On March 4, 2008, the Wisconsin Supreme Court will hear oral arguments in a case with important implications regarding the exposure of Wisconsin contractors to claims and criminal prosecution for theft by contractor. State v. Keyes, 2007 WI App 163, 736, N.W.2d 904; petition for review granted 2007 WI 134, 742 N.W.2d 524. 

Most contractors are familiar with the general rules regarding their rights and responsibilities under Wisconsin’s theft by contractor statutes.  Under section 779.02(5) of the Wisconsin Statutes, any money paid to a prime contractor or subcontractor for the construction of improvements on land is a “trust fund” for amounts owed by the prime contractor or subcontractor for labor, materials, and services performed or provided on the project.  Use of the money for purposes other than project expenses before all claims related to the project have been paid is considered theft by contractor and may be punishable as criminal theft under Wis. Stat. § 943.20.

In the 2007 Keyes case, the Court of Appeals held that a prime contractor acting as a subcontractor can pay itself for labor and materials before other subcontractors, but not for profit on those materials.  Angela and Matthew Keyes owned the La Crosse construction company Keyes to Design Inc., which acted as general contractor on a house building project.  Angela Keyes also performed services on the project as a subcontractor.  The Keyes were charged individually with felony theft by contractor under Wis. Stat. §§ 779.02(5), 939.05, and 943.20(1)(b) and (3)(c) because they kept as a profit approximately $36,000 from the project and did not make payment in full to all subcontractors and suppliers.  The Keyes contended that as a subcontractor on the project, Angela was entitled to receive payment for materials provided plus profit even though other subcontractors had not been paid in full. 

The decision appears to reiterate two basic rules for general contractors to follow.  First, the general contractor has the same claim to funds as a subcontractor with respect to reimbursement for its labor and materials.  Second, the general contractor is at risk with respect to profit and indirect costs (e.g. overhead) until all subcontractors and suppliers are paid in full.

Under a narrow interpretation, the Keyes decision may be limited to its facts, i.e. apply only to general contractors who self-perform work or perform through a related entity.  However, the decision can potentially be read more broadly to prohibit general contractors (and subcontractors with their own subs and suppliers) from paying overhead and profit to unrelated subcontractors until all labor and materials on the project are paid.  Certainly, such a broad application does not mesh well with the realities of a typical construction project or the expectations of contractors. 

Hopefully, the Wisconsin Supreme Court will adopt a narrow, common sense reading of the lower court’s decision, recognizing the realities of the construction industry and the concern that many small and mid-size contractors do not have the resources to survive without a profit until the completion of a project.