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misapplies those trust funds with intent
LEGAL to defraud, they may be guilty of a third-
tion or repair of the improvement or that
they have been retained by the trustee,
Misapplication of trust funds can also after notice to the beneficiary, as a result
create civil liability – and hence, litigation.
Texas Construction Trust Fund Act: Because the holder of the construction
of the trustee’s reasonable belief that the
beneficiary is not entitled to the funds.
Avoiding the potential liability payment or loan receipts is a trustee, It is also a defense that the trustee
you never knew you had there may be a fiduciary relationship with paid the beneficiaries all trust funds they
the beneficiary – at least with respect to were entitled to receive no later than 30
Walker M. Duke, Attorney the trust funds. days following written notice to the trust-
Gibson, McClure, Wallace & Daniels LLP Fiduciary relationships bring with ee of the filing of a criminal complaint or
Dallas, TX them heightened duties, including loyal- other notice of a pending criminal inves-
ty and the utmost good faith, candor, in- tigation.
tegrity of the highest kind, and fair and The Texas Construction Trust Fund
honest dealing. This is notable because Act underscores the need for sound busi-
an intentional breach of fiduciary duty ness practices when it comes to handling
opens up the possibility for punitive dam- of construction funds and payment to
ages. contractors and subcontractors.
T he Texas Construction Trust Fund Act
is a fairly little known but very impor-
tant statute for the construction indus-
erty in this state are trust funds. A con-
tractor, subcontractor, or owner who re-
ceives these funds or has control of them
One unique thing about the Con-
struction Trust Fund Act is that it creates
the potential for personal liability.
If funds are being held back pursu-
ant to an affirmative defense in the Act, it
is particularly important to document
try. is a trustee of the funds. A trustee who, Trustee status does not stop at the this fact and advise, in writing, the party
Because virtually every contractor in intentionally, knowingly, or with intent to corporate veil. Rather, the Act specifically who is expecting payment.
the industry is either making or receiving defraud, retains, uses, or otherwise di- states that an officer, director, or agent of There are serious potential penalties,
construction payments (or both), famil- verts trust funds without first fully paying a contractor, subcontractor, or owner both civil and criminal, for failing to com-
iarity and compliance with the Act’s re- all current or past due obligations to the who receives trust funds or who has con- ply with the Act.
quirements can prevent some major beneficiaries of the trust funds has “mis- trol or direction of them can be a trustee. However, knowing your duties and
headaches down the road. applied” the funds. Texas courts have been willing to obligations in advance will help you avoid
The Construction Trust Fund Act, So far, this probably just sounds like find individuals who have control or di- liabilities down the road.
found in Chapter 162 of the Texas Prop- common sense and good business prac- rection of trust funds and misapplied
erty Code, was enacted to give protec- tices. them personally liable, even if they were Walker M. Duke is an attorney at the
tion to materialmen (in addition to the It might be, but penalties for failing acting on behalf of their company. law firm Gibson, McClure, Wallace & Dan-
protections they receive under the lien to maintain the Act’s requirements can There are affirmative defenses to iels LLP, where he specializes in construc-
statutes), and is to be broadly construed. claims of misapplication of trust funds. tion law and business litigation. He also
be pretty harsh. A trustee who misap-
It establishes that construction pay- It is a defense that the trust funds writes a construction law blog at
plies trust funds over $500 in violation of www.texasconstructionlaw.blogspot.com.
ments and loan receipts that are made the Construction Trust Fund Act commits were used by the trustee to pay its actual
Duke can be reached at (214) 891-8040 or
for the improvement of specific real prop- a Class A misdemeanor. If the trustee expenses directly related to the construc- via e-mail at email@example.com.
Reprint, Construction News Ltd.,™ Dallas/Fort Worth Construction News, November 2008, Page 9