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Andrew Choy v. Graziano Roofing of Texas, Inc.
Citation: Not availableDocket: 01-07-00761-CV
Court: Court of Appeals of Texas; October 1, 2009; Texas; State Appellate Court
Original Court Document: View Document
On October 1, 2009, the Texas Court of Appeals affirmed the trial court's judgment favoring Graziano Roofing of Texas, Inc. in a dispute regarding construction trust funds. Appellant Andrew Choy contested the judgment on three grounds: (1) Graziano's failure to prove all elements of a violation under the Texas Trust Fund Act; (2) the trial court's ruling that liability exists for intra-company fund transfers; and (3) the award of pre-judgment interest. The background of the case involved Lake Olympia Development Corporation, which established Windwater Homes, L.L.C., a subsidiary managed by Choy. Windwater contracted Graziano for roofing services on 39 properties, accruing a total invoice of $226,336.10. Graziano alleged misapplication of loan proceeds by Choy, who controlled Windwater, instead of paying Graziano for the work performed. Graziano filed a lawsuit after Windwater’s bankruptcy, seeking recovery for 21 properties and claiming damages of $134,396.09, alongside attorney's fees and interest. Testimony during the trial included insights from Citibank's loan service manager regarding the draw process for construction funds, which were contingent upon documented completion percentages of the roofing work. Choy, who had been with Lake Olympia since 1983, testified regarding his management responsibilities following a company sale in 1997. The appeal followed a bench trial based on Graziano's Third Amended Petition. In 1998, Windwater was established as a wholly-owned subsidiary for home building, with Choy serving as its President. By 1999, Choy discovered that Tan Yu had diverted approximately $4.732 million from Windwater, funds that were not utilized for their intended purposes. Windwater's payment process involved contractors submitting invoices to a superintendent, who approved them, after which Choy would sign checks. Choy testified that Tan Yu may have taken some funds from bank draw requests overseas without his authorization, although he was aware that proceeds owed to Graziano were sent abroad due to the lack of separate accounts for the company. Choy acknowledged that Windwater did not use construction loan proceeds to pay Graziano Roofing for various properties and admitted the possibility that some of these proceeds went to Tan Yu. He also revealed that he issued checks and wire transfers to Tan Yu at his direction, stating he felt compelled to comply due to Tan Yu's ownership of the company. Choy recognized that Graziano and other contractors were not compensated for their work, and that bank interest and payrolls went unpaid. Ultimately, about $4.723 million was transferred to Tan Yu. Graziano sought damages of $134,396.90, which was later adjusted for a mathematical error. A final judgment on June 7, 2007, awarded Graziano $131,796.09 plus interest and attorney's fees, along with costs related to an unsuccessful appeal. The trial court's findings, akin to a jury's verdict, were subject to review based on the sufficiency of evidence, with challenges to these findings not being conclusive when a full record exists. Evidence is viewed favorably for the prevailing party, and any probative evidence supporting the finding will lead to overruling challenges. An omitted finding can be inferred to support a judgment based on evidence, as established in Black v. Dallas County Child Welfare Unit. In assessing the factual sufficiency, all evidence must be weighed, and a verdict can only be set aside if it significantly contradicts the evidence, following Ortiz v. Jones. Trial court conclusions of law are reviewed de novo, with the court independently assessing their correctness and upholding them if any legal theory supported by evidence sustains the judgment, as noted in In re Moers. In the case at hand, Choy contends that the trial court erred in ruling against him, asserting that Graziano failed to demonstrate all necessary elements for a violation of the Trust Fund Act. Choy claims Graziano needed to prove: (1) the existence of trust funds related to Citibank and Frost Bank as defined by the Act; (2) Choy's duty to disburse these funds to Graziano; and (3) Choy's misapplication of trust funds, leading to personal liability. Choy argues the trial court's findings regarding these elements lacked sufficient legal and factual support. The Trust Fund Act is intended to protect subcontractors and materialmen, promoting a liberal interpretation favoring laborers, as highlighted in RepublicBank Dallas and further supported by cases like Taylor Pipeline Constr. and Herbert. Choy specifically challenges the evidentiary support