ND Attorney General probing possible fraud by now-closed Fargo contractor
FARGO—The North Dakota Attorney General's office is investigating if a Fargo contractor committed fraud leading up to its sudden closure.
Parrell Grossman, director of the Attorney General's Consumer Protection Division, said he directed staff to investigate possible fraud as soon as he saw news reports Monday, Oct. 23, about the abrupt closure of Studs to Rugs.
The company's south Fargo office, 5289 51st Ave. S., was locked Monday and its websites and social media accounts were deleted by Monday night. Several attempts to reach President Tim Rosene for comment were unsuccessful.
Grossman said his office fielded two "very disturbing" complaints from customers, with one alleging Studs to Rugs took $25,000 on Oct. 4 for a renovation that never started. Another complainant said the contractor was paid $40,000 but didn't finish the project.
Grossman said businesses aren't required to alert his office before closing, and his staff will try to talk with the owners to hear their explanation.
But he said there are several questions they need to answer, including when Studs to Rugs first got into financial trouble and if it continued to take money from customers knowing it wouldn't be able to finish the projects.
"Any time someone abruptly quits working and has taken thousands or hundreds of thousands of dollars and either hasn't done some of the work or has only partially completed projects or hasn't done any of the work, it potentially invokes the necessity for a consumer-fraud investigation," he said. "That's the situation here."
Adam Jacobson, a licensed contractor in Fargo who owns Dakota Built Restoration and Atlas Concrete, said he noticed some "major red flags" when he briefly worked with Studs to Rugs last winter during a slow period.
"With all their radio ads all over the place, they sounded like a really big, reputable company, so I wanted to go there and work with some professionals," he said.
Instead, he found warning signs he declined to specify that prompted him to quit.
Jacobson said customers should be cautious when considering hiring a big company that relies more on subcontractors than its own employees to do the work. Larger companies can have a flashy "image," he said, but they might have to charge more or cut corners to make up for significant overhead costs, which could include vehicles and offices.
Subcontractors that aren't paid for work they've done on behalf of a contractor can put a lien on houses to recover their losses—even if the homeowner paid the contractor for that work, Jacobson said. Residents should insist a contractor provide a lien release form signed by all subcontractors before giving their final payment to avoid this liability.
He said he doesn't know what prompted Studs to Rugs to close, and he never met Rosene.
"But I've seen this time and time and time and time again where people just put this big facade up, and it is just not true," Jacobson said.
Dan Hendrickson said customers shouldn't pay a contractor a down payment of more than 30 percent of the total project cost. The Better Business Bureau of Minnesota and North Dakota spokesman said customers also should require a contract that ties subsequent payments to project milestones, a small step that could prevent significant losses on work that never gets done.
That advice won't help Studs to Rugs customers now wondering what to do. He said they should hire an attorney to figure out possible legal recourses, and they should also monitor news about the company.
If the business seeks bankruptcy protection, for example, customers can file a claim, effectively getting in line with other complainants for possible repayment.
Unlike Minnesota, North Dakota doesn't have a contractor's recovery fund, an account that can help clients get back part of their losses.
Grossman said the Attorney General's office doesn't yet know if Studs to Rugs did engage in fraudulent conduct, a question that could take six months or longer for his office to answer.
Grossman said situations like this were one of the reasons his office helped push for legislative changes in 2015 to beef up the state's construction-fraud laws. As a result of those changes, he said cases can be treated as a crime when appropriate, such as when a contractor knew or should've known it couldn't do a job but took the money anyway.
He encouraged customers who suffered "substantial" impact from the closure of Studs to Rugs to file a formal complaint by calling (800) 472-2600 or visiting www.attorneygeneral.nd.gov/consumer-resources/consumer-complaints. Any documentation, such as contracts or copies of canceled checks, should also be submitted.
While Grossman said his office will seek restitution both for attorney fees paid by the state and the money lost by customers, he said it's been "highly unusual" to actually recover money in the 100 or so consumer fraud cases investigated by his office in the past two years.
"In one respect, it's much like a bankruptcy when a business takes money and then isn't able to deliver the goods or services for a variety of reasons," he said. "The difference here, maybe, is was there also some illegal conduct?"