CONTRACTOR THEFT
WHAT IS IT AND HOW CAN IT EFFECT YOU?
By Nicholas R. Delaney

May 2009

In today’s economy, those in the building industry need to be on the lookout for contractor theft.. The focus of this article is to discuss what constitutes contractor theft, the unfortunate situation it leaves for subcontractors, suppliers and owners, and your options if you fall victim to it.

Minnesota Statute § 514.02 is known as the contractor theft statute in Minnesota. The law requires that proceeds of payments received by a person contributing to an improvement of real estate shall be held in trust by that person for the benefit of those persons who furnished labor, skill, material, or machinery contributing to the improvement. In other words, if you or your company are working on a project, whether as a general contractor or subcontractor, and you have hired subcontractors or suppliers, once you or your company are paid, you are required to see to it that your subs and suppliers are also paid. Failure to do so constitutes theft.

Theft creates an unfortunate situation for others involved. Often times, contractor theft is committed when a contractor is behind on bills and he pays off subs and suppliers from the previous project with proceeds from a current project. If you have not been paid by a contractor who has been paid, you not only have the option of pursuing payment under the contractor theft statute from the contractor, but you may also enforce a mechanic’s lien against the owners property. This can leave a sour taste in one’s mouth, because often times it involves foreclosing on an innocent owner’s property after the owner paid the contractor in full. This may be your only option of actually getting paid though, as contractor’s theft may be a sign of empty pockets for the contractor.

The contractor theft statute allows for remedies against the contractor. A subcontractor, supplier or even the owner of the property can bring a civil action against the individual or entity guilty of contractor theft. The remedies available to someone bringing a theft claim include the recovery of damages, costs and disbursements, as well as costs of investigation and reasonable attorney fees. If that is not a deterrent enough to committing theft, a person guilty of contractor theft can also be charged criminally under Minnesota Statute Section 609.52. The criminal penalties vary depending on the amount stolen.

The heightened risk of contractor theft highlights the importance of pre-lien notice to property owners. Not only is pre-lien notice required in order to perfect a mechanic’s lien claim on residential property, but it puts the owner on notice of the fact that they may pay subs and suppliers directly as opposed to rely upon the contractor to turn around and pay subs and suppliers when paid. While it may be rare, in some cases, homeowners will take advantage of this right and pay subs and suppliers directly. Nevertheless, it is important as a subcontractor or supplier to cover all of your bases and see to it that mechanic’s lien rights are perfected in order to keep open as many avenues for payment as possible. You will be glad you did if a contractor commits theft because, as stated, it often means the contractor has no money.

Nicholas Delaney practices in the areas of real estate, construction law, land use and civil litigation.

© 2009 Rinke-Noonan.

This article is a general discussion of legal issues and is not intended to be legal advice. We would be pleased to review the specific facts and law regarding any given legal matter.