Captive Insurance and Risk Retention

Posted by: Hilger Hammond On: 24th February 2017 | no responses.

By: Mark A. Rysberg

The concept behind captive insurance companies is based on the principle that rewards are derived from the assumption and retention of risk. Traditional insurance vehicles purchased through third-party agents is directed at shifting definable risks onto insurance companies that assume such risks based on weighing the statistical probability that, when viewed in the aggregate, the costs to the insurance company for paying claims will be less than the premiums the insurance company charges for assuming those risks. In that sense, insurance companies operate on the business model that they generate revenue, and ultimately profit, by assuming risk. A captive insurance company operates on a similar principle with the main difference being that rewards are the result of retaining risks by the parent company rather than shifting those risks to traditional insurance companies. In short, captive insurance companies are formed as part of a risk management strategy to take advantage of the economic benefits derived from risk retention. One of the more notable benefits of captive insurance models relates to the tax benefits provided to so-called micro captives. Under I.R.C. Section 831(b), micro captives can elect to only be taxed on investment income and avoid tax on income derived from the collection of up to $2.2 million in insurance premiums. As a result, incorporating captive insurance concepts as part of a risk management strategy can provide opportunities to go beyond simply planning for catastrophic and non-catastrophic losses.

To offset the retention of risk, captive insurance companies are formed.

Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.

Michigan Prevailing Wage Update

Posted by: Hilger Hammond On: 15th February 2017 | no responses.

By: Mark A. Rysberg

Michigan’s prevailing wage law faces potential repeal in 2017. The first three bills proposed by the Michigan Senate are directed at repealing the laws that require labor on Michigan public construction projects be paid at prevailing wage rates akin to union-level wages. This is not the first time this issue has surfaced in Michigan and in other states across the country.

Proponents of repealing prevailing wage contend that requiring higher labor costs is passed through to the taxpayers whereas the opposition claims that prevailing wage results in higher-quality public improvements and a fair wage for the people of Michigan that perform the improvements. The debate over these issues is expected to be heated and continue throughout the year. Check back for additional updates about this issue and the future of Michigan’s prevailing wage legislation on public construction projects.

Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.

Court Enforces Subcontractor’s Obligation to Indemnify Contractor

Posted by: Hilger Hammond On: 3rd February 2017 | no responses.

By Aileen Leipprandt

The Michigan Court of Appeals recently affirmed a contractor’s right to defense and indemnity from its subcontractor under the plain language of the parties’ subcontract. Provenzino v Macomb County Department of Roads, et al (January 2017).

In this case, Mr. Provenzino alleged that he was injured when he fell from his motorcycle after encountering a disparity in height between adjacent milled and unmilled lanes of traffic in a construction zone. Provenzino sued multiple parties including Florence Cement Company, the general contractor, and Lois Kay Contracting Company (LKCC), the subcontractor who milled the roadway surfaces. Florence filed a cross claim against LKCC seeking indemnity based upon the indemnification provision in the parties’ subcontract. That provision stated:

Subcontractor agrees, and shall bind all sub-subcontractors to agree to indemnify Contractor, Owner and all other parties the Contractor is obligated to indemnify pursuant to the Prime Contract (hereinafter “Indemnities”), and to defend and hold Indemnities forever harmless from and against all suits, actions, legal and administrative proceedings, claims, demands, damages, interest, attorney fees, costs and expenses of whatsoever kind or nature whether arising before or after completion of Subcontractor’s work and in any manner directly or indirectly caused or claimed to be caused by any action or negligence of Subcontractor of Sub-subcontractor, and regardless whether directly or indirectly caused or claimed to be caused in part by a party indemnified hereunder or by anyone acting under their direction, control or on their behalf, until such time as a judgement [sic] is entered against Contractor by a court of law. …[emphasis added].

The trial court dismissed Florence’s claim for indemnity ruling that LKCC’s work did not cause the plaintiff’s injuries and that there was no evidence to suggest LKCC was negligent. The Court of Appeals reversed, ruling that the plain language of the indemnity provision required LKCC to defend and indemnify Florence. The appellate court explained that in determining whether a duty to indemnify exists, the issue is not whether LKCC was actually negligent; rather, the issue is whether Mr. Provenzino’s allegations arose in “any way” from LKCC’s work. Since Mr. Provenzino broadly alleged that LKCC and Florence’s actions created an unreasonably dangerous condition, under the plain language of the subcontract, the indemnification clause was triggered.

