Selby v. Williams Construction Services

SHARER, J. In this appeal we are asked to decide the propriety of a personal judgment entered against the managing agent of a corporation under the Maryland construction trust statute, Md.Code, Real Property, §§ 9-201, et seq. (2000 RepLVol.). David W. Selby, appellant and Selby Construction, Inc., were sued by appellee, Williams Construction Services, for money damages. The Circuit Court for Prince George’s County entered judgment in favor of Williams and against Selby Construction and David Selby, jointly and severally, in the amount of $70,550.69.

In this appeal, David Selby raises a single issue, which, as rephrased, is: ⁵⁶ Whether appellant is personally liable under the Maryland Construction Trust Statute for an obligation owed by Selby Construction, Inc. to appellee. For the reasons that follow, we shall reverse the judgment of the circuit court. BACKGROUND David Selby is the owner, president, and sole shareholder of Selby Construction, Inc., a company engaged primarily in the performance of concrete and related construction. As such, Selby meets the definition of “managing agent” in Real Prop. § 9-201(a).

In the performance of its specialty work, Selby Construction leased heavy construction equipment from appellee, Williams. H.R. General Maintenance Corp. (“HRGM”), a general construction company, entered into a contract with Prince George’s County, Maryland, as the general contractor on a project involving the Cheverly Health Center. HRGM then subcontracted with Selby Construction to perform concrete work at the project. On March 22, 2002, Selby Construction entered into an agreement with Williams in which Williams agreed to provide equipment, materials, and services to Selby Construction.

At the end of the project, not having been paid in full, Selby Construction filed suit against HRGM, claiming that it was owed $205,000. In a separate action, Williams filed suit against Selby Construction and David Selby, alleging that its account with Selby Construction on the Cheverly project was unpaid in the amount of $70,550.69, for crane rental and associated services. In addition to a claim that Selby Construction had breached its contract by “failing and refusing to remit payment,” Williams also sought to hold David Selby personally liable under the construction trust statute. The parties stipulated to the entry of judgment in favor of Williams against Selby Construction, and judgment was entered accordingly for $70,550.60.

Contested was whether Selby should be personally liable to Williams under the con ⁵⁷ struction trust statute. On March 30, 2006, the circuit court entered a judgment holding Selby personally liable to Williams. Selby filed a motion to alter or amend, requesting that the court provide reasoning to support its opinion. The motion was denied on April 20, 2006.

Selby then filed a timely appeal to this Court, contending that the circuit court erred by failing, pursuant to Md. Rule 2-522(a), “to provide a statement of reasons for its decision and the basis for determining any damages in support of its judgment against Selby [individually].” This Court remanded, directing the circuit court to state its reasons in support of its judgment Selby v. Williams Const., No. 548, Sept. Term 2005, 172 Md.App. 724 (filed February 21, 2007, unreported). The circuit court issued a memorandum opinion on February 22, 2007, stating: ORDERED that Judgment is entered in favor of [appellee] and against [appellant] in the amount of $70,550.69, jointly and severally with co-defendant Selby Construction, Inc., because: 1. [Appellant] testified that he was the sole officer, director, shareholder and managing agent of Selby Construction, Inc., and that he personally handled all receipts, disbursements and invoices of the corporation; 2. [Appellant] received, on behalf of Selby Construction, Inc., all payments from the general contractor, HRGM Corporation, and was responsible for disbursing those funds to subcontractors, including [appellee], pursuant to invoices received; 3. [Appellant] failed to explain why he did not disburse funds to [appellee] from those received from HRGM Corporation, but explained only that the funds received from HRGM Corporation were insufficient to satisfy invoices of all subcontractors, signifying commingling of funds due subcontractors; 4. [Appellee] established that it satisfactorily completed work on its subcontract with [appellant], and that [appellant] owed it $70,550.69; ⁵⁸ 5. Therefore, [appellee] established, by a preponderance of the evidence, that HRGM Corporation paid [appellant] funds to be held in trust for [appellee] as [appellant’s] subcontractor, as required by MD.Code Anno., Real Prop. Art., § 9 — 201(b)(2), and that [appellant’s] admitted personal knowledge of these circumstances entitles [appellee] to judgment against him, pursuant to Real Property Article § 9-203.

