Disputes often arise during the course of construction projects, whether minor or significant in nature. At times, disputes may arise regarding payment for work performed or materials provided for the project. The Wisconsin Court of Appeals recently issued a decision in a case of this nature. In Century Fence Company v. American Sewer Services, Inc., Appeal No. 2019AP2432 (Ct. App. 2021) (recommended for publication), the Court considered whether the prime contractor in a project for the City of Waukesha (“City”) engaged in theft by contractor when it failed to pay a subcontractor after receipt of payment from the City. This Legal Update will review the facts and legal arguments involved in this case, as well as some lessons learned as a result.
After the subcontractor completed its work on the City’s project, it billed the prime contractor. The prime contractor then billed the City for this work, and the City paid the prime contractor the full amount. After that, the prime contractor failed to pay the subcontractor and instead claimed that the subcontractor was only entitled to a portion of the amount invoiced because it ultimately had to perform less work than originally anticipated. The subcontractor demanded payment from the prime contractor on several occasions and asserted that it was entitled to the full amount because the contract was “lump sum.” Ultimately, the prime contractor failed to pay the subcontractor for any of its work, resulting in the subcontractor commencing a lawsuit against the prime contractor.
The subcontractor asserted that the prime contractor had committed theft by contractor. After a trial, the circuit court found that the subcontractor failed to meet its burden of proving theft by contractor “due to the fact that [the prime contractor] was solvent and always able to pay the contested amount due and owing, and because there was an arguably viable issue as to the value of the work performed by [the subcontractor].” The subcontractor appealed.
The Court of Appeals disagreed and reverse the circuit court’s ruling. The Court of Appeals held that the subcontractor did prove that the prime contractor committed theft by contractor. The Court explained that to establish a claim under Wis. Stat. § 779.16 for theft by contractor and to obtain additional damages under other statutes applicable to theft and property damage or loss caused by a crime, the subcontractor needed to prove that:
(1) American acted as a prime contractor; (2) American received money from Waukesha for public improvements; (3) American intentionally used, retained, or concealed the money ‘for purposes other than the payment of bona fide claims for labor or materials prior to the payment of such claims’; (4) the use, retention, or concealment was without Waukesha’s consent and was contrary to American’s authority; (5) American knew the use, retention or concealment was without Waukesha’s consent and contrary to its authority; and (6) American used, retained, or concealed the money with the intent to convert it to its own use or the use of another.
The Court reasoned that once the City paid the prime contractor for the subcontractor’s work, the prime contractor “became the trustee of those funds” and was obligated to pay the subcontractor. By depositing the money into its general account and failing to pay the subcontractor, the prime contractor used the money for purposes other than payment of claims. In addition, the Court explained that it was irrelevant whether the prime contractor was solvent, as the prime contractor used its general account for various business expenses at the same time that it should have been paying the subcontractor. The Court also noted that the prime contractor’s failure to pay any amount of the subcontractor’s invoice showed that it was using “leverage” against the subcontractor in an attempt to get the subcontractor to agree to a lesser payment. In addition, there was testimony at the trial that the prime contractor intended to keep a portion of the money to pay itself for work it performed, but did not bill to the City.
The prime contractor asserted that it could not have committed theft by contractor because it made a partial payment to the subcontractor after the lawsuit commenced and placed the remainder of the funds into its own attorney’s trust account. The Court rejected this argument. The Court reasoned that the prime contractor could not “cure its theft once the crime was completed.” In addition, the prime contractor’s deposit of the funds into its own attorney’s trust account was nothing more than a “continued refusal to pay.” The Court explained:
The theft-by-contractor statute does not allow for what occurred here—a prime contractor paying itself from moneys it held in trust for a subcontractor prior to paying what is owed to that subcontractor and holding hostage money owed to a subcontractor in an effort to get the subcontractor to accept less than the contracted price by forcing the subcontractor to choose between hiring lawyers and initiating an expensive lawsuit or agreeing to the lesser amount.
Lastly, the Court disagreed with the circuit court’s finding that there was a “bona fide dispute” regarding the subcontractor’s work. The Court reasoned that the undisputed evidence showed that the contract was for a “fixed fee/lump-sum contract” for the project, such that the actual amount of work necessary to complete the job was irrelevant to how much the prime contractor owed the subcontractor. Therefore, the subcontractor met its burden of proving theft by contractor.
This case is instructive regarding management of project funds during construction. Another related consideration, though not addressed in this particular case, are provisions that must be included in certain public improvement or public works projects regarding payment of subcontractors and suppliers.
For instance, depending on the contract price, a school district may need to include provisions in the contract for payment of subcontractors, other payment assurances, and/or payment bonds. Wis. Stat. § 779.14. If there is a payment bond, and the prime contractor fails to pay the subcontractor for work performed on the project, the subcontractor may file an action in court against the surety and the prime contractor under the bond. There are specific notice and timing requirements that a subcontractor must satisfy to bring a court action, however. An unpaid subcontractor may also have certain lien rights on public projects as to amounts due to the prime contractor by the owner. Wis. Stat. § 779.15. Therefore, for school districts, it is important to ensure that construction projects meet the applicable requirements and also provide adequate protection.
Different provisions apply to other types of projects. For example, in projects that do not involve public property, an unpaid prime contractor, subcontractor, or supplier may have lien rights as to the property involved. However, the procedures to properly place a construction lien on a property for non-payment of work or materials vary based upon who is making the claim and the nature of the project. Therefore, it is important to carefully review the applicable procedures before making a lien claim.
For questions regarding this article, please contact the author,
or your Renning, Lewis & Lacy attorney.