Homebuyer beware: Case highlights difficulties of proving theft by contractor

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An Ozaukee County theft-by-contractor case is on its way to becoming a prime example of the difficult path private citizens must trod when trying to prove they’ve been defrauded by a homebuilder.

The Ozaukee District Attorney filed a criminal complaint on Nov. 9 against Timothy Rigsby, the owner of the Delafield-based homebuilding company Rigsby Group, alleging that Rigsby had misappropriated money provided in trust for the construction of a custom-built house in Mequon. Rigsby faces one felony count of theft by contractor over suspected trust-account violations that occurred while he was building the house for James and Michelle Friedman, a married couple who hired Rigsby in the summer of 2013.

According to documents filed in a related civil case, Rigsby had told the Friedmans that the house would be built using a cost-plus method. In essence, that meant he would pass on to the couple any labor and materials expenses incurred on the project.

On top of that, Rigsby Group would get a fee amounting to 10 percent of the house’s total cost. Rigsby also gave the Friedmans a guarantee that the project’s price tag would not exceed $1.26 million, according to the civil complaint.

To make sure Rigsby had the money needed to pay subcontractors while the work was proceeding, the Friedmans took out a roughly $1 million bank loan, as well as contributed about $129,000 from their own pockets. The money was held in a trust account managed by Chicago Title Insurance Co., of Jacksonville, Fla.

Rigsby was able to tap the trust account only after giving the title company a signed affidavit spelling out which subcontractors were to get the money and for what work. He had to submit a similar form to BMO Harris Bank, which holds the mortgage on the house.

The Friedmans started to suspect something was amiss when the architect they had hired to design their house began noticing abnormalities in the paperwork Rigsby was submitting. After dealing with a long series of project mishaps — the civil complaint lists allegations of shoddy workmanship, fees that were charged in excess of the agreed rate and change orders for work the Friedmans had not approved — the couple started an investigation on Feb. 5.

Rigsby’s contract was terminated six days later. Afterward, the Friedmans discovered that Rigsby, in the first draw he had taken from the project’s trust account, had in fact charged the company’s fee at a rate of 29 percent, according to the complaint.

The couple also found that Rigsby was misusing money that he had ostensibly pulled from the trust account to pay subcontractors and suppliers.

“Rigsby converted the funds to his own use, all in breach of the Contract and in violation of Wisconsin law,” according to the complaint.

Brent Nistler, the lawyer representing Rigsby in the criminal case, said his client is innocent and declined to comment further. An attempt to reach Rigsby directly was unsuccessful.

According to the complaint, Rigsby at one point responded to the Friedmans’ allegations by denying that he had ever entered into a cost-plus contract. He argued that what the parties had actually reached was a lump-sum agreement and that he was thus never really obliged to accurately document the labor and materials costs that would go into the price ultimately charged for the entire project.

Michelle Friedman countered by noting that Rigsby Group’s website boasts that, “Earning your trust through our detailed and open book pricing schedules will educate you and allow you to understand real costs of what you want for your project.” The civil complaint also states that Rigsby, before being hired, had obtained bids for various materials and showed them to the Friedmans. The Friedmans took those actions to mean that the materials’ costs would influence the house’s final price tag.

“In my opinion and experience, Rigsby’s transparent pricing is about as transparent as a clogged toilet,” said Michelle Friedman.

While a criminal charge of theft by contractor is serious, the possible civil penalties could be even worse for Rigsby. A plaintiff who can prove in civil court that a defendant violated the state’s theft-by-contractor statute can win treble damages, as well compensation for attorneys and expert-witness fees.

Michelle Friedman said costs related to the case, including those stemming from repairs that needed to be made to the house after Rigsby was fired, have easily exceeded $400,000 for her and her husband, who is a lawyer at Milwaukee’s Quarles & Brady. Anthony Varda, a Madison-based lawyer representing one of the subcontractors hired for the Friedmans’ project, said the penalties are set so high in part because lawmakers recognized how hard it is to pursue a theft-by-contractor case.

Seeing how next-to impossible it would be to ensure every contractor who breaks the rules faces legal consequences, they wanted to make examples of the ones who are caught.

Various subcontractors who worked on the Friedmans’ house are also awaiting payment. Among them is Trecek Builders LLC, of Verona, which is being represented in the case by Varda.

Varda said the Rigsby case highlights a particular flaw in construction practices. Subcontractors, he explained, are too often willing to sign lien waivers even before receiving payment for work they’ve performed. In the Friedmans’ case, subcontractors were told that Rigsby could not withdraw money from the Friedmans’ trust account until they had waived their right to place liens on the project.

In most cases, the subcontractors did not even know what amounts Rigsby was supposedly taking out on their behalf. In that way, at least one possible check on any misappropriations was undermined: Because the subs could not say for certain that Rigsby was paying them the full amount he had promised, they also could not know if they were being shorted in some way, according to the complaint.

The complaint states that Trecek Builders and two other subcontractors on the Friedmans’ house — Atlas Iron Works and Thermal Insulation — were still owed $11,500 in total in November. It was unclear how much of that, if any, has since been paid off.

Varda said Trecek Builders is not suing Rigsby directly. Instead, company officials are hoping that the Freidmans are successful in their legal battle and that Trecek Builders will get what it is owed as a result.

Varda conceded that it’s hard to understand why subcontractors would be willing to sign away lien rights — which are often the main legal means they have of recouping money still owed them. Many times, he said, it’s because they believe they have no other choice.

“Big contractors will often say, ‘You can’t apply to be paid unless you waive your lien rights,’” Varda said. Follow @TDR_WLJDan