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Obtaining Relief Under Maryland’s Construction Trust Fund Statute

By January 24, 2020 Construction Law

C&B Construction, Inc. v. Dashiell.

Maryland’s construction Trust Fund Statute has long been a comforting and reliable tool for subcontractors seeking payment from an upper-tier contractor.  The Trust Fund Statute requires general contractors and upper-tier subcontractors to hold the money received on account of a subcontractor in trust for that subcontractor.  The express purpose of this trust is to ensure that lower-tier subcontractors actually receive monies paid for work which they performed.  The Trust Fund Statute incentivizes compliance by upper-tier contractors as officers and directors of a general or upper-tier contractors are personally liable under the statute for any money subject to the statute that is not paid to the subcontractors.

On July 30, 2018 the Court of Appeals issued its decision in C&B Construction, Inc. v. Dashiell, which altered the landscape for subcontractors and material providers seeking relief under the Trust Fund Statute.  This decision has raised the bar in terms of the availability of relief under the Trust Fund Statute and has created ambiguity regarding how subcontractors are to proceed under it.

The Applicability Provision

The Trust Fund Statute includes an applicability provision, which states at that “this subtitle applies to contracts subject to Title 17, Subtitle 1 of the State Finance and Procurement Article, known as the ‘Maryland Little Miller Act’, as well as property subject to § 9-102 of this title,” i.e., the Maryland Mechanics’ Lien Law.  This means that, for a subcontractor to recover money under the Trust Fund Statute, the property upon which the work was performed had to either be public property subject to the Maryland Little Miller Act or private property subject to the Maryland Mechanics’ Lien Law.

Prior to C&B Construction, the conventional wisdom and practice was that the Trust Fund Statue protected subcontractors on all construction projects except for those projects expressly excluded in the applicability provision.  Moreover, as a matter of practice, subcontractors seeking to assert a claim under the Trust Fund Statute neither alleged nor proved, as a foundational matter, that the property upon which the work was performed was either public property subject to the Maryland Little Miller Act or private property subject to the Maryland Mechanics’ Lien Law.  This practice was challenged in C&B Construction.

C&B Construction, Inc. v. Dashiell   

C&B Construction, Inc. was a subcontractor to Temco Builders, Inc. on six different construction projects.  C&B was not paid by Temco on those projects despite Temco having received payment from the project owners for C&B’s work.  C&B alleged that Temco either diverted or misappropriated the funds which were due to it, and sought to hold the officers of Temco, Messrs. Dashiell and Maguire, personally liable for the misappropriated funds under the Trust Fund Statute.

At the close of C&B’s case, Messrs. Dashiell and Maguire moved for judgment in their favor arguing that C&B did not produce any evidence that the construction projects at issue were subject to the Maryland Mechanics’ Lien law or the Maryland Little Miller Act.  The trial court agreed, and entered judgment in favor of Messrs. Dashiell and Maguire.

C&B appealed to the Court of Special Appeals, which affirmed the trial court’s judgment and held that a plaintiff seeking to impose liability under the Trust Fund Statute is required, as part of its case in chief, to prove that the property upon which the work was performed was subject to the Maryland Mechanics’ Lien Law or the Maryland Little Miller Act.  The Court of Appeals granted C&B’s petition for writ of certiorari, and affirmed the judgment in the trial court and the Court of Special Appeals’ holding.

The Court of Appeals first confirmed that the purpose of the Trust Fund Statute was “to protect subcontractors from dishonest practices by general contractors and other subcontractors for whom they might work.”  In keeping with this purpose, the Trust Fund Statute imposed personal liability on the directors, officers and managers of the contractor corporation if they violated its provisions.

The Court of Appeals then assessed the language and context of the Trust Fund Statute, finding that the plain language of the applicability provision clearly evidenced the legislature’s intent to limit the application of the Trust Fund Statute only to contracts covered under the Maryland Mechanics’ Lien Law or the Little Miller Act.  As such, the Court of Appeals held that, contrary to prior practice, plaintiffs seeking relief under the Trust Fund Statute must allege and prove that the property upon which the work was performed was subject to either the Maryland Mechanics’ Lien Law or the Maryland Little Miller Act.

