Maryland Appeals Court Limits Application of Construction Trust Statute to Contracts Subject to Little Miller Act and Mechanics' Lliens

The Maryland Construction Trust Statute provides a powerful tool to prevent a dishonest contractor from merely closing up shop to avoid liability for its malfeasance. However, as a creature of statute, it is not without its limitations. In the recent decision of C&B Construction, Inc. v. Dashiell, 234 Md. App. 424 (2017), the Maryland Court of Special Appeals confirmed one of those limitations, namely that the Maryland Construction Trust Statute applies only to construction contracts that are subject to the Maryland Little Miller Act or the Mechanics' Lien Statute.

The case arose out of six construction projects in Maryland on which a subcontractor, C&B Construction, Inc. ("C&B"), performed drywall, ductwork, and other related construction work for a general contractor, Temco Builders, Inc. ("Temco"). Although Temco received payment from the owners for C&B's work, it failed to pay C&B. C&B alleged that Temco's officers used these funds to pay other subcontractors, purchase office supplies, and repay themselves for money invested in Temco. C&B filed suit against Temco for breach of the subcontract, as well as Temco's officers personally under the Maryland Construction Trust Statute, Md. Code Ann., Real Prop. §§ 9-201, et seq. Temco entered into a consent judgment with C&B in the amount of $225,607; however, the claims against Temco's officers proceeded to trial. At the conclusion of C&B's case, the trial court entered judgment against C&B on its Construction Trust Statute claim on the grounds that C&B had not introduced evidence that its subcontracts were subject to either the Little Miller Act or the Mechanics' Lien Statute.

On appeal, the Maryland Court of Special Appeals noted that the Construction Trust Statute was designed primarily to protect subcontractors from dishonest practices from general contractors or other subcontractors. This was the reason why the legislature made officers, directors, and managing agents within a contractor corporation personally liable if the agents used funds held in trust improperly. In order to glean whether C&B was required to prove at trial that it's subcontract was governed by the Little Miller Act or Mechanic's Lien Statute, the Court then performed a statutory analysis of three factors as applied to the Construction Trust Statute: its (1) text, (2) context and purpose, and (3) consequences. First, as to text, the Court held that RP § 9-204 limits the applicability of the subtitle to contracts subject to the Little Miller Act and the Maryland Mechanic's Lien Statute. No language in § 9-204 indicates applicability to contracts other than those subject to the Little Miller Act or the Mechanics' Lien Statute. Second, as to the context and purpose of RP § 9-204, the Court found that its reliance on definitions contained in the Mechanic's Lien Statute was a strong indicator that the legislature intended the statutes to be applies in similar circumstances. Since the Mechanics' Lien Statute does not provide a remedy for improvements on state-owned properties, the enactment of the Little Miller Act does provide protections to those subcontractors who perform work for certain public contracts. Therefore, the Construction Trust Statute applied to a broad range of both public and private construction projects. Third, as to possible consequences in applying the Construction Trust Statute, the Court discusses how an adoption of C&B's expansive viewpoint - that the Statute apply to all construction contracts - was not supported by the statutory language and would have consequences that the Legislature did not intend. After concluding its statutory analysis, and noting that all case law in Maryland rejected C&B's contention, the Court found that the Construction Trust Statute applies exclusively to contracts subject to the Little Miller Act or the Mechanics' Lien Statute.

For more information on the Maryland Construction Trust Statute, click here to read an article published by Robert J. Dietz of our firm in the Maryland Bar Bulletin.

Categories: Legal Updates