Life After the Homeowner Construction Lien Recovery Fund

Posted by: Hilger Hammond On: 24th February 2011 | no responses.

Home builderBy Benjamin Hammond

 

Published in The Grand Rapids Lawyer, January/February 2011

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.

Support Guide for Friends and Family of the Michigan Homeowner’s Lien Recovery Fund

Posted by: Hilger Hammond On: 12th October 2010 | no responses.

by Aileen M. Leipprandt and Mark A. Rysberg

 

After years on life support, Governor Granholm approved PA 147 of 2010 effectively pulling the plug on the Homeowner’s Lien Recovery Fund (“Fund”), effective August 23, 2010.  Under prior operation of the Construction Lien Act (“Lien Act”), where an owner paid its residential contractor in full for improvements made by subs and suppliers, the subs and suppliers liens would not attach to the owner’s property, and instead, the lien claimants could look to the Fund to satisfy their lien claims.  The purpose of the Fund was to protect owners from paying twice and to afford some relief to subs and suppliers who got stiffed by the builder.  Since its inception in 1982, however, the Fund has paid nearly $11.5 million in claims and simply ran out of money.  With the Fund upside down, the Legislature pulled the plug on it.   Without the Fund to bail out lien claimants, subcontractors and suppliers are only left with claims against the builder, an undesirable circumstance if the builder is uncollectible.

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To avoid becoming “Bank of Subcontractor”, “Bank of Supplier”, or worse yet a “Charity” you need to be proactive.  First, review your credit terms and your policies about those to whom you are willing to extend credit and the limits of such credit.  Second, don’t be afraid to require prepayment or deposits, especially on custom products – you don’t get what you don’t ask for.  Third, develop a good contract or purchase order so that you can recover collection costs and attorney fees.  Without such a contract, these costs are typically not recoverable.  Fourth, consult an attorney who knows construction law and the ins and outs of the Lien Act and Builder’s Trust Fund Act.  With the Fund dead and gone, residential lien claimants need to move on, tweak their business practices and plan for better days ahead.