Lesson Learned :  Each party to a construction contract (whether giving or receiving indemnity) should carefully assess (and negotiate) the indemnity provision to properly manage risk transfer.

Improperly Licensed Architect Firm Not Liable On Licensing & Malpractice Claims

Posted by: Hilger Hammond On: 2nd February 2017 | no responses.

By Aileen Leipprandt

In Center Street Lofts Condominium Association v AZD Associates, Inc., et al (Mich. Ct. App. Dec. 2016), a condominium association sued an architectural firm, AZD Associates, claiming that AZD’s deficient design of the condominium project caused multiple units to leak. The Association also claimed that AZD was not properly licensed because less than 2/3 of AZD’s principals were licensed architects, contrary to the requirements of the Michigan Occupational Code (MOC).

The trial court dismissed the Association’s claims as to improper licensure, ruling that the Michigan Occupational Code does not give a private person the right to sue an architect to enforce the licensing requirements of the MOC. Instead, the MOC gave enforcement authority only to prosecutors and the Attorney General. The only exception given to private persons is the right to seek an injunction (an order to stop) against an unlicensed practice. The Court of Appeals agreed with the trial court and affirmed dismissal of the claim.

The trial court also dismissed the Association’s claims for professional negligence, ruling that the claims were filed too late. Again, the appellate court agreed, ruling that the Association did not file its claim within the six-year period of limitations which began to run when the Association occupied, used or accepted the improvement. Furthermore, even though the Association might have been permitted to file its claim within one year of discovering the defect, the evidence established that the Association likewise did not file its lawsuit within that one-year time frame.

Finally, the appellate court observed that even if the Association’s argument was correct – that AZT was not properly licensed – the Association’s claim would be controlled by the three-year statute of limitations for negligence claims. The period of limitations for such a claim begins to run “at the time the wrong upon which the claim is based was done regardless of the time when the damage results.” Here, the alleged “wrong” was the negligent design of the project. The Association argued that the damage did not occur until it first noticed the leaking. The appellate court disagreed, ruling that the “‘damage’ actually occurred when the portions of the project that were negligently designed were actually built, i.e., when the problem could no longer be corrected without the need for plaintiff to spend money on redesign and reconstruction. It was at that point that all elements of negligence were in existence, though plaintiff at the time did not know that its legal rights had been impacted upon.”

Lesson Learned – While the Condominium Association’s claim for improper licensure was dismissed, design professionals should nonetheless take care to assure they are properly licensed in accordance with the Michigan Occupational Code, otherwise they may face an administrative enforcement proceeding. And, building owners who encounter design or construction deficiencies cannot sit on their claims, otherwise, they risk dismissal for untimeliness.

Contractor Loses Bad Faith Argument Against Surety

Posted by: Hilger Hammond On: 18th January 2017 | no responses.

By Aileen Leipprandt

The Sixth Circuit Court of Appeals recently affirmed that a surety did not act in bad faith when it settled the claim of its principal contractor against the State of Michigan related to disputes on a prison construction project. Great American Ins. Co. v E.L. Bailey & Co., et. al. (November 2016).

In this case, the State hired E.L. Bailey & Company to construct a kitchen in a prison in Ypsilanti. Great American Insurance Company (GAIC) provided performance and payment bonds ensuring Bailey’s performance and payment to subcontractors. In turn, Bailey agreed to indemnify GAIC for payments or expenses GAIC incurred under the bonds and to post sufficient collateral to protect GAIC from claims. The indemnity agreement between Bailey and GAIC also gave GAIC the right to settle on Bailey’s behalf any claim concerning the prison contract.

Disputes arose on the project and Bailey never finished the work. The State and GAIC agreed to have another contractor complete the project. The State withheld payment to Bailey asserting liquidated damages (“LDs”) for Bailey’s failure to timely perform. Bailey disputed the LDs, blaming delays on the State and its architect. The parties sued each other in the Michigan Court of Claims (Lawsuit #1). On the eve of facilitation, GAIC informed Bailey that it had settled Bailey’s claims against the State, with the State agreeing to pay GAIC $358,000 as final payment under the construction contract.

