                                                                          F I L E D
                                                                   United States Court of Appeals
                                                                           Tenth Circuit
                     UNITED STATES COURT OF APPEALS
                                                                          MAR 14 2001
                            FOR THE TENTH CIRCUIT
                                                                      PATRICK FISHER
                                                                               Clerk

    In re: RICKIE L. SIEGFRIED,

                Debtor,

                                                         No. 00-1122
    J.M. MANGUM, doing business as                   (D.C. No. 98-M-2234)
    J.M. Mangum Co.,                                       (D. Colo.)

                Plaintiff-Appellee,

    v.

    RICKIE L. SIEGFRIED,

                Defendant-Appellant.


                            ORDER AND JUDGMENT            *




Before BRISCOE , ANDERSON , and MURPHY , Circuit Judges.




         After examining the briefs and appellate record, this panel has determined

unanimously that oral argument would not materially assist the determination




*
      This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
of this appeal.   See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is

therefore ordered submitted without oral argument.

       Defendant-appellant Rickie L. Siegfried appeals from the district court’s

order affirming a final judgment entered by the bankruptcy court, declaring that a

debt owed by Siegfried to plaintiff-appellee J.M. Mangum was not discharged

pursuant to 11 U.S.C. § 523(a)(4). We affirm.


                                        FACTS

       On March 31, 1994, Siegfried Construction, Inc., acting through its

president Rickie L. Siegfried, entered into a construction and purchase agreement

with Stephen L. Danielski and Marnie P. Danielski (the “Danielskis”). In the

agreement, Siegfried Construction agreed to construct a residence for the

Danielskis on a lot located at 295 Berthoud Trail, Broomfield, Colorado (the

“Property”). The Danielskis provided Siegfried Construction with $55,000 in

start-up money for the project.

       At the time the agreement was signed, Siegfried and his wife, Michelle Y.

Siegfried, owned the Property. On April 29, 1994, the Siegfrieds quitclaimed the

lot to Siegfried Construction. Siegfried Construction then granted a deed of trust

to the Bank of Boulder encumbering the Property.

       The Bank of Boulder provided Siegfried Construction with a construction

loan in the amount of $380,000. These funds were placed in a checking account

                                           -2-
owned by Siegfried Construction. The first draw on the account took place on

May 4, 1994, when Seigfried Construction paid the Siegfrieds $105,900 for the

purchase price of the lot.

      On November 10, 1994, Siegfried Construction granted a second deed of

trust to the Bank of Boulder encumbering the Property to secure an additional

loan in the amount of $75,000. Draws from these sums were used to pay

suppliers, subcontractors and the general operating expenses of Siegfried

Construction.

      Closing on the Property occurred in February 1995. The Danielskis

purchased the Property for $565,393.62. Siegfried Construction received a check

for net proceeds of $15,363.21. In connection with the closing, Rickie L.

Siegfried executed and delivered an indemnity and affidavit as to debts, liens, and

possession verifying that all labor and materials in the construction of the

residence on the Property had been paid in full.

      In reality, however, several materialmen and subcontractors, including

Mangum, remained unpaid. Mangum had been paid for his work in painting the

interior of the residence, but remained unpaid for the exterior painting. He sued

and obtained a default judgment of $12,238.15 against Siegfried and Siegfried

Construction, which remains unpaid.




                                         -3-
          The net proceeds paid to Siegfried Construction at closing were used for

partial payment of outstanding debts on the project. The project resulted in a loss

to Siegfried Construction, however, and Siegfried filed this bankruptcy as a

result.

          Mangum filed a complaint in the bankruptcy court, seeking to prevent

dischargeability of the debt owed to him. The bankruptcy court conducted a

bench trial at which both Siegfried and Mangum testified. After the parties

submitted written closing arguments, the bankruptcy court concluded that

Siegfried’s debt to Mangum was not discharged, because Siegfried, who

controlled Siegfried Construction, had misapplied trust funds while acting in a

fiduciary capacity for Mangum. The district court affirmed this decision.

          In this appeal, Siegfried contends that he did not misapply trust funds and

that the debt should therefore be discharged. Mangum elected not to file an

response brief.


