Trust Fund Statute Flashcards
What is the Trust Fund Statute?
The “Trust Fund” statute (Tex. Prop. Code § 162) is a criminal statute that has been held to provide a civil cause of action against those who misapply construction payments.
Does the Trust Fund Statute require Privity?
No privity is required; therefore, a downstream supplier or subcontractor can sue a general contractor with whom it has no contract or direct dealings.
Chapter 162 Texas Property Code
Trust Fund Statute. Enacted in 1983.
Are Loan Receipts trust funds?
yes, if the funds are borrowed by a contractor, subcontractor, or owner, or by an officer, director, or agent of a contractor, subcontractor, or owner, for the purpose of improving real property, and the loan is secured in whole in part by a lien on the property.
May a Property Owner be a beneficiary under the Trust Fund Statute?
Yes.
Who are Beneficiaries?
An artisan, laborer, mechanic, contractor, subcontractor, or materialman who labors or who furnishes labor or material for the construction or repair of an improvement on specific real property in this state is a beneficiary of any trust funds paid or received in connection with the improvement. A property owner is a beneficiary of trust funds described by Section 162.001 in connection with a residential construction contract, including funds deposited into a construction account described by Section 162.006.
Statute does not apply to who?
(1) a bank, savings and loan, or other lender;
(2) a title company or other closing agent; or
(3) a corporate surety who issues a payment bond covering the contract for the construction or repair of the improvement.
When does a Trustee act with the “intent to defraud”
when the trustee:
(A) retains, uses, disburses, or diverts trust funds with the intent to deprive the beneficiaries of the trust funds;
(B) retains, uses, disburses, or diverts trust funds and fails to establish or maintain a construction account as required by Section 162.006 or fails to establish or maintain an account record for the construction account as required by Section 162.007; or
(C) uses, disburses, or diverts trust funds that were paid to the trustee in reliance on an affidavit furnished by the trustee under Section 53.085 if the affidavit contains false information relating to the trustee’s payment of current or past due obligations.
Residential Construction Account Requirement
A contractor who enters into a written contract with a property owner to construct improvements to a residential homestead for an amount exceeding $5,000 shall deposit the trust funds in a construction account in a financial institution.
(b) The periodic statement received from the financial institution must refer to the account as a “construction account” to satisfy the requirements of this section.
What is “Misapplication of Trust Funds”?
A trustee who, intentionally or knowingly or with intent to defraud, directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries of the trust funds, has misapplied the trust funds.
Affirmative Defense for actual expenses and reasonable belief of not being owed.
It is an affirmative defense to prosecution or other action brought under Subsection (a) that the trust funds not paid to the beneficiaries of the trust were used by the trustee to pay the trustee’s actual expenses directly related to the construction or repair of the improvement or have been retained by the trustee, after notice to the beneficiary who has made a request for payment, as a result of the trustee’s reasonable belief that the beneficiary is not entitled to such funds or have been retained as authorized or required by Chapter 53.
Commingling Affirmative Defense
A trustee who commingles trust funds with other funds in the trustee’s possession does not defeat a trust created by this chapter.
Class Misdemeanor
A trustee who misapplies trust funds amounting to $500 or more in violation of this chapter commits a Class A misdemeanor.
Felony
A trustee who misapplies trust funds amounting to $500 or more in violation of this chapter, with intent to defraud, commits a felony of the third degree.
Failure to establish a construction account
A trustee who fails to establish or maintain a construction account in violation of Section 162.006 or fails to establish or maintain an account record for the construction account in violation of Section 162.007 commits a Class A misdemeanor.
