New Article Discusses Interplay Between Section 523(a)(4) of Bankruptcy Code and Michigan Builder's Trust Fund Act

As discussed in an earlier post, the Michigan Builder's Trust Fund Act (MCL 570.151, et seq) may impose personal liability upon corporate officers, or members of a limited liability company, who misappropriate construction proceeds in violation of the statute. Pending legislation, such as H.B. 6176, would codify the imposition of personal liability, which is now a function of case law.

The Builder's Trust Fund Act also plays a role in bankruptcy, in which certain debts that arise when the debtor is acting in a "fiduciary capacity" may not be dischargeable. I am not a bankruptcy attorney, but Thomas R. Morris, who is an experienced bankruptcy attorney, has written an excellent article on this important topic, which appears in the latest issue of the Michigan Business Law Journal:

Pursuant to 11 USC 523(a)(4), a debt owing by an individual "for fraud or defalcation while acting in a fiduciary capacity" is not dischargeable in bankruptcy. Two United States Supreme Court cases, one from 1844 and one from 1934, establishes a definition of "fiduciary" for purposes of section 523(a)(4). However, the enactment by Congress and the state legislatures of "statutory trust" laws has created a new type of fiduciary duty not specifically addressed by the Supreme Court cases. The lower courts are not in agreement as to whether a statutory trust creates a "fiduciary capacity" for purposes of section 523(a)(4). As a result, there are a number of unanswered questions which arise under section 523(a)(4). Of particular interest to Michigan attorneys are questions relating to the dischargeability of liability under the Michigan Building Contract Fund Act (MBCFA) or "Builders Trust Fund."

Thomas R. Morris, "Trust Fund Statutes and the Discharge of 'Trustee' Debts Under Bankruptcy Code Section 523(a)(4)," 28 MI Bus LJ 11 (Spring, 2008). For the full text of this article, click here. We also reported on a previous article Mr. Morris wrote on this subject in a February, 2007 post.

Mr. Morris is a member of the West Bloomfield firm of Silverman & Morris, PLLC. Mr. Morris is a 1986 graduate of the University of Michigan Law School. Mr. Morris and his firm concentrate their practice in the areas of bankruptcy, commercial law, workouts, bankruptcy litigation and similar matters, and represents both creditors and debtors. For more information on any of these issues, contact Thomas R. Morris directly.

Materials Deduction Bill Signed by Governor Granholm, Public Act 177 of 2008

On July 9, 2008, Governor Granholm signed into law S.B. 1217 [Public Act 177 of 2008]. As discussed in an earlier post, this new law provides that construction companies can deduct materials purchased for specific construction projects from calculation of their gross receipts taxes. The deduction is retroactive to January 1, 2008.

Defendant Lacks Standing to Challenge Plaintiff's Corporate Status, Michigan Supreme Court rules in Miller v Allstate

On July 2, 2008, the Michigan Supreme Court issued its ruling in the Miller v Allstate case, which was discussed in an earlier post.

The Supreme Court upheld the Court of Appeals' decision denying Allstate's attempt to avoid payment, but vacated the rationale. It held that only the Attorney General has the legal standing to challenge Plaintiff's corporate status. The Court made no ruling on the question of whether the service business was in fact properly incorporated. See, 481 Mich 601; 751 NW2d 463 (2008).

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AGC of Michigan Sponsors ConsensusDOCS Seminars

AGC of Michigan is sponsoring two upcoming seminars designed to acquaint contractors with the new ConsensusDOCS contract forms, which we discussed in an earlier post last September.

• June 18, 2008 Ramada Inn, Marquette, MI
• June 20, 2008 EMU Livonia, Livonia, MI
  

For more information, follow this link.

Sixth Circuit Affirms "Disappointed Bidder" Rule, Upholds Dismissal of Bid Protest

On May 22, 2008, the 6th Circuit Court of Appeals upheld the grant of summary disposition in favor of the City of Detroit, and against the low bidder on a DWSD project, and affirmed the "disappointed bidder" rule in Michigan.

