The Michigan Builders’ Trust Fund Act (“MBTFA”) creates liability for officers and employees of contracting companies; however, some confusion remains about what triggers that liability. The Michigan Court of Appeals recently clarified that individual liability is controlled by participation in the decision to act in a manner that violates the MBTFA. What that means for employees and officers is simple. If you participate in the retention, use, or distribution of project payments, you are at risk that a claim may be made against you personally in the course of a construction payment dispute. While you may not be able to control whether a claim is made, you can take simple steps to minimize your exposure and the cost of defending such a claim.
First, understand the MBTFA.
The MBTFA is a Michigan statute that prohibits using construction project payments for any purpose unless and until all of the subcontractors and suppliers you engaged for that project have been paid. In other words, the MBTFA prohibits, among other things, using progress payments, or parts thereof, to finance overhead, operating expenses, and unrelated project costs. What that means in a practical sense is that MBTFA liability can be triggered by something as simple as approving what bills are paid or signing a check. Understanding that you may be exposed to a MBTFA claim for doing your job is an important step.
Second, comply with the MBTFA.
The best way to prevent exposure to liability under the MBTFA is to comply with the MBTFA. But, MBTFA violations can happen inadvertently from poor business planning regarding operational finances and company capitalization. Complying with the MBTFA can be complicated and may seem impractical given the nature of the construction industry; however, accountants and attorneys with construction industry expertise can evaluate existing practices and help limit potential exposure.
Third, be prepared for potential MBTFA claims.
Obtain appropriate insurance coverage. One of the biggest dangers of an MBTFA claim is the defense cost. MBTFA claims are complex and typically require expert analysis to show that the MBTFA was not violated. As a result, such claims can get expensive quickly. Fortunately, defense costs may be insurable through a director’s and officer’s policy. Consulting with an insurance professional who understands the MBTFA is an important step toward being prepared for an unforeseen MBTFA claim.
Dealing with a MBTFA claim can be expensive and time consuming. Many construction industry professionals are not aware that they may be exposed to individual liability arising from their job. Professionals with expertise in the construction industry can assist with understanding, complying, and preparing for MBTFA claims. Being proactive about the MBTFA is simply good business.
If you found this article useful, you may also wish to read “The Michigan Builders’ Trust Fund Act – Understanding the Obligation.”