The Michigan Builders Trust Fund Act (MBTFA), MCL 570.151 et seq. was signed into law in the early years of the Great Depression to protect people from fraud and misappropriation of funds in the construction industry. During the booming 1920s, many builders undertook construction projects beyond their financial means. Those builders often financed materials and subcontractors for older projects with funds received for newer ones. When the Great Depression hit, the house of cards collapsed, and many subcontractors and suppliers were left unpaid. The Michigan legislature signed the MBTFA into effect in 1931, imposing a statutory trust on funds paid for private construction projects. The trust protects subcontractors, suppliers and owners from fraud and misappropriation of funds.
Evolution Through the Years – A Criminal Statute with Civil Liability
The MBTFA was originally passed as a criminal statute with no express civil cause of action. However, Michigan courts have routinely held that the MBTFA implicitly created a civil cause of action because it created a statutory trust for the benefit of others. In recent cases, the Michigan Court of Appeals confirmed the availability of civil remedies under the MBTFA, stating that “[t]he MBTFA is a penal statute, but our Supreme Court recognizes a civil cause of action for its violation.” Livonia Bldg Materials Co v. Harrison Const Co, 276 Mich App 514, 519; 742 NW2d 140 (2007). Thus, under the MBTFA, a contractor, subcontractor or corporate employee can be held personally civilly liable for fraud or misappropriation of funds paid for materials or services.
MBTFA Violation – A Party May Recover Three Times Their Damages
In the 2023 case Driver v. Corey, the Michigan Court of Appeals further expanded the scope of the MBTFA to apply to any person that collects payment for building contracts. In Driver, a residential builder (Corey) and his girlfriend (Bordeaux) entered into two agreements with two owners to renovate their homes. Bordeaux was not a party to the agreements but communicated with the homeowners and appeared to be part of Corey’s team. At Corey’s instruction, the homeowners paid over $50,000 directly to Bordeaux’s Venmo account. Corey and Bordeaux later spent that money at casinos and on lottery tickets, effectively completing no work on either job.
The parties filed suit claiming violations of the MBTFA. Bordeaux claimed that she could not be a party to the lawsuit, because she was not a contractor or subcontractor and therefore the MBTFA did not apply. The Court of Appeals rejected the argument and determined that Bordeaux was a subcontractor within the meaning of the MBTFA because she collected payments on a building contract. The fact that she was acting in her individual capacity and was not a party to the agreement did not bring Bordeaux outside the reach of the MBTFA. As a subcontractor, Bordeaux became a trustee of those funds when she accepted the payments and was in violation of the MBTFA when she appropriated those funds for her own personal use. The court further held that Bordeaux’s violation of the MBTFA gave rise to a claim for treble damages (three times the amount of damages) under MCL 600.2919a, which grants treble damages for stealing, embezzlement and conversion of property.
Major Takeaways
The MBTFA is intended to deter against fraud and misappropriation of funds. Potential criminal liability and the ability for an injured party to recover three times their damages, plus attorney fees, play central roles in that deterrence. All parties involved in a construction contract should meticulously record all incoming and outgoing funds, along with specific project expenditures. Careful attention to enforcement of contractual provisions — such as those requiring sworn statements and lien waivers — throughout the course of the project can prevent and mitigate issues down the road.
For questions or issues concerning the MBTFA or any other construction or real estate matter, please contact Mike Bovill or your Warner attorney.
2024 Summer Associate Early Stephens, Michigan State law student, contributed to this eAlert.
