Trust Fund Statute Offers Subcontractors Financial Recourse
In Texas, mechanic’s liens offer protection to subcontractors and material suppliers who may or may not have a direct contractual agreement with the general contractor or owner of the project. Under normal circumstances, a subcontractor with a perfected lien can file suit against the general contractor and the owner as long as the subcontractor has provided timely notice letters to both, filed the mechanic’s lien affidavit in the county where the property is located and otherwise complied with the requirements of Chapter 53 of the Texas Property Code.
“It becomes much more difficult though when the general contractor or the owner has defaulted on the construction loan and the lender forecloses the property,” said Cubbage. “Usually, at that point, subcontractors are left with little or no recourse under Chapter 53 of the Texas Property Code unless they have a claim for removable materials. All other mechanic’s liens get wiped out.”
Under Chapter 162, payments to a contractor under a construction contract, including funds borrowed in connection with the construction project, are considered “trust funds” for the benefit of persons furnishing the labor or material. The contractor who receives the trust funds is considered to be the trustee, and the officers and principals of the contractor can be subject to personal fiduciary liability if those funds are intentionally diverted to unrelated uses.
“Chapter 162 of the Texas Property Code provides subcontractors with a viable option to go against the individuals behind contractor or owner entities-entities which may file bankruptcy in the middle of a project,” said Cubbage. “Even if no bankruptcy is filed, an unscrupulous or financially pinched contractor or owner may wrongfully divert loan proceeds for their own use.”
In addition to civil liability, misdemeanor or felony criminal liability may exist under Chapter 162 for those who, in their capacity as trustees, misapply trust funds with the intent to defraud or fail to maintain a construction account as required by the Texas Property Code.