for the existence of 'trust funds' under the Act, claiming insufficient evidence for various findings of fact related to Windwater’s construction loans. He asserts that Graziano must demonstrate that each loan was for improving specific real property, that receipts were properly allocated, and that loans were secured by a lien on the property. The findings in question affirm that Windwater obtained construction loans for the specified properties, secured by liens, and that loan proceeds were distributed for roofing work completed as per Citibank's draw schedule. Windwater received loan proceeds from Citibank for construction work, which were designated as trust funds. Documentation indicates that construction on certain properties was at least 35.5% complete. Specifically, for the property at 7110 Harmony Cove, which was only 33.5% complete, $57,719.35 was disbursed, but none of these funds were allocated to Graziano Roofing. Citibank records confirm that a total of $1,840,782.85 was disbursed to Windwater for roofing and other construction works across various properties, excluding 7110 Harmony Cove, and none of these funds were paid to Graziano Roofing. Windwater owed Graziano Roofing $81,584.20, which reflects a reduction due to a payment made by the Bankruptcy Trustee. Additionally, Windwater obtained construction loans from Frost Bank for nine properties, which were secured by liens on the real property where Graziano Roofing supplied materials and labor. Frost Bank disbursed $87,517.72 for roofing work to Windwater, but this amount was also not paid to Graziano Roofing. The excerpt concludes by outlining that, under Section 162.001 of the Texas Property Code, construction payments and loan receipts are classified as trust funds if made for specific real property improvements, establishing a legal basis for the funds' intended use. Windwater secured home construction loans from Citibank and Frost Bank to improve specific Texas properties for which Graziano seeks damages. Each loan was backed by a deed of trust, establishing a lien. Draw requests documented in Exhibits 210 through 215 show Windwater requested funds from Frost Bank for nine properties, while Exhibit 220 summarizes disbursed funds, including roofing work costs and Graziano's invoices. Exhibits 180 through 191 outline Windwater's requests to Citibank for funding across 12 properties, with Exhibit 192 summarizing the drawn amounts and invoices. Citibank deemed roofing work complete for disbursement when progress reached 35.5%, as evidenced by the 'Construction Lending Department Inspection Sheet.' Citibank's representative confirmed that property inspections are conducted based on this sheet for draw requests. Records indicate Graziano completed roofing on 11 properties exceeding 35% completion, with specific completion percentages listed for each property. The property at 7110 Harmony Cove was noted at 33.5% completion, leading Graziano to reduce the amount due by $2,600. Invoices for labor and materials were properly submitted and funded. Frost Bank's records show six signed Construction Draw Requests by Windwater for nine properties, each declaring 'Roof Complete,' supported by Choy's testimony that these requests indicate completion. Frost Bank confirmed roofing completion for several properties, and draw requests were funded promptly upon completion. All relevant exhibits were submitted without objection, with no contrary evidence presented by Choy. Evidence was viewed favorably for Graziano, leading to the conclusion that the findings in question were legally and factually sufficient. The trial court correctly classified funds from Frost Bank and Citibank as construction trust funds intended for Graziano's payment for roofing work, consistent with Texas Property Code § 162.001(b). Choy contended that Graziano lacked documentary evidence regarding the timing of labor, materials supplied, and invoices issued. However, Choy did not provide legal support for additional evidentiary requirements beyond what the statute stipulates. Texas law dictates that statutes be interpreted based on their plain language, and additional requirements may only be added to enforce clear legislative intent in extraordinary circumstances, which were not present here. Choy also challenged the sufficiency of evidence regarding his role as trustee and Graziano as a beneficiary, arguing that Graziano did not prove Windwater's duty to pay or trace the funds appropriately. Choy asserted insufficient evidence supporting various findings of fact that led to the conclusions of law he contested. Specifically, the findings affirmed the contractual relationship between Windwater and Graziano Roofing for roofing services. The total principal amount owed to Graziano Roofing as of November 11, 2002, is $226,336.10. Windwater received loan proceeds from