Maybe you remember the 1970’s “Saturday Night Live” broadcasts where Gilda Radner played a character called Roseanne Roseannadanna. Her skits would always start with the phrase: “A Mr. Richard Fetter from Fort Lee, New Jersey, writes…” Whereupon the question of the day would be answered comedically by Roseanne Roseannadanna. The question we have today, though, is not quite so funny. It comes from another Home Builders Association inquiring of our office and asks what might happen to a builder’s license if they and/or their corporation declared bankruptcy. There are many issues to deal with in regards to financial stability, but let’s discuss the ones that are most likely relevant to this inquiry:
A.Code Requirements:
MCL 339.2404(1) provides that “the department may require an applicant…to submit evidence of … financial stability.” The statutes do not further define what “financial stability” means, nor are there any judicial decisions or even an opinion of the Attorney General’s office which give guidance.
However, a builder could be subject to a complaint pursuant to MCL 339.2411(2)(l) by “becoming insolvent, filing a bankruptcy action, becoming subject to a receivership, assigning for the benefit of creditors, failing to satisfy judgments or liens, or failing to pay an obligation as it becomes due in the ordinary course of business.”
The Code further allows the Licensing Board to require that an applicant post a bond as part of his licensure. Assumedly a bankruptcy would terminate the bond and that, in turn, would terminate the license. In our area, bonds are extremely rare for residential builders, and are instead more common where you have builders constructing large, multi-family developments and for compliance with the out-of-state builders who may be granted a license in this State.
The practical realities of bankruptcy and its effect on your license, however, seem to be somewhat different.
B.Practical Effects:
In speaking with the Department of Labor and Economic Growth (now, Department of Licensing and Regulatory Affairs – “LARA”), none of them had ever heard of a complaint being filed by anyone but a homeowner regarding a builder becoming bankrupt. The import of a homeowner complaining to LARA would be that the bankrupt builder would undoubtedly have improperly diverted money given to the builder for payment to subcontractors, suppliers, and the like. The bankruptcy by the builder (and undoubtedly the liens that would be filed by the subcontractors and suppliers) would be the triggering event for complaint by the homeowner. But in the absence of a homeowner complaint, LARA is not likely to get involved.
It is odd that LARA would have the understandable requirement of financial stability, but be disinterested in this requirement unless a homeowner complains about it. Nevertheless, it appears that as long as a builder’s insolvency does not affect paying bills on any particular project, LARA is relatively uninterested in a builder’s bankruptcy, and indeed is not staffed to pursue such matters outside of direct complaints from homeowners. I want to caution that you certainly cannot consider this the “official” position of LARA.
C.Other Considerations:
As it relates to financial worries and consequences, let me point out one other thing to keep in mind. The diversion of funds or failure to account for money received but not paid over to the proper suppliers, subcontractors, etc., can also cause great trouble for a builder. In fact, depending on the circumstances, they could be charged with a felony for retaining or using proceeds or any part thereof for any other purpose than to first pay laborers, subcontractors, and materialmen. See MCL 570.152.
D.Conclusion:
As I write this, the financial markets have been turned upside-down in the last two weeks. The building industry, particularly in Michigan, has already taken a beating in the last year or two. As Roseanne Roseannadanna used to say, “It’s always something.” We will overcome these financial challenges, but in the meantime we are probably well served to be aware of the financial considerations and problems that might exist.
If any of you would like to discuss this with me in confidence, you are welcome to contact me.
Besides being a past President of the Home Builders Association of the Grand Traverse Area and a licensed contractor, Robert Whims is an attorney at Whims Legal Group, PLC, located at 12935 S. West Bay Shore Drive, Traverse City, MI 49684. Telephone: 231-938-6099; Facsimile: 231-421-6686; E-mail: rwhims@whimslaw.com