Every contractor knows the temptation: use cash from job A to cover expenses on job B. That’s called diversion of funds. It’s perfectly legal in some states and a crime in others. But it’s not good business in any state. The Massachusetts case of Damian Anketell illustrates my point.
Damian Anketell was a licensed Massachusetts home improvement contractor, doing business as Ground Up Construction. Not long ago, he signed a contract to remodel the attic of a Massachusetts home – adding an office, bedroom, bathroom and play area, replacing the roof and building a staircase. The contract price was $111,293. Payments were (1) $38,952 as a deposit; (2) $27,823 on the first day of demolition; (3) $27,823 on completion of rough construction and framing; and (4) $16,695 when done. Nothing in the contract required Damian to use payments on the attic job exclusively for that project.
Damian had a second company, Castle Hill Properties. Castle Hill bought, renovated, and sold properties. When Castle Hill needed cash, Damian dipped into the Ground Up account. You can guess what happened next.
Before the third installment on the attic job was due, Damian came up short of cash. He asked for and got another advance on the attic job, $11,130. At that point, Damien had been paid $77,814 for the attic job, nearly 70% of the contract price. But Ground Up had completed less than twenty-five percent of the project. Framing wasn’t complete. The roof was off. Exposed areas were covered only by a tarp. The HVAC system had been disconnected. But it got worse.
About that time, one of Damien’s subs asked for a meeting with the owners. The sub said he and other subcontractors on the job were not being paid. He had seen Damien’s bank statements. Advances for the attic job had been diverted to Damien personally: cash withdrawals with no explanation, checks payable to “cash” or to Damien personally. There was no record of where most advances on the attic job had gone. And Ground Up’s checking account had a negative balance.
When the owners refused to advance more cash, Damien walked off the job. Now what?
The homeowners filed suit against Damien, Ground Up, and Castle Hill. Two days later, Damien and Ground Up filed for bankruptcy. The bankruptcy court ruled debts on the attic job non-dischargeable due to fraud and misrepresentation. The homeowners were due a refund. But that wasn’t all.
The homeowners also filed a complaint with the Massachusetts Office of Consumer Affairs and Business Regulation. The OCABR hearing officer found that
Diversion in Other States
Fifteen states impose restrictions on use of construction funds. Most of these states make the contractor a trustee of funds that will become due tradespeople, suppliers and subs. The contractor is liable for diversion of construction funds the same as any trustee would be liable for misuse of funds. California goes one step further. Penal Code Section 484(b) imposes a fine of up to $10,000 and jail time of up to a year for misapplication of construction funds.
Massachusetts isn’t one of the 15 states that make contractors trustees. But last week the Massachusetts Appellate Court in Damien Anketell v. Office of Consumer Affairs found another way to discourage diversion of construction funds. Massachusetts General Laws 142A, § 17(2) requires a list of disclosures in home improvement contracts. Damien never mentioned that advances on the attic job would be deposited in an account used to bankroll Castle Hill jobs. The court considered that omission a material misrepresentation under Massachusetts law. Damien got hit with a $4,700 administrative penalty and had his contractor registration suspended for ten months.
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