Citibank, with documentation indicating construction was at least 35.5% complete, and the funds were categorized as trust funds. The roofing work on the property at 7110 Harmony Cove was only 33.5% complete, resulting in a trust fund amount of $3,232.00. Total disbursements from Citibank for roofing and other construction work to Windwater amounted to $1,840,782.85, excluding funds for the Harmony Cove property. After accounting for a 7.905% reduction due to payments made by the Bankruptcy Trustee, the trust funds owed to Graziano Roofing from Citibank total $81,584.20. Additionally, Windwater received loan proceeds from Frost Bank for roofing work, amounting to $87,517.72, which, after a 7.905% reduction for payments made by the Bankruptcy Trustee, results in $52,811.89 owed to Graziano Roofing. Overall, Graziano Roofing is owed a principal sum of $131,796.09 for roofing work performed on properties with construction loans from Citibank and Frost Bank, after adjustments for incomplete work. Andrew Choy, as a fiduciary of the construction trust funds, had a duty to act in the best interest of subcontractors, including Graziano Roofing, and to ensure proper distribution of the trust funds. Choy breached this duty by failing to distribute the funds appropriately and knowingly misapplied a total of $131,796.09 in construction loan proceeds as of April 5, 2003. Section 162.002 defines contractors, subcontractors, and associated officers as trustees of trust funds if they receive or control these funds. Choy, as President of Windwater, had control over funds received and was deemed a trustee of construction trust funds. Testimony from Adam Stanford, Vice-President of Graziano, confirmed that checks from Windwater were signed by Choy, with no evidence presented to refute this. Consequently, Choy was identified as a trustee. Graziano, as a subcontractor that provided roofing services, was classified as a beneficiary of the trust funds related to its work. Choy argued he had no obligation to disburse funds to Graziano until specific conditions were met, including the submission of evidence of labor and materials provided before receiving the funds, and that payments must be due within 30 days of receipt. He referenced Section 162.031 regarding the misapplication of trust funds, asserting that funds could be used for any purpose as long as there were no outstanding obligations at the time of receipt, and challenged Graziano's compliance with the definition of "current or past due obligations." Choy maintained that if an obligation was not due within 30 days of receiving trust funds, those funds did not qualify as trust funds under the Act. He further claimed there was no evidence showing Windwater owed Graziano for labor or materials before the receipt of trust funds or that such obligations were due within the stipulated timeframe. A trustee who intentionally or knowingly misapplies trust funds by diverting them without first settling all current or past due obligations owed to beneficiaries is in violation of Section 162.031(a) of the Property Code. 'Current or past due obligations' are defined in Section 162.005 as those incurred for labor or materials related to a construction contract, which are due no later than 30 days after receiving trust funds. The Code Construction Act presumes the legislature intended for statutes to be effective, just, reasonable, and in the public interest, with courts interpreting statutes based on their plain language unless it leads to absurd outcomes. As a trustee for funds borrowed for property improvements, Choy has the duty to pay all obligations for labor or materials furnished under the construction contract before disbursing trust funds. The definition of 'due and payable obligations' does not imply that obligations not due within 30 days of receiving funds are exempt from being considered trust funds. Moreover, a trustee must fulfill payment obligations that are already due when requesting construction loan funds, regardless of whether those obligations will be due again within the 30-day window post-receipt of trust funds. Choy's proposed interpretation of the statute is deemed illogical, as it would eliminate all past due obligations from the definition of 'current and past due obligations,' thereby nullifying the term 'past due obligations.' This interpretation would allow borrowers like Windwater to draw construction funds based on invoices for completed work without needing to pay the beneficiary, given that the beneficiary did not specify a 30-day payment requirement post-fund release. The court finds no justification for imposing such a requirement and clarifies that the statute's language regarding obligations 'due and payable no later than 30 days' after receiving construction trust funds encompasses invoices that were already due at the time the funds