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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 Reid Brown Raysman & Steiner LLP