`
`
`
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF TEXAS
`SHERMAN DIVISION
`
`Case No. 4:14-cv-770
`
`
`
`
`
`
`
`
`
`
`§
`§
`§
`BARRY IRWIN HENSLEY
`______________________________________ §
`§
`§
`§
`§
`§
`§
`§
`
`
`
`HARRY (SONNY) MARGOLIS, et al.
`
`
`v.
`
`BARRY IRWIN HENSLEY
`
`IN RE:
`
`
`
`
`
`
`
`MEMORANDUM OPINION AND ORDER ON APPEAL
`
`
`the Court
`is Appellant Barry Irwin Hensley’s appeal of
`
`Currently before
`
`the
`
`Bankruptcy Court’s orders entering judgment against Appellant in its ruling on, and denying
`
`evidentiary objections raised in response to, Appellees’ Second Motion for Summary Judgment
`
`disposing of all claims of the parties. Jurisdiction over this matter is proper in this Court as
`
`an appeal from a final judgment of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a).
`
`
`
`After reviewing the parties’ briefs, the record in this case, and the applicable law, the
`
`Court AFFIRMS the order of the Bankruptcy Court.
`
`I.
`
`
`
`PROCEDURAL AND FACTUAL BACKGROUND
`
`On November 26, 2012, Appellees Harry Margolis and Dana Margolis filed their original
`
`complaint in Adversary Proceeding No. 12-4180 in the United States Bankruptcy Court for the
`
`Eastern District of Texas. On March 26, 2014, Appellees (Plaintiffs in the adversary action)
`
`filed their Second Motion for Summary Judgment (Doc. No. 24 in USBC Case No. 12-41801),
`
`
`1 The Court will refer to docket entries in the adversary action as “USBC Doc. No. XX” and to
`docket entries in the instant case as “Doc. No. XX.”
`1
`
`
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 2 of 19 PageID #: 425
`
`
`
`
`which is at the core of the instant appeal. On October 1, 2014, the Bankruptcy Court entered
`
`four documents: (1) an Order Granting Plaintiffs’ Second Motion for Summary Judgment
`
`(USBC Doc. No. 33); (2) an Order Denying Defendant’s Evidentiary Objections Contained in
`
`Defendant’s Response to Plaintiffs’ Second Motion for Summary Judgment (USBC Doc. No.
`
`34); (3) a Judgment (USBC Doc. No. 35); and (4) a Memorandum of Decision Regarding
`
`Plaintiffs’ Second Motion for Summary Judgment (USBC Doc. No. 36). On October 14, 2014,
`
`Appellant filed a Notice of Appeal in the Bankruptcy Court (USBC Doc. No. 41) from “the
`
`judgment, order, or decree of the bankruptcy judge entered in this adversary proceeding on the
`
`1st day of October 2014.” The same Notice of Appeal, with a Bankruptcy Cover Sheet, a copy
`
`of the docket of the Bankruptcy Court adversary proceeding, a copy of the Judgment and a copy
`
`of the Memorandum of Decision attached, was then filed in this Court on November 25, 2014
`
`(Doc. No. 1). The Appellant’s Brief was filed on December 2, 2014 (Doc. No. 2) and the
`
`Appellees’ Brief was filed on December 30, 2014 (Doc. No. 4). On July 14, 2015, Appellees
`
`filed Notice (Doc. No. 6) of the Bankruptcy Court’s Order in Bankruptcy Case No. 15-40508, a
`
`Chapter 13 proceeding, lifting the automatic stay to permit litigation to proceed.
`
`
`
`This case revolves around a contract between Appellees, a couple who wished to have a
`
`home built, and Appellant, a contractor who wished to build the home. Although the parties
`
`often disagree about what was promised, for how much, and what happened at the time the
`
`contract fell apart, the main thrust of the matter is that Appellees claim they entered into a
`
`contract with Appellant and paid him substantial sums of money in his role as a contractor.
`
`Appellant then allegedly diverted some of that money to other uses and ultimately could not
`
`complete the project. The parties then proceeded to litigate in state court; arbitrate before a state-
`
`court-ordered Arbitrator; and, on Appellant’s filing for Chapter 7 relief, in the Bankruptcy Court.
