What Is The Colorado Construction Trust Fund Statute?April 29, 2013
Many contractors and construction professionals want more information about the Colorado Construction Trust Fund and how it affects them. Briefly, the Trust Fund is designed to ensure subcontractors, material suppliers, rental companies, construction laborers, and others who have contributed value to a construction project get paid what they are due.
What The Colorado Trust Fund Statute Does
The Colorado Construction Trust Fund falls under the Colorado Mechanic’s Lien statute and requires contractors to set asides funds that they have received as payment for a project in to a trust. The trust fund monies will then be used to pay subcontractors, suppliers and laborers. The contractor must use these funds to pay their subcontractors even before paying any other business expenses.
Failure to set payments aside and into a trust is a violation of the State of Colorado’s civil theft statute and can result in misdemeanor charges and the awarding of treble damages, plus attorney fees. These restrictions put extra pressure on the general contractor to make sure they place funds in the trust and distribute them per their contract requirements with each of their subcontractors, suppliers, laborers, etc.
The trust fund extends its reach far beyond the general contractor, however. Any payments made from the trust to a subcontractor, for example, then go into a separate trust managed by the subcontractor to be used for payment to any suppliers, laborers or their own subcontractors. This process repeats itself over and over until the very last supplier has been paid.
The Impact On Contractors And Subcontractors
The Trust Fund Statute provides protection for subcontractors, laborers and suppliers in regards to receiving payment for work done or materials supplied. Working in conjunction with the Colorado Mechanics’ Lien statute, the Trust Fund Statute helps everyone involved in a construction project get paid.
Whenever a property is being constructed or having improvements being made to it, a mechanic’s lien is filed against the property. This creates an encumbrance on the property’s title that remains until the lien is released. Once everyone has been paid, the encumbrance, or lien, is lifted. Until it has been lifted, anyone who has worked on the project and not yet been paid can lay claim to the property.
The Impact On Property Owners
Although the statute seems designed to protect project participants and providers, the property owner has some protections as well. If a property owner pays their general contractor and the general contractor does not pay the subs, the property owner can bring a claim under the statute.
Since construction projects create a lien against the property that cannot be released until all subcontractors, etc. have been paid, the property owner has a vested interest in making sure their general contractor pays their subs. Fortunately for owners, the trust obligation is much stronger than a simple contract obligation.
How Trust Obligations Differ From Contractual Obligations
Trust obligations are stronger than contract obligations for one simple reason: they create a fiduciary relationship. Fiduciary relationships by their very nature mean more is at stake and more liability exists. The trust obligation is so strong that any contractor who does not pass the funds down to his subs can face misdemeanor charges.
Misdemeanor charges open up many different legal options and remedies for receiving payment including the ability to file claims against both the company as a whole and individuals within the company who have neglected their fiduciary duties. These claims can arise even without the sub providing a perfect, documented lien for the work. If violations are found, the damages due result in treble amounts, which is triple the amount of actual damages owed. Furthermore, these damages may not be eligible for discharge via a bankruptcy filing.
The Trust Fund Statute has been very helpful in ensuring providers get paid for their services and materials, but it requires careful documentation on the part of the general contractor and any subcontractors who also hire subs or laborers. Companies need to make sure they are documenting the payment of their suppliers through the trust, and before they pay any of their own bills, to protect themselves from claims that the funds were used improperly. Failure to do so can result in extremely damaging, and expensive, lawsuits.
For additional information about the Colorado Construction Trust Fund Statute, contact one of the construction attorneys at Schlueter, Mahoney & Ross, P.C. Our attorneys can be reached by phone at (303) 292-4525, at our office, or by filling out the contact form on our Contact Us page.
Our construction law attorneys, Michael A. Schlueter, Elliot Fladen and Lisa C. Secor represent clients throughout Colorado, including Denver, Aurora, Broomfield, Boulder, Greely, Commerce City, Lakewood, Highlands Ranch, Littleton, Arvada, Westminster, Pueblo, Thornton, Colorado Springs, and Fort Collins.