At about the same time, some of Bailey’s subcontractors sued Bailey and GAIC in state court under the payment bonds for amounts due for work (Lawsuit #2). GAIC demanded that Bailey provide collateral for those claims, but Bailey refused. GAIC ultimately settled the subcontractor claims for $645,287.

In another separate proceeding (Lawsuit #3), GAIC sued Bailey in federal court seeking indemnity for Bailey’s failure to provide collateral for the subcontractor claims and requesting a declaratory judgment that GAIC had the right to settle Bailey’s claims against the State. Bailey raised a “bad faith” defense, arguing that GAIC’s settlement with the State was in bad faith because GAIC concealed its negotiations with the State until the eve of facilitation.

While the federal court generally agreed that GAIC’s undisclosed settlement negotiations raised concerns because it might deprive Bailey of the opportunity to consider its options appropriately, that fact alone did not establish bad faith. Rather, Bailey had to prove that GAIC was motivated by a selfish purpose or a desire to protect its own interest at the expense of Bailey. Bailey offered no evidence as to GAIC’s state of mind. The Court sided with the surety concluding that GAIC had a right to settle Bailey’s claims under the parties’ indemnity agreement and that GAIC had not acted in bad faith in doing so, particularly where communications between GAIC and the State established that GAIC pushed the State for a higher settlement amount.

Lesson learned – a surety’s rights under the general indemnity agreement with its principal contractor are expansive. A contractor should carefully evaluate its course of action on project disputes in the face of its broad reaching indemnity obligations.

An ADC Construction Classic – The Timeless Gingerbread House

Posted by: Hilger Hammond On: 9th January 2017 | no responses.

You never know what might spark a student’s interest in construction. Such was the case on December 21, 2016, when 10th grade students in the Academy of Design and Construction (ADC) at Grand Rapids Public Schools’ Innovation Central High School enthusiastically embraced their studies in the classic holiday short course favorite – gingerbread house construction. Aileen Leipprandt, an ADC mentor, offers the following account of the students’ successful project.

After spending approximately two minutes in a design charrette guided by Ashley Dunneback (Tower Pinkster), the team broke ground. The first order of business was assembly and installation of the pre-fabricated wall panels (graham crackers). Field fabrication of the panels (snapping the crackers into proper dimensions) proceeded without incident largely due to the pre-scored panels. Attempts to customize panel size by sawing with hand tools (plastic knives) was only marginally successful due to breakage and quickly abandoned. Consistency of the principal fastener (icing) played a crucial role in affixing the panels to the structure (ok, we admit that a shoe box provided well-needed structural support).

Next came the roof. Very tricky. Installation of the gables and roof decking was skillfully accomplished through use of gable wall studs and lateral bracing (pretzel sticks), precisely measured and cut with central incisors (front teeth). The ridge vent (colorful gumdrops) was a key aesthetic component. Because of the short construction duration (<50 minutes), to maintain the critical path of the project a portion of the crew worked concurrently on the curtain wall system. Using trowels (more plastic knives), the laborers quickly screeded the mortar (yes, more icing) on the exterior in anticipation of installation of the salty and sweet architectural components (pretzel stick muntins, Cheez-It® siding and M&M® headers).

With Substantial Completion achieved two minutes before the bell ringing, the ADC students and their mentors delivered the project ahead of schedule with only minimal loss in materials consumed by the labor force during the construction process, with M&Ms experiencing a more significant loss ratio than other components. Legal counsel for the contractor (Aileen, Hilger Hammond) confirms that aside from excessive icing coating the fingers and the clothing of the laborers, there were no OSHA recordable injuries on the project site.

Well done ADC students!

Students in the Academy of Design & Construction at GRPS Innovation Central represent the future construction labor force in West Michigan. Perhaps you will consider donating your time or resources as a benefactor or mentor to the ADC program and students? The rewards are priceless…

Construction Contract Clauses – Flow-Through Provisions

Posted by: Hilger Hammond On: 15th November 2016 | no responses.