"We reviewed the law surrounding standing and disappointed bidders in Club Italia Soccer & Sports Org., Inc. v. Charter Twp. of Shelby, 470 F.3d 286 (6th Cir. 2006). Club Italia held that absent a statutory exception, "a disappointed bidder does not have standing before this court." Id. at 293. Cases prior to Club Italia consistently refused to allow disappointed bidders to bring claims for violations of the bidding procedures. [citations omitted] A bidder who, in addition to seeing his bid rejected, is disqualified from bidding on future projects may have standing, [citations omitted] but EBI cannot obtain standing this way because EBI was not disqualified from bidding on future projects.

* * *

"United of Omaha [v. Solomon, 960 F.2d 31, 34 (6th Cir. 1992)] is particularly fatal to EBI's claims because it held that a disappointed bidder must show that "it was actually awarded the contract at any procedural stage or that local rules limited the discretion of state officials as to whom the contract should be awarded." United of Omaha, 960 F.2d at 34. EBI cannot meet this test because it was never awarded the contract and because [Detroit Mayor] Kilpatrick has unlimited discretion in awarding contracts in order to comply with the EPA consent decree. Like the bidder in United of Omaha, EBI was "obviously disadvantaged" by the government's actions, id. at 35, but it nevertheless "retained only a unilateral hope of being awarded the contract, not a right to it." Ibid. A "unilateral hope" does not create standing."

See, EBI-Detroit, Inc. v. City of Detroit, 2008 U.S. App. LEXIS 11043, *18-21 (6th Cir. Mich. 2008). The trial court's ruling was reported in an earlier post.

[Update: The official cite for this case is EBI-Detroit, Inc. v. City of Detroit, 279 Fed. Appx. 340 (6th Cir. 2008) ]

New Law Passed to Boost Set Asides for Disabled Veteran Contractors

On May 21, 2008, Michigan's Governor Granholm signed S.B. 751 into law as PA 133 of 2008. The new law takes effect immediately. As noted in an earlier post, the new law amends the Management and Budget Act to increase the goal for contract set asides for disabled veterans from 3% to 5%.

Material Deductions Bill Voted Out of House Tax Policy Committee

AGC of Michigan reports in its May 14, 2008 Midweek Briefing that H.B. 6031, the House version of S.B. 1217, was voted out of committee following testimony by AGC Member, Patrick Cebelak, Controller for Granger Construction.

As noted in an earlier post, S.B. 1217 is designed to correct problems with the Michigan Business Tax as it affects construction contractors.

H.B. 6031 would amend the Michigan Business Tax (MBT) Act to amend the definition of "purchases from other firms" as it applies to general building contractors, heavy construction contractors, and construction special trade contractors that do not qualify for a small business credit under Section 417. For those companies, the definition would apply to "any construction materials or supplies directly purchased by the firm for a construction project." These purchases would, then, not be counted in the gross receipts tax base.

Circuit Court Retains Jurisdiction Over $15,000 Contract Claim, Even When Lien Claim is Dismissed

Section 118(1) of the Michigan Construction Lien Act requires that an action to foreclose a construction lien be brought in the circuit court for the county where the real property is located. For smaller liens, this provision overcomes the requirement that claims in circuit court exceed $25,000. Thus, a lien claimant can pursue a foreclosure action in circuit court even where the amount in controversy is less than $25,000.

But what happens if the claim of lien is dismissed? Does this divest the circuit court of jurisdiction over the remaining claims, and require that the case be remanded to the district court? In a recent unpublished decision, the Michigan Court of Appeals considered this issue, and held in the negative. The remaining claims can proceed to trial:

"As a rule, when a court of competent jurisdiction becomes possessed of a case, its authority continues until the matter is finally and completely disposed of, and no court of co-ordinate authority is at liberty to interfere with its action."

Maidaniuc v. Country Pond, L.L.C., 2008 Mich. App. LEXIS 861 (Mich. Ct. App. Apr. 29, 2008). A copy of the slip opinion can be found here.

