May 18, 2009

Sixth Circuit Court of Appeals Issues Decision on Defalcation

In an opinion issued May 12, 2009, the Sixth Circuit Court of Appeals determined that a Michigan contractor’s obligations to a subcontractor would not be discharged. Sameer Patel v. Shamrock Floorcovering Services, Inc. No. 08-1265.

Sameer Patel (Patel) was a 50 percent owner, corporate officer and day-to-day administrator of Empire Builders of Michigan, Inc. Under the Michigan Builders Trust Fund Act, contractors are required to first pay laborers, subcontractors and materialmen. The Michigan statute further provides that appropriation of money by the contractor before paying laborers, subcontractors and materialmen is evidence of intent to defraud.

The Sixth Circuit held that Patel was a contractor for purposes of the Michigan statute, and his failure to ensure payment of this subcontractor created personal liability that was not dischargeable because he breached his fiduciary duty to the subcontractor by defalcation.

This E-alert was prepared by David M. Whittaker. Please contact any member of the Bricker & Eckler Creditor Rights & Bankruptcy group for more information.