Opinion ID: 2982010
Heading Depth: 3
Heading Rank: 1

Heading: Existence of a trust

Text: Poynter’s first issue on appeal is that the bankruptcy court and the district court erred in finding that the AOI between Poynter Construction (and Poynter individually) and GAIC created an express trust. State law governs whether an express or technical trust exists. Id. Under Kentucky law, an express or technical trust is created by: “(1) an expressed intent to create a trust; (2) an ascertainable res; (3) a sufficiently certain beneficiary; and (4) [a] trustee who administers the trust for the beneficiary.” In re Grant, 325 B.R. 728, 734 (Bankr. W.D. Ky. 2005) (citing Cumberland Sur. Ins. Co. v. Smith, 238 B.R. 664, 670-71 (Bankr. W.D. Ky. 1999)). With regard to the first element, there must be a manifestation of an intent on the part of the alleged trustee to create it in favor of the alleged beneficiary to the particular funds involved. Frazier v. Hudson, 130 S.W.2d 809, 810 (Ky. Ct. App. 1939). Here, there is a contractual provision in the AOI which refers to Poynter Construction holding “in trust” any funds that it received from -5- No. 12-6424 Poynter v. Great Am. Ins. Co. any contract covered by the bond. Specifically, the provision requires “that all funds received by them [Poynter Construction & Poynter, individually], or due or to become due under any contract covered by any Bond are trust funds.” (Doc. 1-1, Page 3.) In a somewhat similar case involving a dispute with offset payments under a construction contract, we found similar language in a general agreement of indemnity to be sufficient evidence of a manifestation of intent to create a trust. See Fed. Ins. Co. v. Fifth Third Bank, 867 F.2d 330, 332-34 (6th Cir. 1989) (holding that language “[a]ll monies paid on account to any contractor for materials or labor shall be regarded as fund [sic] in his trust for payment of any and all obligations relating to this contract” is a sufficient manifestation of an intent to create a trust). Other courts have also found similar language in indemnity agreements to be sufficient to satisfy the first element of express trust creation. See Acuity v. Planters Bank, Inc., 362 F. Supp. 2d 885, 891-892 (W.D. Ky. 2005) (finding that language “all monies due and to become due under any contract or contracts covered by the Bonds are trust funds” to evince intent to create a trust); see also In re Smith, 238 B.R. at 671 (finding “to hold all monies or other proceeds [of bonded construction contracts] . . . as a trust” to be sufficient). We find that the AOI provision in question expresses a clear intent to create a trust because the contractual language of the AOI at issue here is largely the same as the language used in other cases, including one of our own, where the first element was met. In terms of the second element, “the subject matter of the trust must be definite or definitely ascertainable from facts existing at the time of the creation of the trust.” Ridley v. Shepard, 168 S.W.2d 550, 551 (Ky. Ct. App. 1943). “[E]ven where the intent to create a trust is clear and -6- No. 12-6424 Poynter v. Great Am. Ins. Co. unmistakable, the trust would be incomplete unless executed and effectuated by bringing property within the trust.” Acuity, 362 F. Supp. 2d at 892 (quoting Deleuil Ex’rs v. DeLeuil, 74 S.W.2d 474, 477 (Ky. Ct. App. 1934)). Poynter argues that a two-year time lapse between the execution of the AOI and the first bonded contract that Poynter Construction received makes the creation of a trust impossible. While Poynter does not make clear which element of trust creation he takes issue with, presumably it is the ability to ascertain the trust res at the time the trust was created. Poynter relies heavily on Acuity to support his argument. The court’s issue in Acuity, however, was a subrogation rights dispute between a surety and a creditor bank. Id. at 888. Our issue whether a sufficient fiduciary relationship existed under 11 U.S.C. § 523(a)(4) such that the debt was nondischargeable is entirely different. Nevertheless, Acuity is not irrelevant because it explains that under Kentucky law, a trust is not created by merely identifying a future trust res. Id. at 892. The Acuity court found that one of the contractors competing for superior rights in the funds was out of luck because it was “without an actual ownership interest in those funds until it received those funds [or] until it performed work entitling it to payment.” Id. at 893. In other words, the subject matter of the trust was still too abstract. The difference here is that GAIC had a definite pecuniary and legal interest, at the time the agreement was signed, in the amount that it was agreeing to insure Poynter Construction. Although there was a time lapse, Poynter Construction (and Poynter individually) signed the AOI in consideration of GAIC’s issuance of the payment and performance bonds. When the first contract was received, a payment and performance bond was issued by GAIC to Poynter Construction. We believe the issuance of the bonds and the acceptance of the bonds by Poynter Construction is sufficient to create a continuing obligation to abide by the trust provision in the AOI. -7- No. 12-6424 Poynter v. Great Am. Ins. Co. See In re Smith, 238 B.R. at 672. For this reason, we conclude that the ascertainable res is all funds received under any contract covered by the bond. With respect to the third element, there is no dispute that there is a sufficiently certain beneficiary. The beneficiaries are “all parties to whom the Undersigned [Poynter Construction] incurs obligations in the performance of the contract.” This provision establishes a sufficiently certain beneficiary. Id. at 673 (finding “job creditors” as being a sufficiently certain beneficiary). Lastly, in regard to the designated trustee element, the AOI designates Poynter Construction. Poynter seems to argue that a trust was not formed because he had unlimited use of construction draws and was never required to segregate those funds from his other construction projects. We addressed this exact argument in Federal Insurance and determined that “this is not a determining factor of whether a trust was formed.” 867 F.2d at 334. Moreover, “the requirement to hold the funds in a separate account is a fiduciary obligation of [Poynter Construction] as a trustee, and therefore, when a trust is formed, the trustee has this obligation regardless of the trust agreement wording.” Id. As a result, we hold Poynter Construction (and Poynter individually) was the designated trustee and that an express trust was formed in accordance with the AOI trust fund provision.