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05/1999 |
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Paul S. Sugar Appeared in ABC Newsletter / Baltimore Chapter Contractors, read this article. Thinking upside-down may keep you from going out-of-pocket. Under the Maryland Trust Fund Statute, money paid by an owner to a contractor, or by a contractor to a subcontractor for construction services is held in trust by the party who received the money for the purpose of paying the party who performed the work. The trustees of the trust are the contractor's or subcontractor's officers, directors or managing agents who control the money. Ordinarily, the Statute is viewed as a remedy that a subcontractor can use against a contractor or its employees who refuse to pay the subcontractor. Stated another way, it is the unpaid party at a lower tier (i.e. the party somewhere down the payment food chain) who normally seeks enforcement of the Statute against an upper tier party who has failed to make payment. The language of the Statute, however, states that any managing agent, officer or director who uses the trust money for any purpose other than to pay the subcontractor for whom the money is held in trust, "shall be personally liable to any person damaged by the action." Consider the following situation. A contractor pays a subcontractor. Part of that sum is owed by the subcontractor to a material supplier. Under the Statute, the subcontractor holds that money in trust for the supplier. The supplier is not paid and files a mechanics lien action against the owner's project. The contractor, because of its indemnity obligation to protect the owner from mechanics liens, pays the material supplier. Under these circumstances, not only can the contractor pursue the subcontractor for repayment, but because the contractor was "damaged by the action" it can also pursue the subcontractor's officers, directors or managing agents who were acting as trustees of the funds held in trust for the supplier. This is significant leverage when seeking payment from the subcontractor. Consequently, not only can the Statute work for subcontractors looking "uphill" for payment, but also can work for contractors looking "downhill" for reimbursement, i.e., thinking upside-down. |
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Ober, Kaler, Grimes & Shriver Maryland
Washington, D.C. Virginia
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