In latest edition of The Wright Toolbox:
- Important Limitations on the Reach of the Maryland Construction Trust Statue
Important Limitations on the Reach of the Maryland Construction Trust Statue
The Maryland Construction Trust statute, Md. Code Ann. Real Prop. § 9-201 et seq., allows a lower tier subcontractor to sue individual officers, directors, or managing agents of a higher tier subcontractor or of the prime contractor in their personal capacity and obtain a judgment against them if the claimant can prove that the individual or individuals knowingly used construction contract funds improperly, such as to pay other company debts or personal obligations. This can be a particularly potent tool if the business entity at issue in the dispute is now in bankruptcy or out of business and effectively judgment-proof.
Recent appellate court decisions clarify that there are important limitations to the Construction Trust statute’s reach. First, by its terms, the statute applies only to private construction contracts that are subject to the Maryland mechanic’s lien statute or public construction contracts governed by the Maryland “Little Miller Act.” This eliminates application of the statute to any contracts with the federal government. In C & B Constr., Inc. v. Dashiell, 460 Md. 272, 190 A.3d 271 (2018), the Court of Appeals made clear that it would not expand the statute’s reach beyond its express terms, rejecting a claimant’s efforts to apply the statute where money was admittedly owed to the claimant on a number of private renovation/repair projects but the claimant had not offered evidence at trial that each building had been improved by 15 percent of its value, a threshold requirement for establishment of a valid lien under the Maryland mechanic’s lien statute.
In another recent case, an unpaid Maryland subcontractor filed suit against the prime contractor and some of the prime contractor’s officers and employees, asserting a violation of the Construction Trust statute as to the individual defendants. Although the construction project was located in Maryland, the prime contractor’s office was located in Virginia and all individual defendants were Virginia residents. In vacating default judgments against the individual defendants, the Court of Special Appeals held, in a case of first impression, that a Maryland court cannot assert personal jurisdiction under the Construction Trust statute over the agents of a non-resident corporation solely on the basis of alleged actions that they took in their capacity as the corporation’s agents outside of the State of Maryland, finding these actions insufficient to establish the “transacting business” in Maryland component required for exercise of jurisdiction under the Maryland’s long-arm jurisdiction statute and due process. Dominion Mech. Contr., Inc. v. E.C. Ernst, Inc., 2022 WL 873313 (Md. Ct. App. March 24, 2022).
While the Construction Trust statute remains a potentially valuable means of recovery for a construction contract payment default, as a statutory remedy, Maryland courts will strictly construe its terms. Before making a claim under the statute, a thorough review of the underlying facts and the statutory language is necessary to ensure that such a claim is valid under the circumstances.