Contractors Beware – Minnesota’s Contractor Theft Law Carries Stiff Penalties
Contractors who don’t use payments received from customers on real property construction projects, resulting in subcontractors not being paid, expose themselves to criminal and civil liability under Minnesota’s contractor theft statute (§ 514.02, Minn. Stat.). Those who violate the statute can face criminal prosecution for theft of proceeds pursuant to section 609.52, Minn. Stat. Not only can violation of the statute result in a monetary penalty, but it can also result in imprisonment, though this more extreme enforcement option is rarely implemented by county prosecutors.
The teeth behind the civil component of the statute, which is more commonly pursued than the criminal option, is two-fold. First, it allows owners to go after individual shareholders, officers, directors, and agents of the company who knowingly received the proceeds that should have gone to subcontractors, and received those proceeds as salary, dividends, loan repayments, capital contributions, or otherwise. Second, the statute allows for attorney fee recovery should the owner prevail at trial, which is a really big deal because attorney fees are otherwise not recoverable to a prevailing party in Minnesota absent a specific statute or contractual provision that provides for recovery.
From a contractor’s perspective, this highlights the importance of only using client funds for costs associated with that client’s project. Although the statute doesn’t require contractors to segregate funds received from clients in separate accounts given the impracticability of this requirement, contractors should maintain solid bookkeeping to ensure that client funds are appropriately earmarked for expenses related to that project.
Owners, to minimize the risk of contractor fund mismanagement, should to the extent possible, insist that the written construction contract include a provision that the contractor provides, upon request, an updated summary of who the contractor has paid and in what amounts, to make certain that payments are going where they should and are tracking with the actual work performed as of the payment date. Owners also have the right under Minnesota law to condition the tender of payments on subcontractor written lien waivers, which reduces the risk of subcontractors going unpaid and filing mechanic’s liens against the property. Nothing can sour a project more from an owner’s perspective than having to pay twice for the same work.
It is critical that contractors and owners have a working knowledge of this important statute, especially contractors, as ignorance of the statute’s requirements can have dire consequences.
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This website features educational information based on general legal principles in Minnesota. Specific legal advice is contingent upon the unique facts of each case. Therefore, you should not rely only on this information for your particular legal issue. Contact an attorney to obtain advice specific to your legal situation.