                                       ANALYSIS

          Section 523(a)(4) provides in pertinent part that “[a] discharge under

section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an

individual debtor from any debt . . . for fraud or defalcation while acting in a

fiduciary capacity.” Under § 523(a)(4), Mangum had to establish two elements to

prevent the discharge of Siegfried’s debt: first, that a fiduciary relationship

                                            -4-
existed between Siegfried and Mangum, and second, that the debt was attributable

to fraud or defalcation committed by Siegfried in the course of that fiduciary

relationship. Fowler Brothers v. Young (In re Young)        , 91 F.3d 1367, 1371 (10th

Cir. 1996). We review de novo whether these two elements were established,            id. ,

keeping in mind that “exceptions to discharge are to be narrowly construed” and

doubts resolved in the debtor’s favor,    Bellco First Fed. Credit Union v. Kaspar (In

re Kaspar) , 125 F.3d 1358, 1361 (10th Cir. 1997). As we read them, Siegfried’s

arguments primarily target the second element of the analysis; however, we will

discuss each element separately.

       1. Existence of trust relationship

       While “[t]he existence of a fiduciary relationship under § 523(a)(4) is

determined under federal law,” state law is relevant to this inquiry.       In re Young ,

91 F.3d at 1371.   Under applicable federal principles, “an express or technical

trust must be present for a fiduciary relationship to exist under § 523(a)(4).”      Id.

The Colorado construction lien statute creates such a trust.

       Section 38-22-127(1) of the Colorado Revised Statutes provides:

       All funds disbursed to any contractor or subcontractor under any
       building, construction, or remodeling contract or on any construction
       project shall be held in trust for the payment of the subcontractors,
       laborer or material suppliers, or laborers who have furnished
       laborers, materials, services, or labor, who have a lien, or may have a
       lien, against the property, or who claim, or may claim, against a
       principal and surety under the provisions of this article and for which
       such disbursement was made.

                                             -5-
      This statute plainly creates a fiduciary relationship for § 523(a)(4)

purposes. It expressly designates the funds received by the contractor as trust

funds to be held for payment to subcontractors.        See Woodworking Enters., Inc. v.

Baird (In re Baird) , 114 B.R. 198, 202-03 (9th Cir. BAP 1990) (discussing effect

on dischargeability of wording of various types of construction lien statutes).

      The bankruptcy court further determined that Siegfried controlled the

finances of Siegfried Construction, and was therefore personally responsible

under state law as a fiduciary to Mangum.         See Alexander Co. v. Packard , 754

P.2d 780, 782 (Colo. Ct. App. 1988) (stating contractor’s vice president, who

controlled its finances, was “charged with knowledge of the relationship of trust

and confidence” which the statute placed on the contractor and on himself, and

was therefore personally liable for debt caused by contractor’s failure to pay its

suppliers). Siegfried does not challenge this finding on appeal.

      2. Debt attributable to fraud or defalcation

      Seigfried mounts a vigorous attack on Mangum’s showing on the second

element of the analysis: that the debt to Mangum is attributable to a fraud or

defalcation that occurred in the course of the fiduciary relationship. The

testimony at trial centered on two sums of money that Mangum contended

Siegfried should have reserved for payment to Mangum, but did not: the $105,900

that Siegfried Construction paid Siegfried for the lot, and the $15,363.21 that

                                            -6-
Siegfried Construction received at closing. We will focus, as Siegfried does,

primarily on the $105,900 lot payment.

      Siegfried contends that the $105,900 that Siegfried Construction paid him

for the lot was not subject to the trust created by the lien statute. He advances

two arguments in support of this contention. First, Siegfried notes that the statute

requires that funds disbursed to a contractor be held for the benefit of “laborers

who have furnished laborers, materials, services, or labor.” Colo. Rev. Stat.

§ 38-22-127(1) (emphasis added). Use of the past tense in the phrase “have

furnished,” he contends, means that a contractor who receives funds at the

beginning of a project need not hold them in trust for the payment of work to be

performed in the future.

      The phrase “have furnished” situates the furnishing of work or materials in

time with reference to some later event. Siegfried contends that the later event is

the disbursement of funds to the contractor. We conclude, however, that the

“later event” is actually completion of the project.

