- change ups
Dropping The Fraud Bomb
The changes state lawmakers made to the Construction Lien Act shouldn’t send reputable contractors scurrying for cover.
But fly-by-nighters might want to seek safe shelter or, at the minimum, wear an extra-large hard hat, because violating the 2007 version of the law will likely drop a lot of Circuit Court-active fallout on their heads.
“When I’m giving my lien saeminars, I always refer to it as the ‘atom bomb of collection actions.’ Because it gives the person filing the lien — whether it’s a contractor, a subcontractor, a supplier or a worker — an interest in the land, and can force the sale of the property to make sure they get paid,” said Bruce Courtade, a partner at Rhoades McKee and member of the firm’s construction law group.
The major changes made to the act affect lien waivers and sworn statements.
A sworn statement is a document that comes from a general contractor and goes to the owner of a project the firm managed. In it, the contractor swears that it has paid everyone who worked on the project and supplied materials to it. Once that document is filed, the property owner pays the contractor. So, obviously, the statement is vital for a contractor to collect its fee and for an owner to know that his project will be free of liens.
The statement is to be considered a truthful document but sometimes isn’t. Sometimes shady contractors have said everyone has been paid when they weren’t, and then collected their money. In the past, owners weren’t required to contact everyone a contractor claimed was paid. But starting this year, they must, as part of an effort to reduce fraud in the industry.
“(Owners) now have to contact all of the parties that are listed in that sworn statement to let them know they’ve received a sworn statement. Then (subcontractors) have to notify the owner whether they really have been paid,” said Courtade.
“So they’re on notice. If they haven’t been paid, they have 10 days to contact the owner,” he added.
Courtade has handled three false sworn statement cases over the past few years where contractors have said subs and suppliers had been paid, but in reality hadn’t, and the owners paid the contractors. So when, say, a subcontractor that hasn’t been paid files a lien against an owner for lack of payment, the owner uses the contractor’s sworn statement as a defense mechanism, which can often lead to a time-consuming and costly legal mess.
The change in the law does put an extra burden on the owners, who are responsible for notifying everyone. But it also should give owners some peace of mind to know that no one has been cheated out of their money and that they likely won’t be facing any lawsuits.
The law also requires that every firm involved in a project be involved in the process, which is important because some large projects have subcontractors paying other subs and that increases the complexity of a situation by creating more levels for dishonest action.
“Anybody who gets a sworn statement under this new change cannot lie on that sworn statement. They have a duty to contact people listed on the statement and notify them that they received the statement. It should protect everyone involved in a construction project and it should address the problem of fraudulent sworn statements,” said Courtade.
A change to the lien waiver — which is an acknowledgement from a firm that it has been paid for its work on a project and has no claim to a property — requires a firm to strictly adhere to the language required in the act.
The other change is just like the one made to the sworn statement. It, too, requires some form of notice to prevent fraud from occurring.
“In a lot of larger projects, the general contractor is required by the contract to provide lien waivers from all of its subs. And just like sworn statements where there are generals that file fraudulent sworn statements, there will be contractors who file fraudulent lien waivers indicating that their subs have been paid and wave their right to file a lien,” said Courtade.
Under the previous version of the law, owners relied on the waivers they received from subcontractors to deflect any legal action, and that often resulted in subs not being paid. That is what happened to a client Courtade recently represented.
A landscaper did his part in a project in which the contractor falsified lien waivers for the subs on the job. When the landscaper told the owner not to pay the contractor because he hadn’t been paid, he found out the contractor had already been paid. The owner paid the contractor, because he thought he had accurate lien waivers signifying that everyone on the job had been paid. Under the new law, an owner has to contact everyone on a lien waiver to make sure they’ve been paid.
“This law was addressed to attend to the situation,” said Courtade. “Before anybody pays on the reliance of a lien waiver, they have to shoot notice back to a person who allegedly signed a lien waiver.”
Falsifying a construction document is a felony in Michigan. The penalty for doing so ranges from up to a $2,000 fine and one year in prison to up to a $10,000 fine and five years in prison, depending on the amount of fraud involved.
Courtade said the Circuit Court isn’t flooded with these types of cases. But he said fraud usually goes up when the construction market slows down and money get tighter.
“The reputable contractors around town will not have any problem whatsoever with this law, even though it’s a little bit more of an administrative burden. But the reputable ones already have the systems in place so they know what to do and they know how to comply. And they do it all the time,” said Courtade.
“These laws, hopefully, are going to make life difficult for the fly-by-night operators.” CQ