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     www.constructionnews.net                   (972) 517-4703       Home Ofc: P.O. Box 791290 San Antonio, TX 78279 (210) 308-5800                  NOV 2008           Vol. 6      No. 11


                                                                                                 misapplies those trust funds with intent
                                 LEGAL                                                           to defraud, they may be guilty of a third-
                                                                                                 degree felony.
                                                                                                                                                   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 wduke@gmwd.com.

                                                                                                   Reprint, Construction News Ltd.,™ Dallas/Fort Worth Construction News, November 2008, Page 9

				
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