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MD Trust Fund Provision
Do Maryland contractors have to hold funds paid for subcontractors in a trust?
In Maryland general contractors are required to hold any funds received on account of work done by a subcontractor in a trust for that subcontractor. This ensures that the subcontractors receive compensation for their work and the funds are not used for other purposes. This trust fund law only applies to projects that would be subject to Maryland’s Mechanic’s Lien stature or Maryland Little Miller Act. The statute expressly does not apply to contracts for the construction and sale of single-family residential dwellings and home improvement contracts by a contractor licensed under the Maryland Home Improvement Law. The claimant must show that the contract at issue is subject to either statute in order for recovery. The subcontractor must also show that the money that was paid to the general contractor was ear-marked for the subcontractor’s work. Subcontractor funds do not have to be kept in a separate account and are expressly allowed by the statute to be comingled.
It is important to keep track of these funds and avoid conflict with this statute as personal liability can attach to any officer, director, or managing agent of a contractor who knowingly retains or uses the funds for any purpose other than paying the subcontractor. There does not have to be a showing of fraudulent intent in the diversion of the funds. The only way to discharge this personal liability is through bankruptcy and the claimant would then have to show that there was actual fraud in order to avoid this discharge.