2016-12-21_13-29-54By: Mark A. Rysberg

Construction contracts are intended to define and memorialize the parties’ expectations regarding how they will perform during the course of a construction project. This series will examine clauses that are routinely found in construction contracts and provide a brief explanation of what they are and why they are important.

Flow-through provisions are common in construction contract documents. In essence, when a general contractor enters into a construction contract with an owner, the general contractor obligates itself to perform certain functions and services for the owner. The general contractor then subcontracts some of those functions to sub-contractors. A flow-through provision is language in a contract that makes one party obligated to fulfill the obligations of another party. In essence, by way of example, if properly drafted, it could prevent a subcontractor from arguing that the obligations it owed a general contractor were different from the obligations the general contractor owed the owner. However, the language of these provisions needs to be carefully read and construed to determine precisely the specific obligations of the parties.

Further, flow-through provisions can work two ways: A subcontractor can owe a responsibility to the owner, and likewise, a general contractor can owe a subcontractor the same obligations that an owner owes the general contractor. The form and extent of flow-through provisions depends specifically upon the language of each contract document. Consider the following example:

The Subcontractor shall be bound to the Contractor by the terms of this Agreement and, to the extent that provisions of the Contract Documents between the Owner and Contractor apply to the Work of the Subcontractor as defined in this Agreement, the Subcontractor shall assume toward the Contractor all the obligations and responsibilities which the Contractor, by those Documents assumes toward the Owner and the Architect/Engineer, and shall have the benefits of all rights, remedies and redress against the Contractor which the Contractor, by Those Documents, has against the Owner, insofar as applicable to this Subcontract, provided that where any provision of the Contract Documents between the Owner and Contractor is inconsistent with any provision of this Agreement, this Agreement shall govern.

These clauses are important for several reasons. However, at its core, these provisions are intended to transfer risk from one party to another. Risk transfer is important in construction contracting because it is important to put the risk on the party that is in the best position to prevent the risk or insure around it. In that sense, flow-through provisions can be thought of as serving the purpose of aligning the parties’ performance obligations with regard to insurance and risk transfer.

Construction contracts have many different clauses that are intended to work together to accomplish risk transfer and to define performance obligations. When the parties to a contract have a different understanding about what terms are in a contract, problems can result. Therefore, it is important to understand and include thoughtfully planned and precise contract clauses in your construction contracts.

Attorneys who practice in construction law can be a valuable resource for contract review and in-house training that is intended to avoid costly mistakes later.

Construction Contract Clauses Part 1: Inegration Clause

Posted by: Hilger Hammond On: 8th November 2016 | no responses.

2016-11-08_13-01-55By: Mark A. Rysberg

Construction contracts are intended to define and memorialize the parties’ expectations regarding how they will perform during the course of a construction project. This series will examine clauses that are routinely found in construction contracts and provide a brief explanation of what they are and why they are important.

The first clause to be considered is the integration clause. An integration clause is language in a contract that prohibits telling a court or an arbitration panel that prior oral arguments, or even prior written agreements, are part of the contract documents. For example, suppose an owner and a general contractor enter into an agreement. The agreement has ten elements, and the parties were discussing orally the eleventh element. If this oral eleventh element is not reduced to writing and included in the written document, chances are that that oral provision will not be enforced due to the fact that the contract is “fully integrated” because it contains an integration clause. A “fully integrated” contract means that all of the prior dealings between the parties have culminated into the written contract and a court or arbitration panel will not look beyond the written contract to determine the obligations of the parties. The following is a common example of an integration clause.

The Contract Documents enumerated in this Agreement form the contract for construction, represent the entire and integrated agreement between the parties hereto and supersede all prior negotiations, representations or agreements, either oral or written.

Notice that the language above makes it clear that the only contract terms are those embodied in the contract documents that are specifically identified in the contract. In other words, prior oral and written agreements are not part of the contract if an integration clause is included. Now, consider why this is important.

First, a written contract is intended to specify all of the terms of the agreement. If an integration clause is not included, there can be significant questions about the terms of the agreement.

