Wisconsin has codified a “Theft by Contractor” statute under Wis. Stat. § 779.02(5) which imposes stiff penalties if violated. There are several potential penalties for violating this statute. 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 certain cases corporate officers can be held personally liable.
In general, any money provided by a project owner to a contractor is to be held in trust by that contractor until all subcontractors’ claims for labor and materials are paid. The elements of a theft by contractor claim pursuant to Wis. Stat. § 779.02(5) include the following: (1) the contractor acted as a prime contractor; (2) the contractor received money for the improvement of land from the owner (or a lender); (3) the contractor intentionally used the money for purposes other than the payment of bona fide claims for labor or materials; (4) the use of the money was without the owner or lender’s consent and was contrary to the contractor’s authority; (5) the contractor knew the use of the money was without consent and contrary to its authority; and (6) the contractor used the money with the intent to convert it to its own use or the use of another.
A typical example of a violation of the statute is a contractor who gets behind on his bills and ends up using money from the newest project to pay off amounts owed to suppliers or subcontractors from the last project. This type of behavior is prohibited under the statute. It is important to understand that the Wisconsin Supreme Court has confirmed that this statute can be violated even if the contractor obtained no benefit from the use of the money.
The consequences for being found civilly or criminally liable under this statute are severe. Under the statute, any officer, director, member or agent responsible for the misappropriation is liable in civil court for damages including up to three (3) times the unpaid amount, and reimbursement of attorney’s fees and costs incurred by the property owner in obtaining a judgment. Not only can significant damages be awarded, which cannot be dischargeable in bankruptcy by the contractor, there are potential criminal penalties. Criminal prosecution will lead to bad publicity, negative internet presence and the potential loss of licenses, and loss of security clearances and access to public projects.
Therefore, it is imperative that the contractor maintain the funds for a particular project separate from other projects and only utilize those funds for a proper purpose under the statutes. Contractors should speak with an attorney to ensure that the system they have in place for handling client funds is in compliance with the statutory requirements. Prime contractors should be aware of the elements and consequences of a theft by contractor claim and be mindful of their disbursement practices and procedures. It is always a good practice to maintain strict payment procedures, detailed records and documentation of lien waivers. Additionally, property owners who believe their funds have been misused also should consult with an attorney to discuss the options they have available for recovering those funds that were improperly used.