By Bruce Jervis
If a contractor receives a progress payment covering work performed by subcontractors and then fails to use those funds to pay the subcontractors, it is almost certainly a breach of contract. A Missouri court recently ruled it was also civil conspiracy and fraud.
A Missouri construction company was a corporation owned by three shareholders. Those individuals diverted progress payment funds to their own use, leaving subcontractors unpaid. The three shareholders were held personally liable for actual and punitive damages. The court said intentional misrepresentation and misappropriation of the funds distinguished this situation from a “garden variety” breach of contract case.
There were aspects of this situation that understandably angered the court. The shareholders not only paid their own salaries and health insurance premiums, but they made car and cell phone payments without paying the subcontractors. They drew the corporate bank account down to $500 before filing for corporate bankruptcy.
On the other hand, this was not the first small, closely held business to play fast and loose with progress payment proceeds. Some of the payments, such as officers’ salaries, were legitimate corporate expenses. Holding corporate shareholders personally liable for punitive damages is a severe sanction. What is your opinion? Did the punishment fit the offense?