Second, enforcing oral or piecemeal contracts is costly and difficult. Imagine having to piece together a contract at the end of a project based on notes, emails, and memory. That can be a difficult, if not impossible, task.

Third, basing decisions on a contract that is not fully integrated can be risky. As you may imagine, decisions to default or terminate are usually made based on the language of the contract. The precursor to those decisions is usually performance requirements set out in other sections of the contract, such as payment timing and scheduling. If one party’s expectations are based on the belief that one of those terms was agreed upon orally before the contract was signed and the other believes those terms are defined by the signed contract, there can be a serious problem because the parties will likely operate on different understandings of their respective obligations. As a result, the party issuing a default may actually be the party in default.

Construction contracts have many different clauses that are intended to work together to accomplish risk transfer and to define performance obligations. When the parties to a contract have a different understanding about what terms are in a contract, problems can result. Therefore, it is important to understand and include planned and precise contract clauses in your construction contracts.

Attorneys who practice in construction law can be a valuable resource for contract review and in-house training that is intended to avoid costly mistakes later.

New Overtime Rule – Legal Implications for Employers

Posted by: Hilger Hammond On: 11th October 2016 | no responses.

time-1196952-640x480By Elizabeth Welch Lykins
Welch Law

In May 2016, the Department of Labor (DOL) released its long-anticipated new overtime rule for Executive, Administrative, and Professional employees. These employees are generally your managers and white-collar professionals. If these employees perform certain “duties” (as defined by DOL regulations) and are paid a salary, then you do not need to pay them overtime. They are referred to as “salaried exempt” (ie, exempt from overtime laws).

As of December 1 of this year, these Executive/Administrative/Professional employees will need to be making at least $47,476 annually (or $913 per week) in order to qualify as “exempt” from overtime. Right now, the required salary threshold is only $23,660 (or $455 per week). Under the new rule, up to 10 percent of the salary can include nondiscretionary bonuses, incentive payments, and commissions.

Thus, if you have a current employee classified under one of the Executive/Administrative/Professional exemptions, that employee MUST BE PAID the new salary minimum. If he/she does not make the minimum, then the employee must be converted to an hourly employee and be paid overtime for hours worked in excess of 40 in a week. Alternatively, the employee can receive a salary to cover a set number of hours (but the employee still must be paid overtime for hours worked over 40 in a work week).

There is a grace period until December 1 to update the status/salaries of your employees. Employees who do not meet the new salary minimum will now have to keep time records. These employees will need to record start/stop times, breaks, lunch, and time worked in the evening. This is vital as the employer has the burden of proving “hours worked.” Even if an employer decides to just limit “hours worked” to only 40 in a work week, hours still must be tracked to show that is in fact the case. Furthermore, these employees will now be subject to all your hourly employee policies regarding sick time, vacation/PTO etc. It will be a huge adjustment for them since their pay will be tied to hours worked—they will no longer just make the same amount each week regardless of hours worked.

The legal implications of this change are large. If an employer fails to make the salary change (or convert employees to non-exempt/overtime eligible), the employer could be sued for past-due overtime for any hours worked in excess of 40 (and face the possibility of treble damages with a 3-year lookback as well as payment of the employee’s attorney’s fees). It is critical that you examine every salaried position in your company and make sure you are compliant with this new rule.

The new minimum for “highly compensated employees” (another exemption some employers utilize) is now $134,004 (raised from$100,000).

The new rule raises the salary minimum every three years. Thus, the DOL estimates that as of January 1, 2020, the estimated minimum will rise to $51,168. The “highly compensated employee” exemption will likewise be adjusted every three years.

One final note: MANY employers have employees mis-classified as “exempt” from overtime just because they pay a salary to an employee. Salaried status alone is not enough. The employee must also meet one of the approved exemption categories. Each category has its own duties checklist. This new rule presents an opportunity to make sure everyone in your work place is in fact properly classified. My fellow management-side employment law attorneys and I have been very busy the last few years handling wage/hour matters resulting largely from mis-classifications (ie, treating an employee as salaried-exempt when in fact they are not and should have been receiving overtime).

