Commentary: Using Trust Fund Solutions for Contractor Payment Defaults
These trying economic times require more knowledge and creativity to survive and prosper. With many trade contractors failing, general contractors and owners need to know and take actions that could reduce or eliminate losses when their contractors or subcontractors don’t pay their bills.
One of those actions available in Colorado is under the Trust Fund Statute originally enacted in Colorado in 1973, largely at the behest of this columnist.
While most trade contractors do business as corporations or limited liability companies intended to shield their owners against personal liability for their companies’ debts, the Trust Fund Statute may be used to pierce those shields. It provides that monies paid to contractors become trust funds that must be used by the contractor or subcontractor to pay for labor, materials, services and other obligations for the project.
Anyone who knowingly uses those monies for any other purpose may then be personally liable not only for the amount of the misapplied trust funds, but also for treble damages and the attorneys’ fees incurred in the pursuit of those claims.
For example, let’s say Shocking Electric Co. LLC is a subcontractor to General Construction Co. on a commercial office building project. During the progress of the job, Shocking Electric receives periodic payments from the general contractor but fails to use those funds to make payments to its suppliers for materials used on the project. Shocking Electric then shuts its doors and goes out of business. Shocking Electric’s suppliers file mechanic’s liens against the office building. General Construction may then be stuck for payment of the materials—again.
However, a little investigation by or on behalf of General Construction Co. may reveal that Shocking Electric’s president (and likely one of its owners) has a large home in Cherry Hills, a condominium in Vail and a lot of other wealthy trappings. Using the Trust Fund Statute and the probability that Shocking Electric’s Mr. Moneybags was in control of its finances and used or directed the use of monies paid on the office building project for purposes other than the payment for materials and supplies, General Construction may recover from him the monies it paid to have its supplier’s mechanic’s lien(s) removed as well as treble damages and attorneys’ fees allowed by the Trust Fund Statute. Success is likely.
General Construction Co. may have another avenue to recover what it has paid to have Shocking Electric’s supplier’s mechanic’s lien released. A little investigation may reveal the fact that some of General Construction’s payments to Shocking Electric were used to pay Shocking Electric’s debt to its bank or that its bank simply took the money out of its account to pay off Shocking Electric’s loan from its bank. Since those monies were trust funds, General Construction can go after the bank to recover those monies.
Similarly, General Construction Co. could go after any other party who was paid with General Construction’s monies. In law, trust funds are known as “res,” and there is a general legal proposition that a party may “chase the res,” which means that the party entitled to the funds may go after them.
Misapplication of these trust funds is also a crime under Colorado law, but most district attorney’s offices do not prosecute those cases unless the amounts are large or the circumstances are particularly egregious.
A little knowledge, a little creativity and some investigation may well prevent owners or contractors from suffering losses when their contractors or subcontractors fail to pay their bills with monies paid to them for that purpose.
Albert B. Wolf is a principal in the Denver law firm of Wolf Slatkin & Madison P.C. This column was written with the intent of providing general legal information intended to be reasonably accurate although not comprehensive. Readers are therefore urged to consult their attorneys for any specific legal advice they may desire concerning the subject matter of this column.