Sunday, July 13, 2008

New Article Discusses Interplay Between Section 523(a)(4) of Bankruptcy Code and Michigan Builder's Trust Fund Act

As discussed in an earlier post, the Michigan Builder's Trust Fund Act (MCL 570.151, et seq) may impose personal liability upon corporate officers, or members of a limited liability company, who misappropriate construction proceeds in violation of the statute. Pending legislation, such as H.B. 6176, would codify the imposition of personal liability, which is now a function of case law.

The Builder's Trust Fund Act also plays a role in bankruptcy, in which certain debts that arise when the debtor is acting in a "fiduciary capacity" may not be dischargeable. I am not a bankruptcy attorney, but Thomas R. Morris, who is an experienced bankruptcy attorney, has written an excellent article on this important topic, which appears in the latest issue of the Michigan Business Law Journal:
Pursuant to 11 USC 523(a)(4), a debt owing by an individual "for fraud or defalcation while acting in a fiduciary capacity" is not dischargeable in bankruptcy. Two United States Supreme Court cases, one from 1844 and one from 1934, establishes a definition of "fiduciary" for purposes of section 523(a)(4). However, the enactment by Congress and the state legislatures of "statutory trust" laws has created a new type of fiduciary duty not specifically addressed by the Supreme Court cases. The lower courts are not in agreement as to whether a statutory trust creates a "fiduciary capacity" for purposes of section 523(a)(4). As a result, there are a number of unanswered questions which arise under section 523(a)(4). Of particular interest to Michigan attorneys are questions relating to the dischargeability of liability under the Michigan Building Contract Fund Act (MBCFA) or "Builders Trust Fund."
Thomas R. Morris, "Trust Fund Statutes and the Discharge of 'Trustee' Debts Under Bankruptcy Code Section 523(a)(4)," 28 MI Bus LJ 11 (Spring, 2008). For the full text of this article, click here. We also reported on a previous article Mr. Morris wrote on this subject in a February, 2007 post.

Mr. Morris is a member of the West Bloomfield firm of Silverman & Morris, PLLC. Mr. Morris is a 1986 graduate of the University of Michigan Law School. Mr. Morris and his firm concentrate their practice in the areas of bankruptcy, commercial law, workouts, bankruptcy litigation and similar matters, and represents both creditors and debtors. For more information on any of these issues, contact Thomas R. Morris directly.

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