Jeffrey Wade
The Texas Trust Fund Act, found in Chapter 162 of the Texas Property Code, designates certain construction payments as trust funds that must be used only for the benefit of subcontractors, suppliers, and laborers involved in a project. When a property owner pays a general contractor, that money is legally held in trust to pay the people who actually did the work or supplied materials. The Texas Trust Fund Statute makes general contractors into trustees who have a fiduciary duty to manage payments for the benefit of the subcontractors, who are the beneficiaries of the trust funds held by the general contractor. The Texas Construction Trust Fund Act provides criminal penalties for missteps, including fines and jail time.
| Characteristics | Values |
|---|---|
| What are considered trust funds? | Construction payments, loan receipts |
| Who are considered trustees? | Contractors, subcontractors, or any party that has control or direction of trust funds |
| Who are the beneficiaries? | Artisans, laborers, mechanics, contractors, subcontractors, or materialmen |
| What are the trustee's responsibilities? | To manage payments for the benefit of the beneficiaries |
| What happens if a trustee misapplies funds? | Civil, personal, or criminal liability may be imposed on the trustee |
| What is the penalty for misapplication of trust funds? | Fine of up to $10,000 and/or jail time ranging from 2 to 10 years |
| Are there any defenses to a misapplication claim? | Yes, if the trustee used the funds to pay for actual expenses directly related to the project |
| Are property owners considered trustees? | No, but they can be pulled into disputes if payments do not go through proper channels |
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What You'll Learn
Texas Trust Fund Statute
The Texas Construction Trust Fund Act (CTFA) is a statute that aims to protect subcontractors and vendors by designating certain construction payments as "trust funds". The statute applies to construction projects involving real property improvement and classifies construction payments made to contractors, subcontractors, or their officers, directors, or agents as "trust funds".
Under the Act, trustees are defined as "a contractor, subcontractor, or owner, or an officer, director, or agent of a contractor, subcontractor, or owner, who receives trust funds or has control or direction of trust funds." Beneficiaries of the trust are defined as any "artisan, laborer, mechanic, contractor, subcontractor, or material-man" who provides labour or materials for the construction or repair of an improvement on specific real property, as well as any property owner on a residential construction project.
The Act provides three statutory affirmative defences:
- The funds were used to pay for the actual direct costs of construction or repair of the improvement.
- The trustee retained the amounts after notifying the beneficiary and based on a reasonable belief that the beneficiary was not entitled to the funds or as authorised and required by the lien statute.
- The trustee paid all beneficiaries the amounts they were entitled to within 30 days of receiving written notice of their claims.
The Texas Construction Trust Fund Act also outlines requirements for a "construction account". This type of account must be held in a financial institution, be referred to as a "construction account" on all statements, and only contain trust funds and funds necessary to pay charges for the account. Contractors are required to maintain detailed records for the account, including information on deposits, disbursements, account balances, and project-specific costs.
The Act provides criminal penalties for missteps and misapplication of trust funds. It is important for those in the construction business in Texas to understand the Act to avoid potential penalties.
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Construction Trust Fund Act
The Texas Construction Trust Fund Act (CTFA) is a law that applies to anyone who receives construction payments on behalf of others, including contractors, subcontractors, property owners, and developers. It creates fiduciary duties for those who handle construction funds and designates certain construction payments as "trust funds" that must be used only for the benefit of subcontractors, suppliers, and labourers involved in a project.
The CTFA provides that certain construction payments are designated as funds held in trust for the benefit of the project participants. This includes payments made to a contractor under a construction contract, loan disbursements earmarked for building improvements, and insurance proceeds paid out for construction or repair work. These funds must be used exclusively for the payment of current or past project-related obligations.
The CTFA requires that, in certain circumstances, a "construction account" is established. A "construction account" refers to an account in a financial institution into which only trust funds and funds deposited by the contractor that are necessary to pay charges imposed on the account by the financial institution may be maintained. The contractor must ensure that all deposit and disbursement documentation includes the construction account number or information that provides a direct connection between the documentation and the account. The contractor is also required to retain all invoices and other supporting documentation relating to funds disbursed from the construction account.
Violations of the CTFA can result in personal liability, civil penalties, or even criminal charges. A violation occurs when a trustee spends trust funds for personal or business use before paying subcontractors, fails to pay vendors despite receiving sufficient project funds, or transfers funds to unrelated accounts or projects. This is known as a misapplication of trust funds and can trigger civil lawsuits or criminal charges for fraud or theft. The penalties for breaches of the CTFA's imposed duties can be severe, with the Act providing for personal liability, meaning that the owner/officer/director of a company may be personally liable for the breach even if the construction participant was a corporation or LLC.