Interestingly, the Court of Appeals spelled out what a plaintiff would have to allege and prove in order to establish that the property upon which the work was performed was subject to the Maryland Little Miller Act or the Maryland Mechanics’ Lien Law:

To seek relief under [the Maryland Little Miller Act], a claimant must demonstrate that the requirements of State Finance and Procurement Article § 17-108 have been satisfied.  The provision states that a supplier may bring suit if: (1) the supplier provided labor or materials for a contract subject to this subtitle; and (2) have not received payment within 90 days.  See State Finance and Procurement Article § 17-108.  In the case at bar there have been no submissions, which indicate that the underlying contracts were public in nature.  Moreover, Petitioner has not demonstrated that the requirements of State Finance and Procurement Article § 17-108 have been satisfied.  Therefore, we find that the underlying contracts are not subject to the Maryland Little Miller Act.

Similarly, Petitioner has not demonstrated that the contracts at issue are subject to the Maryland Mechanics’ Lien Statute.  As stated, the Maryland Mechanics’ Lien Statute only applies to contracts that satisfy all the statutory requirements of Real. Prop. § 9-101 et seq.  The statute requires specifically that the building be “improved to the extent of 15 percent of its value….” Real Prop. § 9-102.  Further, the subtitle requires that a petition be filed to establish the lien outlining the nature of the work done including the materials furnished, a description of the land, as well various other facts.  See Real Prop. § 9-105(a).  Taken together the establishment of a mechanics’ lien can only occur where the work or materials provided increase the value of the land and where a valid petition has been filed.  Turning to the contracts at issue, Petitioner has not demonstrated that the basic requirement of the Maryland Mechanics’ Lien Statute has been met, i.e. that the contracts improved the respective buildings by 15 percent of their original value.  In this regard, the trial court after detailed review of the evidence determined that no evidence supported a finding that the buildings were improved by 15 percent of their original value.  We agree.  Petitioner has not demonstrated that the Maryland Mechanics’ Lien Statute applies.

As will be discussed, requiring plaintiffs seeking relief to comply with the requirements of the Maryland Mechanics’ Lien Law as a condition precedent to the availability of relief under the Trust Fund Statute creates a significant burden and barrier to obtaining relief under the Trust Fund Statute.

Maryland’s Little Miller Act and Mechanics’ Lien Law: A Brief Overview

Maryland’s Little Miller Act, provides a remedy by which suppliers may recover outstanding funds for labor or material owed on public construction projects.  It requires prime contractors on public project to provide a payment bond protecting suppliers who, because of the doctrine of sovereign immunity, are precluded from obtaining a mechanics’ lien on public property.  Certain suppliers who are not paid for labor or materials rendered within 90 days are allowed to file a claim against the Little Miller Act payment bond, and 2nd tier sub-subcontractors and 3rd tier suppliers are also required to provide a notice of claim to the contractor within 90 days after the last date that the labor or materials were rendered to the project.

Maryland’s Mechanics’ Lien Law, provides a remedy by which subcontractors may recover outstanding funds for labor or material owed on private construction projects.  However, the Maryland Mechanics’ Lien Law only applies in limited and well defined situations:  For improvements to existing buildings, the value of the improvements must be at least 15% of the value of the existing improvement.  For improvements to existing buildings made at the direction of a tenant, the value of the improvements must be at least 25% of the value of the existing improvement.  New construction is not subject to these value limitations.  In addition, the procedure to obtain a mechanics’ lien is dictated by statute, is complicated, somewhat burdensome, and strictly enforced such that a subcontractor’s failure to properly comply with any of the statutory requirements will render the mechanics’ lien invalid.  Accordingly, a subcontractor is required to file a notice of intent to claim a lien within 120 days following the last date that the subcontractor rendered labor or materials to the property.  The notice has to contain certain information set forth in the statute, and be personally served on the owner or posted on the property.

Once a compliant notice of intent to claim a lien is properly served or posted, the subcontractor has to file a petition to establish a mechanics’ lien in the circuit court having jurisdiction over the property.  The petition has to be filed within 180 days following the last date that the subcontractor rendered labor or materials to the property.  The statute sets forth five factual allegations which must be included in the petition as well as two items that must be appended as exhibits to the petition.  Suffice it to say that complying with the requirements of the Maryland Mechanics’ Lien Law is burdensome and costly, which makes it all the more curious that the Court of Appeals would require a subcontractor to jump through all of these hoops as a condition precedent to obtaining relief under the Maryland Trust Fund Statute.

