Texas Construction Trust Fund Act & Priority of Contractors' Claims

Contractors' Claims under the Texas Construction Trust Fund Act


The Texas Construction Trust Fund Act, located in chapter 162 of the property code, provides that any funds to a contractor, subcontractor, or supplier made in payment of labor and materials are held in trust for all parties in the construction chain. Tex. Prop. Code Ann. §§ 162.001-.033 (West 2007 & Supp. 2010); Vulcan Materials Co. v. Jack Raus, Inc., 157 B.R. 592, 597 (Bankr. W.D. Tex. 1993) (finding that "once the owner makes a payment to either the general contractor or to a subcontractor, that payment gives rise to a trust for all parties in the subcontract chain").


Purpose of the Act


The statute was enacted to protect materialmen, laborers, contractors, and subcontractors and should be given a broad construction to effectuate its protective purposes. Vulcan Materials, 157 B.R. at 597. In accordance with the act, all funds owed by Constructors to Tedco under the subcontracts were trust funds as a matter of law held for the benefit of the suppliers. See Tex. Prop. Code Ann. §§ 162.001-.002.


Trust funds may only be distributed for purposes unrelated to the construction project after all current or past due obligations to the supplier beneficiaries have been paid. See id. § 162.031. There are no procedural requirements for a subcontractor or supplier to qualify for protection under the Texas Construction Trust Fund Act. See In re Waterpoint Int'l, LLC, 330 F.3d 339, 345 (5th Cir. 2003).


Claim priorty of construction trust funds generally and in bankruptcy


When two competing claims exist, one under the construction trust fund act and the other as an assignee money lender, the trust fund claim takes priority. See Stone Fort Nat'l Bank v. Elliott Elec. Supply, Inc., 548 S.W.2d 441, 446 (Tex. Civ. App.--Tyler 1977, writ ref'd n.r.e.) ("[U]nder the statute and the authorities, [the materialman] was entitled to the trust funds in preference to the [secured lender]."); Panhandle Bank & Trust Co. v. Graybar Elec. Co., Inc., 492 S.W.2d 76, 81 (Tex. Civ. App.--Amarillo 1973, writ ref'd n.r.e.) (stating that case law established "the preferred position of materialmen and laborers over assignee money lenders in ascertaining priorities as to the distribution of retained funds under construction contracts"). This priority does not disappear in bankruptcy, as trust funds are not part of the bankruptcy estate. See Begier v. I.R.S., 496 U.S. 53, 59 (1990) (stating that money held in trust for another is not property of debtor for purposes of bankruptcy code preferences); In re N.A. Flash Found. Inc., 298 Fed. Appx. 355, 360 (5th Cir. 2008) (concluding that in hypothetical bankruptcy, trust funds under Texas Construction Trust Fund Act gave subcontractor priority claim to funds).
 
SOURCE: Austin Court of Appeals - 03-10-00357-CV - 7/14/11