Kraemer Bros., Inc. v. Pulaski State Bank

• Decision Date: 01 June 1987
• Docket Number: No. 85-0260,85-0260
• Citation: 406 N.W.2d 379,138 Wis.2d 395
• Parties: KRAEMER BROS., INC., Appellant, v. PULASKI STATE BANK, Plaintiff-Respondent-Petitioner, Weslow & Sons, Inc., Defendant.
• Court: Wisconsin Supreme Court

Page 379

406 N.W.2d 379

138 Wis.2d 395

KRAEMER BROS., INC., Appellant, v. PULASKI STATE BANK, Plaintiff-Respondent-Petitioner, Weslow & Sons, Inc., Defendant.

No. 85-0260.

Supreme Court of Wisconsin.

Argued March 3, 1987.

Decided June 1, 1987.

Joseph Nicks, Green Bay, argued, for plaintiff-respondent-petitioner; Randolph Perkins, F. Scott Wochos, Egan & Laird, the Green Bay office of Godfrey & Kahn, S.C., Green Bay, on brief.

James A. Jaeger, Madison, argued, for appellant; Melli, Walker, Pease & Ruhly, S.C., Madison, on brief.

SHIRLEY S. ABRAHAMSON, Justice.

This is a review of a published court of appeals decision, Kraemer Bros., Inc. v. Pulaski State Bank, 130 Wis.2d 194, 387 N.W.2d 94 (1986), reversing an order of the circuit court for Brown county, N. Patrick Crooks, Circuit Judge. The circuit court concluded that funds in the account of Weslow and Sons, Inc., at the Pulaski State Bank were not a trust fund for the benefit of Weslow's subcontractors and material suppliers under sec. 779.02(5), Stats. 1985-86. The court of appeals reversed the order of the circuit court. We affirm the decision of the court of appeals reversing the order of the circuit court, but we remand the matter to the circuit court for further proceedings.

The issues before us are: (1) Whether sec. 779.02(5), Stats. 1985-86, requires a "direct" payment from the owner to a subcontractor in order for the monies to constitute a trust fund for material suppliers and second-tier subcontractors; and (2) whether the monies lose their trust fund status because they are not "in the hands of the subcontractor" when they are deposited in the subcontractor's bank account.

Before discussing these two issues, we set forth the facts to which the parties stipulated. Jackson County Bank entered into a construction contract with Kraemer Brothers, Inc., under which Kraemer Bros. as the prime contractor was to make improvements on the bank's real estate. Kraemer Bros. entered into a subcontract agreement with Weslow and Sons, Inc., a corporation engaged in the mechanical, plumbing, heating and air conditioning contracting business, in which Weslow was to furnish labor and materials on the Jackson County Bank project. Weslow in turn entered into subcontract agreements with third parties to obtain labor and materials to perform its contract with Kraemer Bros. on the Jackson County Bank project.

In January 1983, Weslow entered into a general line of credit agreement with Pulaski State Bank evidenced by notes secured by security interests in certain assets of Weslow.

On December 7, 1983, Weslow applied to Kraemer Bros. for a progress payment of $1,665 for labor and materials Weslow and its subcontractors or suppliers had furnished. Kraemer Bros. paid that amount to Weslow on December 23, 1983. On December 31, 1983, Weslow applied to Kraemer Bros. again, this time for a payment of $26,018 for labor and materials that Weslow and its subcontractors or suppliers had furnished. Kraemer Bros. paid that amount to Weslow, which deposited the check for that amount in its account at Pulaski State Bank. On January 27, 1984, a receiver for Weslow was appointed pursuant to ch. 128 of the Statutes.

Weslow owes $18,377.43 to several of its subcontractors and suppliers for whom Weslow received payment from Kraemer Bros. as a result of the December 7 and December 31 applications. Weslow has on deposit at Pulaski State Bank the sum of $18,377.43, which represents proceeds traceable to Kraemer Bros.'s check in the amount of $26,018. Kraemer Bros. contends that these monies are held in trust for the benefit of subcontractors and suppliers whom Weslow had identified in its application for payment. The claims of Weslow's subcontractors and suppliers for unpaid labor and materials are lienable claims against the project property for which Kraemer Bros. is liable by contract, if such amounts remain unpaid.

Kraemer Bros. requested payment of the $18,377.43 from Pulaski State Bank for disbursement to the unpaid subcontractors and material suppliers. ¹ Pulaski State Bank refused payment, claiming that the monies were not a trust fund and that it had a right to set off Weslow's debt to the Bank against the account. Kraemer Bros. requested the circuit court to determine the trust fund status of the monies.

I.