      Under Siegfried’s reading of the statute, a contractor who received funds

for a project at its outset and squandered them before the subcontractors began

their work would have no trust responsibilities with regard to the dissipated




                                         -7-
funds. 1 This is inconsistent with Colorado case law, which holds that the trust is

imposed to protect subcontractors who perform work until the construction

project (and the purpose of the trust) has been        completed . See, e.g. , Flooring

Design Assocs., Inc. v. Novick      , 923 P.2d 216, 219 (Colo. Ct. App. 1995)

(rejecting application of definition of “disburser” contained in related statute to

§ 38-22-127 on grounds that definition would “defeat the utility of the mechanics’

lien statute for the last subcontractors on a job”);      People v. Collie , 682 P.2d 1208,

1210 (Colo. Ct. App. 1983) (stating that purpose of § 38-22-127 “is to protect

homeowners, laborers, and materialmen from dishonest or profligate contractors

by requiring all contractors to hold in trust their customers’ advance payments

received if any independent laborers or materialmen will be necessary to          complete

a particular job”) (emphasis added). We conclude that the statute is intended to

protect contractors who perform work until the project’s completion; Siegfried’s

argument that it protects only those who perform work prior to the disbursement

of funds lacks merit.   2




1
      It might be argued that this is unlikely to occur in practice because in most
instances, the lender retains some control of the funds through the use of draw
requests for work done in completion of the project. Nevertheless, a contractor
may receive funds, such as start-up capital from a home buyer, which are not
monitored and which he could squander without paying contractors.
2
       This reading of the statute also defeats Siegfried’s sub-argument that
Mangum cannot rely on the statute because he did not have, and could not have, a
lien on the property prior to the time Siegfried was paid the $105,000. As we
                                                                      (continued...)

                                              -8-
        Siegfried’s second argument relies on the last phrase of § 38-22-127(1):

“for which such disbursement was made.” Siegfried argues that the Bank of

Boulder intended the $105,900 disbursement to pay for the land, not to pay

subcontractors, and that the disbursement was therefore not made “for” the

benefit of subcontractors.

        “[F]or a subcontractor to avail itself of § 38-22-127, it need not be shown

that the disburser of funds specifically intended . . . the disbursements to be

allocated for the payment of subcontractors.”       Novick , 923 P.2d at 220. Indeed,

“for which” as it is used in this statute most likely does not refer to subcontractors

at all; instead, it refers to the   project “for which” disbursements are made. Any

other reading incorporates a requirement that the disburser intend that

subcontractors be paid. The Colorado Court of Appeals rejected such a

requirement in Novick . Moreover, such a reading would allow a borrower and

lender to enter into a private agreement between themselves permitting the

borrower to use the borrowed money for purposes other than the payment of




2
 (...continued)
have seen, one purpose of the lien statute is to impose a trust on funds advanced
to contractors in order to protect laborers and materialmen who complete their
work after the funds are advanced. The $105,000 advance falls within this
category, even though it was disbursed prior to the time that Mangum could have
filed a lien.

                                              -9-
subcontractors. We find no such purpose reflected in the statute and therefore

reject this argument as well.

       Siegfried’s last argument is that Siegfried Construction permissibly spent a

portion of the remaining funds from the bank loans on payment of general

operating expenses, and that such payment did not constitute a per se

misapplication of funds. In light of proof that Siegfried Construction disbursed

trust funds well in excess of Mangum’s claim to Siegfried for payment of the lot,

however, this argument lacks merit.

       Moreover, nothing in the Colorado lien statute suggests that a contractor is

entitled to carve out a privileged portion of the trust fund for its own expenses, to

the detriment of subcontractors; rather, the contractor is responsible for paying

the subcontractors and meeting its own expenses from the funds disbursed. In the

absence of a showing that    all the trust funds were used to pay subcontractors or to

satisfy the owner’s obligations on the project,    cf. People v. Erickson , 695 P.2d

804, 805-06 (Colo. Ct. App. 1984) (permitting such a defense in criminal

prosecution for theft based on § 38-22-127), which was not made here, the

insufficiency of the funds to meet the contractor’s expenses is not a defense.

Upon a de novo review of the record, we conclude that Mangum established that

Siegfried’s debt to him was attributable to fraud or defalcation in the course of a

fiduciary relationship.


                                            -10-
     The judgment of the United States District Court for the District of

Colorado is AFFIRMED.



                                                  Entered for the Court



                                                  Mary Beck Briscoe
                                                  Circuit Judge




                                      -11-
