In re Monaco: Overhead Expenses For Construction Are Dischargeable

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Monaco v. TAG Invs., Ltd. (In re Monaco), 839 F.3d 413 (5th Cir. 2016).
Opinion Issued Oct. 6, 2016 WestLaw Link
Written By: Ryan McKee, Staff Editor

Debtor was hired as the general contractor in a construction contract to develop a luxury home. The debtor was responsible for tracking progress, making payments, and obtaining lien releases from subcontractors. Developer began receiving lien notices from subcontractors and subsequently fired the debtor. Developer hired another general contractor, paid off the subcontractors’ liens, and demanded repayment from the debtor for misappropriated funds. Debtor filed for Chapter 7 bankruptcy, so the developer filed for reimbursement under the Construction Trust Fund Act—from Texas Property Code § 162.031—for misapplication of trust funds and under 11 U.S.C. § 523(a)(4)—non dischargeable debts for fraud while acting as a fiduciary. The debtor argued § 162.031(b) provided an affirmative defense which would excuse the developers claim.

On appeal, the court reviewed de novo the affirmative defense claim in § 162.031(b) to determine whether the debtor’s salary expenses were directly and actually related to the construction. The court found the debtor’s use of the funds to be overhead expenses which fall within the scope of the exceptions to discharge. The developer claimed overhead charges did not apply because bankruptcy courts have never approved “indirect expenses such as overhead” as “actual expenses directly related to the construction.” The court dismissed the developer’s claim, distinguishing prior bankruptcy case holdings as dicta that never actually decided whether the exception applied. The court found that the debtor’s expenses—used for salaries, overhead, and supervisory costs—fell within the exception as “actual expenses directly related to the construction” and were therefore dischargeable.

The decision definitively broadens the scope of dischargeable expenses and the affirmative defense under § 162.031(b). Analogous to nondischargeable debt under 11 U.S.C. § 523(a)(4), each party is responsible for proving what the funds were used for. Since creditors have the burden of proof to show that funds are not dischargeable, creditors will have a more difficult time collecting construction expenses from debtors.