Mechanic’s Lien Update: Use of Trust Fund Statutes
It is never been easy for general contractors, subcontractors and suppliers to collect on their construction projects. This applies even if the remedy of a mechanic’s lien is applicable. But are there other ways of enforcing your receivables? In many cases the good news is that you have further ammunition.
This relates to the various trust fund statutes by some of the states. Under these statutes, monies paid from an owner to the general contractor are to be held in trust for the benefit of suppliers and subcontractors. In other words, they are funds earmarked for those lower tiered individuals. The money cannot be diverted or used for other purposes and must be specifically dispersed to those subcontractors for their portion of the work.
Why is this important? One of the reasons is that it gives you extra rights to enforce your receivables, other than a regular mechanic’s lien. If the money is to be held for your benefit, under a legal fiction, it is as if you are the beneficiary of a trust fund.
This means the general contractor cannot divert or use it for other purposes. For example, the money could not be used for other jobs, held indefinitely, or used for personal purposes.
The states of Maryland, New York, New Jersey, Illinois, Minnesota, Wisconsin, and Michigan have such trust fund statutes.
Typically, if there is satisfactory work and no bona fide dispute, the monies must be paid within 7 to 10 days. If not, there is a statutory breach. It comes with every heavy penalties which would be beyond that of a mechanic’s lien. For example, there can be personal liability, criminal action for diversion, interests or even punitive damages.
Also, if you hire an attorney, you can typically receive attorney’s fees under such statutes.
By all means collect under your mechanic’s lien, but also realize you have other remedies available.