Do Contractors Need to Open a Separate Account ? The Michigan Builder’s Trust Fund Act

Simon PLC Attorneys & Counselors – February 2024 Memorandum

Do Contractors Need to Open a Separate Account ? The Michigan Builder’s Trust Fund Act

Troy, MI. When a general contractor is paid a draw on a construction project, do they have to open a separate bank or trust fund account to hold the funds pursuant to the Michigan Builder’s Trust Fund Act?

The short answer is “no”, but general contractors: beware!

We recently resolved a litigation in which our general contractor client was accused by a homeowner of misappropriating a construction draw that was paid by the homeowner.  In the litigation, a claim was brought for violating the Michigan Builder’s Trust Fund Act (the “Act”) MCL 570.151 et seq.   In particular, the homeowner alleged the Act requires a general contractor to maintain a separate trust fund account to ensure that payments for materials and labor related to the construction project were properly disbursed.

The Act itself is brief.  It provides:  “In the building construction industry, the building contract fund paid by any person to a contractor, or by such person or contractor to a subcontractor, shall be considered by this act to be a trust fund, for the benefit of the person making the payment, contractors, laborers, subcontractors or materialmen, and the contractor or subcontractor shall be considered the trustee of all funds so paid to him for building construction purposes.”

The Act imposes a trust fund upon construction proceeds received by a contractor, which runs to the benefit of all of the contractor’s unpaid laborers, subcontractors and suppliers.  Livonia Bldg Materials Co v Harrison Const. Co, 276 Mich App 514, 518; 742 NW2d 140 (2007). 

Despite the allegations of the homeowner against our client, the Act does not mandate any special form of accounting for trust funds.  The Act only prohibits the use of construction project funds for something other than that particular construction project, like a jet ski or trip to Bali.  Courts in the State of Michigan have interpreted this as giving contractors discretion in handling trust funds.  As long as everyone providing labor and materials gets paid, commingling funds from different projects into one bank account is acceptable and not prohibited.  

However, contractors must beware.  If a subcontractor, laborer or materialman is not paid it can open up a general contractor to claims in court over the exercise of the contractor’s discretion.  Because there is no legislated standard of accounting for trust funds, the contractor may have difficulty defending the claim, even if payment was withheld for a valid reason. Similarly, the full contents of the account actually used will be open for discovery and detailed review. As a result, it is imperative for general contractors to properly account for funds received on construction projects and maintain meticulous accounting records in the event of a dispute with an owner, subcontractor, laborer or materialman occurs.  The better the records, the quicker a potential dispute can be either resolved or dismissed.

If you have any questions about the Michigan Builder’s Trust Fund Act, please contact the attorneys at Simon PLC Attorneys & Counselors.

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