Colorado law requires contractors to hold funds in trust for the payment of subcontractors, laborers, or material suppliers who have furnished services connected to a construction project or who may have a lien against the property. C.R.S. § 38-22-127(1). This Mechanic’s Lien Trust Fund statute requires contractors to maintain separate accounting for each project and violations of the statute amount to civil theft pursuant to C.R.S. § 18-4-401. For example, when a contractor receives funds for work at Construction Project Y and uses those funds to pay subcontractors on Construction Project Z, the contractor has violated the trust fund statute. Treble damages and attorney fees may be awarded for violations of the trust fund statute.
Substantially similar to the Mechanic’s Lien Trust Fund statute, the Colorado Court of Appeals recently analyzed the Public Works Trust Fund statute that applies to government funds received on public works projects. C.R.S. § 38-26-109. The issue in Franklin Drilling v. Lawrence Construction, 2018COA59, was when does a violation of the trust fund statute result in civil theft liability? Id. at ¶ 16. The court held that exhausting funds paid to a contractor prior to payment of a subcontractor constitutes a violation of the Public Works Trust Fund statute and may constitute civil theft. Id. ¶ 29.
Specifically, the court reasoned that a “res” (or an identifiable thing) is created when payment is made to the contractor that must be held in trust for the subcontractors. Id. at ¶ 26. A violation of the trust fund statute may be established by evidence the “res” was exhausted prior to payment to subcontractors. Id. The concept of payment constituting a “res” that is to be held in trust is necessary for the operation of the trust fund statute, otherwise the statute is frustrated and rendered ineffective to meet its legislative purpose. Id. at ¶ 28.
In residential or commercial construction projects where an owner pays a contractor for a construction project and the contractor fails to pay the subcontractors, a violation of the Mechanic’s Lien Trust Fund statute may be triggered. Applying the court’s reasoning in Franklin, when a contractor knowingly uses the “res” for other purposes instead of holding the funds in trust for payment to subcontractors, this evidences a violation of the Mechanic’s Lien Trust Fund statute and the requisite mental state for civil theft. Support for a claim of a trust fund violation requires evidence that the “res” is exhausted or depleted prior to issuance of subcontractor payments.
When a construction project goes bad it not only includes construction defects that fall under the Colorado Construction Defect Action Reform Act (“CDARA”), it may also involve violations of the Mechanic’s Lien Trust Fund statute. The Franklin case provides guidance to practitioners in establishing claims for trust fund violation. Thus, practitioners should consider including claims for violations of the Mechanic’s Lien Trust Fund statute when payments are made to the contractor, but subcontractors or materialmen are threatening to lien the project or claiming nonpayment. Furthermore, practitioners should seek discovery into the contractor’s bank accounts to uncover how deposits made for one project, or the “res,” were held in trust for that construction project.
If you have any questions, please contact Johnson Law’s team of attorneys for a free consultation regarding construction defect claims under the CDARA, mechanic’s lien claims, and mechanic’s lien trust fund claims.