COURT RULES THAT MONEY PAID TO A SUBCONTRACT BELONGS TO THE BANK,AND NOT THE SUB-SUBCONTRACTOR

By David J. Meyers

A recent decision from the Court of Appeals has again made life more difficult for contractors and, this time, closing companies. You may recall that in the mid-1990s a tornado did extensive damage to St. Peter and surrounding areas. Unscrupulous contractors ended up taking a lot of insurance and consumer money, and not doing the agreed work. In response to the demands of the area Legislators, BAM helped write and enact a strong Contractor Theft Statute.

Minnesota Statutes Section 514.02 says that any money paid by an owner or general contractor is to be held by the person receiving the money in trust until all subcontractors and sub-subcontracts are paid. BAM convinced the Legislature that it was not necessary to segregate the money in a separate account. Section 514.02 with trust language would protect the money from other creditors.

In the recent case of Siemens Building Technologies, Inc. v. Peak Mechanical, Inc., the Court of Appeals, in my view, got the statute wrong. In that case, Peak Mechanical, Inc., was a subcontractor and Siemens a sub-subcontractor of Peak. Peak filed a Mechanic’s Lien and later Peak settled with the owner and general contractor for a discounted amount. Siemens did not file a Mechanic’s Lien.

Siemens should have been paid its claim from the money Peak received. The problem is that Peak had pledged all of its assets, including accounts receivable, to Associated Bank. Peak went into default with the Bank and the Bank took all of the settlement proceeds, including the money due Siemens.

Siemens sued the Bank arguing that under the trust language of Section 514.02, that Peak held the money in trust for payment of the subcontractors. Siemens argued that the Bank could not claim the money, because the money was not actually Peak’s, but was instead held in trust by Peak for the Siemens as a subcontractor.

The Court of Appeals disagreed and treated Siemens as an unsecured creditor. It said the Bank was acting in the ordinary course of business when it took all of Peak’s money. The Court simply ignored the trust language in the statute.

This decision should be corrected by the Legislature, but it means trouble for builders and closing companies in the meantime. If, for example, a builder or closing company pays a subcontractor, who then goes broke, the subcontractors bank, and not the subcontractor’s suppliers and sub-subcontractors could get the money. The unpaid suppliers or sub-subcontractors could file Mechanic’s Liens. Until this law is corrected, builders and closing companies need to take extra caution to be certain everyone down the line is paid. It is not enough to simply pay the subcontractor.

I hope that BAM is willing and able to take this matter to the Legislature to get a correction to Section 514.02.

©2004, David J. Meyers and Rinke-Noonan Law Firm, St. Cloud, Minnesota

David J. Meyers is licensed to practice law in the Minnesota State and Federal Courts. He is a former BAM President.