In re Strickfaden, Bankruptcy No. 07-58885-R.

• Decision Date: 18 December 2009
• Docket Number: Adversary No. 07-6788-R.,Bankruptcy No. 07-58885-R.
• Citation: 421 B.R. 802
• Parties: In re Matthew G. STRICKFADEN, Debtor. R. Bart Sangal and JoAnne Sangal, Plaintiffs, v. Matthew G. Strickfaden, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

421 B.R. 802

In re Matthew G. STRICKFADEN, Debtor.

R. Bart Sangal and JoAnne Sangal, Plaintiffs, v. Matthew G. Strickfaden, Defendant.

Bankruptcy No. 07-58885-R.

Adversary No. 07-6788-R.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

December 18, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Jeffrey T. Stewart, Mark B. Berke, Southfield, MI, Stuart A. Gold, Gold, Lange & Majoros PC, Southfield, MI, for Plaintiffs.

Richard F. Fellrath, Troy, MI, for Defendant.

Opinion

STEVEN RHODES, Bankruptcy Judge.

I. Introduction

On April 29, 2002, Dr. R. Bart Sangal and his wife Joanne Sangal entered into a contract with Matthew G. Strickfaden & Associates (MGS), for the company to act as general contractor and project manager for the construction of the Sangals' home in Bloomfield Hills, Michigan. The Debtor, Matthew G. Strickfaden was the principal for MGS and signed the contract as the agent for the company.

From early on, the relationship between the parties did not go smoothly. Strickfaden asserts that the Sangals did not fund billing requests in a timely manner. The Sangals assert that Strickfaden misappropriated funds from their project for use on other projects. By November 26, 2002, the parties executed an addendum to the contract. Under the addendum, the construction expenses were to paid from an account separate from that holding the contractor's fees; and an escrow agent's permission would be required in order to pay funds from the account.

The relationship continued to deteriorate. On March 23, 2003, the parties entered into a second addendum, under which MGS agreed to reimburse a $16,106.03 cost overrun.

In July 2003, the parties entered into a third addendum. The third addendum prohibited MGS from expending any sums for allowance¹ items without guaranteeing that the expenditures in the entire allowance category would not exceed the amount listed in the estimate of costs; required MGS to seek the Sangals' approval to discharge liens; and required MGS to submit to the Sangals the change orders for changes previously implemented without their prior approval, with supporting documentation.

In September 2004, the architect certified several breaches of contract by MGS. The architect's final accounting indicated $42,101.85 in unauthorized transfers and $33,009.39 in unearned project-management fees. At that time, the Sangals terminated their contract with MGS.

Following MGS's termination, Strickfaden sent letters to subcontractors involved in the project. The letter informed the contractors that MGS had been terminated, that the contract between MGS and the subcontractor was null and void, and instructed the subcontractor to stop working on MGS's behalf.

In November 2004, the Sangals filed a lawsuit against MGS and Strickfaden personally in the Oakland County Circuit Court. The complaint against Strickfaden included causes of action for fraud, breach of fiduciary duty, violation of the Michigan Builders Trust Fund Act, and conversion.

In September 2007, Strickfaden filed a Chapter 7 bankruptcy petition. The Sangals filed this adversary proceeding against Strickfaden seeking a determination that debts owed to them by Strickfaden are not dischargeable pursuant to § 523(a)(2)(A), (a)(4) and (a)(6).²

The court conducted a trial over the course of four days, March 31, 2009, April 16, 2009, July 14, 2009, and July 16, 2009. The court heard testimony from Matthew Strickfaden, Dr. Sangal, and Todd Young, the architect. At the conclusion of the trial, the Court took the matter under advisement.³

II. The Claim Under § 523(a)(4)

A. Applicable Law

The Sangals assert that Strickfaden violated, or caused his company to violate, the Michigan Builders Trust Fund Act.⁴ Specifically, the Sangals allege that Strickfaden submitted sworn statements requesting funding for payments for subcontractors, labor and materials, and then, rather than paying those listed on the sworn statement, instead paid labor and material expenses incurred by his own company. Additionally, the Sangals assert that the labor charged by Strickfaden either was not actually performed or if performed, was not authorized. The Sangals argue that this payment to unauthorized labor rather than to the subcontractors for whom the funds were designated was a defalcation and therefore nondischargeable pursuant to § 523(a)(4).

11 U.S.C. § 523(a)(4) excepts from the discharge a debt for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny. "A debt is non-dischargeable as the result of defalcation when a preponderance of the evidence establishes: (1) a pre-existing fiduciary relationship, (2) a breach of that relationship, and (3) resulting loss." In re Patel, 565 F.3d 963, 968 (6th Cir.2009). The Sixth Circuit has adopted a narrow interpretation of "fiduciary" as used in § 523(a)(4). R.E. America, Inc. v. Garver (In re Garver), 116 F.3d 176, 179 (6th Cir.1997). To trigger the defalcation provision in that statute, a debtor must hold funds in a trust for the benefit of a third party. Id. at 179. Furthermore, the types of trusts that trigger the defalcation provision of § 523(a)(4) are "limited to only those situations involving an express or technical trust relationship arising from placement of a specific res in the hands of the debtor." Id. at 180.