were requested. Evidence from Citibank and Frost Bank supports this interpretation, showing that Graziano had provided roofing materials and services for 20 of 21 properties, with sufficient completion percentages to warrant draws. Windwater drew funds for these services as work was completed, and banks funded each draw request via wire transfer. Graziano submitted detailed summaries of draw requests and disbursements, which were unchallenged, demonstrating that Windwater owed Graziano for labor and materials prior to the receipt of trust funds, and that Graziano's invoices triggered Windwater’s draw requests for the necessary construction funds. Upon receipt of these requests, the banks promptly transferred the funds to Windwater to fulfill its payment obligations to Graziano. Choy failed to provide evidence contradicting Graziano's claims, and upon reviewing the evidence favorably toward Graziano, it is determined that the evidence sufficiently supports the challenged findings. The findings are not against the great weight of the evidence or unjust, indicating factual sufficiency. Choy argues that the statute does not prioritize payments to beneficiaries from loan proceeds or address trustee misapplication of funds when receipts are inadequate for obligations. This argument is dismissed, as no evidence suggests additional beneficiaries were overlooked in favor of Graziano. The records indicate that Windwater drew funds from Citibank and Frost Bank to pay Graziano for completed roofing work but failed to do so. Choy acknowledged that funds totaling $4.732 million were withdrawn from commingled accounts, with indications that some were taken overseas, and admitted Graziano was not compensated for its work. Choy's assertion that Graziano must provide specific dates of work and detailed payment terms to prove a violation of section 162.031(a) is rejected, as it imposes unwarranted requirements not present in the statute's language. Additionally, Choy's claim that Graziano must trace funds from loans to demonstrate their receipt and disbursement is also unsupported by the statute, which does not mandate such tracing. Buyers terminated Kirschner's services after suspecting he was billing for unperformed labor and materials they had already paid for. Subsequent investigations revealed that Kirschner had failed to pay 17 subcontractors, leading to his indictment. Upon conviction, Kirschner appealed, claiming insufficient evidence of misappropriation of trust funds. The court noted that the State did not provide evidence regarding the timing of obligations owed to ten subcontractors, hindering the proof of current or past due obligations when Kirschner received trust funds. However, evidence from two subcontractors showed that Kirschner drew on loan proceeds without using trust funds for those obligations, writing checks from trust funds to various parties, including himself and his wife. This led the court to conclude a misapplication of trust funds had occurred, rejecting Kirschner's claim that the State needed to trace fund flows. In a related case, Choy, as trustee for Windwater, faced allegations of misapplication of trust funds. Choy argued that Graziano Roofing needed to trace the funds to establish misapplication, which the court found unsupported by statute or precedent. The court affirmed that Graziano provided labor and materials for 21 projects, invoicing upon completion, and that Windwater received loan proceeds which were not paid to Graziano. Choy's assertions that evidence was insufficient to prove misapplication were dismissed, with specific findings indicating he directed loan proceeds away from Graziano Roofing and knowingly diverted trust funds owed to them. Andrew Choy, as President of Windwater, misapplied $131,796.09 of construction loan proceeds from Frost Bank, using the funds for purposes unrelated to the construction costs of homes involved in the lawsuit. Choy's actions led to legal conclusions that he knowingly misapplied trust funds owed to Graziano Roofing, which is classified as a beneficiary of those funds due to its role as a subcontractor providing roofing services. Under Texas Property Code §162.002, Choy, having control over the trust funds, was deemed a trustee. Testimony confirmed that he signed checks to Graziano, and he presented no evidence to counter this assertion. Choy argued that he had no obligation to disburse trust funds to Graziano until specific conditions were met, including the submission of evidence that labor or materials were provided prior to receiving trust funds and that payments were due within 30 days of receipt. He also claimed that Graziano failed to demonstrate any "current or past due obligations" as defined under §162.005(2) of the Property Code. Choy maintained that if obligations were not due within the stipulated 30 days, the funds