`
`
`
`2
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 3 of 19 PageID #: 426
`
`
`
`
`Appellees filed the adversary action in the Bankruptcy Court and obtained a lift of the automatic
`
`stay in the Chapter 7 proceeding to allow the matter that is the subject of this appeal to continue.
`
`
`
`The Bankruptcy Court’s Memorandum of Decision contains a succinct Factual and
`
`Procedural Background of the case as it was determined in the adversary action (referring to
`
`Appellant as Defendant and Appellees as Plaintiffs):
`
`In mid-2008, the Plaintiffs began discussions with the Defendant with
`
`regard to the proposed construction of a residence for the Plaintiffs in the
`Shaddock Creek Estates development near Frisco, Texas. After having received
`an estimate from the Defendant regarding the costs of constructing the home, the
`Plaintiffs contracted with the Defendant in the summer of 2009 to construct the
`residence. The construction process was a contentious one, with each side now
`contending that various actions of the other precluded the successful construction
`of the house as contemplated.
`
`
`
`On September 10, 2010, the Plaintiffs filed a state court lawsuit against the
`Defendant for breach of fiduciary relationship before the 219th Judicial District
`Court of Collin County, Texas (the “State Court”) under case no. 219-03753-2010
`(the “State Court Litigation”). On February 24, 2012, the State Court entered an
`order abating the prosecution in state court and submitting the matter to
`arbitration by the agreement of the parties. Richard Abernathy, Esq. was
`appointed as the Arbitrator by the State Court.
`
`
`
`Before that arbitration could take place, on October 15, 2012, the
`Defendant filed a voluntary petition for relief under Chapter 7 of the Bankruptcy
`Code in this Court under Case No. 12-42785, the Hon. Brenda T. Rhoades,
`presiding. After a contested hearing in the bankruptcy case, the Court modified
`the stay in order to allow the arbitration hearing to take place and for a final
`judgment to be entered. FN5.
`
`
`FN5. Meanwhile, the Plaintiffs had timely filed a complaint to
`determine dischargeability of a debt on November 26, 2012,
`seeking to except their claims from the scope of any discharge
`granted to the Defendant. The prosecution of this adversary
`proceeding was subsequently abated to allow that state court
`process to be completed. That abatement was terminated on
`August 16, 2013.
`
`On April 17, 2013, the Arbitrator ruled that the Defendant, jointly and
`
`severally with other parties, owed the sum of $98,737.99 to the Plaintiffs “for
`violations of Chapter 162, Texas Property Code, FN6 including Section 162.005,
`Texas Property Code.” The Arbitrator also awarded to the Plaintiffs attorney’s
`
`
`
`3
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 4 of 19 PageID #: 427
`
`
`
`
`fees in the sum of $75,000, court costs of $4,204.57, and denied all of the
`counterclaims filed by the Defendant. That arbitration award was finalized into a
`Final Judgment issued by the State Court on April 19, 2013 (the “State Court
`Judgment”). In interpreting the arbitration award and granting final judgment, the
`State Court confirmed the award in favor of the Plaintiffs and against the
`Defendant for “$98,737.99 for violation and fraud under Chapter 162, Texas
`Property Code, including a finding of fraudulent conduct under 162.005 of said
`Texas Property Code.” No other findings of fact or conclusions of law were
`entered. The Final Judgment also confirmed the attorney’s fee award, the court
`costs assessment and the denial of the Defendant’s counterclaims. It further
`ordered that post-judgment interest would accrue on the judgment at the rate of
`5% per annum. No appeal was taken from the entry of the State Court Judgment.
`
`
`FN6. See 5 TEX. PROP. CODE ANN. § 162.001(a) et. seq.
`(Vernon 2011 and Vernon Supp. 2014). The provisions of Chapter
`162 are often referenced collectively as the Texas Construction
`Trust Fund Act (hereafter referenced as the “CTFA”).
