With tighter terms on construction loans and permanent financing, payment claims in the construction arena have increased. Noticeable during this uptick are assertions of violations of the Texas Construction Trust Fund Act. The Act is found in Chapter 162 of the Texas Property Code and creates overarching rules for all real property construction projects, with one applying specifically to residential construction over $5,000.

The Construction Trust Fund Act classifies construction payments made to a contractor or subcontractor or one of their officers, directors, agents under a construction contract for improvement to real property as “trust funds”. Loan receipts are also “trust funds” if the funds are borrowed by a contractor, subcontractor, owner, or agent, officer, or director of such for the purpose of improving real property. The contractor, subcontractor, owner, or agent, director, or officer of such are defined as “trustees” of trust funds, with the laborers and materialmen that perform the work or supply the materials for the project being defined as “beneficiaries”.

Within these general parameters exist more stringent rules for written contracts for improvements to residential homesteads exceeding $5,000. For these projects, a contractor is required to utilize a construction account with a financial institution, and the financial institution must identify the account as a construction account on all statements. A construction account is an account that only holds trust funds and funds that are necessary to pay charges for the account. Additionally, when a construction account is required, contractors must also maintain certain records for that account that track the deposits, disbursements, account balance, records for each construction project that specify the direct and indirect costs to the owner, and all supporting documentation for the disbursement of funds. All disbursement and deposit documents must contain the construction account number, and these documents must be maintained for at least one year from completion of the project.

The Construction Trust Fund Act does, however, contain one specific exclusion. Fees payable to a contractor are not trust funds if a contractor and property owner enter into a written contract for the construction prior to commencement of the project, the contract provides for payment of the construction costs plus a reasonable fee, and the fee is earned as stated in the contract and paid to the contractor or disbursed from a construction account.

A violation of the Act consists of intentionally or knowingly or with intent to defraud, directly or indirectly retaining, using, disbursing, or diverting trust funds without first fully paying all obligations incurred. Violation of this act refers to acts by a company or individuals, and a company or individuals can be found liable. The Act identifies clear criminal penalties, but the damages in a civil action are much less clear.

The Act provides three statutory affirmative defenses: 1) The funds were used to pay actual direct costs of construction or repair of the improvement; 2) the trustee retained the amounts, after notice to the beneficiary, based on a reasonable belief that the beneficiary is not entitled to the funds or as authorized and required by the lien statute; and 3) the trustee paid all beneficiaries amounts they are entitled to within thirty days of written notice of claims.

Although the language of the Act only specifically identifies violations of this Act as criminal violations, the Act does include language referring to “other actions” and the Texas Supreme Court has stated that civil causes of action and liability are possible for violations of the Act.

As to why the recent uptick in payment disputes has resulted in more assertion of violations of the Texas Construction Trust Fund Act, the individual liability of officers and directors may hold some clues. Suing individuals frequently has more potency than a corporate entity and may, at least in the mind of a plaintiff’s attorney, lead to quicker resolution of claims.

The attorneys in our Austin and Dallas offices have extensive experience representing members of the design and construction industry in payment disputes.  If you should have any question about the Act or your rights and remedies under Texas law, please do not hesitate to contact us at info@gstexlaw.com.

Legal Disclaimers

This blog is made available by Gerstle Snelson, LLP for educational purposes and to provide general information about the law, only.  Neither this document nor the information contained in it is intended to constitute legal advice on any specific matter or of a general nature.  Use of the blog does not create an attorney-client relationship with Gerstle Snelson, LLP where one does not already exist with the firm.  This blog should not be used a substitute for competent legal advice from a licensed attorney.

©Gerstle Snelson, LLP 2024.  All rights reserved.  Any unauthorized reprint or use of this material is prohibited.  No part of this blog may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system without the express written permission of Gerstle Snelson, LLP.