The Colorado construction trust fund statute was enacted to impose penalties on anyone who uses construction project funds for any purpose other than paying the contractors and suppliers on the job. The statute classifies any project funds as money held in trust for the benefit of the subs and suppliers who earned it.
Payments on construction projects are structured in a chain. Project funds pass through multiple hands before it reaches the lower-tier participants. That’s a lot of trust for an industry that’s not exactly famous for it. By establishing a fiduciary duty on those that receive payment, makes them personally liable for the proper disbursement of funds.
Colorado construction trust fund statute overview
The Colorado construction trust fund statute is meant to ensure that subs, suppliers, and other lower-tiered project participants get paid on a construction project. The rules and regulations can be found in C.R.S. §38-22-127. The statute begins by stating that: all funds disbursed to any contractor or subcontractor under any building, construction, or remodeling contract… shall be held in trust for the payment of the subcontractors, laborers or material suppliers.
Colorado construction trust fund requirements
These rules and regulations are required on every construction project within the state. Also, this responsibility does not fall exclusively on the general contractor. These requirements extend to all funds disbursed and to any building or construction project. Therefore, once payments are passed down, the trust liability passes down with it, until payments reach the lowest tier.
Unlike other trust fund statutes, there is no requirement to keep the money in a separate bank account. However, they must maintain separate records of account for each project or contract. This can be a tedious task, as proper and careful documentation should be kept to ensure that all funds are disbursed properly.
Violation of the Colorado construction trust fund
Why is this such a powerful protection? Well, beyond the contractual obligations, classifying money as trust funds creates a fiduciary duty. This not only creates personal liability on the trustee but also on any other directors or officers of the company that controlled the finances. That’s because that money isn’t technically theirs. They are holding them in trust for the benefit of the subs and suppliers who earned it. Furthermore, trust funds cannot be discharged in a bankruptcy filing.
Essentially, if construction project payments are used for any other purpose besides paying project participants, it is considered theft. There is no need for bad faith or malintent. Using the money to fund other projects or to pay for legitimate business expenses or overhead costs constitues a violation of the statute. Construction payments are to be used solely to pay project participants.
Ignorance of the law and responsibilities is no excuse. As the courts stated in In re Storie– a debtor’s lack of knowledge of the construction trust fund statute’s fiduciary requirements is not a defense. But, there is an exception if there is good faith belief that the claim is invalid or a claim of set-off on the payment.
Subcontractors and suppliers aren’t the only ones that can bring a claim under this law. Property owners can also bring a claim under the statute, as it’s their property that would be facing mechanics lien claims if a sub or supplier goes unpaid.
Penalties
A contractor who fails to comply with these provisions, could be facing some serious penalties. If found guilty for the misappropriation of construction funds, the person can be held liable under civil theft. This means potential liability for treble damages, that means three times (3X) the money that was misused, in addition to attorney’s fees and court costs. Also, they can also face a misdemeanor criminal theft charge under §18-4-401 of the Criminal Code. And, depending on the amount, it could be increased to a felony charge! This could result in fines, probation, and potential jailtime.
Bottom line
The Colorado construction trust fund statute is an incredibly powerful tool for relief in case of nonpayment. This is important for those in the construction industry to understand. Not only for the protections it provides, but the liability that can be imposed if the rules aren’t closely complied with. If working on a project in Colorado, be sure to document and account for every payment that comes your way.
Additional resources
- How to Protect Your Payments When Dealing with a Construction Bankruptcy
- The Payment Funnel: A Step-by-Step Guide to Overhauling A/R
- Colorado Prompt Payment Guide & FAQs
