The Texas Construction Trust Fund Act: What You Need to Know

Anyone who has ever been involved in a construction job—be it commercial or residential—is familiar with the complexity of the payment process as it relates to partial, periodic payments and the downstream flow of money from general contractors to subcontractors or others who performed the work.  Quite frequently, the money received upstream does not make it downstream, and, instead, is retained by the contractor, disbursed to other subcontractors, or used for other purposes.  The Texas Construction Trust Fund Act imposes serious legal consequences for such conduct. 

Under the Texas Construction Trust Fund Act (the “Act”, found in the Texas Property Code), generally speaking, payments made to a contractor or subcontractor (or officer, agent, or director) under a construction contract for the improvement of real property in Texas are considered trust funds – and the contractor or subcontractor who is in control of the funds is deemed a trustee.  A trustee can face civil, personal, or even criminal liability under the Act.  Here is what you need to know:

Civil Liability. Generally speaking, a trustee that intentionally or knowingly or with “intent to defraud” retains, uses, or diverts trust funds without first paying all obligations due misapplies the trust funds.  “Intent to defraud” can mean: 1) misapplies the funds to deprive the beneficiary; 2) misapplies the funds and fails to establish a construction account exclusively for trust funds (required for homestead jobs exceeding $5,000); or 3) misapplies trust funds obtained through the use of a false affidavit provided to the owner as to the status of payment obligations.

Personal Liability.  A company owner, officer, director, or agent who directly or indirectly retains, uses, or diverts trust funds can be held personally liable to the beneficiary of the funds, regardless of whether a corporation or other entity with liability protection was involved.  This means whoever has control or direction over the funds is personally liable. 

Criminal Liability.  A trustee who misapplies funds of $500 or more commits a Class A Misdemeanor (fine up to $4,000 and up to 1 year in jail).  If it is proven the trustee acted with the intent to defraud, the crime is elevated to a 3rd degree felony (fine up to $10,000 and no more than 10 year in jail).  Finally, if a trustee on a residential job fails to establish or maintain a construction account as required by the Act, it commits a Class A Misdemeanor.

The Act does provide certain exceptions and defenses, but the important thing to remember is that the Act has serious legal ramifications when trust funds are not handled correctly.  If you have questions about how construction funds are being handled on a construction job, contact Rosenblatt Law Firm for help.