A company or individual who wrongfully withholds payment from a Payee or diverts construction funds from the Project can be both civilly and criminally liable. Pursuant to Texas Property Code, Chapter 162, referred to as the “Trust Fund Statute”, Contractors, Subcontractors, Suppliers and their respective officers, employees and agents who receive Project funds become a “trustee” of those funds if they are owed to another for labor or material provided to the Project. A trustee who intentionally, knowingly or with the “intent to defraud” directly or indirectly retains, uses, disburses, or otherwise diverts trust funds from the Project without first fully paying all current or past due obligations, is considered to have misapplied trust funds. A trustee acts with an “intent to defraud” when the trustee: (1) retains, uses, disburses, or diverts trust funds with the “intent to deprive the beneficiaries of the trust funds”; or (2) uses, disburses, or diverts trust funds that were paid to the trustee in exchange for a Lien Waiver & Release wherein the express representation was made that the funds would be used to pay current or past due obligations. A trustee who misapplies trust funds amounting to $500 or more commits a Class A misdemeanor. A trustee who misapplies trust funds amounting to $500 or more with the “intent to defraud”, commits a third-degree felony. The individual trustee who had control over the misapplied funds is personally liable, both civilly and criminally.
A trustee can potentially defeat an alleged Trust Fund violation if the trustee can prove that: (1) the funds were used to pay other Project related expenses; (2) the funds were retained in accordance with the Prompt Payment Act “Good Faith Dispute” exception (explained above); or (3) if the trustee pays the beneficiaries the funds owed within no later than 30 days following the filing of a criminal complaint or notice of a pending criminal investigation.
The Trust Fund Statute in Texas
If you need assistance with the Trust Fund Statue in April 2024, contact us today.