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Stoughton Lumber Co. v. Sveum

United States Court of Appeals, Seventh Circuit

June 4, 2015

PETER A. SVEUM, Defendant-Appellant

Argued: April 17, 2015.

Appeal from the United States District Court for the Western District of Wisconsin. No. 3:13-cv-00789-wmc -- William M. Conley, Chief Judge.

For In the Matter of: PETER A. SVEUM, Debtor - Appellant: Timothy J. Peyton, Attorney, Madison, WI.

For Stoughton Lumber Company, Incorporated, Plaintiff - Appellee: Erin A. West, Attorney, Godfrey & Kahn S.C., Madison, WI.

Before POSNER and WILLIAMS, Circuit Judges, and WOOD, District Judge.[*]


Page 1175

Posner, Circuit Judge.

Peter Sveum and his wife declared bankruptcy under Chapter 7 of the Bankruptcy Code. Sveum had since 1989 owned with his brother a home-building company in Wisconsin named Kegonsa Builders, Inc. One of Kegonsa's creditors, Stoughton Lumber Company, had sued Sveum along with his brother and their company under Wisconsin law, alleging breach of contract and theft by contractors. The suit had been settled for approximately $650,000 (plus some other consideration, which however we can ignore). Sveum violated the settlement agreement and Stoughton sued again and this time obtained a default judgment for $589,638.10. Unable (we assume) to pay the judgment, Sveum filed for bankruptcy, and asked the bankruptcy judge to discharge his debts, including the debt to Stoughton, on the ground that he lacked the wherewithal to pay them. Stoughton responded by filing an adversary proceeding in the Sveums' Chapter 7 bankruptcy, claiming that Sveum's debt to Staughton was not dischargeable. The bankruptcy judge agreed and denied discharge, and was affirmed by the district court, from which Sveum appeals to us.

The Bankruptcy Code forbids discharge of a debt " for fraud or defalcation while [the person or firm committing it is] acting in a fiduciary capacity [in

Page 1176

relation to the victim of the fraud or defalcation]." 11 U.S.C. § 523(a)(4). " Defalcation" refers to the misappropriation of funds entrusted to one--a form of embezzlement. It differs from fraud in not requiring a false statement. " 'Defalcation,' as commonly used ... can encompass a breach of fiduciary obligation that involves neither conversion, nor taking and carrying away another's property, nor falsity." Bullock v. Bankchampaign, N.A., 133 S.Ct. 1754, 1760, 185 L.Ed.2d 922 (2013). Fraud and defalcation are interchangeable in the present case, because Sveum, as we'll see, made many false statements, though they were not made directly to Stoughton but rather seem to have been intended to enable Sveum to pay other creditors ahead of Stoughton from money, held by Sveum's company in trust for Stoughton, to which Stoughton alone was entitled.

The specific wrong, which is both fraud and defalcation, alleged by Stoughton is what Wisconsin law calls " theft by contractors." Wis. Stat. § 779.02(5). As explained in the statute, " all moneys paid to any prime contractor or subcontractor by any owner for improvements, constitute a trust fund only in the hands of the prime contractor or subcontractor to the amount of all claims due or to become due or owing from the prime contractor or subcontractor for labor, services, materials, plans, and specifications used for the improvements, until all the claims have been paid ... . The use of any such moneys by any prime contractor or subcontractor for any other purpose until all claims, except those which are the subject of a bona fide dispute and then only to the extent of the amount actually in dispute, have been paid in full or proportionally in cases of a deficiency, is theft by the prime contractor or subcontractor of moneys so misappropriated." See also Mark Hinkston, " Wisconsin's Construction Trust Fund Statute: Protecting Against Theft by Contractor," Issue=5& ArticleID=1000 (visited May 10, 2015).

Between 2008 and 2011 Kegonsa bought hundreds of thousands of dollars' worth of building materials from Stoughton, on credit, for 34 homes that Kegonsa built and sold. A portion of the money received for those sales became by operation of the Wisconsin statute that we just quoted a trust fund that though administered by Kegonsa could be used only to pay for materials used in the construction of the homes, such as the building materials bought from Stoughton on credit. Rather than segregating the revenues held in trust, Kegonsa deposited all its revenues in a single bank account from which it paid all its bills. Segregation of the trust funds was not required either by the statute or, as far as we're aware, the case law; but while Kegonsa was therefore free to commingle the funds with other moneys, it had to preserve intact the assets of the trust fund for Stoughton. It didn't.

Sveum argues that he committed an innocent mistake by failing to pay Stoughton what Kegonsa owed it--that although he was aware of the statute he didn't know about its provision for a trust fund, and acting as he did out of ignorance did not commit fraud or defalcation and therefore should not have been denied his discharge. The bankruptcy judge who presided at Stoughton's adversary proceeding didn't believe Sveum's protestations of innocence. An educated person with a college degree in business administration, Sveum had been in the building business ...

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