The very act of hiring work out on your construction project creates the potential for a lien.
The passage of the Michigan Construction Lien Act 497 of 1980 created the guidelines by which a lien was to be perfected. The Act protects both the owner of the real property that is to be improved, and also darn near everyone else involved in the project.
There are many reasons for a lien, and typically liens are placed by suppliers and subcontractors who haven’t been paid. General contractors usually get paid or work out their differences (usually overruns and unforeseen hiccups) with the owner. The general contractor’s lien is usually considered their last resort.
In many situations the contractor “forgets” to pay suppliers and subs. While there are laws that govern these situations, it usually takes a judge to decide that the act is fraudulent.
If you are in the courtroom, your competent attorney will pursue conversion under Michigan common law, which is loosely defined as “Any distinct act of dominion wrongfully exerted over another’s personal property in denial of or inconsistent with the rights therein.” The penalty pursued for claims of conversion are trebled damages (yes, three times the basis of the claim). Note that fraud and conversion typically are not dischargeable in bankruptcy court.
Note – I sued a contractor in district court for conversion and the judge said “Yes, there was fraud but it was only a little fraud”. He then ruled that the defendant could not be held individually responsible or accountable for his deeds. This ruling allowed the contractor to literally steal money from the supplier when in fact this contractor had no right to that which is called trust money.
The purpose of this article is to introduce the project owner to the concept of the Michigan Building Contract Fund Act 259 of 1931 (Michigan Builders Trust Fund Act). This Act was largely discounted until 1966 when a Supreme Court Justice ruled that the Act is relevant in civil courts.
The Michigan Builders Trust Fund Act 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.”
This is conceptually huge for you, the owner of the project. I urge you to ponder this for a moment, because in some ways this is like giving someone your checkbook.
If you have a project, understand that when you as an owner pay the person in charge of the project, much of that money is trust money. It doesn’t belong to him – not all of it anyway. You are entrusting him to pay everyone their just due BEFORE he pays himself.
If your payment to your contractor does not get disseminated to subs, materialmen, and workers, you could be liened. If you don’t think it could happen to you, consider the Act above was created eighty-one years ago. It was happening then, and it’s still happening today.
Thanks for your interest.