`
`
`
`After the parties renewed the prosecution of this adversary proceeding, the
`Plaintiffs filed this Second Motion for Summary Judgment. FN12. They assert
`that there are no genuine issues of material fact pertaining to the CTFA award and
`that, under such uncontested facts, they are entitled to a determination as a matter
`of law that the sum of $98,737.99 awarded for violations of the CTFA, together
`with other ancillary awards, as evidenced by the State Court Judgment, are
`collectively nondischargeable as a debt for fraud or defalcation while acting in a
`fiduciary capacity under §523(a)(4). FN13.
`
`
`FN12. A first motion for summary judgment had been filed by the
`Plaintiffs after the abatement of this lawsuit had been terminated,
`but it was dismissed by the Court as premature since the post-
`abatement management conference resulted in certain clarifying
`directives being issued to the Plaintiffs.
`
`FN13. As stated earlier, the Plaintiffs’ amended complaint also
`contains asserted causes of action under 11 U.S.C. §523(a)(2)(A)
`and §523(a)(6). The (a)(6) claim was not addressed by the Second
`Motion for Summary Judgment. The Second Motion for Summary
`Judgment did address the same portion of the award under the
`State Court Judgment under §523(a)(2)(A). However, because of
`the summary judgment granted herein under §523(a)(4), the Court
`need not adjudicate those claims under either subsection.
`
`Memorandum of Decision (USBC Doc. No. 36) at 2-5 (footnotes referring to the parties’ exhibits
`
`before the Bankruptcy Court omitted; substantive footnotes retained). The Bankruptcy Court
`
`
`
`4
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 5 of 19 PageID #: 428
`
`
`
`
`went on to grant Appellees’ Second Motion for Summary Judgment and found the $98,737.99 in
`
`actual damages from the State Court Judgment to be nondischargeable, along with $54,750.00 in
`
`attorneys’ fees and $3,069.34 in court costs from the State Court Judgment, with an additional
`
`$293.00 in courts costs incurred in the adversary proceeding. Memorandum of Decision at 19-
`
`22. In sum, the total amount found nondischargeable from the State Court Judgment is
`
`$156,557.33, along with $293.00 from the adversary proceeding.
`
`
`
`Appellant appeals these findings, as they are memorialized in the Bankruptcy Court’s
`
`Judgment (USBC Doc. No. 35) and the Memorandum of Decision (USBC Doc. No. 36). Those
`
`two documents are listed in Appellant’s Notice of Appeal. Appellant added the Bankruptcy
`
`Court’s Order Granting Plaintiffs’ Second Motion for Summary Judgment (USBC Doc. No. 33)
`
`and its Order Denying Defendant’s Evidentiary Objections Contained in Defendant’s Response
`
`to Plaintiffs’ Second Motion for Summary Judgment (USBC Doc. No. 34) to his Appellant’s
`
`Brief before this Court, though they are not mentioned in the Notice of Appeal. Specifically,
`
`Appellant summarizes the issues he raises on appeal as:
`
`1.
`
`
`
`
`2.
`
`
`
`
`
`Whether the Bankruptcy Court can grant a motion for summary judgment
`based upon collateral estoppel where such assertion or affirmative defense
`is not plead and was not a ground upon which the movant relied for
`summary judgment.
`
`Whether the Bankruptcy Court erred in granting Plaintiffs’ Second Motion
`for Summary Judgment [ ] in its order dated October 1, 2014 [ ] and
`through the reasoning set forth in the Judgment [ ] and the Memorandum
`of Decision [ ], because of the following issues:
`
`a.
`
`
`
`
`
`b.
`
`
`Sub-issue 1: Whether, as a matter of law, a state court
`judgment against Appellant containing the word “fraud” is
`sufficient to create a preclusive effect such that the debt
`liquidated therein is nondischargeable pursuant to 11
`U.S.C. § 523(a)(2)(A).
`
`Sub-issue 2: Whether the Texas Construction Trust Fund
`Act creates a fiduciary relationship so as to deny the
`
`
`
`5
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 6 of 19 PageID #: 429
`
`
`
`
`discharge of Appellant’s debt to Plaintiffs pursuant to 11
`U.S.C. § 523(a)(4), for fraud or defalcation while acting in
`a fiduciary capacity.
