There are certain areas of construction for both developers and subcontractors that we know as
attorneys are consistent problem areas. Today, I am going to focus on the most sensitive area which
causes probably the most grief for everyone involved – paying and getting paid. On the owner/
developer side, we see issues of subcontractors not performing to specs or schedule and still wanting to
get paid. On the subside, we see subs performing, hitting the mark, and they need to go through the
mechanic’s lien process. Regardless of your position in the construction, you need to understand the Texas
Trust Fund Act (“TTFA”). We see so many clients not knowledgeable about their obligations under the
TTFA. This will be the first of two blogs on the issue. If you have any requests for further information,
always know you can give a holler up to any of us at the office to discuss your question, or we can
include your topic under another blog for the benefit of everyone.
The basics of TTFA (Texas Property Code Section 162.001, et seq.) provide the definition of
“trust funds” as follows:
Sec. 162.001. CONSTRUCTION PAYMENTS AND LOAN RECEIPTS AS TRUST FUNDS.
(a) Construction payments are trust funds under this chapter if the payments are made
to a contractor or subcontractor or to an officer, director, or agent of a contractor or
subcontractor, under a construction contract for the improvement of specific real
property in this state.
(b) Loan receipts are trust funds under this chapter if the funds are borrowed by a
contractor, subcontractor, or owner or by an officer, director, or agent of a
contractor, subcontractor, or owner for the purpose of improving specific real
property in this state, and the loan is secured in whole or in part by a lien on the
property.
This section is very basic for each party to understand what are denoted as trust funds under
the Code. Clearly, if you receive funds, either through payment or by loan proceeds, the funds are
deemed trust funds. They carry with them obligations by the person/entity who receives them. Under
the general idea of a trust, the person who receives such funds, manages and is responsible for the trust
and monies/property dispersed through such, is called the “trustee.” If you are on the receiving end of
trust fund monies/property (i.e., it’s paid out to you), you receive a benefit, hence the designation of a
“beneficiary.” The Code defines these designations pretty clearly:
Sec. 162.002. CONTRACTORS AS TRUSTEES. A contractor, subcontractor, or owner or
an officer, director, or agent of a contractor, subcontractor, or owner, who receives
trust funds or who has control or direction of trust funds, is a trustee of the trust funds.
Sec. 162.003. BENEFICIARIES OF TRUST FUNDS. (a) An artisan, laborer, mechanic,
contractor, subcontractor, or materialman who labors or who furnishes labor or
material for the construction or repair of an improvement on specific real property in
this state is a beneficiary of any trust funds paid or received in connection with the
improvement.
(b) A property owner is a beneficiary of trust funds described by Section 162.001 in
connection with a residential construction contract, including funds deposited into a
construction account described by Section 162.006.
The TTFA does not discriminate (or is in favor of) against owners, developers or subcontractors.
The Code looks to who receives the money and from where it came. An owner, developer or
subcontractor can get designated as a trustee or beneficiary depending upon who gets the money and
from where. The TTFA is not in favor of any party to a construction contract – it is meant to ensure the
monies used for construction projects is properly held by the responsible person and disbursed
according to the law. It is a protection for all people involved.
The TTFA takes its role very seriously. It has provisions for not using the funds properly along
with strict penalties:
Sec. 162.031. MISAPPLICATION OF TRUST FUNDS. (a) A trustee who, intentionally or
knowingly or with intent to defraud, directly or indirectly retains, uses, disburses, or
otherwise diverts trust funds without first fully paying all current or past due obligations
incurred by the trustee to the beneficiaries of the trust funds, has misapplied the trust
funds.
I think by far this section is the biggest area we litigate on. It does have a pretty high standard
to prove your claim – intentionally, knowingly or with intent to defraud. These are usually proven
through testimony of people involved and by showing a pattern of activities which would lend
themselves to a trustee acting in defiance of the Code.
All in all, the easiest way for you, as an owner, developer or subcontractor to avoid any issues
with the TTFA is to determine what your role will be under the TTFA in beginning new projects, insuring
internal company compliance with your specific role, and consistently documenting with great detail
each payment made and/or received. The key is organization and compliance when it comes to the
TTFA. Two things have to be met – getting the project completed and making sure everyone gets
properly paid. In the end, you can avoid getting your attorneys involved which will save everyone
money.
