The Colorado Supreme Court (the “Court”) has now weighted-in on the requirements for foreign courts to create enforceable charging orders against Colorado LLCs.  In JPMorgan Chase Bank N.A. v. McClure (2017 CO 22. No. 15SC816 (Colo. 2017)), the Court ruled that to be enforceable, foreign charging orders against a Colorado LLC must be either (i) procedurally domesticated in Colorado, or (ii) issued by a court with proper jurisdiction over the LLC or the membership interest in question. Continue Reading Enforcing Foreign Charging Orders against Colorado LLCs

A last minute bill has been introduced in the Colorado Senate.   Colorado Senate Bill 12-181, introduced last week by State Senator Lois Tochtrop, proposes new requirements related to construction projects in Colorado.  These proposed changes are not favorable to property owners in Colorado and will limit the ability of property owners to negotiate business terms in their construction contracts.  SB 12-181 is set for a hearing before the Senate Business, Labor and Technology Committee on Wednesday, May 2, 2012. 

SB 12-181 applies to “Building and Construction Contracts” which is defined as any contract subject to Title 38, Article 22 of the Colorado Revised Statutes, Colorado’s mechanics’ lien law.  SB 12-181 contains the following points:

  • Colorado Law Must Apply.  Any provision in a Building or Construction Contract for work to be performed in Colorado that makes the contract subject to the laws of another state or contains a dispute resolution provision governed by the laws of another state, is void and unenforceable. 
  • Parties Cannot Contract Around Colorado Mechanics’ Lien Law.  Any provision in a Building and Construction Contract that requires a contractor or subcontractor to waive its right to file a mechanics’ lien or claim against a payment bond prior to being paid is void and unenforceable.
  • Payment to Subcontractors and Suppliers Required Within 7 Days.  All principals, general contractors and subcontractors must pay their subcontractors and material suppliers within seven days of receipt of services.
  • Mandatory Interest Penalty; Costs and Attorney Fees Award.  A 1.5% monthly interest penalty applies to all unpaid amounts, and subcontractors and suppliers who successfully sue to collect this interest penalty will also be entitled to collect their costs of suit, including attorney fees.
  • Monthly Progress Payments Required; Retainage Amounts Capped.  Property owners or parties responsible for payment must make monthly progress payments to the general contractor unless the Building and Construction Contract specifies otherwise, and owners or payment parties may only reserve as retainage a maximum of 5% of each payment.
  • Change Orders.  General contractors must submit the costs of any change orders to owners for payment within 30 days of the change order.  Owners or payment parties will be required to pay at least 50% of any disputed change order amounts.

A few months ago, I wrote about a recent Colorado Court of Appeals decision that gave a broad interpretation to the Colorado Trust Fund StatuteThat decision highlighted the importance of maintaining strict accounting practices and segregating funds for each separate construction project.  As a follow up to that post, I would like to highlight a particular accounting practice that has the potential to create liability under the Trust Fund Statue while also invalidating mechanics’ liens filed by subcontractors.

construction tunnel.jpgGeneral contractors often use the same supplier or subcontractor on multiple projects.  Sometimes a newer project will pay out much quicker than an older project, whether because of construction issues that need to be resolved or delays in payment from the property owner.  In these situations some contractors decide to enter into arrangements with their subcontractors whereby invoices get paid based on aging rather than on a project by project basis.  This might be because neither the contractors nor the subs like to show past due accounts payable/receivable on their financial statements, or maybe the subcontracts provide for steep interest payments on past due invoices.

Whatever the motivation, the contractor and the sub often view this practice as harmless.  However, upon closer scrutiny, these types of arrangements can become disastrous for both contractors and subcontractors.  For example, if an older project never pays out as expected and the contractor is left with a shortage of funds, then that contractor will likely face liability under the Trust Fund Statute (to a property owner and/or other subcontractors) for diverting funds from one project to pay for the expenses of another. 

Meanwhile, the subcontractor whose invoices were paid based on aging, rather than on a project by project basis, is likely to have some unpaid invoices.  In such a case a subcontractor would usually protect itself by filing a mechanics’ lien against the property for which it did work and did not get paid.  However, this subcontractor will have a difficult time enforcing a mechanics’ lien for the newer “unpaid” invoices because it in fact already got paid with funds from that very project – those funds were simply misapplied to an older invoice for a different project.

While it can be tempting to maintain informal accounting practices with long standing and trusted subcontractors or suppliers, both sides need to ensure that they properly account for all funds so as not to run afoul of the Colorado Trust Fund and Mechanics’ Lien statutes.

Photo by laffy4k (Flickr)

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.

construction - small.jpgThe 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)