One of the quickest and most common ways a contractor or subcontractor can get into big trouble is by not being careful with their money. I am not referring to how they pay their personal bills or perhaps set up their pension funds. What I am talking about is the money they are paid for specific projects or jobs. It is easy to get into a “borrow from Peter to pay Paul” mindset. The lines can become very blurry as it relates to which money is for which project. Unfortunately, and much like a game of musical chairs, if and when the music stops there is going to be quite a crash. Any contractor can experience cash-flow problems, but the cash they receive from customers and homeowners must receive your highest priority of care.
Specifically, our laws in the State of Michigan provide that any fund paid by any person to a contractor or subcontractor:
“. . . shall be considered . . . to be a trust fund, for the benefit of the person making the payment, contractors, laborers, subcontractors or material men, and a contractor or subcontractor shall be considered the trustee of all funds so paid to him for building construction purposes.” (MCLA 570.151)
Now, it seems simple enough that if you get paid for one project, you will cut checks to your various subs and/or materialmen. The difficulties arise when you have multiple jobs going or when cash flow is squeezed. The temptation is to merely pay the bills that present themselves and leave others for later, figuring that the money will come in at some point. However, if you use “Project 1” funds to pay for anything other than a “Project 1” expense, you could be committing a felony. MCLA 570.152 provides, in part, that it is a felony to appropriate “such funds to [the builder’s] own use while any amount for which he may be liable or become liable under the terms of his contract for such labor or material remains unpaid[.]” Penalties for violation of this act are up to $5,000 in fines and three (3) years in state prison.
That is an awfully stiff consequence for what could be a very infrequent and minor issue. The importance of discipline when handling your money cannot be overstated. One other item worth noting is that a corporate employee or official can be personally liable for criminal acts, even if it is on behalf of the corporation. Even if a builder has taken the time to incorporate, they are not immune from prosecution or civil suit even though they may only move the money around in the name of the corporation.
Every one of us knows another builder who we think might be a little fast and loose with their money. We all know a builder who has some leftover bills from a project and who is also temporarily short of cash but knows the next job is coming. Try not to be one of those builders, because it could mean big trouble for you or your company.
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