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 construction project through a civil action. The re-working of Section 514.02 created a civil cause of action, available to any “person injured by a violation” of subdivision 1. The Minnesota Court of Appeals has described subdivision 1a as a provision that “provides a limited civil remedy.” State v. Bren, 704 N.W.2d 170 (Minn. Ct. App. 2005).
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. 1a, 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 who knowingly receives proceeds of the payment as salary, dividend, loan repayment, capital distribution, or otherwise.
Most notable is that, for an improvement to residential real estate made by a contractor who is licensed (or should be licensed) under section 326B.805, the statute creates a direct cause of action reaching not only the general contractor’s business but also a shareholder, officer, director, or agent who, though not responsible for the theft, knowingly received the diverted proceeds (as salary, dividend, loan repayment, capital distribution, or otherwise). This is a freestanding statutory personal liability tied to the construction trust-fund scheme, not a common-law “piercing of the corporate veil,” which would require a separate alter-ego/injustice showing. Subdivision 1(a) itself disclaims any fiduciary or tort liability on the part of a person receiving payment.
There were constitutional challenges to this statute, before it was amended, grounded in Minnesota’s prohibition against imprisonment for debt. The Minnesota Constitution provides that “No person shall be imprisoned for debt in this state, but this shall not prevent the legislature from providing for imprisonment, or holding to bail, persons charged with fraud in contracting said debt.” Minn. Const. art. I, § 12. Upholding the statute against that challenge, the Minnesota Supreme Court explained that the law reaches a contractor who receives payment for an improvement to real estate knowing that the cost of the labor, materials, skill, and machinery furnished for that improvement remains unpaid, and who then fails to do any of three things: use the proceeds to pay those costs, furnish the person making the payment a valid lien waiver, or furnish a payment bond. State v. Reps, 302 Minn. 38, 46, 223 N.W.2d 780, 785-86 (1974).
Reps remains good law after the 2000 amendment. In State v. Bren, the Minnesota Court of Appeals held that the 2000 changes “merely disclaim certain civil liabilities or remedies, but do not change the basic elements of the crime” that Reps found constitutional, and that “because the provisions considered crucial in Reps remain in the 2000 version of the statute, we conclude that the statute remains constitutional.” State v. Bren, 704 N.W.2d 170 (Minn. Ct. App. 2005).
