Article - Content Copyright Rinke Noonan

TAKING MONEY FROM AN OWNER AND NOT PAYING THE SUBCONTRACTOR OR SUPPLIER IS A CRIME

At a recent meeting of construction lawyers, there was a great deal of discussion about the increased number of Mechanic's Liens being filed on residential projects. In some cases it was because a spec. or model home had not sold, and the lien claimant needed to start the lawsuit to continue its lien rights after one year. In too many instances, it was because the contractor had been paid, but had not paid the subcontractors.

Minnesota has a strong Contractor Theft Statute that will put a contractor in jail for taking money. A few years ago BAM was instrumental in rewriting the Contractor Theft Law to protect subcontractors and consumers. Minnesota Statutes Section 514.02 has several sections, which are important for all builders to understand.

First, any money paid to a builder by an owner does not belong to the builder, until all subcontractors and suppliers have been paid in full. The money is to be held by the builder "in trust" for the benefit of people who supply labor and materials. This does not mean the builder must open a separate bank account for this money, but instead the builder may not use any of the money for the builder's personal use, until all subcontractors and suppliers are paid. It means no profit or compensation to the builder may be taken out of a job until the job is completed and everyone else is paid.

On residential jobs, if a builder uses the money for anything other than payment of subcontractors and suppliers, it is a theft and punishable as a gross misdemeanor. This means that the builder could go to jail, pay a fine, or both.

In addition, the owner of a corporation or other entity is personally liable for the money. Just because a builder is operating as a corporation, will not protect the individual builder from criminal action or civil lawsuit. In a residential construction company, every shareholder, officer, director or agent of a corporation who receives the money can be held liable. This includes payment of all attorney fees. The corporate shield will not protect someone who takes money from a job.

If a subcontractor, supplier, or a property owner believes that the general contractor has taken the money, they must provide the general contractor with a written notice of non-payment. The notice must identify the property where the work was done and state the amount reasonably believed to have been taken. If the contractor does not respond within 15 days, it is assumed that the contractor stole the money.

In some cases, this law also applies to subcontractors. For example, if a cement finisher is a subcontractor, and the cement finisher bought the concrete from the ready-mix company, he could be personally responsible or be guilty of a criminal theft if the general contract pays the concrete finisher, but the concrete finisher fails to pay the ready-mix company.

In addition to these penalties, taking from a job and not paying the subcontractors is grounds for revocation of a Contractor License.

If you find yourself in a position where the job cost has overrun, I highly recommend you talk to the subcontractors and suppliers. Do not believe you can take money from the next job to pay the past job. This creates a domino effect. Eventually the dominoes will collapse and you will be at the bottom. I find that most subcontractors and suppliers will work with the general contractor who finds themselves in difficulty on a job. There could be grave consequences for someone who tries to cover up and take money from the next job to pay the last job.

David J. Meyers is licensed to practice law in the Minnesota State and Federal Courts. He is former President of BAM and former member of the BAM Board of Directors. He currently serves on the Governing Council of the Construction Law Division of the Minnesota State Bar Association.