`
`
`
`
`
`Whether the Bankruptcy Court erred in denying Defendant’s evidentiary
`objections in Defendant’s Response to Plaintiffs’ Second Motion for
`Summary Judgment and Brief in Support [ ], especially in light of the
`evidentiary deficiencies noted
`in
`the Order Authorizing
`the
`Supplementation of the Summary Judgment Record [ ] to which Plaintiffs
`failed to adhere.
`
`3.
`
`
`
`
`
`
`Appellants Brief (Statement of the Issues) (Doc. No. 2) at 6-7 (citations to the USBC docket
`
`omitted). The Court will address each issue in turn.
`
`II.
`
`STANDARD OF REVIEW
`
`
`
`
`
`A.
`
`Bankruptcy Appellate Review
`
`This Court reviews the Bankruptcy Judge’s findings of fact for clear error. Robertson v.
`
`Dennis (In re Dennis), 330 F.3d 696, 701 (5th Cir. 2003). A finding of fact is only clearly
`
`erroneous if the reviewing court has a definite and firm conviction that the finding was in error.
`
`Id. The Court conducts a de novo review of the Bankruptcy Judge’s conclusions of law. Id.
`
`
`
`
`
`B.
`
`Summary Judgment
`
`Rule 56(a) requires the issuance of summary judgment “if there is no genuine issue as to
`
`any material fact,” and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P.
`
`56(a). The movant bears the initial burden of informing the court of the basis for its motion and
`
`identifying those portions of the record it believes demonstrate the absence of a genuine issue of
`
`material fact. Celotex Corp. v. Catrett, 447 U.S. 317, 323 (1986). Only when the moving party
`
`has discharged this initial burden does the burden shift to the non-moving party to demonstrate
`
`that there is a genuine dispute of material fact. Id. at 322. A dispute is “genuine” if the evidence
`
`is such that a reasonable jury could return a verdict for the nonmoving party. See Anderson v.
`
`Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Cooper Tire & Rubber Co. v. Farese, 423 F.3d
`
`
`
`6
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 7 of 19 PageID #: 430
`
`
`
`
`446, 454 (5th Cir. 2005). A dispute is “material” if its resolution could affect the outcome of the
`
`action. Anderson, 477 U.S. at 248. The Court must view the evidence and draw inferences in the
`
`light most favorable to the nonmoving party. Id. at 255; Tolan v. Cotton, 134 S. Ct. 1861, 1862
`
`(2014) (per curiam); Richardson v. Monitronics Int’l, Inc., 434 F.3d 327, 332 (5th Cir. 2005).
`
`III. DISCUSSION AND ANALYSIS
`
`
`
`Appellees generally argue in response to the same issues Appellant raises, though
`
`somewhat differently in form and order. The Court will address each point as the Court
`
`interprets the parties’ arguments.
`
`A.
`
`Invoking The Doctrine Of Collateral Estoppel Sua Sponte
`
`Appellant argues that the Bankruptcy Court improperly granted summary judgment in
`
`
`
`favor of Appellees based in part on the doctrine of issue preclusion, because that doctrine was
`
`not pleaded or otherwise raised in Appellees’ summary judgment papers. Appellant does not
`
`complain that the Bankruptcy Court’s collateral estoppel analysis was incorrect; instead, he
`
`simply claims that “the Bankruptcy Court reversibly erred in granting summary judgment by
`
`relying upon a basis not asserted in Plaintiffs’ Second Motion for Summary Judgment or
`
`pleadings.” Appellant’s Brief at 10-11.
`
`
`
`Appellant’s argument is without merit. Even if the Appellees did not explicitly use the
`
`words “collateral estoppel” or “issue preclusion” in their pleadings on summary judgment before
`
`the Bankruptcy Court, that is not a bar to the Bankruptcy Court raising the doctrine sua sponte.
