In many states, payment given by a property owner to a contractor carries a special trust obligation: the funds must be used first to satisfy subcontractor and supplier claims rather than for general business purposes. This principle underlies theft by contractor law, which seeks to protect those lower in the contracting chain from nonpayment and misuse of funds. When a general contractor or upstream subcontractor fails to adhere to this trust obligation, serious legal consequences may ensue.

Understanding the Trust Fund Obligation

The core idea is simple but powerful: when an owner pays a contractor, those funds are considered to be held in trust for the benefit of subcontractors and material suppliers. The contractor must use those funds to pay those who performed work or delivered materials before doing anything else, even overhead or corporate expenses. In other words, the money is not “free for general use” once received—it’s earmarked for fulfilling obligations already incurred. 

That trust fund obligation does not rest only on a particular draw or phase. Many courts interpret that every dollar paid to the prime contractor must be applied first to satisfying outstanding claims. If a contractor diverts funds meant for subcontractors to other uses—paying rent, salaries, utilities, or any other expense before ensuring subcontractor claims are satisfied—that may constitute a breach of the statutory or equitable trust. 

Why the Law Exists

The rationale behind theft by contractor statutes is to protect the vulnerable subcontractors and suppliers. These lower-tier participants often have little leverage over the owner, and if a general contractor misappropriates funds, they may end up unpaid or forced to sue with limited remedies. The trust theory gives these parties a direct claim against funds the contractor holds, shifting risk burden back up the chain.

Additionally, that protection often includes personal liability and treble damages. In many jurisdictions, officers, directors, or members of entities (like corporations or LLCs) may be held personally liable if they are responsible for directing, authorizing, or allowing misapplication of trust funds.

Case Example: St. Croix Medical Center v. Keller

A real-world example illustrates how this can play out. In a dispute over contractor draws on a hospital addition, the owner withheld approval of a large draw due to alleged construction defects. The contractor prevailed in arbitration and was awarded payment for that draw. But when it did not pay several subcontractors tied to that draw, the owner (who had resolved those subcontractor claims) sued the contractor personally. The court held that because of the trust fund obligation, the contractor was required to satisfy subcontractor claims. The fact that the contractor claimed it had no funds didn’t excuse the obligation—the full trust obligation applied to all funds received in relation to the project.

Implications for Contractors

The consequences of violating theft by contractor law can be severe:

• Personal liability: Company officers or controlling persons may be personally liable—not shielded by corporate structures.
• Treble damages: In some statutes, the damages awarded may be multiplied as a penalty, not only for actual losses.
• Cash flow strain: Contractors must carefully manage project funds to ensure they can satisfy subcontractor claims first. If a project runs over budget, that risk becomes acute.
• Heightened scrutiny: Courts may construe trust obligations broadly, and contractors must maintain clean bookkeeping, avoid commingling funds between projects, and clearly segregate trust funds from general funds.

How to Minimize Risk and Stay Compliant

1. Segregate funds: Keep trust fund collections separate and distinct from general operating funds.
2. Prioritize subcontractor payments: Always satisfy subcontractor and supplier obligations before allocating funds to general expenses.
3. Clean accounting: Maintain transparent books and records so that any audit or review can trace fund flows.
4. Avoid commingling: Never mix funds across different projects or use money from one job to prop up another.
5. Be capitalized: Contractors, particularly smaller ones, should ensure they have a financial cushion because profits may not be available during the life of the job.
6. Review state law carefully: Though the example is from Wisconsin, many states have analogous statutes or common law doctrines. Always check your state’s lien law, trust obligations, and contractor statutes.

Conclusion

Theft by contractor isn’t just a niche construction law concept—it’s a vital protection for subcontractors and an imposing risk for contractors who mishandle project funds. Understanding what it means, why it exists, and how to comply can make the difference between a profitable project and a legal nightmare. Contractors who honor the trust fund obligation, maintain disciplined fund management, and keep clean records are far less likely to face personal liability or treble damages. In a world where bills run, delays happen, and margins shrink, respecting the trust built into every construction payment is both a legal requirement and a moral imperative.