LEED Legislation Profiled

The Hilger Hammond firm has posted an article (here) profiling S.B. 1111-1114 (2010), which were introduced in the Michigan Senate earlier this year. This legislation would  amend the Commercial Redevelopment Act (PA 255 of 1978), and would provide financial incentives for construction and renovation projects achieving LEED certification. 

Legislation Introduced to Prohibit Pay-When-Paid Clauses on Michigan Public Projects

On May 6, 2010, Senators Michael Switalski (D. Roseville)  and Dennis Olshove (D. Warren) introduced S.B. 1319, which would prohibit a surety’s reliance on a “pay-when-paid” clause in defense of payment bond claim. 

Specifically, S.B. 1319 would amend Section 3 of the Public works bond statute (MCL 129.201, et seq) by adding the following prohibition:

(2) A payment bond for a contract executed on or after the effective date of the amendatory act that added this subsection shall not contain any provision that conditions the payment of the subcontractor upon the receipt by the contractor of its money from the governmental unit.

S.B. 1319 would also add a fee-shifting, and interest provision in Section 7 for the prevailing party:

(6) In any action brought under this section, the prevailing party is entitled to recover from the nonprevailing party the reasonable costs and attorney fees incurred in the action. If, in such an action, the finder of fact determines that there was no good faith basis for the nonpayment of the amount sought by the claimant, the claimant is entitled to recover interest at the rate of 12% per annum on the amount found to be due by the finder of fact from the date that payment was due until fully paid.

Note: Michigan is among a small minority of states that uphold the use of "pay-when-paid" or so-called "pay-if-paid" clauses. The controlling case is  Berkel & Co v Christman Co, 210 Mich App 416 (1995).

Personal Liability under the Michigan Builder’s Trust Fund Act, Michigan Court of Appeals Affirms

Proof that a corporate officer personally misappropriated contract proceeds “is not necessary to find an officer liable” for a violation of the Michigan Builder’s Trust Fund Act (MCL 570.151, et seq).  

“[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, materialmen, or other entitled to payment.”  

So declared the Michigan Court of Appeals recently in BC Tile & Marble Co v Multi-Bldg Co., 2010 Mich App LEXIS ____ (Mich Ct App, April 13, 2010) (slip opinion), another decision affirming the principal (and risk) of personal liability for the owners of construction companies under the Michigan Builder’s Trust Fund Act (MBTFA).

In BC Tile, the defendant general contractor built and sold a condominium to a homeowner.  Although the contractor received funds at the closing for Unit 5 to pay his tile and marble subcontractor, the contractor failed to pay the subcontractor citing defective workmanship and delayed performance.  The subcontractor, who had recorded and served a construction lien four days prior to the closing, then filed suit to foreclose his lien, and included a claim against the contractor’s president, in his individual capacity, for violation of the MBTFA. As indicated in an earlier posting to this blog, this fact pattern is fairly typical. 

The MBTFA provides that upon receipt of payment from the owner, a trust is created for the benefit of contractors, laborers, subcontractors and suppliers, and makes the contractor or subcontractor who receives the payment a trustee of the funds.  The MBTFA is a criminal statute, but the courts have also recognized a civil cause of action under common law. To make out a civil cause of action under the MBTFA, a plaintiff must establish the following elements:  

• The defendant is a contractor or subcontractor engaged in the building construction industry, 
• The defendant was paid for labor or materials provided on a construction project, 
• The defendant retained or used those funds, or any part of those funds, 
• The funds were retained for any purpose other than to first pay laborers, subcontractors, and materialmen, and  
• The laborers, subcontractors and materialmen who were engaged by the defendant to perform labor or furnish material for the specific construction project.

See, Livonia Bldg Materials Co v Harrison Construction Co, 276 Mich App 514, 519 (2007). See also, DiPonio Construction Co v Rosati Masonry Co, 246 Mich App 43, 49; 631 NW2d 59 (2001), lv app denied, 465 Mich 896 (2001).

In BC Tile, plaintiff asserted that the president of Muti-Bldg Co. was personally liable because he had signed the closing documents that allowed payment to other contractors, but not BC Tile & Marble Co. The president denied that he had had any day-to-day involvement with or exercised any decision-making for the particular construction project. He further denied that he had personally received any of the funds at closing.

While the Court of Appeals agreed that “there is no evidence here that [the president] personally used the funds owed to BC Tile,” it found that this was not dispositive of the MBTFA claim.

First, the Court reiterated its decision in the appeal of a criminal prosecution under MBTFA:  “there is no requirement that contract payments be made directly to the officer of the corporate contractor in order to hold the officer individually responsible under the MBTFA.”  People v Brown, 239 Mich App 735, 743-744 (2000).

Second, relying on a 2007 decision involving civil claims, the Court of Appeals noted:

“In Livonia Bldg, the defendant contractor received funds for a project but did not pay the plaintiff in full. The corporate officers gave testimony regarding their decision to put the funds received in various accounts and subsequently, their actions in writing checks to entities other than the plaintiff. This Court found that the individual corporate officers ‘acted in direct contravention of the MBTFA.’ According to this Court, there was sufficient evidence to create a presumption of misappropriation and to find the corporate officers individually liable.”

The Court of Appeals concluded that the president of the construction contractor should not have been granted summary disposition, and reversed the trial court’s ruling. The corporate officer thus faces a trial and possibly a personal judgment.

Not addressed in the Court’s decision, but another significant issue for individual defendants, is the impact a trust fund claim may have on a personal bankruptcy. Since the statute is predicated on the existence of a trust, a violation of the MBTFA is also breach of the (contractor) trustee’s fiduciary duties. Under Section 523(a)(4) bankruptcy code, fraudulent conduct while acting in a fiduciary capacity (defalcation) is one of the specified grounds for excluding a claim from discharge. Said another way, a Builder's Trust Fund Act claim is a debt that can survive a bankruptcy when most other claims are discharged.
 

Comment: To avoid personal liability issues, contractors must take care in these turbulent economic times to address shortfalls in payment with subcontractors and suppliers by securing waivers and releases that include officers and shareholders, especially when making compromise payment agreements, and documenting the reasons for non-payment to subcontractors and suppliers where facts and circumstances warrant the withholding of payment. 

  
For More Information

Since the facts of each case are unique, this case summary should not be taken as legal advice. For more information about the Michigan Builder's Trust Fund Act, and how it might affect you personally or your business, please contact Peter Cavanaugh or visit our website at www.MichiganConstructionLaw.com. 

Update: The Michigan Court of Appeals decided June 8, 2010 to publish this decision.  A full citation will follow.