Opinion ID: 372544
Heading Depth: 1
Heading Rank: 2

Heading: Was Angelle A Fiduciary?

Text: 16 Since this Circuit has not previously discussed the meaning of fiduciary under § 17a(4), and since various courts have taken somewhat different views on the issue, some background discussion is essential.
17 The Bankruptcy Act of 1841 contained a provision similar to § 17a(4). In 1844, the Supreme Court considered whether a factor who sold property belonging to his principal and failed to pay the principal the proceeds owed him a debt created in a fiduciary capacity. The Court held that a factor was not a fiduciary and made clear that under the Bankruptcy Act, the concept of fiduciary should be narrowly defined: 18 In almost all the commercial transactions of the country, confidence is reposed in the punctuality and integrity of the debtor, and a violation of these is, in a commercial sense, a disregard of a trust. But this is not the relation spoken of in the (Bankruptcy Act). . . . The act speaks of technical trusts, and not those which the law implies from the contract. A factor is not, therefore, within the act. 19 Chapman v. Forsyth, 2 U.S. (How.) 202, 207, 11 L.Ed. 236, 238 (1844) (emphasis added). 20 Subsequently, the Supreme Court refined and narrowed the concept of fiduciary articulated in Chapman. The Court made clear that the technical trust required by Chapman must exist prior to the act creating the debt and without reference to that act. See Upshur v. Briscoe, 138 U.S. 365, 378, 11 S.Ct. 313, 317, 34 L.Ed. 931, 936 (1890). As the Court stated in Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 154, 79 L.Ed.2d 393, 397-98 (1934) (emphasis added): 21 It is not enough that by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio. He must have been a trustee before the wrong and without reference thereto. In the words of Blatchford, J., The language would seem to apply only to a debt created by a person who was already a fiduciary when the debt was created. (Quoting Upshur v. Briscoe, supra.)Thus, a constructive trust is not sufficient to create a fiduciary relationship under the discharge provisions of the Bankruptcy Act. 22 These Supreme Court cases giving limited meaning to the term fiduciary are entirely consistent with and indeed, serve to promote the Bankruptcy Act's very purpose, which is to give the debtor a 'new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.'  Lines v. Frederick, 400 U.S. 18, 19, 91 S.Ct. 113, 114, 27 L.Ed.2d 124, 127 (1970), Quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244-45, 54 S.Ct. 695, 699, 78 L.Ed. 1230, 1235 (1933). The cases are also consistent with the well-established principle that exceptions to discharge should be limited to those clearly expressed in the statute. Gleason v. Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 289, 59 L.Ed. 717, 719 (1915). 23 In recent years, courts have extended the principles of Chapman and its progeny to situations where state statutes impose obligations on parties engaging in certain kinds of contracts. Since these cases reach conflicting results on similar facts, they are difficult to reconcile with one another. 24 In May of 1976, the Tenth Circuit decided a case with facts very much like those involved here. The case, Allen v. Romero (In re Romero ), 535 F.2d 618 (10th Cir. 1976), also involved advances made to a building contractor that were not used by the contractor for the party's construction project. The Court held that the contractor acted in a fiduciary capacity. It based its decision on a New Mexico statute which provides for revocation of a contractor's license if funds advanced by the owner are not applied to the completion of the contract. The Court reasoned that this statute imposed a fiduciary duty on the contractor. 25 Three months later, in Schlecht v. Thornton (In Re Thornton ), 544 F.2d 1005 (9th Cir. 1976), the Ninth Circuit held that an employer who, in violation of a written agreement, made deductions from the wages of four employees and then failed to remit the funds to a vacation-savings trust fund, was not a fiduciary. The Court reached its conclusion even though an Oregon statute makes an employer's failure to remit such funds in violation of a written agreement unlawful. 26 Then came the decision of the District Court for the Western District of New York in Besroi Construction Corp. v. Kawczynski (In re Kawczynski ), 442 F.Supp. 413 (W.D.N.Y.1977). In Kawczynski, the debtor (another home builder) also used funds advanced by contracting parties for business purposes other than for the projects of the contracting parties. The Court found the contractor to be a fiduciary based on the New York Lien Law, which requires a contractor to keep detailed records of advances and to segregate funds advanced, and makes it a criminal offense to use funds advanced for a particular project for other purposes. 