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Theft by Contractor

junio 16, 2020

The penalties for a violation of Wisconsin’s “Theft by Contractor” statute can be severe.  If such a claim is proven, a contractor could be subject to criminal prosecution, be held liable in a civil suit for money damages, and, in some cases, corporate officers can be held personally liable.

In general, any monies provided by a project owner to a contractor are to be held in trust by that contractor until all subcontractors’ claims for labor and materials are paid.  Wisconsin’s version of Theft by Contractor is codified within Wisconsin’s construction lien law at Wis. Stat.  § 779.02(5).  The elements of a claim are:

  • The contractor acted as a Prime Contractor;
  • The contractor received money for the improvement of land from the owner (or a lender);
  • The contractor intentionally used the money for purposes other than the payment of bona fide claims for labor or materials;
  • The use of the money was without the owner or lender’s consent and was contrary to the contractor’s authority;
  • The contractor knew the use of the money was without consent and contrary to its authority; and
  • The contractor used the money with the intent to convert it to its own use or the use of another.

In the case of a deficiency of available funds, contractors owe a duty to make proportionate payments to claimants.  In these situations, documentation of payments is critically important and contractors would be wise to seek assistance of counsel to avoid potential disputes.

Criminal prosecution for the theft of trust funds, as defined by the statute, is not common, but a Google search will reveal enough examples to provide ample warning to contractors to avoid such difficulties.  The collateral consequences of criminal prosecution include bad publicity, a negative internet presence, and the potential loss of licenses, security clearances and access to public projects.  The end results can be worse than the actual criminal fines or penalties.

In most cases, a violation of the Theft by Contractor statute results in a lawsuit.  A successful claimant that proves the elements of the offense can recover compensatory damages.  The damage award can be tripled and attorney fees awarded.  A violation of the statute can turn a $50,000 mistake into a $200,000 judgment that is not dischargeable in bankruptcy.  Corporate officers can be held personally liable, even if the officer did not receive a personal benefit.

Even a successful defense of a Theft by Contractor claim can result in prohibitive defense costs spent on experts and legal fees.  Prime Contractors need to be aware of the elements (and consequences) of a Theft by Contractor claim and be mindful of their disbursement procedures and practices.  It is always a good exercise to maintain strict payment procedures, detailed records and documentation of lien waivers.  If a claim arises, consult with an attorney at the earliest opportunity.