Questions Raised by C&B Construction

Subcontractors on public projects who seek relief under the Trust Fund Statute have to make sure that they allege and prove that the project is subject to the Maryland Little Miller Act—a relatively easy burden to bear.  As the Court of Appeals stated, “a claimant must demonstrate that the requirements of [Md. Code Ann., State Fin. & Proc. § 17-108] have been satisfied.  The provision states that a supplier may bring suit if: (1) the supplier provided labor or materials for a contract subject to this subtitle; and (2) have not received payment within 90 days.”

Subcontractors on private projects, on the other hand, will have a much more difficult time finding relief under the Trust Fund Statute in light of C&B Construction.  For subcontractors working on new construction, the Trust Fund Statute complaint should contain allegations that the construction was new and that the property is subject to the Maryland Mechanics’ Lien Law.  For subcontractors working on renovations or improvements of existing buildings, the burden becomes a bit more difficult as proving that the work improved the value of the property by 15% (or 25% in a tenancy situation) is often challenging, especially when the original value of the property prior to the commencement of construction is disputed.  Nevertheless, whether the project is new construction or an improvement, these allegations and proofs will only satisfy the first prong of the Court of Appeals’ analysis:  “[t]aken together the establishment of a mechanics’ lien can only occur where the work or materials provided increase the value of the land….”

It is the second part of the analysis, “and where a valid petition has been filed” that is problematic.  Did the Court of Appeals intend to require a subcontractor seeking relief under the Trust Fund Statute to actually go through the entire mechanics’ lien process simply to obtain Trust Fund Statute relief?  Or, could this prong be satisfied by a subcontractor alleging and proving that it could have obtained a mechanics’ lien should it have chosen that avenue of relief?  The answer to this question has significant consequences.  First, because of the numerous statutory requirements that have to be strictly complied with in order to file the mechanics’ lien petition and because the mechanics’ lien case has a show cause hearing early on in the process, obtaining a mechanics’ lien is costly, and complying with the mechanics’ lien requirements will make it expensive to obtain Trust Fund Statute protection.  In addition, subcontractors may have strategic or business considerations which dictate whether or not the filing of a mechanics’ lien is warranted.  A subcontractor might have a business relationship with an owner which would become awkward should it be required to file a mechanics’ lien, or the amount at issue might make the filing of a mechanics’ lien economically unwise.

An overriding question is why would the Court of Appeals require a plaintiff seeking relief under the Trust Fund Statute to involve the owner of the property in the dispute by filing a mechanics’ lien petition?  The Trust Fund Statute is supposed to protect against higher tier contractors misusing funds paid for the subcontractors’ benefit.  Why should the owner have to suffer the consequences of a mechanics’ lien being filed against its property because of its contractor’s malfeasance?  It is noted that, when addressing the availability of Trust Fund Statute relief on public projects, the Court of Appeals did not require the plaintiff to actually file a claim against the contractor’s Little Miller Act surety.  Rather, the Court of Appeals stated that the claimant must simply allege and demonstrate that it provided labor or materials to a project which is subject to the Little Miller Act, and that it had not been paid for 90 days.  As such, why would the Trust Fund Statute claimant on a public project not be required to file a claim against the contractor’s Little Miller Act surety while the Trust Fund claimant on a private project is required to file a mechanics’ lien claim against the property owner?

Ideally, the legislature will resolve these uncertainties in the near future by clarifying the relationship between the Trust Fund Statute, the Maryland Little Miller Act, and the Maryland Mechanics’ Lien Law.  In the interim, lawyers representing subcontractors seeking relief under the Trust Fund Statute are advised, in an abundance of caution, to not only allege and prove that the property upon which the work was performed was subject to either the Maryland Little Miller Act or the Maryland Mechanics’ Lien Law, but also to comply with the requirements of the Maryland Mechanics’ Lien Law by providing a statutorily compliant notice of intent to file a lien within the requisite time period, and including with the Trust Fund Statute claim a statutorily compliant and timely petition to establish a mechanics’ lien.

Eli Robbins

Author Eli Robbins

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