pr oj ec t s on w hi c h t he h ar dw ar e w as u se d, n o f und s r em ai ned t o pay B art l ey. B art l ey argu es th a t t h is deb ti s non - di schargea bl e i n ban kru ptcy becau se of

t h e pay m en t s t h e Sw ors m ad e t o t h em selves. T h e b a n k r u p tc yc o u r t fo u n dth e d e b t d is c h a r g e a b le . Ita p p a r e n tly de t e r m i ne d thatt he i nf us i o ns of

m o ne y byt he Sw o r s t o Sw o r ’ s G l as s w e r e l o ans and t hatt he c hec ks t o t he S w or s c ons t it ut ed re paym ent . B as ed o n t hi s fac t ual de t e r m i nat i o n, t he b ank r upt c y c o ur t r e ac he d the l e ga lc o nc l us i o n t hatt he f unds receivedon th e proj ect s up on w h i ch B art l ey sup pl i ed m ater i al s w ere not m i sapp l i ed byt h e Sw ors. O n appeal , t he di st r i c tc our tr eve r se d t he bankr upt c y c our t , f i ndi ng t hat t he Sw or s d i d notl oan m oney t o the bus i nes s buti nst ead m ade c api t al con trib u ti on s. Itthe n h eld th a t th e S w ors im p rop e r lyp a idthe m selve s w i th m o ne y t he y he l d i n t r us tfo rB ar t l e y, and t he s e ac t i o ns re nde r e d t he de btno ndi schargea bl e. B ef ore thi s cou rt , M rs. S w or argu es: ( 1) T h e repaym en tof t h e l oan s t h ey m ad e t o t he co m pa ny w as an or di nary bus i ne s s e xp e ns e o f t he c o m pa ny andt hus al eg i ti m a te u se o f tru st f u n d s, an d( 2 ) ev en if i m p erm i ssible, B a rtl eyfa i l edto m eeti t s burd en t o show t h at th e pay m en t s w ere m ad e usi n g t rust f u n ds. II. A N A L Y S IS T h i s c o u r tr e v i e ws a b a n k r u p t c yc o u r t ’ s a p p l i c a t i o n o f t h e l a w de no vo a nd its fin d in g s o f fa c t fo rcle a re r r o r . R i c hm o nd Le as i ng Co. v. C ap i t alBr anc h, N. A. , 7 6 2 F .2d 1 3 0 3 , 1 3 0 7

– 0 8 (5t h C ir. 1 9 8 5 ).N o. 09- 20061

4 S ect i on 523 ( a) ( 4) of

t h e B an kru ptcy C ode exem pts certain d ebts f rom di s c har ge : “A di scha r ge. . . do e s no tdi s c har gea n i ndivi dua lde bt o rf r o m a ny debt

— f orf r aud ordefal c at i on w hi l e a cti ng i n a f i duci ar y c apac i t y, e m be z zl em en t , or l ar c e ny. ” 1 1 U . S. C. § 5 23 ( a) ( 4) . Defal c at i o n i nc l ude s t he fai l u re t o produ ce f

u n ds en t rusted to a f i du ci ary, ev en w h ere su ch cond u ctdoes n o t r e a c h th e le v e l o f fr a u d . S ee In reF au lkn er , 2 1 3 B . R . 660, 664 (B a n k r. W .D . T e x . 1 9 9 7 ). T h e T exas P ropert y C ode requ i res, “ C on st ru ction pay m en t s are t rust f u n ds . . . if

t h e pay m en t s are m ad e t o a contr act or . . . un der a constr u ct i on con tract for th e i m p rov em en t of sp ecif i c rea l p rop erty i n th i s state.” T EX . P ROP . C ODE§ 162. 001 ( a) . Th e contr act or h ol ds t h ese c on st ructi on pay m en t s i n t rust fo rth e b e n e fit o f th e m a te r ia lm e n th a t fu r n is h e dco n s tr u c tio n m a te r ia l. T EX . P ROP . C ODE§§ 162. 002 –00 3. Th e F i f t h C i rcui tha s det erm i n ed that vi ol ati on of th is tr u s t ca n r e s u lt in n o n -d is c h a r g e a b ilityu n d e r§ 5 2 3 (a )(4 ). I n reNi c ho las , 9 5 6 F .2d 1 1 0 , 1 1 2

