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

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.

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