Once salary/hourly wage adjustments are made, you will need to examine your policies for this new group of potentially non-exempt employees. Your handbook policies and benefits packages will need to be examined with an eye towards the impact on this group who previously was not subject to the “hourly” policies.

Elizabeth Welch Lykins practices exclusively in the area of labor and employment law. Her work includes assisting management with issues related to hiring and firing, wage and hour compliance, union negotiations, as well as all aspects of employment law on the local, state and federal levels. She has extensive experience practicing in front of the National Labor Relations Board, the Equal Employment Opportunity Commission, the Michigan Department of Civil Rights, and the state/federal Departments of Labor. Elizabeth is also a trained mediator.

 

The Good, The Bad, and The Ugly – The Michigan Builders’ Trust Fund Act

Posted by: Hilger Hammond On: 3rd October 2016 | no responses.

ride-into-the-sunset-1312997-639x987

This article was originally posted in Michigan Infrastructure and Transportation Assocation (MITA) publication, Cross-Section, Summer 2016 edition.

By Mark Rysberg

Contractors performing work on State and Federal construction projects are likely familiar with prompt payment acts. These laws generally require contractors and subcontractors to pay their downstream subcontractors shortly after receiving payment for such work. As the economy has improved, many contractors are finding opportunities in the private sector. The work may be similar, but the rules that apply are vastly different. These differences present pitfalls for the unwary contractor that may result in criminal and civil penalties. One such hazard exists under the Michigan Builders’ Trust Fund Act, which exposes contracting entities and its officers, directors, and employees to individual liability. The consequences for violating the Michigan Builders’ Trust Fund Act could result in substantial financial penalties and prison.i

The purpose of the Michigan Builders’ Trust Fund Act is to prevent fraud in the construction industry, and to ensure that the subcontractors, suppliers, and materialmen that did the work received the payments their work generated.ii

However, courts have recognized that:

[T]he date of its passage, 1931, identifies the act as one of a genre of Depression-era measures intended to afford relief to subcontractors and materialmen in the construction industry.

During the boom period of the 1920’s, speculative builders often undertook to construct projects too large for their available capital to finance, and they frequently paid suppliers and materialmen on older projects with funds received as payment on more current operations. With the advent of the crash of 1929 and the consequent widespread insolvency of many building contractors, these pyramided empires also collapsed and many subcontractors and suppliers were never paid. Subcontractors and materialmen on private projects were left only with mechanics’ liens as remedies, and these were often ineffective.

[S]tatutes like the Michigan Act of 1931 were enacted to afford a “supplement to the Mechanics’ Lien Law,” providing a more effective remedy for private project suppliers against their principal contractors than they had previously.iii

Despite its shrouded history, the Michigan Builders’ Trust Fund Act is a tool for those engaged in the construction industries to collect funds, protect funds from third-parties, and to prevent projects from becoming entangled with problems arising from misuse of project funds.

The Good—It Is Your Money

The backbone of the Michigan Builders’ Trust Fund Act is the imposition of trust status over payments received on private construction projects.iv In its simplest sense, when money is held in trust it creates a property right in favor of the trust beneficiaries. This means that funds impressed with trust status under the Michigan Builders’ Trust Fund Act do not belong to the contractor or subcontractor that receives them.v Rather, the funds belong to the subcontractors, suppliers, and laborers who were engaged by the upstream contractor or subcontractor. As a result, funds subject to the Michigan Builders’ Trust Fund Act are not subject to liquidation in bankruptcy or setoff by lenders.vi Should bankruptcy or default occur, a beneficiary can follow any diverted funds and recover them from third-parties.vii The property rights created by the Michigan Builders’ Trust Fund Act are both a sword and shield intended to guarantee that the funds reach the intended.

The Bad—Officer and Employee Liability

At its core, the Michigan Builders’ Trust Fund Act is a criminal statute that provides civil remedies.viii Accordingly, the use of funds received on a construction project for any purpose other than to pay those who performed the work exposes the individuals and corporate entities that participated in using those funds to criminal and civil liability. In that sense, it is the people involved in causing a violation of the Michigan Builders’ Trust Fund Act who pay the price.