27 Most recently, in Devaney v. Dloogoff (In Re Dloogoff ), 600 F.2d 166 (8th Cir. 1979), the Eighth Circuit held that a builder who received advances for the construction of a garage and failed to apply the advances to the debts created by labor and materials was not a fiduciary. The Court reached its decision despite the existence of a Nebraska law making it illegal for a contractor who receives advances to fail to apply the advances to claims of laborers and materialmen having a right to file a lien. 7 28 While there are other relevant cases, 8 the cases discussed above present the various approaches utilized by the courts and demonstrate adequately the confusion surrounding the definition of fiduciary under § 17a(4). We believe that to analyze the case before us, we must first attempt to make some sense out of these cases. 29 At the outset, we wish to make clear that in our view, Chapman and its progeny need not be read so narrowly that a state can Never make certain parties fiduciaries by imposing trust-like duties, such as segregating accounts, on those who enter into certain kinds of contracts. Under certain statutes, it is entirely fair to charge contractors with intent to create a trust simply because they have entered into a contract governed by a statute. 9 30 We have our doubts, however, that a statute which merely makes misappropriation of funds a crime without, for example, requiring segregation of accounts would be enough to charge the parties with an intent to create a trust. Fortunately, we need not resolve this issue, since we believe that the requirement that the trust arise prior to the act creating the debt applies with full force to what Kawczynski calls a statutory trust. Thus, even assuming that a statute making misappropriation of funds a crime creates a trust, this trust arises out of the misappropriation and plays its role only at that very time. 10 31 Based on this requirement that the trust arise prior to the act creating the debt we conclude that Romero was wrongly decided. Even assuming that the rule providing for license revocation in instances of misappropriation creates a trust, the revocation, like the criminal penalties in the Thornton and Dloogoff statutes, occurs only upon the act of misappropriation. It simply cannot be said that the trust exists prior to the wrong and without reference to it. 11 32 In contrast to Romero, however, we think the statute involved in Kawcznyski did serve to impose a fiduciary duty on the contractor. To begin with, the Lien Law contains requirements very much like those traditionally imposed on a trustee. As the Court recognized, once payments are made to the contractor, he must segregate and keep records of trust funds, and pay them out according to a statutory priority scheme. 442 F.Supp. at 417. Moreover, the trust clearly arises prior to and without regard to the misappropriation: 33 In addition to creating independent fiduciary duties, the Lien Law makes clear that the trust arises prior to rather than by virtue of any claim of misappropriation of trust funds. (The Lien Law) provides that the trust commences when the contractor first receives payment from the owner, whether or not there shall be at that time any beneficiary of the trust, and continues until all of the trust beneficiaries have been paid. 34 Id. at 417. 35 One further diversion is necessary before we proceed to the instant case and yes, we do plan to get to it. We think it essential to clarify the precise role of state law and in so doing, to summarize the above analysis. 12 To begin with, the scope of the concept fiduciary under § 17a(4) is a question of federal law. The Supreme Court has repeatedly made clear that the concept is limited to technical trusts. Thus, regardless of how a state defines fiduciary, the Chapman/Davis definition applies in cases involving § 17a(4). 36 On the other hand, state law takes on importance in determining when a trust exists. The state may impose trust-like obligations on those entering into certain kinds of contracts, and these obligations may make a contracting party a trustee. Of course, the trust must arise prior to and without reference to the act creating the debt. We also believe that state law may play importance in determining whether a specific case involves an express trust. 13
37 Examining the case before us in light of all the above, it is clear that the District Court erred in finding that Angelle was a fiduciary under § 17a(4). To begin with, the Court applied a definition of fiduciary that is far too broad. The definition relied upon simply requires a relationship involving confidence, trust, and good faith. Under § 17a(4), however, a fiduciary relationship is limited to a technical trust. 38 The only possible way Angelle could be considered a fiduciary is if Louisiana law imposed trust-like duties on contractors in his position. The only statute relevant on this point is LSA-R.S. 14:202, 14 which make misappropriation of funds by a contractor a criminal offense. As in Thornton and Dloogoff, however, even assuming the criminal statute made Angelle a trustee, Angelle would have been a trustee only at the time of and because of the misappropriation. 15