`
`
`
`First, collateral estoppel applies in the bankruptcy context, including in bankruptcy
`
`appeals to the United States District Court on the issue of nondischargeability and the effect of
`
`collateral estoppel on a prior state court judgment:
`
`Collateral estoppel, or issue preclusion, “means simply that when an issue of
`ultimate fact has once been determined by a valid and final judgment, that issue
`
`
`
`7
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 8 of 19 PageID #: 431
`
`
`
`
`cannot again be litigated between the same parties in any future lawsuit.” Schiro
`v. Farley, 510 U.S. 222, 232 (1994) (internal quotations omitted). “Under
`collateral estoppel, once an issue is actually and necessarily determined by a court
`of competent jurisdiction, that determination is conclusive in subsequent suits
`based on a different cause of action involving a party to the prior litigation.”
`Montana v. United States., 440 U.S. 147, 153 (1979) (citing Parklane Hosiery Co.
`v. Shore, 439 U.S. 322, 326 n.5 (1979)). Where the factual issues for the
`creditor’s theory of nondischargeability have been actually litigated in a prior
`proceeding, neither the creditor nor the debtor may relitigate those grounds.
`RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1294 (5th Cir.1995).
`
`When a party is asserting collateral estoppel regarding a state court judgment, the
`court applies the collateral estoppel law of that state. In re Pancake, 106 F.3d
`1242, 1244 (5th Cir.1997). Under Texas law, collateral estoppel occurs when:
`“(1) the facts sought to be litigated in the second case were fully and fairly
`litigated in the first; (2) those facts were essential to the prior judgment; and (3)
`the parties were cast as adversaries in the first case.” Id. (citing in re Garner, 56
`F.3d 667 (5th Cir.1995); Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 806
`(Tex.1984)).
`
`Whitaker v. Moroney Farms Homeowners’ Ass’n, No. 4-14-CV-700, 2015 WL 3610306, at *3
`
`(E.D. Tex. June 5, 2015) (appeal of bankruptcy adversary action).
`
`
`
`In addition, a federal court may raise the issue of collateral estoppel sua sponte:
`
`Finally, the State parties argue that even if they earlier failed to raise the
`preclusion defense, this Court should raise it now sua sponte. Judicial initiative
`of this sort might be appropriate in special circumstances. Most notably, “if a
`court is on notice that it has previously decided the issue presented, the court may
`dismiss the action sua sponte, even though the defense has not been raised. This
`result is fully consistent with the policies underlying res judicata: it is not based
`solely on the defendant’s interest in avoiding the burdens of twice defending a
`suit, but is also based on the avoidance of unnecessary judicial waste.” United
`States v. Sioux Nation, 448 U.S. 371, 432, 100 S. Ct. 2716, 65 L. Ed. 2d 844
`(1980) (REHNQUIST, J., dissenting) (citations omitted).
`
`Arizona v. California, 530 U.S. 392, 412 (2000). The “special circumstances” the Supreme
`
`Court discussed above is consistent with the situation here, where the Bankruptcy Court was
`
`wholly aware of the judgment and the issues raised in the State Court Judgment, developed out
`
`of the final decision in arbitration. The United States Court of Appeals for the Fifth Circuit has
`
`ruled similarly:
`
`
`
`8
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 9 of 19 PageID #: 432
`
`
`
`
`This circuit also recognizes two instances in which the district or appellate court
`can sua sponte dismiss an action on issue preclusion grounds. Nagle v. Lee, 807
`F.2d 435, 438 (5th Cir. 1987). One exception allows a court to raise the issue
`preclusion defense on its own when all the relevant data and legal records are
`before the court and the demands of comity, continuity in the law, and essential
`justice mandate judicial invocation of the principles of issue preclusion. See id. at
`439 n.2 (citing American Furniture Co. v. International Accommodations Supply,
`721 F.2d 478, 482 (5th Cir.1981)
`
`Williams v Midwest Employers Cas. Co., 34 F. App’x 152, 2002 WL 496395, at *6 (5th Cir.
`
`Mar. 21, 2002). The Fifth Circuit’s reasoning directly supports the Bankruptcy Court’s decision
`
`to apply collateral estoppel sua sponte in this case.
`
`
`
`Accordingly, the mere fact that the Appellees did not specifically plead collateral
`
`estoppel is no bar to the Bankruptcy Court’s sua sponte application of the doctrine. Appellant’s
`
`first issue thus fails as a matter of law.
