Builders Trust Fund Act
Money paid on a construction project is not ordinary revenue. Michigan treats it as trust money, held for the people who actually performed the work.
Under Michigan's building contract fund statute, funds a contractor or subcontractor receives for a construction project are impressed with a trust for the benefit of the laborers, subcontractors and suppliers on that project. The recipient holds the money as a trustee. It may not be applied to other purposes until everyone who earned it on that job has been paid.
This is what makes the statute powerful. Ordinary nonpayment is a contract dispute against a company. A trust fund violation reaches the individuals who directed where the money went, can support personal liability for officers and owners, and carries criminal exposure as well as civil.
What a trust fund violation looks like
The pattern is familiar. A contractor is paid for a project, uses the money to cover payroll on a different job, to pay older debts, or to fund operations generally, and the subcontractors and suppliers on the project that generated the money go unpaid.
- Payment received on a project and applied to obligations from a different project
- Project funds used for general overhead, older debts or owner distributions while subs remain unpaid
- Retainage collected from the owner but never passed down after release
- Sworn statements representing that parties were paid when they were not
- A company that collects final payment and then winds down without paying the trades
Where an officer, member or owner directed the misapplication, they can face personal liability even though the contract was with the entity. That distinction matters most in exactly the situation where it comes up, which is when the company has no assets left.
Compared with an ordinary payment claim
| Contract claim | Trust fund claim | |
|---|---|---|
| Defendant | The contracting entity | The entity, and potentially the individuals who directed the funds |
| If the company is insolvent | Judgment is often uncollectible | A route to individuals may remain |
| Nature | Civil only | Civil, with criminal exposure under the statute |
| Bankruptcy | Generally dischargeable | Obligations arising from defalcation while acting in a fiduciary capacity may not be |
| Proof required | The contract and the unpaid balance | Receipt of project funds and their application elsewhere while the claimant went unpaid |
Defending a trust fund allegation
These allegations are also made loosely, attached to what is really an ordinary payment dispute in order to raise the stakes and reach an individual. A contractor facing one should take it seriously and should not concede it.
Genuine defenses exist. There may be a real dispute about whether the money was owed at all. The accounting may show the funds were in fact applied to the project. Overhead attributable to that project is not automatically a misapplication. And the allegation has elements that must actually be proven rather than assumed from the fact of nonpayment.
How these matters run
- Trace the moneyWhat was received on the project, when, and where it went. These claims are proven or defeated with records rather than argument.
- Identify the decision makersWho controlled the accounts and directed payment, since that determines whether individual liability is realistically available.
- Combine with lien and contract claimsTrust fund claims usually run alongside a lien and a contract claim rather than instead of them.
- Demand or filingA demand that correctly identifies the exposure resolves a meaningful share of these, because the individual exposure changes the calculation.
Questions about trust fund claims
The contractor's company has no money. Is it worth pursuing?
This is precisely the situation where a trust fund claim is worth examining. Where project funds were misapplied, there may be a route to the individuals who directed it, which an ordinary contract judgment against an empty company does not provide.
They filed for bankruptcy. Is my claim gone?
Not necessarily. Obligations arising from misuse of funds held in a fiduciary capacity are treated differently from ordinary debts and may survive a discharge. This needs to be raised properly and within the deadlines of the bankruptcy case, so it is time sensitive.
I am the contractor and I have been accused of this. How serious is it?
Serious enough to get advice immediately rather than responding on your own. The statute carries criminal as well as civil exposure and can reach you personally. It is also frequently overstated by claimants, and there are real defenses, but this is not a letter to answer without counsel.
Does this apply to residential work?
The statute applies to building construction contracts generally rather than being limited to large commercial projects. Whether it applies to your particular arrangement depends on the facts, and that is part of the initial assessment.
Project funds are held in trust, not earned on receipt.
[PHONE]Matters with a lien deadline, a filing deadline or a hearing already on the calendar are handled by phone.