Selby has again appealed, asserting that the evidence before the circuit court was not sufficient to establish personal liability. We shall set forth additional facts as they become necessary. DISCUSSION When, as in the instant case, an action has been tried without a jury, we review the case on both the law and the evidence, and will not set aside the judgment of the trial court on the evidence unless it is clearly erroneous. Md. Rule 8 - 131(c).

The Maryland Construction Trust Statute 1 This appeal implicates the Maryland construction trust statute, Md.Code, Real Prop. § 9-201, et seq. Entitled “Moneys to be held in trust; commingling,” the statute provides: (a) For the purposes of this subtitle, “managing agent” means an employee of a contractor or subcontractor who is responsible for the direction over or control of money held in trust by the contractor or subcontractor under subsection (b) of this section. (b)(1) Any moneys paid under a contract by an owner to a contractor, or by the owner or contractor to a subcontractor ⁵⁹ for work done or materials furnished, or both, for or about a building by any subcontractor, shall be held in trust by the contractor or subcontractor, as trustee, for those subcontractors who did work or furnished materials, or both, for or about the building, for purposes of paying those subcontractors. (2) An officer, director, or managing agent of a contractor or subcontractor who has direction over or control of money held in trust by a contractor or subcontractor under paragraph (1) of this subsection is a trustee for the purpose of paying the money to the subcontractors who are entitled to it.

(c)(1) Nothing contained in this subtitle shall be construed as requiring moneys held in trust by a contractor or subcontractor under subsection (b) of this section to be placed in a separate account. (2) If a contractor or subcontractor commingles moneys held in trust under this section with other moneys, the mere commingling of the moneys does not constitute a violation of this subtitle. Williams’s Contentions To impose personal liability on Selby, Williams relies on Real Prop. § 9-202: Any officer, director, or managing agent of any contractor or subcontractor, who knowingly retains or uses the moneys held in trust under §§ 9-201 of this subtitle, or any part thereof, for any purpose other than to pay those subcontractors for whom the moneys are held in trust, shall be personally liable to any person damaged by the action. As we have noted, the circuit court agreed with Williams’s application of § 9-202: [Appellant] failed to explain why he did not disburse funds to Plaintiff from those received from HRGM Corporation, but explained only that the funds received from HRGM Corporation were insufficient to satisfy invoices of all sub ⁶⁰ contractors, signifying commingling of funds due subcontractors.

Selby’s Contentions In contrast, Selby argues that “[njeither of these provisions [of the trust statute] impose[ ] personal liability on an officer, director or managing agent merely because there are insufficient funds available to pay subcontractors to a general contractor or sub[ ] subcontractors to a subcontractor.” On this record, we agree and explain. The trust statute was enacted in 1987 “to protect subcontractors from dishonest practices by general contractors and other subcontractors for whom they might work.” Ferguson Trenching Co., Inc. v. Kiehne, 329 Md. 169, 174-175 , 618 A.2d 735 (1993). The statute imposes a trust upon the performance of an act (the payment of funds) irrespective of the intentions of the parties. As a result, it is a trust implied in law.

In re Holmes, 117 B.R. 848, 852 (Bankr.D.Md.1990). In its original incarnation, the statute provided that diversion or misapplication of funds was prima facie evidence of an intent to defraud parties to whom funds were due under construction contracts. Real Prop. § 9-203 provided: The use by a contractor or subcontractor or any officer, director, or employee of a contractor or subcontractor of any moneys held in trust under §§ 9-201 of this subtitle, for any other purpose than to pay those subcontractors who did work or furnished materials, or both, for or about the building, shall be prima facie evidence of intent to defraud in a civil action. Section 9-203 was amended out of the statute in 1995, and the legislature, at the same time, enacted what is now codified as Real Prop. § 9-201(b)(2): [A]n officer, director or managing agent of a contractor