`
`The State Court Judgment And Effect Of The Texas Construction Trust
`Fund Act
`
`B.
`
`
`Appellant next makes a two-pronged argument that, first, the mere use of the word
`
`
`
`“fraud” in the State Court Judgment was insufficient to render the debt that judgment imposed
`
`nondischargeable under federal bankruptcy law; and, second, that the CTFA does not create a
`
`fiduciary relationship in this circumstance so as to support a finding of nondischargeability.
`
`The State Court Judgment’s Finding Of “Fraud” As A Basis For
`Nondischargeability In Bankruptcy
`
`1.
`
`
`Wholly aside from the issue whether the Bankruptcy Court could properly apply
`
`
`
`collateral estoppel, Appellant also argues that there was insufficient information in the State
`
`Court Judgment on which to meet the standard of nondischargeability in the federal bankruptcy
`
`proceeding.
`
`
`
`The Fifth Circuit has noted that “the determination of whether a debt is nondischargeable
`
`under [§ 523] has been a matter of federal bankruptcy law, not state law.” Matter of Dennis, 25
`
`
`
`9
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 10 of 19 PageID #: 433
`
`
`
`F.3d 274, 277 (5th Cir. 1994) (citations omitted). The Fifth Circuit went on:
`
`Bankruptcy courts must therefore look beyond the labels which state courts – and
`even parties themselves – give obligations which debtors seek to have discharged.
`
` *
`
` * *
`
`
`The reason for these well-settled principles is that parties and state courts, as a
`general rule, do not label obligations with federal bankruptcy standards in mind.
`Even if a state court reviews an issue which is similar to one created by the
`nondischargeability provision in the bankruptcy code, the state-law concept will
`likely differ from the specific federal bankruptcy doctrine in question.
`
` *
`
` * *
`
`
`Hence, in only limited circumstances may bankruptcy courts defer to the doctrine
`of collateral estoppel and thereby ignore Congress’ mandate to provide plenary
`review of dischargeability issues. Collateral estoppel applies in bankruptcy courts
`only if, inter alia, the first court has made specific, subordinate, factual findings
`on the identical dischargeability issue in question – that is, an issue which
`encompasses the same prima facie elements as the bankruptcy issue – and the
`facts supporting the court’s findings are discernible from that court’s record.
`
`Id. at 277-78 (citations and footnote omitted). Accordingly, Appellant argues that the
`
`Bankruptcy Court improperly based its grant of summary judgment on the State Court Judgment,
`
`which Appellant contends did not contain specific findings on the identical dischargeability issue
`
`before both the state court and the Bankruptcy Court.
`
`
`
`However, the Fifth Circuit has held that specific findings of the nature Appellant would
`
`require are not necessary in a state judgment so long as the state judgment’s intent vis a vis the
`
`similar terms in the federal bankruptcy code are the same and can be discerned from the
`
`available record. Matter of Davis, 3 F.3d 113, 116 (5th Cir. 1993) (state court findings that the
`
`appellant’s “receipt of informal dividends by making profit sharing contributions for his own
`
`benefit and to the exclusion of” the appellee was a willful breach of a fiduciary duty, and
`
`therefore was “sufficient to prevent discharge of both debts under section 523(a)(4).”).
`
`Here, the Bankruptcy Court provided a detailed rendition of its reasoning based on the
`
`10
`
`
`
`
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 11 of 19 PageID #: 434
`
`
`
`existing Arbitrator’s proceedings and the State Court Judgment, including a specific definition of
`
`the term “fraud,” comparing its meaning under the Texas CTFA to the federal bankruptcy code.
