Brenda
T. Cubbage, founding shareholder of Dallas-based law firm, Spencer Crain
Cubbage Healy & McNamara is helping numerous subcontractors by pursuing the
application of Texas Property Code, Chapter 162 – often referred to as the
“Trust Fund Statute.” In Texas,
however, subcontractors have potential legal recourse against the general
contractor or the owner under Chapter 162 of the Texas Property Code-the Trust
Fund Statute. This statute was specifically enacted to protect material men,
laborers and subcontractors, and to a lesser extent, contractors, from those
who misappropriate trust funds deemed to be held for the benefit of those who
provide labor and materials to a project.
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.