Contractors sometimes receive payment on a project, but then fail to use the money they receive to pay their subcontractors and suppliers working on that project. When that happens, Minnesota’s “theft of proceeds” law is an important legal tool.
The law obligates a contractor of any tier that receives payment to hold the proceeds of that payment “in trust” for the benefit of its subcontractors and suppliers. The law makes it a crime to take money that is intended to pay subcontractors and suppliers, but then fail to make those payments. In addition to criminal penalties, the law provides civil remedies, including attorneys’ fees.
But what if the contractor is a corporation that does not have the assets to pay a judgment? In those cases, the law allows for a personal lawsuit against principals of the company – such as shareholders, officers and directors – who knowingly receive proceeds of the payment in question.
A recent court decision clarifies the limits of personal liability under the theft of proceeds law. In Amcon Block & Precast, Inc. v. Suess, 794 N.W.2d 386 (Minn. Ct. App. 2011), the Minnesota Court of Appeals ruled that a corporate principal cannot be personally liable for payments received on commercial projects. In that case, a supplier was not paid for its materials, even though the project owner had paid the contractor, a corporation, in full. The supplier sued the owner of the corporate contractor, arguing that he was personally liable for theft of proceeds. But the Court held that the company’s owner was not personally liable because the project was commercial. In interpreting the law, the Court held that corporate principals can only be personally liable when the payment in question is for a residential project.