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Texas Construction Law Blog For Subcontractors & Suppliers

The Texas Construction Trust Fund Act, AKA “Plan B”

Posted in Collection

The Construction Trust Fund Act is often “Plan B” for subcontractors and suppliers who have not perfected their lien or bond claim.  The Construction Trust Fund Act provides for civil and criminal penalties to those who misappropriate construction trust funds and fail to pay for labor and materials.  When a general contractor or upstream contractor is paid for its work on a specific project but does not pay its downstream suppliers or subcontractors, then the general contractor or upstream subcontractor is in violation of the Construction Trust Fund Act.

However, such claims can be a powerful tool, primarily because the Construction Trust Fund Act provides for personal liability against the agents, officers, or directors of the general contractor or upstream subcontractor who directed or controlled the use of the funds received by the contractor or subcontractor.  Further, at least one court has held a trust fund claimant is entitled to recover its attorney fees incurred in prosecuting a trust fund claim.

There are some exemptions and defenses to be aware of.  The Construction Trust Fund Act does not apply to lenders, title companies, closing agents, or bonding companies.  Also, it is an affirmative defense under the Construction Trust Fund Act if the funds were used to pay the general contractor’s (or upstream subcontractor’s) actual expenses directly related to the construction or repair of the improvement.  There are also practical limitations.  Trust fund claims require extensive discovery and are much more expensive to litigate than lien and bond claims.  Nevertheless, if you miss your lien and bond claim deadlines, a trust fund claim is often your best hope for payment.