Texas Property Code Section 162, referred to as “The Trust Fund Statute” is another powerful tool that you have in your arsenal (independent from a lien) to enforce payment for providing labor or materials to a construction project.
In summary, an owner, contractor or subcontractor violates the statute when it intentionally, knowingly, or with the intent to defraud, retains, uses, disburses, or diverts trust funds without first fully paying all obligations incurred or owed for labor or materials furnished to the project. The statute imposes both civil and criminalliability on any individual who violates it.
How Does a Trustee Violate the Trust Fund Statute?
A trustee violates the Trust Fund Statute when it intentionally, or knowingly, or with the intent to defraud,, directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all “current or past due obligations” incurred by the trustee and owed to the beneficiaries of the funds.
A “current or past due obligations” is defined under the statute to include those obligations incurred or owed by the trustee for: (1) labor or materials furnished in the direct prosecution of the work; (2) under the construction contract; (3) prior to the receipt of the trust funds; (4) and which are due and payable by the trustee no later than 30 days following receipt of the trust funds.
A trustee acts with the requisite “intent to defraud” by doing any of the following: (1) by retaining, using, disbursing, or diverting trust funds with the intent to deprive the beneficiaries of the trust funds; (2) in a residential construction setting, by failing to establish or maintain a construction account or an account record for the construction account for which the trust funds are to be maintained; or (3) by obtaining trust funds through a false payment affidavit pursuant to Texas Property Code Section 53.085 and then using, disbursing, or diverting those funds away from the beneficiaries of the funds.
What are the Penalties for Violating the Trust Fund Statute?
A trustee who violates the Trust Fund Statute is subject to both civil and criminal liability.
In the civil context, the officers, directors and agents of an owner, contractor, or subcontractor who are deemed to be trustees under the statute, are personally liable for misapplication of trust funds. In other words, they can be individually sued in civil court and criminally prosecuted by the state.
In regard to criminal liability, a trustee who intentionally or knowing misapplies trust funds amounting to $500 or more, commits a Class A misdemeanor. A trustee who misapplies trust funds amounting to $500 or more with an “intent to defraud” commits a felony of the third degree.
What are “Trust Funds”
Construction payments are considered trust funds if they are made to a contractor by an owner, or to a subcontractor by a contractor, under a construction contract for the improvement to real property.
For example, progress payments from an owner to a general contractor would generally be considered trust funds for the benefit of everyone under the general contractor who is providing labor or materials to the project.
Who is Not a “Trustee”?
Banks, saving and loan entities, lenders, title companies, closing agents, corporate entities who issue a payment bond all are not trustees under the Trust Fund Statute.
Who is a “Trustee”
A contractor, subcontractor, or an owner who receives trust funds or who has control or direction of trust funds is a trustee. Additionally, an officer, director, or agent of a contractor, subcontractor, or owner are also considered to be trustees under the Trust Fund Statute.
How do You Enforce Trust Fund Violations?
The are two primary ways to enforce Trust Fund Statute violations: (1) through a Payment Demand Letter; or (2) by Filing a Lawsuit. Through a payment demand letter, you advise the debtor of the statute, penalties for violating the statute, that you have information in which to believe they violated the statute, and that if payment is not immediately made a lawsuit will be filed to enforce a violation of the statute. Through a lawsuit, you allege a violation of the statute as a “cause of action” and you request the court to award monetary damages in the form of penalties against the defendants for violation of the statute. Additionally, since the statute imposes personal liability against those individuals who violate the statute, you can name those persons in the lawsuit as individual defendants; of which you would not otherwise be allowed to do on a simple breach of contract claim.