This month we start with a case from the Ohio Court of Appeals for Jefferson County. The Court was asked to determine if an independent contractor who creates a hazard can rely on the open and obvious doctrine as a defense to a third-party negligence claim. The Court held that the open and obvious doctrine applies to landowners and does not apply to independent contractors. Our second case this month comes from the Bankruptcy Court for the Eastern District of Michigan, Southern Division. A contractor filed for bankruptcy and sought to have a $77,000 debt to a material supplier completely discharged through the bankruptcy. The key point was whether or not the material supplier could prove it supplied materials to specific projects on which the contractor worked.

The Open and Obvious Doctrine Does Not Protect Independent Contractors From Liability

When a contractor excavates during a project, there is always the chance that the public may be exposed to danger—especially where the contractor takes inadequate measures to protect the public from a dangerous situation. When construction results in a potentially dangerous situation that is open and obvious, the owner of the property is not always held liable for injuries resulting from that danger.

In Wakefield v. John Russell Construction Co., 2010 Ohio App. LEXIS 1072, the Court of Appeals of Ohio, Seventh Appellate District, reviewed an injury case where a contractor claimed that the danger was open and obvious and, therefore, it should not be held liable for a pedestrian’s assumption of risk. At issue, was whether an independent contractor may use the open-and-obvious doctrine to avoid liability for injuries to a pedestrian.

In Wakefield, a pedestrian crossed through a construction area to enter a building. A contractor had previously excavated a trench around the building. The trench was 12 inches wide and 16 to 18 inches deep. When the pedestrian tried to step over the trench, she lost her balance, fell, and was injured. As a result of her fall, a cast was placed on her left arm and she faced two surgeries and physical therapy.

The pedestrian claimed the contractor was negligent per se for failing to follow a City ordinance to protect the trench. A city statute required all openings and obstructions to be “carefully guarded, protected or barricaded at all times.” The statute also required excavations to be protected by means of backfill, steel plates, or through a method acceptable to the City Engineer. In addition, she claimed the edge of the trench that gave way when she stepped on it was a dangerous condition and was not open and obvious.

The contractor claimed the “open-and-obvious” doctrine as a defense. The open-and-obvious doctrine provides that property owners “owe no duty to people who enter their premises where there is an open and obvious danger.” The basis of the doctrine is that the open and obvious nature of the danger presents a warning to persons entering the premises. The property owner should reasonably expect that a person entering the premises will discover the danger and take measures to protect themselves.

The Court reviewed a Supreme Court case where a contractor created a hole in a bridge and a pedestrian was injured when he fell through the hole. The Supreme Court held that “[a]n independent contractor who creates a dangerous condition on real property is not relieved of liability under the doctrine which exonerates an owner or occupier on land from the duty to warn those entering the property concerning open and obvious dangers on the property.”

When an independent contractor is involved, the issue of whether the danger is open and obvious is an issue that may be considered in the comparative negligence analysis to determine the degree of liability for each party involved in the matter, but not in determining whether the contractor was negligent for a failure to warn.

An owner, or a person with interest in the property, may avail themselves of the open-and-obvious doctrine; however, a person with no property interest who conducts activities on the property with the owner’s consent (such as an independent contractor) may not use the open-and-obvious doctrine to avoid liability.

A Failure to Adequately Connect Materials to Specific Projects May Result in a Dischargeable Bankruptcy Debt Under the Michigan Builders Trust Fund Act

The Michigan Builders Trust Fund Act provides a mechanism to protect laborers, subcontractors, and materialmen from a contractor’s failure to pay. When a contractor finds it difficult to stay afloat and files bankruptcy, material suppliers may have a hard way to go when collecting unpaid balances if they do not maintain business practices in line with the Act.

In Astro Building Supplies, Inc. v. F & C Construction, 2010 Bankr. LEXIS 833, the United States Bankruptcy Court for the Eastern District of Michigan, Southern Division, determined whether a debt owed to a material supplier is non-dischargeable in bankruptcy where the material supplier failed to adequately document its dealings with the contractor.

In Astro, a building supply company supplied materials to a contractor in the business of repairing and replacing residential roofs. The relationship existed for more than four years. The contractor went out of business in 2007 and subsequently filed for bankruptcy. The contactor owed the material supplier approximately $77,774.31.

The material supplier argued that the contractor’s outstanding balance should not be discharged in bankruptcy and the supplier should be paid the full balance. In making its argument, the material supplier referred to the Michigan Builders Trust Fund Act. The material supplier claimed that the Act imposed a fiduciary duty on the contractor to not retain or use construction payments from a particular project until it paid all laborers, subcontractors, and materialmen.

The Act imposed a trust upon the construction payments and the contractor, as trustee, would violate its fiduciary duty as trustee if it were to retain or use construction payments from a particular project before it paid all laborers, subcontractors, and materialmen. Under the Act, such a violation amounts to embezzlement.

The prima facie elements of a claim under the Act are “(1) a defendant is a contractor or subcontractor engaged in the building construction industry, (2) a person paid the contractor or subcontractor for labor or materials provided on a construction project, (3) the defendant retained or used those funds, or any part of those funds, (4) for any purpose other than to first pay laborers, subcontractors, and materialmen, (5) who were engaged by the defendant to perform labor or furnish material for the specific project.”

These elements require the material supplier to show that the contractor used the supplies in specific construction projects, that the customers for these specific projects paid the contractor, and that the contractor failed to pass those payments on to the material supplier.

During the four-year relationship, the material supplier sold $1,111,207.99 of materials to the contractor for work on various projects. The material supplier provided the contractor with many invoices during the business relationship, and the contractor made many payments. The contractor’s payments neither identified specific invoices, nor identified specific projects for which the materials were incorporated. In fact, the material supplier maintained a “running balance” of the contractor’s outstanding balance.

The material supplier’s practice of maintaining a “running balance” amounted to an open account, a line of credit, or some other credit arrangement. The Court determined that such an arrangement does not create a fiduciary duty between the supplier and the contractor under the Act. Because the material supplier used such a practice when invoicing the contractor and accepting payments, the material supplier could not prove that its materials were incorporated into specific projects. The Court determined that a failure to make the connection between materials and projects is a failure to establish the existence of a trust under the Act and, therefore, there could be no violation of the Act.