Navigating the Tricky Waters of the Michigan Builders Trust Fund Act

The Michigan Builders Trust Fund Act (MBTFA) can have a significant financial impact on Michigan restoration contractors. The MFBTA mandates that payments made by an owner to a contractor are to be held “in trust” for paying subcontractors, suppliers, and laborers. This means that if you’re a general contractor who has received project funds, you have a legal duty to use those funds to pay your subs and suppliers first, before any other business expenses.

Why does this matter to a restorer? Because the protections typically afforded by operating under a corporation or limited liability company do not extend to mismanagement of these trust funds. 

The individual owners and officers of a restoration company can be held personally liable for the failure to pay subs or suppliers with funds received for a project. This liability is not dischargeable in bankruptcy. What’s more, violations can lead to criminal prosecution.

For subcontractors and suppliers, the MBTFA provides a powerful remedy to recover monies owed, even if the contractor has gone out of business or filed for bankruptcy. The act underscores that good faith or financial difficulties do not excuse noncompliance with its requirements. 

The precedent set by the Michigan Court of Appeals in Livonia Building Materials v. Harrison Construction, Bell, and Penner, reinforces the seriousness of these obligations, holding company representatives personally liable for non-payment to suppliers. Henry Bell was the president of the Harrison Construction Company, which was a long time customer of Livonia, which supplied building materials to contractors. Harrison went out of business and surrendered its assets to a secured creditor. When it went out of business, it had unpaid bills to many creditors, including Livonia. 

Livonia sued Harrison and Bell and the jury found Bell liable to Livonia for $60,600. The court noted that “a corporate employee or official is personally liable for all tortious or criminal acts in which he participates, regardless of whether he was acting on his own behalf or on behalf of the corporation.”

To establish a claim under the MBTFA, a plaintiff must show: (1) that the defendant is a contractor or subcontractor engaged in the building construction industry, (2) that the defendant was paid for labor or materials provided on a construction project, (3) that the defendant retained or used those funds, or any part of those funds, (4) that the funds were retained for any purpose other than to first pay laborers, subcontractors, and materialmen, and (5) that the laborers, sub-contractors and materialmen were engaged by the defendant to perform labor or furnish material for the specific construction project.

The court further noted that the plain language of the statute indicates that intent to defraud is evidenced simply by “[t]he appropriation by a contractor. . . of any moneys paid to him for building operations before the payment by him of all moneys due or so to become due laborers, subcontractors, materialmen or others entitled to payment.” MCL 570.153. “A reasonable inference of appropriation arises from the payment of construction funds to a contractor and the subsequent failure of the contractor to pay laborers, subcontractors, material-men, or others entitled to payment.”

It was undisputed that Harrison received payment for projects for which Livonia supplied materials, yet Harrison did not pay Livonia for the materials. One of Bell’s defenses was that the jobs for which Livonia supplied materials were “upside-down,” so there was not enough money to pay the suppliers. Rejecting this defense, the court of appeals wrote:

The general assertion that there was not enough money “to go around” is not sufficient to rebut the presumption of misappropriation. Clearly the record shows that monies were coming in on jobs for which Livonia provided materials.

The appellate court concluded that the appropriation of any monies paid to a contractor for building operations before payment of the protected parties — here, the materialman — is evidence of intent to defraud. Therefore, it was reasonable for the jury to conclude that Bell violated MBTFA and he waa personally liable.

Key takeaways: If you are a general contractor, make sure you are using project proceeds to pay subcontractors and suppliers first. If you’re working as a subcontractor or supplier on a project and you have not been paid, contact us to see how you can leverage the MBTFA to your advantage to get paid. 

Knowledge is power in the restoration industry, and legal blind spots can ruin a company. Let’s build a stronger, more legally resilient industry together.

For more detailed guidance or to discuss how the MBTFA might affect your specific situation, don’t hesitate to reach out to us. Our team at The Law Offices of Edward H. Cross is here to support your success in Michigan’s dynamic restoration industry.