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Surprisingly few contractors are familiar with the Texas Construction Trust Fund Act, Chapter 162 of the Texas Property Code. Considering the penalties that can be imposed for violating this statute, a contractor would be smart to understand and follow the requirements of this statute.

What does the Texas Construction Fund Trust Act say?

The Texas Construction Trust Fund Act states that payments made to a contractor or subcontractor or its officer, director, or agent under a construction contract are considered trust funds that are to be used for the payment of costs associated with the project before they are spent for any other purpose.

The intent of this statute is to protect property owners and subcontractors from the risk that a contractor could disappear, along with the funds it has received, without paying the subcontractors or paying the costs associated with the job. Subcontractors and suppliers would be left unpaid and homeowners would face mechanic’s liens for the unpaid work. The Texas Construction Trust Fund Act tries to prevent this by holding contractors responsible for making these payments out of the project funds.

What payments does the statute cover?

The statute applies very broadly to most payments received by a contractor on a construction project. The statute covers not only payments received from the property owner, but also loan proceeds, where the loan proceeds are for a construction project and the loan is secured by a lien on the property. While some exceptions to this statute exist, it can be a highly technical matter to determine such exceptions. In order to determine whether an exception to the Texas Construction Trust Fund Act applies, it is best to consult with an attorney experienced in construction law matters.

What are the statute’s requirements?

The Texas Construction Trust Fund Act requires that payments made to a contractor or subcontractor or its officer, director, or agent under a construction contract may not be spent or otherwise diverted from the project before all current or past due obligations have been satisfied. “Current or past due obligations” are those obligations and debts already existing on the project at the time the funds are received which are due and payable by the contractor no later than 30 days after the receipt of the funds. A contractor who uses the funds for matters outside of the project before these obligations are paid is in violation of the statute.

Where a homestead is involved, matters become much more complicated. In construction contracts of more than $5,000.00 on homesteads, the construction trust funds must be deposited in a bank in a separate “construction account.” The bank statements must refer to the account as a “construction account” and only construction trust fund monies can be deposited into the account. The contractor must keep account records for the construction account showing: (1) the source and amount of the funds in the account and the date the funds were deposited; (2) the date and amount of each payment from the account as well as the person the payments were made to; and (3) the current balance of the account. Further, for each homestead project, the contractor must keep records showing all the costs that have been charged to the homeowner. The contractor must retain all invoices and any other supporting documentation the contractor has received concerning funds that were paid from the construction account. All these records must be kept for at least one year after the project is completed.

What are the penalties for violating the statute?

Violation of the Texas Construction Trust Fund Act can have surprisingly serious consequences. Violators can face not only civil liability, but also criminal liability. Misuse of trust fund amounts greater than $500.00 is a Class A Misdemeanor. If it is shown that this was done with the intent to defraud, it is a Third Degree Felony. Failure to maintain a construction trust fund account on homestead projects or to maintain the required records on that account is a Class A Misdemeanor.

Liability for violation of the statute can be ruled non-dischargeable by bankruptcy courts.

It is important to be aware that an owner, officer, director, or agent of a contractor can be held individually liable for violation of the statute. However, individual liability generally requires a showing that the individual had some control or authority over the disbursement of the trust funds.

Claims filed under the Texas Construction Trust Fund Act definitely need to be taken seriously. If a claim is made against you under this statute, it is important to immediately contact an attorney experienced in construction law matters.

Are there any defenses to violation of the Texas Construction Trust Fund Act?

The most common defense to a construction trust fund claim is that the funds were used to pay actual expenses directly related to the construction or repair. Another defense available to the contractor exists where the contractor has retained the funds due to the contractor’s reasonable belief that the person claiming the funds is not entitled to those funds. This defense requires that the contractor provide notice of this to the person claiming the funds. It is also a defense for the contractor if the contractor pays those entitled to payment of construction trust funds all amounts they are entitled to within 30 days after the contractor receives written notice of the filing of a criminal complaint or other notice of a pending criminal investigation. If a claim is made against you under the Texas Construction Trust Fund Act, you may have defenses available to you and you should contact an attorney experienced in construction law matters without delay.

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