When an owner pays a contractor, that money is supposed to flow down the chain to the subcontractors and suppliers who contributed to the project. The Texas Construction Trust Fund Act (see Chapter 162 of the Texas Property Code) exists to make sure it does.
Texas law treats certain construction payments as trust funds and provides penalties for contractors who divert them unlawfully. If you believe trust funds were misapplied or you’re facing an allegation of improper diversion, a construction disputes attorney in Houston can help you understand your rights and potential remedies under this law.
What Factors Transform Money into Trust Funds
Not every dollar on a project is covered by the Trust Fund Act. Under Section 162.001, trust funds include:
- Construction payments made under a contract to improve specific real property
- Loan receipts borrowed to pay for the improvement and secured by a lien on the property
A fee earned under a written contract before construction begins is not a trust fund. Once funds qualify, the person holding them owes duties to the subcontractors below them on the project.
Who is a Trustee Under the Act?
Under Texas law, a trustee is a contractor, subcontractor, or owner who receives or controls trust funds. Likewise, an officer, director, or agent who controls or directs those funds is also a trustee.
Being designated a trustee creates fiduciary duties to trust beneficiaries and personal liability for misconduct. For example, an owner of a contracting company can be held personally responsible for misapplied funds even when the business would normally shield them. This law allows aggrieved parties to pierce the “corporate veil.”
Who is a Beneficiary Under the Act?
According to the Trust Fund Act, the beneficiaries to construction-related trust funds are subcontractors, laborers, and material suppliers who furnish labor or materials for the project. On residential construction contracts, the property owner is a beneficiary.
Criminal and Civil Consequences for Misapplying Funds
A trustee misapplies trust funds when they intentionally or knowingly divert trust fund money without first fully paying all current and past-due obligations to the beneficiaries. In other words, a contractor cannot use money owed to subcontractors to pay themselves or to cover an unrelated project.
Misapplying more than $500 in trust funds is a Class A misdemeanor. If the misapplication is done with intent to defraud, it becomes a third-degree felony under Section 162.032.
The civil consequences of a construction lawsuit can be just as serious as the criminal penalties. They include:
- Personal liability for the diverted amount
- Possible exemplary damages for breach of fiduciary duty
- Attorney’s fees
Incidentally, trust funds are not protected in bankruptcy, so a bankruptcy action does not erase the obligation.
Affirmative Defenses for Contractors
The Act gives trustees a defense. Under Section 162.031(b), a trustee is not liable if the funds were used to pay actual expenses directly related to that project. Texas courts have read this to include reasonable project overhead. However, trustees should keep separate, detailed records for each job to prove the money went where it was allowed to go.
How an Attorney Can Help With a Trust Fund Misapplication Claim
These cases turn on proving intent, tracing where the money went, and naming the right parties, all of which require a firm that knows how the Trust Fund Act works in practice.
If you are a subcontractor seeking payment or a contractor defending against a misapplication claim, an attorney protects your position by:
- Determining whether the payments at issue actually qualify as trust funds
- Identifying every potential trustee, including officers, directors, and agents who can be held personally liable
- Tracing the flow of funds to show whether money owed to beneficiaries was diverted
- Send formal demand letters that preserve your rights
- Pursue the full range of remedies, including personal liability, exemplary damages, and attorney’s fees
- Raise the “actual expenses” affirmative defense and document project-specific costs when defending a claim
- Coordinate the trust fund claim with related remedies, such as mechanics’ liens
- Pursue claims that survive bankruptcy
If you are dealing with a trust fund claim on a Houston project, the construction attorneys at Porter Law Firm can protect your rights. Call (713) 621-0700 to schedule a consultation.