End of fund expected to hurt residents


By Mike Scott
Legal News

The possible abolishment of a state-run construction fund designed to protect homeowners could have an adverse impact on residents around the state, costing them hundreds of thousands of dollars, according to legal experts. Yet even if this fund is not abolished, the fact remains that it is currently insolvent, and there may be no legal solution in sight.
The Michigan Homeowner Construction Lien Recovery Fund was created as a way to protect homeowners around the state. Enacted under Part 2 of Public Act 497 of 1980, as amended, this fund provides protection when the homeowner, has in good faith, “paid their licensed contractor for materials and labor and the contractor failed to compensate materials men, subcontractors, and/or laborers.”
Since mid-October 2009, the fund within the Department of Energy, Labor & Economic Growth became insolvent.
It has no current mechanism for securing funds sufficient to allow it to continue to defend the several hundreds of lien claims in approximately 275 lawsuits that were outstanding at the end of 2009.
As of March 4, the balance of the Construction Lien Recovery Fund was fully encumbered. According to the Department of Energy, Labor & Economic Growth’s Web site, it is seeking to repeal the fund through legislative action.
“As long as the statutory provisions of the fund are in place, the fund is statutorily required to continue to collect the fund revenue through the licensure process in addition to restitution payments to the fund. This anticipated revenue is simply not enough to sustain the viability of the fund,” the Web site states.
Rep. Richard Hammel (D-Mt. Morris Township) last month introduced a series of connected bills, HB 5830-5835 that would abolish the Lien Fund and delete references to the fund from a variety of related states.
Hammel admits being aware of the adverse impact this will likely have on homeowners but said without any other source of stable revenue, there is no choice but to abolish it.
“The problem with the fund is that it is supported by fees that builders pay but those fees are at the same level they were 30 years ago,” said Hammel. “No one wants the fees raised and if we keep them at the level they are, we can’t possibly pay for the fund with inflation.”
The issue though is that homeowners, many of whom won’t be aware of the fund’s previous “safety net” impact, will bear the financial burden.
“It’s hard for me to determine the rationale for this bill, but I think that homeowners are the ultimate losers if this bill becomes law,” said Peter Cavanaugh, a member and principal attorney with Cavanaugh & Quesada, PLC in Royal Oak.
Cavanaugh’s practice is concentrated on business and construction law matters, including litigation, arbitration, and mediation of contract and property disputes, construction lien and surety bond claims, and disputes involving owners, contractors, subcontractors, and suppliers.
The funding problem for the fund stems from PA 497 of 2006, an amendment to the Michigan Construction Lien Act, which repealed Section 201(2) of the Act effective January 3, 2007, Cavanaugh said.
It eliminated the ability of the fund to make a $50 special assessment when the fund fell below $1 million.
Starting three years ago, the fund could only assess members a $10 annual renewal fee.
The program is funded through membership fee assessments on each new residential builder, maintenance and alteration contractor, electrical contractor, mechanical contractor and plumbing contractor licensed by the State of Michigan.
As the numbers of residential builders and other workers has fallen, so as the funding for the fund.
Beginning in 2006 and continuing through July 2009, the fund experienced an unprecedented increase in claims as the economy in Michigan worsened, and the state’s housing market formally collapsed.
The fund is currently involved in more than 250 pending lawsuits involving upward of 350 claims against it that total in excess of $18 million, Cavanaugh said.
By 2009, judgments against the fund have averaged $123,800 per month.
Late last year a reported $524,000 was all that remained in fund coffers. Hammel said approximately $8,000 is currently in the fund balance.
“As we all know the state’s general fund is in no position to subsidize the Homeowner Construction Lien Recovery Fund,” Hammel said. “I’d love to look at another alternative because I do anticipate homeowners will have some issues and will get stung (financially) by this.”
In the past, homeowners who had completely paid a contractor for construction or remodeling could still be required to pay subcontractors, suppliers or laborers in order to ensure protection against liens and subsequent foreclosure action.
The Construction Lien Act provides subcontractors, suppliers and laborers a means for remuneration while protecting the interests of homeowners.
Last fall, the fund sought to consolidate all 250 of the pending lawsuits into one proceeding in Macomb County and proposed a pro rata distribution of the remaining money among all the lien claimants.
Now that the fund has virtually been depleted, and may even be abolished based on possible legislative action, homeowners may have to pay twice because their protection against a lien will have disappeared, Cavanaugh said.
“Not having the fund doesn’t restrict the ability of an unpaid supplier to restrict the lien,” Cavanaugh said. “It puts a greater risk on the homeowner. There is still protection of suppliers’ lien rights.”
In the past if the fund made a payment to a supplier, the builder was required to reimburse the fund or be faced with the threat of a suspended license.
Lien claims have increased in recent years as builders have construction homes that weren’t sold. Some builders would fail to make payments to lower-tier subcontractors who might provide such services as concrete work, Cavanaugh said.
The fund would pay lien claims in those instances.
“A homeowner’s title insurance would only provide legal defense and isn’t able to pay lien claims,” Cavanaugh said. “Without a special assessment, or if the fund is abolished, homeowners will literally be on their own.”