– 1 4 (5t h C ir. 1 9 9 2 ). T exas l aw does not r equ i re t rust f u n ds t o b e k e p t i n separate acc ou n t s. In reB oy le , 8 19 F. 2d5 83 , 5 92 ( 5t h Ci r . 1 98 7) . N o rm us tthese f u n ds b e s pe nt on l y on t h e proj ectf or w h i ch they w ere r eceiv ed— t h ey m ay be spen ton other p r oje c ts o ro n e x p e n s e s re la te dto g e n e r a lb u s i n e s s o v e r h e a d . I d. M rs. Sw or d o e s n o t d is p u te th a t t h e yh e ldth e p a y m e n t in tr u s t fo rB a r tle yo rth a t if i m perm i ssibl e pay m en t s w ere m ad e u si n g t rust f u n ds, § 523 ( a) ( 4) w ou l d rend er t h e debt t o B art l ey n on - di schargea bl e. Perm i ssi bi l i ty of

Paym entst o t h e Sw ors A l t h ou gh M rs. Sw o rc har ac t e ri zes th e f u n ds t h ey i n f

u sed i n t o t h e bu si n ess as l oan s an d the checks as repay m en t , t h e di st ri ctcourtcor rect l y t reat ed m on ey provi ded t o t h e bu si n ess as capi t alcontr ibu t i on s:

A l oa n i s a ca p i tal con trib u ti on w h en pa ym en ts correlate w i th t h e debtor ’ s s en se of hi s ow n f

i n an ci alsit u ati on an d the deb t orN o. 09- 20061

5 r e pa ys t he m o ne y at hi s o w n di s c r e t i o n. The Sw o r s ha d t o s ho w t he c o u r t— a n o bje c tiv e o u ts id e r— th a t t h e yw e r e d e b t o r s o f th e ir com pa n y, not j u stun w i se i n vest ors. T h e Sw o rs c an n otprove deb t . Th e absen ce of ei t h er doc um ent at i on o f

t he l oan o ri nt er es tpaym ent s i ndi c at es c api t al rat h er th an debt. Th e S w ors n ever ha d i t s c om pa n y i ssue a pro m i ss or y n ot e f

orthe l oan n ordi d theyenabl e the c om pany t o pay i n t e r e s tr e g u l a r l yt o t h e m. W e a gr ee w i th the distric t c o u r t th a t th e b a n k ru p tcy cou rt cl ea rl y e rred i n i ts concl u si on t h at th e Sw ors h adl oan ed m on ey t o Sw or’ s G l ass. W i t h draw i n g capi t alf rom a bu si n ess i s n o ta perm i ssibl e use of t rust fu n d s . S eeT EX . P ROP . C ODE § 162. 031 ( a) (“At rustee w h o, i n t en t i on al l y or k n o w in g lyo rw ith in te n t t o d e fr a u d , . . . d iv e r t s t r u s tfu n d s w ith o u t fir s t fu lly pa yi ng allc ur r en to rpa s tdueo bli ga t i o ns i nc ur r e d b y t he t r us t e e t o t he b e n e fic ia r ie s o f th e tru s t fu n d s , h a s m is a p p lie dth e tr u s t fu n d s .”); In reF au lkn er , 21 3 B. R. a t 66 5(“ [ I ] f t he f unds i n q ue s t i o n wer e r e t ai ne d, us e d, o rdive r t e d t o a ny u se ot h er than ‘ act u alex pen ses dir ect ly rel ated to the constr u ct i on or repai r of [ an ] i m provem en t , ’th en t h ey w i l lbe h el d t o ha ve been ‘ m i sapp l i ed’i n a fash i on th a t is a ctio n a b le u n d e r se ctio n 5 2 3 (a)(4).” (a lter a tion in o rig in a l) ( quo t i ngT EX . P ROP . C ODE§ 1 6 2 .03 1 (b )). U s eof Tr us tFunds T h e onl y rem ai n i n g qu est i on i s w h et h er t h e f u n ds w i t h w h i ch the S w ors pa i d them selves w ere t rust f u n ds. N ei t h er the ban kru ptcy court nor t h e di st ri ct cou rt m a d e a n y factu a lf i n d i n gs on this po i n t. B art l ey qu ot es Mo o dyv. P itts , 7 0 8 S .W . 2 d9 3 0 (T e x . A p p .— C o r p u s C h r is ti, 19 8 6 , no w rit) , f

or th e proposi t i on t h at t raci n g i s un n ecess ary: “ If a t rustee c o m m in g le s tr u s t fu n d s w ith th e tr u s te e ’s o w n , th e e n tir e co m m in g le dfu n dis su bj ect to the trus t. ” I d. at 93 7. W hi l e t hi s a ppe ar s c o r r e c tw he r e t r us tf unds h a ve be en i m p rop erly m i n gledw i th n on -tr u s t fun d s, T ex a s l a w pe rm i tsN o. 09- 20061

