By
Scott S. Shepardson
Thelen LLP
The
treasurer of a construction company was sentenced to jail
for misapplication of funds on two residential construction
projects. Louisiana v. Cohn, 783 So.2d 1269 (La.
2001). Howard Cohn, secretary-treasurer of TCM, Inc., was
sentenced to three years in prison for failure to properly
direct payments to contractors and materialmen on the projects
he was supervising.
TCM
entered into two separate contracts in 1993 to build houses,
one for Douglas Broussard and the other for Robert Jamison.
Both contracts specified construction was to be completed
within six months. From the outset, both projects were behind
schedule and suffered from numerous errors in construction.
Cohn was site supervisor for both projects. Cohn eventually
was removed as site supervisor on the Broussard project.
By May 1994, Broussard had taken over supervision of the
construction site of his own home. Near that time, Jamison
was informed by TCM that it was quitting construction of
his home because of financial problems.
At
the time TCM left the job sites, both homes were about 85
percent complete. Broussard used the remaining portion of
his construction loan and $4,000 of his own money to complete
construction. Jamison spent $3,000 of his own money and
used friends for labor to complete his home. Upon completion,
contractors and material suppliers who were not paid by
TCM for work or materials used on the homes filed liens
against both projects. Broussard paid $14,000 and Jamison
paid $10,000 out of their own pockets to satisfy the liens.
Broussard
and Jamison filed criminal complaints against TCM and its
individual officers for violation of Louisiana Revised Statutes
§§14:202 (A). That statute makes it a criminal
offense for any construction contractor to knowingly fail
to apply money received to settle claims for material and
labor due for the construction or under the contract. The
cases went to trial. The trial court found that TCM had
no assets before the start of the construction projects.
Accordingly, the only monies available to it during the
projects were those received from Broussard and Jamison.
The
Supreme Court looked at the expenditures on the project
and noted that TCM had used monies provided by Broussard
to purchase materials for the Jamison project and vice-versa.
TCM also had made payments to Cohn for project supervision
after he had been removed from the Broussard project, made
payments on loans not part of either project and paid its
officers supervisory fees without delay even when it was
clear that TCM was expecting to be paid less at completion
than it needed for materials and labor necessary to finish
the projects.
The
jury acquitted two officers of TCM, but Cohn was sentenced
to three years at hard labor. The sentence was suspended,
but Cohn was placed on probation on condition that he pay
restitution. The Court of Appeal overturned the conviction,
but on further appeal, the Supreme Court of Louisiana upheld
the conviction and sentence.
"[T]he
statute requires more than simply pro[ving] that a contractor
has left unpaid claims for materials and labor at the
end of a construction contract. The statute clearly does
not criminalize a bad business deal made by a contractor
who otherwise applies all of the funds received under
the contract for legitimate expenses and claims for materials
and labor in the course of the project, although he cannot
pay all of them because, for one reason or another, the
project has exceeded its estimated costs."
But,
the Supreme Court noted that it was clear that TCM had not
applied the monies received from each homeowner to his respective
project. Rather, payments were commingled. In addition,
at the end of the projects, materialmen from both projects
were not paid. The Supreme Court held that it was a rational
finding by the jury that Cohn, as the treasurer, had knowingly
failed to apply the money received under each contract to
settle the claims for material and labor due on each project,
thus violating the statute. Consequently, the sentence was
affirmed.
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For more information about the issues covered in this report, please contact Scott S. Shepardson in our San Francisco office at 415-369-7184 or at sshepardson@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2002 Thelen LLP
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