Contractors Beware: Trust Fund Statute Receives Broad Interpretation
As Jamie C. Belgum reported in the Colorado Bar Association’s Business Law Newsletter, the Colorado Court of Appeals recently decided a case that gives broad interpretation to the Colorado Trust Fund Statute, C.R.S. § 38-22-127.
The Trust Fund Statute requires contractors to hold funds they receive for a project in trust for the payment of subcontractors. That means if a contractor receives a disbursement from a construction loan or a payment from a home purchaser, the contractor has to use that money to pay subcontractors before paying any general business expenses.
The question presented in AC Excavating, Inc. v. Yale is whether the Trust Fund Statute reaches a manager’s voluntary monetary contribution to his own construction company. Mr. Yale loaned $157,500.00 to his construction company, Antelope Development, LLC, whose sole project was the construction of a retention pond for a golf course community. Yale directed Antelope’s use of the funds to pay general business expenses, including interest on municipal bonds that secured Yale’s loan. AC Excavating, a subcontractor, sued Yale under the Trust Fund Statute for misapplying the funds he himself contributed.
The Court took a broad reading of the statute saying that it reached all funds disbursed irrespective of the intent of the disburser. The Court further held that since Antelope had only one bank account and one project it was clear that the funds were “for the construction project” for which AC Excavating did work. Putting aside the question of whether the Court accurately interpreted the statutory language, there is still some hope for owners/managers seeking to recapitalize their construction company without subjecting themselves to trust fund liability:
- Contractors should set up separate banking accounts for each project into which they can deposit disbursements made specifically for that project. A subcontractor should only be paid from the account for the project for which that subcontractor did work.
- A separate account should also be maintained for general business expenses (i.e., office materials, equipment leases, rent, pay-roll, and marketing). Owners should deposit infusions of capital into the general business account when they plan on using such capital to pay general business expenses.
- Any money left over in a project account after all subs have been paid can then be transferred to the general business account to pay general expenses and profits.
With cash flow tight it is easy to rationalize moving money around to help a struggling project, but to avoid liability under the Trust Fund Statute (which is often non-dischargeable in bankruptcy) contractors must maintain strict accounting practices. Still, with ever broader interpretations of the Trust Fund Statute contractors can never be entirely safe from liability.
Photo from The Library of Congress (Flickr)