were not considered trust funds. However, the court found no supporting evidence for Choy's claims regarding obligations prior to the receipt of trust funds, reinforcing the classification of Graziano as a beneficiary of the trust funds in question. A trustee who intentionally or knowingly misapplies trust funds by retaining, using, or diverting them without first satisfying all current or past due obligations to the beneficiaries is in violation of Tex. Prop. Code Ann. 162.031(a). "Current or past due obligations" are defined as amounts owed by the trustee for labor or materials related to a construction contract that are due no later than 30 days after receiving the trust funds (Tex. Prop. Code Ann. 162.005). Under the Code Construction Act, statutes are enacted with the intent of being effective, just, reasonable, and in the public interest (Tex. Gov't Code Ann. 311.021). Courts interpret statutes by considering their objectives and practical consequences, adhering to the plain language unless it leads to absurd outcomes (Tex. Gov't Code Ann. 311.023; Id. 312.002; Fleming Foods, Inc. v. Rylander). As a trustee for funds borrowed for property improvements, Choy is obligated to pay all current and past due obligations owed for labor or materials before disbursing trust funds. The definition of "due and payable" does not imply that obligations not due within 30 days of receiving trust funds are exempt from being considered trust funds, nor does it relieve the trustee from paying already due obligations when an invoice triggers the request for funds. An obligation owed by the trustee for labor or materials related to construction work is considered due and payable when the trustee requests funds from the bank to cover the invoice, specifically for costs incurred prior to receiving those funds. Such obligations must be settled within 30 days following the trustee's receipt of the trust funds. The statute's language indicates that obligations already due at the time of fund request are included in this timeframe. Any interpretation suggesting otherwise would render the definition of "current and past due obligations" nonsensical and allow borrowers to avoid paying invoices for completed work. The evidence presented, including records from Citibank and Frost Bank, confirms that the construction work was completed or nearly complete at the time funds were disbursed. Specifically, roofing work on 20 of 21 properties was verified as complete, and the remaining property's work was substantially finished. Draw requests for roofing supplies were made as work progressed, and funds were promptly transferred to Windwater for these expenses. Supporting documentation, such as summaries of draw requests and wire transfers, was provided without objection, confirming the amounts drawn and the status of completed work. Windwater is obligated to pay Graziano for roofing work completed on specific properties, as mandated by the construction contract and owed through the trustee for labor and materials provided by Graziano before receiving trust funds. Graziano invoiced Windwater for the completed work, prompting Windwater to request draws from Citibank and Frost Bank, which subsequently transferred the funds to Windwater's account for payment of Graziano's invoices. Choy did not present evidence to dispute these facts. The findings are deemed legally and factually sufficient, supporting Graziano's claims. Choy argues that the statute does not prioritize beneficiary payments from loan proceeds when multiple beneficiaries exist, nor does it establish a misapplication of trust funds if loan receipts are insufficient to cover all obligations. However, there is no evidence of other beneficiaries competing for the same funds. Testimony indicated that Windwater, led by Tan Yu and Choy, misappropriated $4.732 million from commingled funds, with some funds taken overseas. Choy acknowledged that Graziano was unpaid for completed work. He incorrectly asserted that Graziano must provide direct evidence of work dates and contract terms to prove a violation of section 162.031(a) regarding the misapplication of construction trust funds. Choy's attempts to impose additional requirements beyond the statute's language are unsupported. Additional requirements for proving a violation of section 162.031(a) of the Act are not warranted beyond what the statute explicitly states. Choy asserts that Graziano must provide evidence tracing funds from loan proceeds or bank accounts to demonstrate the timing of fund receipt and disbursement, referencing Kirschner v. State. In Kirschner, the lack of evidence regarding when certain subcontractors provided services led to the conclusion that the State failed to prove misappropriation of trust funds. However, the State did present evidence showing that Kirschner had drawn on loan proceeds for