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MADISON - In a case closely watched by the state's construction industry, the Wisconsin Supreme Court today ruled that a prime contractor can not keep or use payments from an owner for any purpose before paying the subcontractors on a construction project in full (or, in the case of a shortfall, proportionately). The court rejected a suggestion made by the court of appeals that the prime contractor must wait until the contract's completion before he can take any profit.
State v. Angela and Matthew Keyes involves the interpretation of Wisconsin's theft by contractor law. Under the law, money paid to a prime contractor by an owner for work on a building contract is held "in trust" by the prime contractor until all "claims" by subcontractors have been paid. If the funds held in trust by the prime contractor are insufficient to satisfy the subcontractors' claims, he must satisfy those claims proportionally. Any "use" of the trust fund by the prime contractor before all claims have been paid in full or proportionally in cases of deficiency is considered "theft" by the prime contractor under Wisconsin law.
"The Keyes decision reiterates the basic principle that both owners and subcontractors are to be protected by the occasional self-dealing of unscrupulous prime contractors," said Wisconsin Attorney General J.B. Van Hollen. "At the same time, the decision removes the business impediments associated with the court of appeals suggestion that prime contractors are not entitled to earn profit until the very end of a construction contract. The decision is good news for both the industry and the consumer."
The case arose after Rose and Jim Wettstein contracted with Matthew and Angela Keyes, the owners of Keyes Design, to serve as general contractors on their home-building project. The project was financed through a bank construction loan, paid to the Keyes in a series of monthly payments. Several months into the contract, the Wettsteins became aware that some of the subcontractors were not being paid by the Keyes. The Wettsteins hired CPA Linda Jones to investigate the project finances. Ultimately, the Keyes' eighth request for a draw from the bank loan was denied, and the Wettsteins filed a complaint with the Onalaska Police Department.
A criminal complaint was filed against the Keyes and a preliminary hearing was held in La Crosse County Circuit Court. Jones found that $47,000 in subcontractors' claims remained unpaid, and that $36,036.38 in unaccounted funds were paid to Angela Keyes. Jones also uncovered various other suspicious activities in the Keyes' bookkeeping, including payments for car loans and other personal or non-project expenses, the creation of "bogus" invoices, and the use of cashier's checks to conceal the disbursement of money. The circuit court concluded that the evidence was sufficient to bind the Keyes over for trial.
The Keyes petitioned the court of appeals for leave to appeal the bind-over decision. The court of appeals affirmed the circuit court's decision. The Keyes then appealed to the Supreme Court.
The Keyes argued on appeal that the unaccounted for funds constituted a profit that Angela was entitled to as a materials subcontractor on the Wettstein project. The Court of Appeals concluded that the Keyes violated the statute when they took their own profit from the Wettsteins' draws prior to paying the outside claims to the subcontractors. Judge Dykman, concurring, interpreted the majority's opinion as creating a new rule that prime contractors can collect "no profit until the end" of the contract, which he predicted would throw the construction industry into chaos.
The Supreme Court affirmed the court of appeals decision. Like the court below, it assumed without deciding that Angela Keyes could act as both a prime contractor and a subcontractor. The Supreme Court affirmed the Circuit Court's decision to bind-over the Keyes, because, at the end of the period investigated by Jones, Angela Keyes was paid in full and the subcontractors were left unpaid. Furthermore, the Supreme Court concluded that the bind-over was supported by Jones's testimony regarding the Keyes' suspicious bookkeeping practices.
The case will be remanded to the La Crosse County Circuit Court for trial.