How to Verify that a Payment or Performance Bond Complies with Michigan's Public Bond Statute

Note: An updated version of this article was posted August 16, 2019 on our firm's website blog here. 

Michigan's public works bond statute (MCL 129.201, et seq) requires that a principal contractor furnish a payment and performance bond executed by a surety authorized to do business in Michigan. Many contracts also require that the general contractor furnish payment and performance bonds, which are executed by a surety listed on Treasury Circular 570.

If you receive a contractor's payment and performance bond, how do you know whether it complies with these requirements? How do you check on a bonding company whose name doesn't sound familiar? How you verify the financial strength of a surety?

There are 3 easy ways to verify basic information about a surety --

Michigan

The State of Michigan, Office of Financial and Insurance Regulation (OFIR) maintains an online database of insurance companies that are registered to conduct business in the State of Michigan. The search interface is somewhat confusing, but if you search using the last field on the form, you should be able to find the surety you are looking for. If you don't find the surety, it means they are not registered to conduct business in Michigan. Take this finding as a red flag.

For insurance companies that are registered to conduct business in Michigan, you get the usual information about state of incorporation, and registered agent. Here's a sample report for Hartford Fire Insurance Company, a surety that is active in Michigan.

Treasury Circular 570

Treasury Circular 570 is a list of acceptable sureties on federal bonds maintained by the U.S. Department of Treasury. A surety that isn't on this list is probably very small, or one that should not be accepted or relied upon. It raises a red flag in my mind when I don't find a surety on this list.

Michigan law generally provides little recourse to potential bond claimants in the event that a contractor fails to furnish a bond, or furnishes one that fails to comply with the statute. Failure to furnish a bond that comports with the statute, however, would probably be grounds for an owner to terminate a general contract.

A.M. Best Company

A.M. Best issues financial-strength ratings measuring insurance companies’ ability to pay claims. If the contract requires that a surety bond be furnished by a surety with a particular rating (ie., AA or B+), you can verify this rating online through A.M. Best.


Update: My colleague Angie Greenslade referred me to the A. M. Best website. It provides information on the current financial strength of insurance companies, including sureties. Thanks Angie!

DWSD Receives $316 Million Low Bid for Upper Rouge CSO Tunnel (South) Project

Earlier today, the City of Detroit Water and Sewerage Department (DWSD) received bids from two contracting teams for the Upper Rouge CSO (South) Tunnel, Contract PC-764.

A low bid of $316,170,200 was submitted by Kenny Construction/Obayashi, JV. The second bidder was Traylor Brothers/Jay Dee, JV at $352,416,600.

The North Tunnel will be bid later this year.

Read Here for more information about the Upper Rouge CSO Tunnel project.

Supreme Court Limits Grounds for Reviewing Arbitration Awards Under FAA

On March 25, 2008, in a 6-3 opinion, the U.S. Supreme Court ruled that Sections 10 and 11 of the Federal Arbitration Act provide the exclusive grounds for vacating or modifying an arbitration award.

Contractual arbitration agreements providing for judicial review broader than the grounds in the FAA are not unenforceable under the FAA, the Court held. Rather, when the FAA is invoked, a court "must" confirm an arbitration award unless it finds that one of the grounds set out in Sections 10 and 11 for vacating or modifying awards is applicable.

Hall Street Associates, L.L.C. v. Mattel, Inc., No. 06-989, 552 U.S. ___, 2008 WL 762537 (March 25, 2008).

Because the particular arbitration at issue was part of a U.S. District Court trial, the Supreme Court remanded the case for determination of whether the arbitration agreement, as drafted, should be enforceable not under the FAA but under the U.S. District Court's inherent authority to manage its own cases. The Supreme Court also declined to extend its holding outside the realm of the FAA, noting that its ruling did not apply to enforcement under state statutes or the common law.