`
`The Bankruptcy Judge stated in part,
`
`The summary judgment record clearly demonstrates that the fact of the
`Defendant’s misconduct was essential to the entry of that portion of the State
`Court
`Judgment
`for which
`the Plaintiffs
`seek a determination of
`nondischargeability under § 523(a)(4). The State Court Judgment contains a
`finding that the Defendant violated the CTFA by explicit reference to its statutory
`location and it specifically finds that the actions of the Defendant, resulting in the
`CTFA violation, constituted fraudulent conduct as defined by § 162.005 of the
`CTFA. The summary judgment record is also clear that the facts as reflected in
`the State Court Judgment were fully and fairly litigated in the first action, as
`initially determined by the Arbitrator, and as subsequently affirmed by the 219th
`Judicial District Court in the State Court Judgment. An actual evidentiary hearing
`was conducted by the Arbitrator. Upon consideration of the admitted evidence,
`the Arbitrator issued the award to the Plaintiffs which was subsequently
`confirmed by the State Court pursuant to § 171.087 of the Texas Civil Practice &
`Remedies Code.
`
`Memorandum of Decision (USBC Doc. No. 36) at 11-12 (emphasis added, footnotes omitted).
`
`The Bankruptcy Judge also provided the state definition of fraud under the CTFA:
`
`Section 162.005(1) of the Texas Construction Trust Fund Act states that:
`
`
`
`
`
`
`
`
`
`
`
`
`
` Tex. Prop. Code Ann. § 162.005 (Vernon 2007).
`
`
`See Memorandum of Decision at 11 n.14 (emphasis added).
`
`
`
`11
`
`(1) A trustee acts with “intent to defraud” when the trustee:
`
`retains, uses, disburses, or diverts trust funds with the intent to
`(A)
`deprive the beneficiaries of the trust funds;
`
`retains, uses, disburses, or diverts trust funds and fails to establish
`(B)
`or maintain a construction account as required by Section 162.006 or fails
`to establish or maintain an account record for the construction account as
`required by Section 162.007; or
`
`uses, disburses, or diverts trust funds that were paid to the trustee
`(C)
`in reliance on an affidavit furnished by the trustee under Section 53.085 if
`the affidavit contains false information relating to the trustee’s payment of
`current or past due obligations.
`
`
`
`
`
`
`
` 5
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 12 of 19 PageID #: 435
`
`
`
`
`
`In comparison, the Fifth Circuit has addressed the meaning of fraud for the purposes of §
`
`523(a)(4):
`
`Under 11 U.S.C. § 523(a)(4), a debt “for fraud or defalcation while acting in a
`fiduciary capacity, embezzlement, or larceny” may not be discharged in
`bankruptcy. In construing this section, this court has stated that this discharge
`exception “was intended to reach those debts incurred through abuses of fiduciary
`positions and through active misconduct whereby a debtor has deprived others
`of their property by criminal acts; both classes of conduct involve debts
`arising from the debtor’s acquisition or use of property that is not the
`debtor’s.” In re Boyle, 819 F.2d 583, 588 (5th Cir.1987).
`
`Matter of Miller, 156 F.3d 598, 602 (5th Cir. 1998) (emphasis added), cert. denied, 526 U.S.
`
`1016 (1999).
`
`
`
`The language of § 162.005 compared with the Fifth Circuit’s interpretation of the
`
`meaning of § 523(a)(4) reflects that each statute defines “fraud” and “fraudulent conduct” in the
`
`same manner. Accordingly, the Bankruptcy Court was perfectly able to discern the meaning of
`
`“fraud” as used in the State Court Judgment for the purposes of determining nondischargeability
`
`in federal bankruptcy law. Appellant’s contention is without merit.
`
`2.
`
`Fiduciary Duty Under The CTFA And 11 U.S.C. § 523(a)(4)
`
`
`
`Aside from the argument above, Appellant contends that the CTFA does not create a
`
`fiduciary relationship cognizable under federal bankruptcy law.
`
`
`
`
`
`(a)
`
`The September 1, 2009, Amendment To The CTFA
`
`First, Appellant contends that the current version of the CTFA, upon which Appellees
`
`based their arguments, was not yet effective until September 1, 2009, the month after Appellees
`
`entered into their construction contract with Appellant.2 Therefore, Appellant argues, that
`
`
`2 Although he does not spell out the nature of the amendment in his Appellant’s Brief, his
`Answer to the Complaint in the bankruptcy adversary action fleshes out his argument that the
`September 1, 2009, amendment allegedly allowed for a private right of action by a homeowner
`under the CTFA, which allegedly had not previously existed. (USBC Doc. No. 22 at 6-7.)
