Back in the early 2000s, the Minnesota legislature revised Minn. Stat. § 514.02 to assist subcontractors in receiving payment for labor and materials used on a residential construction project through a civil action. The re-working of Section 514.02 also allows for homeowners who have properly paid their general contractor, who then in turn fail to pay the subcontractors, to bring a civil action as well.
Prior to the change that became effective on August 1, 2000, Section 514.02 only allowed for criminal penalties. If a subcontractor wanted to somehow get its civil attorney’s fees paid for, it was forced to go through the expensive and lengthy process of obtaining a mechanic’s lien and foreclosing on the property and then recover its attorney’s fees. Section 514.02 now provides a remedy when the homeowner has paid the general contractor, but the general contractor refuses to pay its subcontractors absent a mechanic’s lien foreclosure. Worth noting, a mechanic’s lien foreclosure is still an effective way for contractors to get payment for its services when a homeowner flatly refuses to pay.
Minn. Stat. §514.02, subd. 1(a) states,
A person injured by a violation of subdivision 1 may bring a civil action and recover damages, together with costs and disbursements, including costs of investigation and reasonable attorney fees, and receive other relief as determined by the court, including without limitation, equitable tracing. A civil action under this subdivision may be brought:
(1) against the person who committed the theft under subdivision 1; and
(2) for an improvement to residential real estate made by a person licensed, or who should be licensed, under section 326B.805, against a shareholder, officer, director, or agent of a corporation who is not responsible for the theft but how knowingly receives proceeds of the payment as salary, dividend, loan repayment, capital distribution, or otherwise.
Most notable in this statute is that it allows for a “pierce of the corporate veil” so that homeowners can sue not only the general contractor’s business, but also the shareholders, officers, directors, or agents of the general contractor who knowingly received the funds meant for the subcontractors.
There have been some constitutional challenges to this statute before it was amended due to Minnesota’s prohibition against imprisonment for indebtedness. However, the Minnesota Supreme Court has stated,
punish[ing] one who received proceeds for an improvement to real estate knowing that the cost of labor, material, skill, and machinery furnished for that improvement remains unpaid and who further fails to either (1) use the proceeds for the payment of labor, material, skill, and machinery contributed to the improvement, or (2) furnish the person making such payment a valid lien waiver as to the unpaid labor, materials, skill, or machinery contributed to the improvement, or (3) furnish the person making such payment a payment bond for the payment of laborers and materialmen for their contribution to the improvement.
State v. Reps, 302 Minn. 38, 46, 223 N.W.2d 780, 785-86 (1974).