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A builder can be arrested for using deposit money on another job. Under the Michigan Builders Trust Fund Act, taking funds from one project to cover costs on a different project is not just a civil matter it is a felony.
Most contractors have never heard of this law until a homeowner files a complaint, and suddenly they are facing criminal charges, potential prison time, and the end of their career.
The statute was designed to stop fraud in the construction industry, but its broad language and built-in presumption of guilt have turned it into a trap for contractors who never intended to defraud anyone.
The Michigan Builders Trust Fund Act has existed since 1931, but it remains one of the most dangerous and least understood laws in the construction industry. Under MCL 570.151, every dollar paid to a contractor becomes trust money the moment it hits their account.
The contractor is automatically a trustee, whether they know it or not, and the beneficiaries of that trust include every laborer, subcontractor, and material supplier engaged on that specific project.
This creates a legal reality that contradicts how most construction businesses actually operate. Contractors routinely commingle project funds. They use income from one job to cover expenses on another.
They pay overhead, insurance, and equipment costs out of general accounts that hold money from multiple clients. This is standard business practice across virtually every industry in America except construction in Michigan.
When a contractor does any of these things and a subcontractor or supplier goes unpaid, the contractor has not simply breached a contract. They have committed a felony.
The scenario plays out the same way over and over. A homeowner pays a deposit for a kitchen remodel. The contractor has another project running behind schedule, with subcontractors threatening to walk off.
The contractor uses part of the new deposit to pay old bills, intending to catch up once more payments come in. Then something goes wrong.
Any of these situations can turn a cash flow problem into a criminal investigation:
Once a complaint is filed, the prosecutor pulls bank records. They trace where the deposit went. If project funds ended up anywhere other than paying laborers, subcontractors, and suppliers on that specific project, the elements of the crime are met.
Embezzlement by contractor under this statute carries real prison time. The penalties laid out in MCL 570.152 include:
These penalties stack quickly when a contractor has been juggling funds across several active projects.
Each unpaid subcontractor or supplier can constitute a separate violation. A contractor who used commingled funds across three jobs and five unpaid vendors could face 15 separate felony counts. The math gets ugly fast.
Beyond the criminal penalties, the civil exposure compounds the damage. Michigan courts recognize a private cause of action under the Act, meaning victims can sue as well as press criminal charges.
When they do, they often add claims for statutory conversion under MCL 600.2919a, which allows for triple damages plus attorney fees.
A contractor who misappropriated $50,000 could face prison, a $5,000 fine, and a civil judgment exceeding $150,000 once the multiplier and legal costs are added.
And here is the final blow: debts arising from violations of the Builders Trust Fund Act cannot be discharged in bankruptcy. The contractor cannot even start over with a clean slate.
Many business owners believe that operating through an LLC or corporation protects them from personal liability. Under the Michigan Builders Trust Fund Act, that protection vanishes.
Michigan courts have consistently held that corporate officers, directors, and even employees can be held personally liable when they participate in misappropriating trust funds.
The leading case on this point, Livonia Building Materials Co. v. Harrison Construction Co., made clear that individuals who personally cause their corporation to violate the Act are personally responsible.
If a contractor writes the checks, makes the allocation decisions, or directs funds away from their intended purpose, they are on the hook personally, regardless of what entity name appears on the contract.
This personal exposure extends to civil liability as well. A subcontractor seeking payment can pursue both the construction company and its principals individually. When the company is insolvent which is often the case by the time these disputes reach court the individual becomes the only viable target.
Courts have rejected several arguments that contractors commonly believe should protect them.
When project costs exceed the contract price, contractors often argue they simply did not have enough money to pay everyone. The work cost more than anticipated, the owner did not approve change orders, or the original bid was too low.
Michigan courts have consistently held that this is not a defense. If the contractor received money and paid it out to anyone other than the protected parties on that project including themselves, their overhead, or vendors on different jobs they violated the Act.
The contractor was struggling financially, juggling bills to keep the business alive, and made difficult decisions under pressure. Courts do not care. The Builders Trust Fund Act does not contain a hardship exception.
A contractor who uses Project A funds to prevent Project B from collapsing has still committed a felony, even if the alternative was losing everything.