The resolution of this case turns on the meaning of sec. 779.02(5), Stats. 1985-86, which provides in pertinent part as follows:

(5) Theft by Contractors.... all monies paid to any prime contractor or subcontractor by any owner for improvements, constitute a trust fund only in the hands of the prime contractor or subcontractor to the amount of all claims due or to become due or owing from the prime contractor or subcontractor for labor and materials used for the improvements, until all the claims have been paid, and shall not be a trust in the hands of any other person.

Sec. 779.02(5) is part of the Wisconsin Construction Lien Law. Construction lien statutes originated nearly 150 years ago to encourage construction by protecting the contractors and subcontractors of building projects. Sec. 779.02(5) is designed to protect subcontractors and material suppliers by making money paid by the owner to the contractors and subcontractors a trust fund for the subcontractors and material suppliers.

Pulaski State Bank contends that the monies in Weslow's bank account are not a trust fund under sec. 779.02(5) because Weslow received the monies from the prime contractor, Kraemer Bros., not from the owner, Jackson County Bank. Pulaski State Bank reads sec. 779.02(5) as requiring payment to be made directly by the owner to the subcontractor. Sec. 779.02(5) does not, however, include the word "directly" in describing payment between the owner and its subcontractors. Kraemer Bros. urges that all sec. 779.02(5) requires for a trust to be imposed is that the payment have originated with the owner.

Pulaski State Bank cites Visser v. Koenders, 6 Wis.2d 535, 95 N.W.2d 363 (1959), as suggesting that a direct payment of monies by an owner to a contractor is necessary for the monies to have trust fund status. We disagree with this reading of the case. In Visser the contractor was adjudicated bankrupt, and the subcontractor sought a declaratory judgment that the trustee in bankruptcy had no interest or claim upon money owed by the owner to the contractor. The subcontractor argued that the unpaid monies were held in trust and that the subcontractor should prevail over the claims of the trustee. The court ruled in favor of the trustee, holding that monies retained by the owner were not a trust fund. Visser stands for the proposition that payment by the owner to the contractor is a prerequisite to the creation of a trust fund for the benefit of a subcontractor. Nothing in Visser compels the conclusion that a direct payment by an owner to a subcontractor is required to impose a trust on the monies in the hands of the subcontractor.

The Visser case determined that a prerequisite for the creation of a trust under sec. 779.02(5) is that payment be made by the owner to the contractor or subcontractor, and we must determine whether, as Pulaski State Bank claims, the owner must make payment "directly" to the subcontractor in order for the monies in the hands of the subcontractor to be a trust fund. Kraemer Bros. and the court of appeals cite State v. Blaisdell, 85 Wis.2d 172, 270 N.W.2d 69 (1978), as support for the proposition that direct payment is not required. The court did not expressly address this question in Blaisdell, but implicit in and central to its holding was that payment need not be direct. Blaisdell involved a criminal prosecution of a subcontractor for violation of sec. 289.02(5), the predecessor to sec. 779.02(5). The owner in that case hired a general contractor to construct an addition to the owner's house. The general contractor entered into a subcontract with the defendants, who in turn hired a subcontractor (a second-tier subcontractor) who furnished the defendants with electrical supplies. The general contractor fulfilled its obligations to the owner and was paid in full. The general contractor then paid the defendants for their work in eight monthly installments. The defendants went into receivership and their subcontractors were not paid for the last job. The court held there was sufficient evidence to support the defendants' convictions; the evidence showed the defendants intentionally used monies paid to them by the owner, via the general contractor, for purposes other than paying their subcontractors for supplies furnished on the job. Implicit in this court's decision upholding the convictions was the recognition that monies received by the defendants from the general contractor (who had been paid by the owner) were held in trust and could not be applied to any other obligations until the subcontractors were paid off. Blaisdell, 85 Wis.2d at 177, 270 N.W.2d 172.

Another case that strongly implies that direct payment from an owner to a subcontractor is not necessary to create a trust fund is W.H. Major & Sons, Inc. v. Krueger, 124 Wis.2d 284, 369 N.W.2d 400 (Ct.App.1985). In that case, the court of appeals stated that in order for a second-tier subcontractor or material supplier to claim a trust fund under sec. 779.02(5) it must "establish or 'trace' payment by an owner to the contractor or subcontractor." W.H. Major & Sons, supra 124 Wis.2d at 291, 369 N.W.2d 400. In that case the court ruled in favor of the second-tier subcontractor with respect to one claim in which payment could be traced from the owner to the subcontractor and rejected other claims in which there was no evidence that the owner paid the prime contractor before the prime contractor paid the subcontractors. The opinion implies that if monies can be traced from an owner to a prime contractor and then from the prime contractor to the subcontractor the monies are a trust fund in the hands...