Texas Construction Fund Act

THE TEXAS CONSTRUCTION FUND ACT   

The Texas Construction Fund Act is found in chapter 162 of the Texas Property Code. See TEX. PROP. CODE ANN. §§ 162.001-.033 (West, Westlaw through 2013 3d C.S.). This act "imposes fiduciary responsibilities on contractors to ensure that Texas subcontractors, mechanics, and materialmen are paid for work completed." In re Waterpoint Int'l LLC, 330 F.3d 339, 345 (5th Cir. 2003). This statute provides that construction payments are trust funds if the payments are made to a contractor or to an officer of the contractor for the improvement of specific real property. Id. § 162.001(a); see also Kelly v. Gen'l Interior Const. Inc., 262 S.W.3d 79, 85 (Tex. App.-Houston [14th Dist.]), overruled on other grounds, 301 S.W.3d 653 (Tex. 2010).

The contractor or officer who receives the trust funds is considered a trustee of the funds. TEX. PROP. CODE ANN. § 162.002. The artisan, laborer, mechanic, contractor, subcontractor, or materialman who furnished labor or material for the construction or repair on the real property is considered the beneficiary of any trust funds. Id. § 162.003.

A trustee who intentionally, knowingly, or with the intent to defraud, directly or indirectly retains, uses, disburses, or otherwise diverts the funds without first fully paying current or past due obligations has misapplied the trust funds. See id. § 162.031(a). "Thus, a party who misapplies these trust funds is subject to civil liability if (1) the party breaches the duty imposed by chapter 162, (2) with the requisite scienter, and (3) the claimants are within the class of people chapter 162 was designed to protect and have asserted the type of injury chapter 162 was intended to prohibit." C & G, Inc. v. Jones, 165 S.W.3d 450, 453 (Tex. App.-Dallas 2005, pet. denied). Any officer or director who has control or direction over the funds is also a trustee of the funds and is personally liable. Id. at 453-54.

SOURCE: CORPUS CHRISTI COURT OF APPEALS - No. 13-13-00118-CV - 5/29/2014

MORE ON TEXAS TRUST FUND ACT FROM FEDERAL COURT 

The Construction Trust Fund Act ("Trust Fund Act") is found in Chapter 162 of the Texas Property Code. See TEX. PROP. CODE ANN. § 162.001 et seq.

The Trust Fund Act "imposes fiduciary responsibilities on contractors to ensure that subcontractors, mechanics and materialmen are paid for work completed." In re Waterpoint Int'l LLC, 330 F.3d 339, 345 (5th Cir.2003); accord Fidelity & Guar. Ins. Underwriters, Inc. v. Wells Fargo Bank, N.A., No. Civ. A. 04-2833, 2006 WL 870683, at *9 (S.D.Tex. Mar.31, 2006). This provision was "enacted to serve as a special protection for subcontractors and materialmen in situations where contractors or their assignees refused to pay the subcontractor or materialman for labor and materials." In re Waterpoint LLC, 330 F.3d at 345; see McCoy v. Nelson Utils. Servs., Inc., 736 S.W.2d 160, 164 (Tex.App.—Tyler 1987, writ ref'd n.r.e.).

Accordingly, construction payments constitute trust funds under Chapter 162 of the Texas Property Code if they 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." TEX. PROP. CODE ANN. § 162.001 (Vernon 1995 & Supp.2005); accord Argyle Mech., Inc. v. Unigus Steel, Inc., 156 S.W.3d 685, 687 (Tex.App.—Dallas 2005, no pet.); Holladay v. CW & A, Inc., 60 S.W.3d 243, 246 (Tex.App.—Corpus Christi 2001, pet. denied). In such a situation, the "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" serves as trustee. TEx. PROP. CODE ANN. § 162.002 (Vernon 1995); accord C & G, Inc. v. Jones, 165 S.W.3d 450, 453 (Tex. App.—Dallas 2005, pet. denied); Holladay, 60 S.W.3d at 246. The artisan, laborer, mechanic, contractor, subcontractor, or materialman who labors or furnishes labor or material for the construction or repair of an improvement on specific real property located in Texas is the beneficiary of any trust funds paid or received in connection with the improvement. See TEX. PROP. CODE ANN. § 162.003 (Vernon 1995 & Supp. 2005); accord In re Waterpoint Int'l LLC, 330 F.3d at 345.

Pursuant to the Trust Fund Act, "[any] 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." TEx. PROP. CODE ANN. § 162.031(a) (Vernon 1995); accord C & G, Inc., 165 S.W.3d at 453; Argyle Mech., Inc., 156 S.W.3d at 687; Holladay, 60 S.W.3d at 245-46. Trustees, however, are provided with an affirmative defense under the Trust Fund Act. Namely, a trustee can avoid liability for misapplication of trust funds by showing "the trust funds not paid to the beneficiaries of the trust were used by the trustee to pay the trustee's actual expenses directly related to the construction or repair of the improvement." TEX. PROP. CODE ANN. § 162.031(b); accord Holladay, 60 S.W.3d at 247; Lively v. Carpet Servs., Inc., 904 S.W.2d 868, 875 (Tex. App.—Houston [1st Dist.] 1995, writ denied). "The law interpreting section 162.031(b) does not require . . . an explicit level of proof tying particular expenditures to the improvements at issue." Holladay, 60 S.W.3d at 248. Rather, construction trust funds may be applied to overhead costs as well as other "directly related" expenses. See In re Nicholas, 956 F.2d 110, 113 (5th Cir.1992); In re Boyle, 819 F.2d 583, 586 (5th Cir.1987); Holladay, 60 S.W.3d at 248; Lively, 904 S.W.2d at 875-76; see also Op. Tex. Att'y Gen. No. J945 (1988) (affirmative defense allows paying funds for overhead and other expenses, even if not readily traceable to a particular job, so long as actually incurred). 

SOURCE: United States District Court, E.D. Texas, Beaumont Division. 438 F.Supp.2d 696 (2006)

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

Trust Fund Act: Civil Liabilty for Misapplication of Construction Trust Funds

STATUTORY CAUSE OF ACTION UNDER THE TEXAS CONSTRUCTION TRUST FUND ACT 

The Texas Construction Trust Fund Act makes construction funds "trust funds" 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. Tex. Prop. Code Ann. § 162.001 (West Supp. 2009). Beneficiaries of the trust fund include artisans, laborers, mechanics, contractors, subcontractors, or materialmen who furnish labor or material for the construction or repair of an improvement. Id. § 162.003 (West Supp. 2009).

CIVIL LIABILITY FOR VIOLATION OF CONSTRUCTION TRUST FUND ACT 

A party who misapplies trust funds under the Trust Fund Act is subject to civil liability to trust fund beneficiaries whom the Act was designed to protect. Id. § 162.031 (West Supp. 2009); Dealers Elec. Supply Co. v. Scoggins Constr. Co., 52 Tex. Sup. Ct. J. 1088, 2009 Tex. LEXIS 475, at *16-17 (Tex. July 3, 2009).

SOURCE: 03-06-00636-CV (Austin Court of Appeals (11/6/09)

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