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Bankrupt Contractor Can't Skirt Its Debt To Sub

Monday, January 03, 2011 03:05 am


Under Michigan statute, funds paid to a general contractor for work performed by a sub are considered to be held in trust for the sub. This trust status means that even if a contractor declares bankruptcy, it must still honor any non-payment to a sub.

That was the ruling in In re: Sameer B. Patel v.Shamrock Floorcovering Services, Inc., 2009 U.S. App. 565 F. 3d 963 Lexis 10085 (6th Cir. May 12, 2009), a case that involved contractor Empire Builders of Michigan, Inc. (Empire) and the subcontractor it hired on a 1999 construction project, Shamrock Floorcovering Services, Inc. (Shamrock). Empire collapsed after the bank pulled its line of credit, and, at the time, Empire owed Shamrock more than $80,000. Empire's president and part shareholder, Sameer B. Patel, filed for Chapter 7 bankruptcy and listed the amount due to Shamrock as a debt to be discharged. A bankruptcy court agreed that this debt was dischargeable, but a district reversed, a ruling that stood on appeal. Here's why:

Bankruptcy doesn't dissolve trust

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