Construction Law

            Violations of a trust fund can result in personal liability. Also, in bankruptcy, a debtor will not be relieved of nondischargeable debt: ?any debt ? for fraud or defalcation while acting in a fiduciary capacity?.? 11 U.S.C. § 523(a)(4). The contractor, as trustee, has a fiduciary duty not to defalcate or misappropriate the money. If the contractor does so, the resulting personal liability will be nondischargeable. 

            In a bankruptcy proceeding, the creditor must show by a preponderance of evidence that the debt is nondischargeable. The contractor has several defenses. The contractor may first challenge the validity of the debt. The contractor may also argue that the trust is an implied trust, because nondischargeability applies to express trusts only.  Many times creditors bring actions against debtors in state courts first. Once a state court imposes liability on a debtor for a breach of trust, the creditor can easily obtain a nondischargeability judgment. But if a creditor sues in state court for debt due to a personal guarantee, but chooses to leave out the nondischargeability claim arising out of the same facts, the creditor might later be precluded from claiming nondischargeability. Lastly, most courts require that the debtor be at least negligent to be personally liable.

            Attorneys should be aware of these trust fund rules to advise debtors of possible personal liability, and creditors of possible rights, concerning nondischargeability. 

            This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.