Importantly, the existence of a corporate or quasi-corporate entity does not provide the defense it might otherwise in a breach of contract situation.ix The individuals involved in the processing and decision making regarding the use of project payments are at high risk of personal liability.

The Ugly – Prison, Punitive Damages, and Attorneys Fees

The Michigan Builders’ Trust Fund Act carries significant exposure to criminal and civil liability. On the criminal side, the statute is a felony punishable by up to 12 months in jail and 60 months of probation—per violation.x

Several violations of the Michigan Builders’ Trust Fund Act were punished with lengthy incarceration relative to the amount of money involved.xi

For example, an individual builder was sentenced to 12 months in jail and 60 months of probation for withdrawing $2,000.00 from her account as profit on the project while the project subcontractors were owed at least $1,000.00 resulting in an overdrawn account.xii Other cases reveal criminal sentences ranging from three months to three years.xiii Importantly, these situations involved small construction projects with the amounts received and amounts owed as compared to larger commercial projects.

On the civil side, liability can arise for a violation of the Michigan Builders’ Trust Fund Act or related remedies for statutory conversion. Statutory conversion provides the possibility to recover three times actual damages plus attorney fees, costs, and interest.xiv It is easy to understand the magnitude of exposure when one considers the monthly payables owed to subcontractors, suppliers, and laborers and then multiplies that figure by a factor of three.

Although the risks created by the Michigan Builders’ Trust Fund Act are significant, they may be avoided by prudent business strategies. The key to managing these risks is to understand that they originate in all aspects of construction process. Contract drafting, contract administration, billing, paying vendors, managing cash-flow, financing, and dispute resolution all present opportunities to mitigate these perils. As a result, sensible contractors will make sure that employees involved in those aspects of the construction process understand the Michigan Builders’ Trust Fund Act so they may identify trouble areas and seek resources to assist in avoiding potential problems. Along those lines, engaging professionals can provide insight when developing best practices. Accountants, insurance agents, and attorneys that are familiar with the Michigan Builders’ Trust Fund Act can help prevent and mitigate problems. In short, the Michigan Builders’ Trust Fund Act is an important consideration for successful management of a construction company when entering or expanding work in the private sector.

iM.C.L. § 570.151 et seq.
ii General Ins. Co. v. Lamar Corp., 482 F.2d 856, 860 (CA6 1973) (internal cites omitted); see, National Bank of Detroit v. Eames and Brown, 396 Mich. 611, 619-620, 242 N.W.2d 412 (1976).
iii General Ins. Co. v. Lamar Corp., 482 F.2d 856, 860 (CA6 1973) (internal cites omitted); see, National Bank of Detroit v. Eames and Brown, 396 Mich. 611, 619-620, 242 N.W.2d 412 (1976).
iv M.C.L. § 570.151
v Selby v. Ford Motor Co., 590 F.2d 642 (CA6 1990).
vi Selby v. Ford Motor Co., 590 F.2d 642 (CA6 1990); Blair v. Trafco Products, Inc., 142 Mich. App. 349; 369 N.W.2d 900 (2005).
vii Blair v. Trafco Products, Inc., 142 Mich. App. 349; 369 N.W.2d 900 (2005).
viii M.C.L. § 570.151 et seq.
ix People v. Brown, 239 Mich. App. 735; 610 N.W.2d 234 (2000).
x M.C.L. § 570.152
xi See, People v. Brown, 239 Mich. App. 735; 610 N.W.2d 234 (2000); and People v. Miller, 78 Mich. App. 336, 259 N.W.2d 877 (1977).
xii People v. Brown, 239 Mich. App. 735; 610 N.W.2d 234 (2000).
xiii See, People v. Wedel, No. 290324 (Mich. Ct. App., Feb. 23, 2010); People v. Looze, No. 234195 (Mich. Ct. App., Oct. 25, 2002); People v. Currier, No. 269564 (Mich. Ct. App., Sept. 13, 2007); People v. Bazeley, No. 191440 (Mich. Ct. App., July 11, 1997); People v. Hall, No. 3118830 (Mich. Ct. App., Sep. 29, 2009); People v. Miller, 78 Mich. App. 336, 259 N.W.2d 877 (1977).
xiv M.C.L. § 600.2919a.