The statute does not require contractors to maintain separate bank accounts for each project. This is true. But the absence of a requirement to segregate funds does not excuse the failure to use funds properly. Contractors who commingle project money in a single operating account have simply made it harder to prove their innocence when things go wrong.
Perhaps the most frustrating reality for contractors is that good intentions provide almost no protection. The statutory presumption in MCL 570.153 means that the act of appropriating funds before paying protected parties is itself evidence of intent to defraud.
The contractor must overcome this presumption, not the prosecutor. The burden shifts the moment bank records show project funds flowing anywhere other than to subcontractors, laborers, and suppliers.
Despite the uphill battle, a contractor fraud lawyer can mount effective defenses depending on the facts.
Not all payments create trust obligations. The Act applies to building construction, and disputes sometimes arise over whether particular work qualifies. Additionally, payments made directly by a property owner to a subcontractor bypassing the general contractor may not be subject to the trust requirements at all.
If the contractor can show that funds actually were used for the specific project in question even if accounting was messy the appropriation element fails. Bank records, invoices, material receipts, and testimony about how money was spent become critical evidence.
The statutory presumption of intent to defraud is evidence, not proof. It can be rebutted. A contractor who can demonstrate legitimate business reasons for payment timing, documented cash flow problems with specific causes, and ongoing good-faith efforts to complete the work may convince a jury that no fraud occurred.
Criminal charges under the Act must be brought upon the complaint of any persons so defrauded. If the complainant was not actually defrauded if they received the work they paid for, or their claims are exaggerated the foundation of the prosecution weakens.
Contractors who understand the Builders Trust Fund Act can take steps to reduce their exposure.
Maintaining detailed records showing how every dollar from each project was spent creates a defense before one is ever needed. Segregating project funds into separate accounts even though not legally required eliminates the ambiguity that prosecutors exploit. Paying subcontractors and suppliers before taking profits or covering overhead keeps the payment priority straight.
When cash flow problems arise, contractors should communicate in writing with everyone involved. Document the reasons for delays. Explain when payment will be made and why. These contemporaneous records can later demonstrate good faith rather than fraudulent intent.
Most importantly, when a dispute emerges, such as when a homeowner threatens to go to the police, when a subcontractor mentions fraud, when anyone uses the word embezzlement, contact a defense attorney immediately. Early intervention can sometimes prevent charges from being filed at all.
The Act covers the entire building construction industry, including remodels, renovations, additions, and repairs. Any project involving laborers, subcontractors, or material suppliers can trigger trust fund obligations. The scope is broad enough to include a bathroom renovation, a deck replacement, or a roof repair not just ground-up construction.
Yes. The Act does not require that the contractor be fully paid before obligations arise. Once any payment is received, those funds become trust money. If the contractor uses that partial payment for anything other than paying protected parties on that project, a violation has occurred regardless of what the owner still owes.
Quality disputes do not automatically excuse nonpayment under the Act. If the contractor received funds for the project and used them elsewhere while the subcontractor remained unpaid, the statutory elements are met. The quality dispute might affect civil liability or provide context in a criminal case, but it does not eliminate exposure under the Builders Trust Fund Act.
No. The Act applies whenever a contractor receives payment for building construction purposes, regardless of contract structure. Design-build contractors who receive lump-sum payments that include both design and construction components must still use construction funds to pay construction-related laborers, subcontractors, and suppliers before any other purpose.
Potentially. Personal liability extends to anyone who participated in misappropriating trust funds. If a spouse signed checks, managed accounts, or made allocation decisions that resulted in the improper use of project funds, they could face criminal charges or civil liability. The corporate veil provides no protection, and family relationships provide none either.
The Michigan Builders Trust Fund Act turns routine business decisions into potential felonies.
If you are a contractor facing accusations of misappropriation, embezzlement, or fraud or if you sense that a dispute is heading in that direction you need defense counsel who understands both the law and the construction industry.
Ben Hall Law fights for business owners caught in statutes designed to presume guilt. Every contractor deserves representation that challenges weak evidence, dismantles improper presumptions, and holds prosecutors to their burden of proof. Contact Ben Hall Law today to discuss your case and protect your future.
