Home > Uncategorized > Contractors, Lawsuits, and Incarceration – Lessons from Local and National Headlines.

Contractors, Lawsuits, and Incarceration – Lessons from Local and National Headlines.

Contractor Sentenced Today to Imprisonment
Today the Department of Justice reported  that Roderic J. Smith, a subcontractor for the federal government, was sentenced to 48 months in prison for bribing a public official. See the press release here.
According to the press release:
Smith was the co-founder and president of a contracting company located in Chesapeake, Virginia, that sought contracting business from the United States Navy Military Sealift Command.   In approximately November 2004, Smith joined an extensive bribery conspiracy that spanned four years, involved multiple co-conspirators, including two different companies, and resulted in the payment of more than $265,000 in cash bribes, among other things of value, to two public official.
In local Grand Rapids news…
A local construction contractor is being sued by a customer, and didn’t appear in Court. You can visit the article here
This was happening a lot more in 2008 – 2010. I would say that it appears that the downturn in the economy weeded out a lot of the disreputable contractors and builders.
For most contractors, the risk isn’t quite that they are going to end up like Roderic Smith, but if contractors don’t have their procedures in order they run the risk of doing a poor job, or potentially violating Michigan law, including Builder Trust Fund Act violations, which come with criminal penalties.
A recent Sixth Circuit court of Appeals case high lights some of the complicating issues involved in a real estate development project.  The case is Performance Contracting Inc v DynaSteel Corp, No. 13-1364, 2014 WL 1663077 (CA 6 April 28, 2014)
I. Facts
“This case concerns the interplay between three parties:
  • a general contractor,
  • the owner of a power plant, and
  • a subcontractor.

The general contractor—and a defendant is DynaSteel, a company that had operations in Tennessee and Mississippi.

(Just to recap, 3 different parties involved in a project, involving multiple jurisdictions.)
The facts get a little complicated, as these cases usually are.   To summarize Consumers Energy paid DynaSteel over $2.9 million for DynaSteel’s work, but DynaSteel did not reimburse PCI for PCI’s work, owing PCI $1,542,890.
DynaSteel had also not reimbursed PCI for PCI’s work done on a few other projects,  Instead of paying PCI the remaining money it owed or segregating the funds into a separate trust, DynaSteel placed the funds it received from Consumers Energy into a general account in which DynaSteel allegedly comingled it with funds from other projects.

In sum, it ended up in one big mess.
Builders Trust Fund Act
The Builder Trust Fund Act is found at MCL 570.151 and provides that:
In the building construction industry, the building contract fund paid by any person to a contractor, or by such person or contractor to a subcontractor, shall be considered by this act to be a trust fund, for the benefit of the person making the payment.

Contractors: When you are paid for a job – the funds are to be held in “trusts” for the benefits of the person making the payment.
The  elements of a civil cause of action” under the Trust Fund Act as follows:
(1) the defendant is a contractor or subcontractor engaged in the building construction industry,
(2) a person paid the contractor or subcontractor for labor or materials provided on a construction project,
(3) the defendant retained or used those funds, or any part of those funds,
(4) for any purpose other than to first pay laborers, subcontractors, and materialmen,
(5) who were engaged by the defendant to perform labor or furnish material for the specific project.
Performance Contracting Inc v DynaSteel Corp, No. 13-1364, 2014 WL 1663077 (CA 6 April 28, 2014)
The possible penalties include reimbursement of amounts wrongfully converted, being convicted with a felony, incarceration, and fines. MCL 570.152.
Most people in business probably don’t start out with an intent to steal from their clients. As these headlines from local and national news demonstrate, some people do end up in those situations. I would imagine that it starts with simply cutting corners, and making small compromises. Then the small compromises add up and  one day you find yourself defrauding a home owner and violating the MBT, or serving a federal sentence for defrauding the federal government!
These are extreme examples, but now is the time to get your procedures and protections in order so that you know you are doing the right things with your business. Don’t make small compromises. Your reputation is too important to compromise.
email: jeshua@dwlawpc.com
Categories: Uncategorized
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