The Michigan Construction Trust Fund statute was enacted to protect lower tier construction participants from any misuse of their earned funds. Several states have enacted their own version of a trust fund statute, with varying degrees of applicability and penalties for violation of those provisions. Let’s break down the requirements and penalties imposed for misappropriation of construction funds in Michigan.
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Michigan Construction Trust Fund Overview
Michigan’s trust fund statute, also known as the Michigan Building Contract Fund Act, is found in Mich. Comp. Laws, Ann. §570.151. The first part of which, states the following:
In the construction industry, the building contract fund paid by any person to a contractor, or by such a 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 purpose of this statute is to create a trust fund on construction payments for the benefit of laborers and material suppliers on private projects. Initially, this was strictly a criminal statute, that held a person who violated the provisions criminally liable. However, it has been well established for some time now, that the Michigan Supreme Court recognizes a civil action and remedies for the violation of the act in B.F. Farnell Co. v. Monahan.
For a deep dive on construction trust funds:
When the law applies
First and foremost, this act doesn’t apply to public projects. This was explicitly decided in the case of In re Certified Question. The reasoning behind this is that subcontractors and suppliers on private jobs are only left with mechanics lien remedies. The problem is that enforcing lien rights can sometimes prove ineffective. While those on public projects have the security of the statutorily required payment and performance bonds.
The act does apply on any private project where a person receives a payment that is intended to be distributed to that person’s subs and suppliers who provided labor or materials to the property. Although the official title of the act is the Michigan Building Contract Fund Act don’t let the term “contract” throw you off. A violation under the statute doesn’t necessarily require a contract; the act applies by its own force. There’s no need for the cause of action to be “tethered” to any particular contract.
There is one more exception to the applicability of these statutes. The statute applies to payments earned by laborers, subs, and suppliers hired directly by the person who is acting as trustee. There is one category lower-tier construction project participant that is notably absent from this list. And that’s equipment lessors. Unlike the Michigan mechanics lien laws, the court in KMH Equip. co. v. Chas J, Rogers, Inc. equipment lessors are not a protected class of persons under the trust fund act.
Holding funds “in trust”
So the trust fund statute requires that the contractor or subcontractor receiving funds are considered a trustee. So what does that mean exactly? A trustee is a person who holds assets for the benefit of the beneficiaries. The beneficiaries, in this case, being the subcontractors, suppliers, and laborers that earned the construction payments. Trustees then become personally liable for the proper distribution of the payments; because that money doesn’t actually belong to the contractor. When the payments are converted to trust funds, it creates a property right in favor of the beneficiaries.
Trust funds and bankruptcy
Having the payments deemed as trust funds also has the additional benefit of being protected from bankruptcy. The court in Selby v. Ford, explicitly held that the builder’s trust funds do not constitute property of the debtor’s bankruptcy estate. When a company or owner files for bankruptcy, the funds can’t escape a trust fund claim. This is because any debts that are incurred by theft, embezzlement or fraud, are not dischargeable in bankruptcy proceedings.
Corporate officer liability
The courts have established that even corporate employees and officers may also be required to comply with these provisions. Typically, corporations shield those that work there from personal liability for the company’s debts. That’s not the case under the trust fund statutes. In People v. Brown, the court expressly laid out that corporate employees and officials can be personally liable for any tortious acts in which they participate. This is true regardless if they’re acting on behalf of the corporation or not.
Penalties for violation
As we stated earlier, these provisions were initially enacted as a criminal statute. So the misuse of construction funds will be found guilty of a felony. If convicted, the person can be facing criminal fines and potential jail time. The penalties can range anywhere from $100 to $5,000. As far as imprisonment, the judge has the discretion to send the person to state prison for as little as 6 months, and as long as 3 years. The penalties imposed can vary depending on the severity of the case.
Violation of these provisions also provides for civil remedies as well, particularly for statutory conversion. Codified in Mich. Comp. Laws Ann. §600.2919(a), this statute states that a person damaged as a result of another person stealing or embezzling of property or converting the property for their own use can recover damages. The penalty for violating this statute can result in the ability to recover 3 times (that’s right 3 times) the amount of actual damages, including costs and reasonable attorney fees.
As you can see, the state of Michigan takes the misuse of construction funds very seriously. There are no overly burdensome requirements such as detailed accounting, recording, and keeping the funds in a separate account. It does, however, come with some steep penalties for violation of these requirements. Between the criminal and civil penalties for the misappropriation of construction, funds can add up quickly. If working on a private project in Michigan, be sure you know the duties and responsibilities that are required of you.