6 c o n tr a c to r s th e m in g lin gth a t o c c u r r e dh e r e . In reB oy le , 8 1 9 F . 2 d58 3 , 59 2 ( 5 th C i r. 198 7) (“ [T ] h e T exas st atute . . . does not r equ i re anysegr e g a tion of f u n ds; i tdoes not obl i gate t h e f u n d hol der t o m ai n t ai n t h e separate i den t i t y of an y t rust r e s ; itim p o s e s n o b o o k k e e p in go b lig a tio n s o n th e fu n dh o ld e r .”); cf. T EX . P ROP . C ODE§ 1 62 . 00 6( a) (“A c o nt r ac t or w h o e nt e r s i nt o aw r i t t e n c o nt r ac tw i t h a prop erty ow nert o c ons t r ucti m pro vem ent s t o ar es i dent i alhom es t ead f oran am o unte xc e e di ng $5 , 00 0 s hallde po s i tt he t r us tf unds i n ac o ns t r uc t i o n a c c o unt inafi n a n cia l i n stitu tion .”) . W h ere the l a w u n a m b i gu ou sly pe rm i ts t ru st an dn on -t ru st f u n d s to m i ngl e , t he t r us t e e w i l lno tbe pun i s he d b y m e r gi ng t he f ul la m o unti nt o t he t rust. B art l ey, t h eref ore, bore t h e bu rden t o show th a t t ru st f u n ds w ere m is u s e d , ca u s in gth e d e b t t o fa ll w ith in th e § 5 2 3 (a)(4 ) e x c e p tio n . S ee In re Ni c ho las , 9 5 6 F .2d 1 1 0 (5t h C ir. 1 9 9 2 ). T raci n g pa ym en t s f ro m a b lend ed accoun tback to t rust or non - t rust depos i t s i s gr eat l y ai ded byt he pr es um pt i on t hat“ [w ] hen a t r ust ee has com m i n gledf

u n d s an dh a s ex p en d edfu n d s, th e m on eye xp en d edis pre su m edto b e th e tru stee’ s ow n . ” Mo o dy , 7 08 S. W . 2d a t9 37 . Applyi ng t hi s pr e s um pt i o n, o n e p o s s ib le m e th o do f t r a c in gis th e “lo w e s t in te r m e d ia te b a la n c e ” t e s t. S ee 5 Col l i e r o n Bankr upt c y, ¶ 54 1. 11 ( 15 t h e d. r e v. 20 08 ) . U nde rt hi s a ppr o ac h, t he am o unto f

t r us tf unds i n a c o m m i ngl e d a c c o unti nc r e as e s w he ne ve rt r us tf unds are dep osi t ed bu td ecreases on l y w h en the accoun tb al an ce drops bel ow t h e t rust a m ou n t. Th e di st r i c tc our tc or r ec t l y r eve r se d t he ban k ru p tcy c our t ’ s f i ndi ng t hat t h e Sw ors’p a y m en t s t o t h em selves const i t u t ed p erm i ssibl e use of t rust f u n ds. Butt he pa ym e nt s c am e f r o m a n a c c o untm i ngli ng t r us tf unds w i t h non- t rustN o. 09- 20061

To the extent Mr s. Swor isarguingth at there wa s no evide nce on the u seof tru st 1 funds, we conclude that Bartley did provide some evidence on this subj ect. Mrs. Swortestified about her account s, and the court a dmitted exhibits, such as Defendant’s E xhibit 6 , regarding the accounts . 7 f u n ds, an d n ei t h er c ou rtan al yzed w h et h er t h e pa ym en t s w ere m ad e w i t h t rust f u n ds. 1 I I I . C ONC L US I ON Fort h ef

o r e g o i n gr e as o ns , w e r e ve r s e t he di s t r i c tc o ur t ’ s j udg m e ntt hatt he d e b t is n o n -d is c h a r g ea b l e a n drem a n dfo rd e te r m in a tio n w h e th e rth e S w o r s p a id t h em selves out of

t rust f u n ds, an d f

or f u rt h er app ropri ate proc eedi n gs. REVE RS ED AND RE M ANDED .