Approximately two and a half years ago, I wrote about a broad interpretation placed on the Colorado trust fund statute by the Colorado Court of Appeals.  In a 2010 decision titled AC Excavating, Inc. v. Yale, the court determined that an LLC manager’s voluntary injection of funds into the general business account of a single purpose LLC constituted “funds disbursed to a contractor on a construction project,” which opened the LLC manager to liability under the Colorado trust fund statute because he used those funds to pay general business expenses rather than to pay subcontractors in full. 

This February, in Yale v. AC Excavating, Inc., the Colorado Supreme Court reversed the Court of Appeals’ decision.  While the Court agreed that the funds loaned by the LLC manager were “disbursed . . . to a contractor,” it disagreed with the Court of Appeals conclusion that the funds were disbursed “on a construction project.”  Looking at the totality of the circumstances, the Court determined that the funds were not disbursed on a construction project, but were instead disbursed as a “survival” loan to be used to finance general operations.  However, had the funds been earmarked for construction purposes, or disbursed pursuant a construction contract, the Court’s decision would have subjected the manager to trust fund liability.

The Court’s recent ruling is good news to developers and general contractors, but it is limited in scope.  While the decision allows owners of struggling companies to voluntarily inject new funds to meet general operational expenses, funds received on account of a particular construction project or pursuant to a construction contract (including a construction loan) are still very much subject to the requirements of the Colorado trust fund statute.  Therefore, contractors need to continue to maintain strict accounting practices to avoid liability.