Elevated Lake Level Damages -- Time for Bringing Claim is 3 Years, Michigan Court of Appeals Rules

A lawsuit brought by plaintiffs claiming that defendants flooded their property and caused trees to die by wrongfully raising the level of a lake, and seeking money damages under theories of negligence, negligence per se, nuisance, trespass, and civil conspiracy, should have dismissed under a three-year statute of limitations ruled the Michigan Court of Appeals in a recent published decision.

In Terlecki v Silver Lake Property Ass'n of Indian River, ___ Mich App ___ (2008); plaintiffs complained that defendants caused Silver Lake in Cheboygan County to rise, flooding plaintiffs’ low-lying forested property. The defendants' actions, however, occurred more than three years before the plaintiffs filed their lawsuit. The Court of Appeals concluded that "the plain text of MCL 600.5805(10) and MCL 600.5827 bar plaintiffs’ claim for money damages under any of plaintiffs’ liability theories."

Click here for the full text of the opinion.

Bill to Amend Michigan Business Tax Approved by Senate

On April 22, 2008, the Senate approved S.B. 1217 on a roll call vote of 250-38. The bill now goes to the House Committee on Tax Policy.

As noted in an earlier post, S.B. 1217 is designed to correct problems with the Michigan Business Tax as it affects construction contractors.

22 Billion Gallons!

The Atlanta Journal-Constitution reported on Sunday, April 20, 2008 that a mistake in calibrating a gauge that measures lake water resulted in the release of 22 billion gallons from Atlanta's principle source of drinking water in 2006.

"More than a year before Georgia's historic drought demanded the Atlanta area's attention, the U.S. Army Corps of Engineers accidentally released about 22 billion gallons of water downstream from Lake Lanier in 2006, while trying to save taxpayers $138."

Neighbors apparently noticed the water level dropping in Lake Lanier, but the U.S. Army Corps of Engineers didn't realize the problem due to staffing changes.

For the rest of this incredible story, Read Article.

Michigan Construction Law, Contractor's Guide Available from AGC of Michigan

In 2005, the AGC Legal Advisory Committee published an updated "Contractor's Guide to Michigan Construction Law," which is now available on the AGC of Michigan's website in the Legal Resources section.

The Guide was written by members of the AGC Legal Advisory Committee, and is is divided into 17 Chapters --

1. The Contract for Construction: Standard Forms and Common Risk Transferring Provisions
   
2. Bids, Bidders, and Bid Protests (by Thomas Keranen and Peter Cavanaugh)
   
3. Defective Plans/Specifications
4. Contract Changes/Differing Site Conditions (by Peter Cavanaugh)
   
5. Delay in Contract Performance
6. Remedies for Payment Disputes
7. Dispute Resolution Mechanisms
8. Overview of State and Federal Prevailing Wage Law
9. Michigan Occupational Safety and Health Act (MIOSHA)
10. Hiring and Terminating Employees in Michigan
11. Environmental Law: A Brief Overview for the Construction Contractor
12. Bankruptcy in a Construction Setting
13. Dealing With the Media and Press in Corporate Crisis Situations
14. Bonding and Insurance
15. Subcontractors, Rights and Remedies
16. Michigan Construction Defect and Mold Litigation
17. Information Technology and Construction Law

Bill to Amend Michigan Business Tax for Construction Firms Inches Forward

On April 17, 2008, a bill to fix the Michigan Business Tax for construction contractors moved closer to passing the Michigan Senate. S. B. 1217 was placed on order of third reading with substitute S-1.

S.B. 1217 would amend Section 113(6)(e) of the Michigan Business Tax (MBT) Act (MCL 208.1113) to include in the definition of "purchases from other firms", for certain builders and contractors, direct material costs for a construction project under a contract specific to that project.

The MBT currently imposes a modified gross receipts tax on every contractor with nexus in the State. The tax is imposed on the modified gross receipts tax base, after allocation or apportionment to the State at a rate of 0.8%. The tax base is a taxpayer's gross receipts less purchases from other firms before apportionment.
The definition of "purchases from other firms" includes payments to subcontractors for a construction project under a contract specific to that project. Under the bill, "purchases from other firms" would also include direct material costs for a construction project under a contract specific to that project. "Direct material costs" would mean the amounts paid for materials that are deductible on the taxpayer's Federal income tax return as purchases under the cost of goods sold.