The Sixth Circuit has held that the Michigan Builders Trust Fund Act makes the contractor a fiduciary with respect to the funds paid to him by the owner so as to render the debt arising from the contractor's misapplication of those funds a defalcation under § 523(a)(4) of the Bankruptcy Code. Carlisle Cashway, Inc. v. Johnson (In re Johnson), 691 F.2d 249 (6th Cir.1982). Under § 523(a)(4), a defalcation occurs when a debtor either misappropriates or fails to properly account for those funds held in a trust. Garver, 116 F.3d at 180 (citing Capitol Indemnity Corp. v. Interstate Agency, Inc. (In re Interstate Agency, Inc.), 760 F.2d 121, 125 (6th Cir.1985)). This standard does not require a showing that the debtor acted intentionally, although a showing of mere negligence is insufficient. Johnson, 691 F.2d at 255-57.

The Michigan Builders Trust Fund Act, set forth in M.C.L.A. § 570.151, provides:

In the building construction industry, the building contract fund paid by any person to a contractor, or by such person or contractor to a subcontractor, shall be considered by this act to be a trust fund, for the benefit of the person making the payment, contractors, laborers, subcontractors or materialmen, and the contractor or subcontractor shall be considered the trustee of all funds so paid to him for building construction purposes.

The effect of this statute is to impose a trust, with the contractor as the trustee, upon the funds paid by any person in connection with a building contract. Huizinga v. United States, 68 F.3d 139, 144 (6th Cir.1995). Accordingly, a violation of the Michigan Builders Trust Fund Act is an act of defalcation while acting in a fiduciary capacity as applied to § 523(a)(4).

B. The Evidence

The evidence establishes that Strickfaden acted both individually and on behalf MGS as a general contractor for the Sangals. Accordingly, the funds he received from the Sangals were imposed with a trust pursuant to the Michigan Builders Trust Fund Act.⁵ Strickfaden, as the contractor, bears the burden of accounting for the funds he received from the Sangals. In re Little, 163 B.R. 497, 500-01 (Bankr.E.D.Mich.1994) ("[w]here a trustee is called upon in a court of equity to account for the funds received by him as trustee, ... the duty rests upon him to so account, and the burden of proof is upon him to establish the correctness of the account." Citing Grund v. First Nat'l Bank of Petoskey, 209 Mich. 613, 615, 177 N.W. 299 (1920)). See also, e.g. Mertz v. Mertz, 311 Mich. 46, 18 N.W.2d 271 (1945); Long v. Earle, 277 Mich. 505, 269 N.W. 577 (1936); Raak v. Raak, 170 Mich.App. 786, 428 N.W.2d 778 (1988).

Strickfaden offered into evidence 75 exhibits to account for the funds he received from the Sangals. These exhibits include summaries of his labor and expenses, sworn statements submitted to the Sangals, statements from the client trust account, check analysis and detail reports, and summaries of all his income and expenses from his QuickBooks Acccounting Program. Additionally, the Sangals offered 366 exhibits including the contracts, addendums, sworn statements, Strickfaden's transaction details, Strickfaden's bank statements and copies of checks written on behalf of MGS.

The Sangals assert that early on in the relationship, Strickfaden used their funds for other projects. Strickfaden admitted this use, asserting that the contract had not required a trust fund and that he was not aware of the requirements of the Michigan Builders Trust Fund Act. The addendum signed November 26, 2009, dealt with this issue by requiring a trust fund and requiring MGS to pay interest on the funds it had previously used on other projects. The Sangals have not alleged a claim or requested any damages for this initial misappropriation.⁶ Rather, the Sangals have focused their case on the funds requested in Sworn Statement # 5, dated December 10, 2003. The architect approved that funding request on December 16, 2003, and Dr. Sangal testified that he fully funded the request.⁷ Strickfaden's transaction detail (Pl.Ex.167.) reflects two deposits by Sangal into the Trust Fund account. One on December 16, 2003 for $71,261.19 and another on February 2, 2004 for $75,000. Dr. Sangal asserts that the following subcontractors were listed on the sworn statement, but were not paid from those funds:

                Place Stone........................$15,000
                Caterpillar Generator..............$13,550
                Gravel/Stone Back Fill.............$ 1,500
                Anderson Pools.....................$ 3,000
                New Generation Masonry.............$ 5,000
                Eon/EPOM Decking...................$ 7,500
                Emmet

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