GPNA Tip of The Week: Criminal Liability For Commingling Funds

GPNA Tip of The Week: Criminal Liability For Commingling Funds

Written on February 01st, 2021

A recent decision of the South Dakota Supreme Court calls into question contractor accounting practices concerning the commingling of owner funds from different projects.  In State v. Suchor, 2021 S.D. 3, ¶¶ 1-32, -- N.W.2d --, 1-17 (S.D. 2021) the Court reversed the conviction of a defendant-contractor on multiple counts related to several construction projects after he allegedly misappropriated funds in contravention of SDCL § 44-9-13.  The statute in question makes it a crime for a contractor making an improvement to real estate to use more than five hundred dollars for another purpose when an outstanding account for labor, skill, or machinery remains unpaid.  Although this statute had been on the books for many years it had not previously been considered in the context of comingled project funds.  The Supreme Court based their reversal of the conviction on the State’s failure to produce sufficient evidence to prove the essential elements of the criminal charges beyond a reasonable doubt, but in so holding did not foreclose the possibility of future prosecutions pursuant to SDCL § 44-9-13.  The Court states as follows: “SDCL 44-9-13 does not, contrary to the State's suggestion, prohibit a contractor from operating a cash-based business with only one general account. While a contractor operating in this fashion (depositing funds into and paying bills out of one account) must nevertheless pay the subcontractors and suppliers on any given project in a timely manner to avoid running afoul of SDCL 44-9-13[.]”  Such or, 2021 S.D. 2, ¶ 24.  The Court goes on to explain that the prosecution did not introduce evidence sufficient to follow the money. Bank records were not introduced showing deposits and disbursements.  In addition, there were contractual disputes over whether money was owed to the contractor under the contract.  Id. at ¶ 25.   

Although the conviction was ultimately reversed, the decision leaves open the possibility that a contractor who commingles funds from separate projects within a single account could be subject to criminal conviction if the prosecution can prove its case by following the money.  This may prove difficult where funds from many projects are involved or where there are contractual disputes between the parties.  Nevertheless, contractors should carefully account for all project funds, using appropriate record keeping, especially when using a single bank account with unsegregated funds.