Archive for May, 2009

As Building Companies and Contractors Collapse, The Personal Liability of Owners and Officers Rise

Thursday, May 14th, 2009

As commercial contractors and residential builders continue to fail, the owners and officers of these companies are being sued personally for violating the Michigan Builder’s Trust Fund Act (BTFA).  The BFTA has both civil and criminal penalties. 

Under the BTFA, the monies paid by an owner or on behalf of an owner – (i.e. title company or bank) to a contractor are deemed held in trust for the benefit of subcontractors and suppliers.  The contractor is considered a “trustee” of the owner’s funds and must use them to first pay subcontractors and suppliers.  The failure of the contractor to do so also gives rise to personal liability of the contractor’s owners and officers. 

Merely because the builder or contractor business entity (i.e. corporation or LLC) is unable to pay its subs and suppliers does not insulate its owners and officers from personal liability or even bankruptcy.  As an example, if Smith Building Company receives payment from the owner and uses the proceeds to pay expenses and some trades but not others.  The building company is out of business or uncollectible.  The unpaid subs and suppliers have, in addition to their lien rights, another remedy:  sue the company’s officers and owners for violating the BTFA.

Consider the 2007 case of Livonia Building Materials v Harrison Construction Co, Keith Penner and Henry Bell 276Mich App 514 (2007).  Livonia Building Materials supplied materials to Harrison Construction.  Harrison was paid by the project owner but failed to pay Livonia Building Material (Livonia) and then went out of business.  Livonia sued Harrison’s president, Mr. Bell and its chief financial officer, Mr. Penner claiming they violated the BFTA.  The Court of Appeals ruled in favor of Livonia Building Materials and rejected all the defenses arguments:  The Court stated:

The difficulties posed by a downturn in the economy or poor business acumen do not excuse noncompliance with the MBTFA’s obligations in regard to accounting practices and ordering of payment.  Although [defendants] may not have acted with bad faith and indeed were simply trying to keep their ongoing concern afloat by paying the most urgent outstanding balances, the MBTFA’s requirements must still be followed, and defendants were certainly required to pay [plaintiff] on its projects when monies came in on those particular projects.


What is the lesson here?  If you are a contractor, you must use the monies received by the owner to first pay subcontractors and suppliers.  There are no defenses.

Even If Late It Is Important For Subcontractors and Suppliers To Give The Notice of Furnishing

Wednesday, May 6th, 2009

The Construction Lien Act (CLA) requires that subcontractors and suppliers serve, by certified mail or personal service, a Notice of Furnishing upon the general contractor and owner’s designee named in the owner’s Notice of Commencement. The Notice of Furnishing must be served within 20 days after first labor or material supplied. Even if the Notice of Furnishing is served after the 20 day period, the subcontractor or supplier’s lien claim may not be affected. If the owner fails pays the contractor – – based upon the contractor’s sworn statement – for the labor or material furnished by the subcontractor or supplier, then the late Notice of Furnishing will reduce or defeat the subcontractor or supplier’s claim of lien by the amount of the owner’s payment. On the other hand, if in the interim, the owner does not pay the contractor – – based upon the contractor’s sworn statement – – for labor or material furnished by the subcontractor or supplier, then the lien amount will not be reduced by the late Notice of Furnishing.

As an example, an electrical subcontractor has a $10,000 lien claim, but gave its late notice of furnishing 60 days late. During the 60 day period, the owner paid the contractor a progress draw – – that included $4,000 for the electrical work – – based upon the contractor’s sworn statement, then the lien amount will be reduced to $6,000 ($10,000 – $4,000).

To summarize, a late Notice of Furnishing will only reduce or defeat a subcontractor or supplier’s lien amount if:

1. the owner pays the contractor based upon the contractor’s sworn statement, and;

2. the owner’s payment includes an amount for the labor or material provided by the subcontractor or supplier.

From my experience, a late Notice of Furnishing only reduces or defeats a lien claim in 20-25% of cases. The point – – – give the Notice of Furnishing, even if LATE.