To track the progress of S.B. 1217, you can follow the bill on the Michigan Legislature's website here, or contact Bart Carrigan or Damian Hill with AGC of Michigan, who are following S.B. 1217 closely on behalf of the construction community.

Mediation of Construction Disputes, AAA Updates Mediation Services

The American Arbitration Association recently updated its Mediation Services and now devotes a separate website to its mediation offerings. The new website is appropriately named www.aaamediation.com

Among the changes are the following --

New Pricing Structure

• AAA has eliminated the up-front filing fee
• The "mediation" rate designated on the Mediator's resume is a combined rate for the AAA and the Mediator
  

Revised Mediator Resumes

The AAA now provides the following new information about the Mediators on its Panel:

• Years of Practice as a Mediator
• Total Number of Cases Mediated
• Settlement Rates
• Statement of Philosophy
• Multi-Party Experience
• All Mediator Resumes are Posted On-Line
  

Choice of Administration

• Parties have the choice of filing their Mediation Cases locally (through the AAA Offices in Southfield), or at one of the Case Management Centers.
  
• Parties can also file their Mediation Cases through the AAA Mediation Website.
• Note: From my experience, the AAA's Southfield Office is much better at handling AAA matters than the Case Management Center in Rhode Island, which is the office otherwise assigned to handle mediation and arbitration cases from Michigan. Janice Holdinski and her Staff do a great job and I highly recommend that you file your Mediation Case through the Southfield Office. For more information, contact Janice Holdinski at (248) 352-5509. (pjc)
  

Contract Documents Seminar, Tom Keranen and Fred Butters to Speak on April 29, 2008

On April 29, 2008, Attorneys Thomas M. Keranen, PE, and Frederick F. Butters, FAIA, will speak about the ConsensusDOCs contract documents and the AIA 2007 Contract Documents at a seminar sponsored by AIA of Michigan.

Mr. Butters will address the substantial changes made to the AIA documents, and compare the 2007 and 1997 versions. Mr. Keranen will discuss the new ConsensusDOCS contract documents. This seminar will be held at Laurel Manor in Livonia.

For more information, contact Tom Keranen or Fred Butters at (248) 647-9653, or AIA of Michigan at (313) 965-4100 or on their website to sign up for this seminar .

Note: The introduction of the ConsensusDOCS contract documents was discussed in an earlier post.

PDF for Legal Professionals

Adobe Acrobat (PDF) has become the de facto standard in the legal profession for filing documents electronically with federal courts using the PACER system, and increasingly state courts.

Adobe sponsors an excellent blog -- Acrobat for Legal Professionals -- that is geared for lawyers who use PDF documents in their practice, whether it be for filing documents or using PDF to manage large document collections.

One of the most useful aspects of Adobe Acrobat, which is only found in the Professional version, is the OCR function, which can turn a large scanned document into a full-text searchable one. This is particularly useful for finding specific provisions in large contract documents.

Adobe Acrobat is also a very easy way to present exhibits during trial. For my last several trials, I converted all of my exhibits, both documents and photographs, to PDF and was able to present the information with little problem. The annotation and full-screen display features of Adobe Acrobat also help to highlight and make sense of text documents.

During a recent arbitration, I used a laptop computer hooked to a 20" flat screen display to display my exhibits using PDF. I was able to keep my client's photographs in front of the arbitrator through most of the proceeding. Opposing Counsel had nothing similar to present his evidence, and conceded afterwards that the photographs had tipped the outcome of the case in favor of my client.

Department of Treasury Introduces New Lincoln

Off topic a bit, but the U.S. Department of Treasury is rolling out a new $5 bill today. The Treasury Department has a pretty cool, interactive website that shows off the new Lincoln, along with the other bills that have undergone face lifts and security enhancements in the past several years.