Life After the Homeowner Construction Lien Recovery Fund
By Benjamin Hammond
The Michigan Homeowner Construction Lien Recovery Fund (“Fund”), created in 1982 under part 2 of the Michigan Construction Lien Act (“CLA”), MCL 570.1101 et seq., was significantly revised by Public Act 147 of 2010, which was effective August 23, 2010.
Since its enactment in 1982, the Fund has had two main purposes. First, it was intended to protect owners of residential property from paying twice for improvements to their property in situations where they paid the builder for the work, but the builder failed to pay the subcontractors, suppliers and/or laborers who improved the property. When the subcontractors, suppliers and laborers recorded construction liens they created the possibility that the homeowner would be forced to pay twice for the work. The Fund allowed homeowners to remove these liens by filing an affidavit with the court evidencing the homeowner’s payments to the builder. As a consequence, such liens would not attach to the homeowner’s residence to the extent of the homeowner’s payments to its builder. The good news is that this portion of the Fund was not altered.
Second, the Fund intended to provide a source of recovery for subcontractors, suppliers and laborers that were not paid despite the fact the owner had paid the builder. Essentially, the Fund operated as security for subcontractor, supplier, and/or laborer’s liens in lieu of the homeowner’s property. In these circumstances, the Fund would pay valid claims.
Prior to 2002 the Fund never faced more than 200 claims per year, however, with the real estate market crash and other economic factors the Fund faced nearly 500 claims in 2008. In 2000 the total amount sought from the Fund was $2.4 million and in 2008 that amount had risen to $23.7 million. It has been widely reported that the Fund was unable to sustain itself and ran out of money in late 2009 / early 2010. With the passage of PA 147 it is official – the Fund is dead.
Here are four tips that will help your subcontractor or supplier clients proactively deal with the loss of the Fund: (1) require personal guarantees and additional security, (2) require prepayment or deposits, especially on custom products; (3) develop a good contract or purchase order that will enable the client to recover collection costs and attorney fees; and (4) review the ins and outs of the CLA and Builder’s Trust Fund Act. Without the ability to collect from the Fund, residential lien claimants need to tweak their business practices and plan for better days ahead.