Chapter 8 - § 8.11 TRUST FUND CLAIMS IN BANKRUPTCY

• Jurisdiction: Colorado

§ 8.11 TRUST FUND CLAIMS IN BANKRUPTCY

A lien claimant creditor can object to the discharge of its debt in bankruptcy under 11 U.S.C. §523(a)(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. C.R.S. §38-22-127 creates a statutory or technical trust on all funds disbursed to a contractor or subcontractor for the benefit of laborers and suppliers who have furnished services or supplies on a construction project. (C.R.S. §38-26-109 creates the same trust on a public works construction project). These statutes create the fiduciary duty and the technical trust. The exact definition of what constitutes defalcation has been much disputed and litigated over the decades. The case of Bullock v. BankChampaign, 569 U.S. 267, 133 S. Ct. 1754, 185 L. Ed. 2d 922 (2013) assisted in defining the mens rea requirement of defalcation when the Court held that defalcation requires proof of an "intentional wrong" (Id. at 273-74), but there is an actus rea component to defalcation as well. In Colorado, the case of In re Cupit, 514 B.R. 42, 49 (Bankr. D. Colo. 2014) held that the actus reus for defalcation is a "failure to account" for construction trust funds. (Id. at 49). The In re Cupit case is a well written case by Judge Elizabeth Brown defining defalcation in the case of a trust fund violation after the Bullock case was issued and well worth the time to read.

Judge Brown continues her discussion on the elements allowing objection to discharge of a lien claimant's debt in the case of McGill v. McGill, 623 B.R. 876 (Bankr. D. Colo. 2020). This case involved a public works construction project. The Court found that Debtor McGill "owned and controlled Nomad and made all of Nomad's financial decisions. Therefore, he was personally liable for any breach of the COWA statutory duties. See Alexander Co. v. Packard, 754 P. 2d 780, 782 (Colo. App. 1988)." McGill at 890. In order to determine the actus reus, the Court applied a burden-shifting analysis from the case of In re Gamoba, 400 B.R. 784 (Bankr. D. Colo. 2008). In that case, if a supplier had evidence demonstrating that it had unpaid invoices from projects on which the debtor had received disbursements from the builder, then the burden shifted to debtor to show that all the builder disbursements he received on a particular property were used to pay his suppliers and laborers on that property. "Unless and until [the debtor's] suppliers and laborers were paid in full, [the debtor] could...