Wisconsin imposes severe penalties for theft by contactor, codified in Wisconsin Statutes Chapter 779. Under Wis. Stat. §§ 895.446, 779.02(5), 779.16, and 943.20(1)(b), a plaintiff in a theft by contractor action can recover its actual damages, investigation and litigation costs, and treble damages. To sustain a theft by contractor action, the elements of Wis. Stat. § 943.20 must be proven along with the elements of Wis. Stat. § 779.02 or Wis. Stat. § 779.16, depending on whether a public project is at issue. See Tri-Tech Corp. of Am. v. Americomp Servs., Inc., 2002 WI 88, ¶¶26, 30, 43, 254 Wis. 2d 418, 646 N.W.2d 822.
However, Wis. Stat. § 779.02 and Wis. Stat. § 779.16 both provide a caveat that a contractor’s use of funds which are the subject of a “bona fide dispute,” to the extent of the amount actually in dispute, does not constitute theft by contractor. The Wisconsin Court of Appeals has held that “refusal with good cause to pay a disputed amount on contract cannot and should not be a tort. If the prime contractor has good cause to refuse to pay, it has not violated its fiduciary duty, no tort results and punitive damages are unavailable.” Loehrke v. Wanta Builders, Inc., 151 Wis. 2d 695, 445 N.W.2d 717 (Ct. App. 1989).
Recently, the Wisconsin Court of Appeals defined this exception to narrowly construe the meaning of a “bona fide” dispute and a refusal to pay with “good cause” in Century Fence Co. v. American Sewer Services, Inc. 2021 WI App 75, 967 N.W.2d 32. In this case, American Sewer Services, Inc. (“American”) served as the prime contractor for the City of Waukesha to replace one of the City’s sewer mains. American contracted for Century Fence Company (“Century”) to provide pavement marking services for roughly $11,000. After Century performed the services, it billed American, and American obtained payment from Waukesha of the $11,000. American deposited the funds into its general account, but did not pay Century. Instead, American sent a letter to Century stating that only $3,000 was owed on the contract because there had been less work for Century to perform on the project than was originally contemplated in the contract. Century responded that the contract was a “lump sum,” rather than a “unit price,” contract, so it was entitled to the full amount. American used the funds in its general account to pay its employees and other obligations but was never insolvent, and upon learning of Century’s claim, American put the $11,000 into its attorney’s trust account.
The Circuit Court found that “there was ‘some question’ about ‘the value of the work done’ by Century… suggesting that there was a ‘bona fide dispute,’” and found no theft by contractor. Id. at ¶ 19, 967 N.W.2d at 39. The Appellate Court reversed, finding that because the dispute centered on whether “the contract was a fixed fee/lump-sum contract for ‘the job,’” and not a dispute based on the quality of Century’s work, there was no bona fide dispute. Id. The Court found that the language of the contract was clear that the amount of work necessary to complete the job was irrelevant to the question of what Century was owed, so “American had no legitimate ground for withholding payment simply because it, after-the-fact, may have regretted not negotiating the contract differently,” and “American had no ‘good cause’ to refuse to pay the contracted amount to Century.” Id. at ¶¶ 20-21, 967 N.W.2d at 40.
The consequences for being found liable under theft by contractor are severe, and contractors should be mindful of their disbursement practices. Additionally, property owners who believe their funds have been improperly used should consult with an attorney to discuss their options for recovering those funds. If you are faced with a potential theft by contractor issue or any other potential litigation issue call the litigation team at Mallery sc.