`12
`
`
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 13 of 19 PageID #: 436
`
`
`
`version of the CTFA could not have been applied retroactively so as to give Appellees’ assertion
`
`of a “fiduciary duty” effect. Nonetheless, the 219th Judicial District Court of Collin County did
`
`apply that version of the CTFA, and awarded Appellees money damages thereupon in the State
`
`Court Judgment.
`
`
`
`Unfortunately, this federal Court is not the proper forum for reviewing the application or
`
`interpretation of a state law by a state court. As Appellees appropriately point out, the
`
`Rooker/Feldman doctrine
`
`requires
`
`that, “[a]bsent specific
`
`law otherwise providing,
`
`[Rooker/Feldman] directs that federal district courts lack jurisdiction to entertain collateral
`
`attacks on state court judgments.” Liedtke v. State Bar of Texas, 18 F.3d 315, 317 (5th Cir.
`
`1994) (citing Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923) and District of Columbia Court
`
`of Appeals v. Feldman, 460 U.S. 462 (1983)); see also In re Rabalais, 496 F. App’x 498, 500
`
`(5th Cir. 2012) (finding that “bankruptcy courts may not sit as appellate courts and revisit the
`
`merits of state court decisions,” citing Rooker and Feldman). If a state trial court errs in an
`
`application of its own state law, its “judgment is not void, it is to be reviewed and corrected by
`
`the appropriate state appellate court.” Liedtke, 18 F.3d at 317. “A state court judgment is
`
`‘attacked’ when the losing party in a state court action seeks ‘what in substance would be
`
`appellate review of the state judgment.’” In re Rabalais, 496 F. App’x at 500 (quoting Johnson
`
`v. De Grandy, 512 U.S. 997, 1005-06 (1994)). “Like the bankruptcy court, we lack the authority
`
`to review the decision of the [state] court.” Id. That is the precise situation here.
`
`
`
`Appellant contends that the state trial court erred in its State Court Judgment by applying
`
`the version of the CTFA’s September 1, 2009, amendment to the August 2009 contract between
`
`the parties. However, it is undisputed that Appellant did not appeal the state trial court’s
`
`
`Because this issue is not cognizable on federal review, this Court need not determine whether the
`difference is as Appellant alleged.
`
`
`
`13
`
`
`
`Case 4:14-cv-00770-MHS Document 7 Filed 09/22/15 Page 14 of 19 PageID #: 437
`
`
`
`judgment. Accordingly, no Texas appellate court has had the opportunity to determine whether
`
`the trial court applied the CTFA correctly. Therefore, Appellant’s argument of improper
`
`retroactive application by the state trial court is not cognizable in federal court.3
`
`
`
`
`
`(b) Meaning Of “Fiduciary Duty” Under The CTFA And 11 U.S.C. § 523(a)(4)
`
`Second, Appellant argues that the CTFA does not create a fiduciary relationship in this
`
`instance at all. He contends that the term “fiduciary” does not have the same meaning under 11
`
`U.S.C. §523(a)(4) as under common law. Instead, he asserts, a fiduciary relationship for the
`
`purposes of § 523(a)(4) arises only under express or technical trusts outside of strictly
`
`contractual obligations. However, the very authority upon which he relies also specifies that
`
`“[s]tatutory trusts, by contrast, can satisfy the dictates of § 523(a)(4).” In re Jacobson, 422 B.R.
`
`183, 192 (S.D. Tex. 2010). But, “to meet the requirements of § 523(a)(4), a statutory trust must
`
`(1) contain a definable res and (2) impose ‘trust-like’ duties.” Id. (quoting Tex. Lottery Comm’n
`
`v. Tran, 151 F.3d 339, 342-43 (5th Cir. 1998) (emphasis added in Jacobson)).
`
`
`
`The Fifth Circuit has held that the CTFA can meet these requirements under § 523(a)(4).
`
`The Trust Fund Statute is one way in which the relevant “fiduciary capacity”
`under Section 523 may be created. In re Nic