specific projects and misapplied trust funds by paying himself before settling obligations to subcontractors, which established misapplication. In the current case, evidence indicates that Graziano supplied labor and materials for roofing on 21 projects, invoicing upon completion, which triggered loan draw requests to Citibank and Frost Bank. These banks responded promptly, transferring funds to Windwater’s account, but Choy, as trustee, did not pay the invoices. Choy's argument that Graziano was required to trace funds is rejected as it imposes additional, unsupported requirements on the statute. Furthermore, Choy contests the sufficiency of evidence showing his personal liability for misapplication of trust funds under section 162.031(a). Graziano needed to demonstrate that some portion of a loan draw was not utilized to settle supplier obligations for the property securing the loan, which were due within 30 days of Windwater receiving the loan proceeds. Choy contests findings of fact 25, 26, 37-39 as lacking sufficient evidence and argues that conclusions of law 12-14 and 16 are incorrect. The challenged findings indicate that Choy directed construction loan proceeds from Citibank and Frost Bank to parties other than Graziano Roofing and knowingly misapplied those trust funds, resulting in Graziano Roofing not receiving the owed funds. Conclusion 12 asserts that Choy retained and diverted construction trust funds without settling obligations to Graziano Roofing, while conclusion 14 states that Choy knowingly misapplied these funds, totaling $131,796.09 as of April 5, 2003. Choy cites case law to argue that the lack of statutory definition for "diverting trust funds" is guided by precedent, asserting that misapplication requires proof of intent to defraud and that no segregation of funds by project is necessary. However, the court finds these precedents inapplicable due to the specific circumstances of the case. Choy admitted to diverting over $4.3 million to Tan Yu, with knowledge that contractors, including Graziano, were unpaid. There is no evidence that trust funds from Frost Bank and Citibank were used to pay Graziano's invoices, and to prove misapplication, the statute requires that a trustee knowingly diverts trust funds without resolving obligations to beneficiaries. Evidence has been assessed in favor of Graziano, leading to the conclusion that the findings are legally sufficient and not against the great weight of the evidence, thus factually sufficient as well. Choy's first issue is overruled. In addressing Choy's second issue regarding intra-company fund transfers, he argues that the trial court incorrectly determined liability under the Trust Fund Act. Choy does not challenge any specific factual findings but asserts that Graziano did not prove the details of the transfers, including timing, sources, amounts, or individual transferors. He claims that since the funds remained within the corporate structure, he should not be held personally liable. However, it is noted that Choy's arguments misinterpret the legal requirements, as the Act does not necessitate specific proof of transfer details. Evidence indicated that funds received by Windwater for Graziano’s invoices were not utilized for their intended purpose and were instead commingled and largely transferred overseas without fulfilling corporate obligations. The legal requirement under section 163.931(a) of the Trust Fund Act is met without needing to establish exact details of the transfers, aligning with the clear legislative intent that focuses on the trustee's intentional misapplication of funds. Trustees are prohibited from diverting trust funds without first settling all current or past obligations to beneficiaries, as stipulated in Texas Property Code Ann. § 162.031(a). Choy's argument against the trial court's award of prejudgment interest to Graziano, based on the Texas Prompt Pay Act, is rejected. Choy claims that conclusions of law regarding the interest rate of 1.5 percent per month and the per diem rate of $5,416.2 from April 5, 2003, to June 7, 2007, are erroneous. However, Graziano counters that Choy did not raise this issue at trial, resulting in a waiver of the complaint. The court confirms that Choy failed to preserve the issue for appeal, as required by Texas Rules of Appellate Procedure § 33.1. Consequently, the trial court's decision is upheld, affirming the judgment. The panel, consisting of Justices Jennings, Keyes, and Higley, notes additional points, including that Choy's assertions about the absence of a lien are unfounded, and that Graziano successfully demonstrated a claim related to a property not specifically pled, as it was tried by consent. Graziano's claim for prejudgment interest is supported by the Texas Property Code, which states that unpaid amounts accrue interest after they become due.