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Texas Trust Act
The Texas Trust Fund Act is a law that creates fiduciary duties for those who handle construction funds. It designates certain construction payments as "trust funds" that must be used only for the benefit of subcontractors, suppliers, and laborers involved in a project. This means that when a property owner pays a general contractor, that money is legally held "in trust" to pay the people who actually did the work or supplied the materials. Trust funds under the Act include payments made to a contractor under a construction contract, loan disbursements for building improvements, and insurance proceeds for construction or repair work. These funds must be used exclusively for the payment of current or past project-related obligations.
A violation of the Texas Trust Fund Act occurs when a trustee spends trust funds for personal or business use before paying subcontractors, fails to pay vendors despite receiving sufficient project funds, or transfers funds to unrelated accounts or projects. This is known as a misapplication of trust funds and can trigger civil lawsuits or criminal charges for fraud or theft. One of the most powerful features of the Act is that it allows for personal liability. Even if a contractor operates through a corporation or LLC, they may be personally responsible for trust fund violations if they had control over the funds. In some cases, courts have awarded treble damages and attorney's fees to unpaid subcontractors under the Act.
To avoid liability, trustees may defend themselves by showing that funds were properly applied to authorized obligations and that good record-keeping and proof of payments were maintained. Property owners and developers are not typically deemed trustees, but they can get pulled into disputes if they fail to ensure that payments go through the proper channels and that general contractors comply with their obligations under the Act.
The Texas Trust Fund Act is found in Chapter 162 of the Texas Property Code. It is important for contractors, subcontractors, property owners, and developers in Texas to be aware of this Act as it plays a major role in construction payment disputes across the state.
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Construction payments as trust funds
Construction payments are designated as trust funds under the Texas Trust Fund Act, also known as the Texas Construction Trust Fund Act. This Act is found in Chapter 162 of the Texas Property Code.
Under the Act, construction payments made to a contractor, subcontractor, or an officer, director, or agent of a contractor or subcontractor, are considered trust funds if the payments are made under a construction contract for the improvement of specific real property in Texas. This includes loan receipts borrowed by a contractor, subcontractor, or owner, or their respective officers, directors, or agents, for the purpose of improving specific real property in Texas, where the loan is secured by a lien on the property.
The Act creates a fiduciary duty for the recipient of the funds, deemed the trustee, to hold the money for the beneficiaries. The beneficiaries are typically subcontractors, but can also include artisans, laborers, mechanics, materialmen, and property owners on residential construction projects. The trustee must prioritize paying these beneficiaries before using the funds for other purposes.
Trust funds are misapplied when the trustee knowingly diverts trust funds without first fully paying all obligations to beneficiaries. This can result in civil lawsuits or criminal charges for fraud or theft, with penalties including fines and jail time.
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Civil and criminal liability
The Texas Construction Trust Fund Act (CTFA) provides for civil, personal, and criminal liability for trustees who misapply trust funds. Trustees, in this case, include general contractors and anyone who has control or direction of trust funds, including employees and family members. Civil liability arises when a trustee intentionally, knowingly, or with "intent to defraud" retains, uses, or diverts trust funds without first fully paying all obligations to the beneficiaries. "Intent to defraud" can include misapplying funds and failing to establish a separate construction account for homestead jobs exceeding $5,000, or misapplying funds obtained through a false affidavit. While the CTFA does not provide for the recovery of attorney's fees by the prevailing beneficiary, a breach of contract claim could trigger such an award.
Personal liability under the CTFA means that a company owner, officer, director, or agent who directly or indirectly retains, uses, or diverts trust funds can be held personally liable to the beneficiary, even if a corporation or other entity with liability protection is involved. This extends to individuals who work for the party receiving trust funds and make decisions regarding withholding or misdirecting payments.
Criminal liability under the CTFA can result in severe penalties, including potential fines and jail time. Misapplication of trust funds amounting to $500 or more is a Class A Misdemeanor, while misapplication with intent to defraud is a Third-Degree Felony. These criminal penalties serve as a strong deterrent against breaches of the Act's imposed duties.
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Frequently asked questions
The Texas Trust Fund Act is found in Chapter 162 of the Texas Property Code. It designates certain construction payments as "trust funds" that must be used only for the benefit of subcontractors, suppliers, and laborers involved in a project.
The Texas Trust Fund Statute applies to anyone "who has control or direction of trust funds". This includes general contractors, who are deemed trustees of the funds and are liable if the funds are misapplied.
A "misapplication" of trust funds occurs when a trustee knowingly diverts trust funds without first fully paying all obligations incurred to subcontractors. This can trigger civil lawsuits or criminal charges for fraud or theft.
Misapplication of trust funds amounting to $500 or more with intent to defraud is a Third Degree Felony with a potential fine of up to $10,000 and jail confinement of 2 to 10 years. On residential construction projects, failing to establish or maintain a construction account is a Class A Misdemeanor with a potential fine of up to $4,000 and up to one year in jail.
Trustees may defend themselves by showing that funds were properly applied to authorized obligations. One defense is that the trust funds not paid to the beneficiaries were used by the trustee to pay the trustee's actual expenses directly related to the project. Good record-keeping and proof of payments are essential to avoid liability.
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