Posted: April 21, 2024
Category: Construction Law
If you’re a contractor, subcontractor, property owner, or developer in Texas, you need to know about the Texas Trust Fund Act. This important statute creates fiduciary duties for those who handle construction funds—and violations can result in personal liability, civil penalties, or even criminal charges.
Here’s what the Trust Fund Act means, who it applies to, and why it plays such a major role in construction payment disputes across Texas.
📜 What Is the Texas Trust Fund Act?
The Texas Trust Fund Act is found in Chapter 162 of the Texas Property Code. It designates certain construction payments as “trust funds” that must be used only for the benefit of subcontractors, suppliers, and laborers involved in a project.
In other words, when a property owner pays a general contractor, that money is legally held “in trust” to pay the people who actually did the work or supplied materials. Misusing that money is a serious violation.
👷 Who Is a Trustee Under the Act?
The law applies to anyone who receives construction payments on behalf of others, including:
- General contractors
- Construction managers
- Business owners receiving project funds
These parties are deemed trustees of the funds, and must prioritize paying subcontractors and suppliers before using the money for other purposes like overhead or unrelated expenses.
🏗️ What Are Trust Funds?
Trust funds under the Act include:
- Payments made to a contractor under a construction contract
- Loan disbursements earmarked for building improvements
- Insurance proceeds paid out for construction or repair work
These funds must be used exclusively for the payment of current or past project-related obligations.
⚠️ What Constitutes a Violation?
A violation occurs when a trustee:
- Spends trust funds for personal or business use before paying subcontractors
- Fails to pay vendors despite receiving sufficient project funds
- Transfers funds to unrelated accounts or projects
This is known as a misapplication of trust funds, and it can trigger civil lawsuits or criminal charges for fraud or theft.
💼 Can a Contractor Be Personally Liable?
Yes. One of the most powerful features of the Texas Trust Fund Act is that it allows for personal liability. Even if a contractor operates through a corporation or LLC, they may be personally responsible for trust fund violations if they:
- Had control over the funds
- Intentionally or knowingly misapplied them
In some cases, courts have awarded treble damages and attorney’s fees to unpaid subcontractors under the Act.
📋 Defenses to a Trust Fund Claim
While the Act is strict, trustees may defend themselves by showing that:
- Funds were properly applied to authorized obligations
- They had insufficient control over the funds
- There was a reasonable dispute about the payment
Good recordkeeping and proof of payments are essential to avoid liability.
🔍 How Owners and Developers Are Affected
Property owners and developers are not typically deemed trustees, but they can get pulled into disputes if:
- They directly control payment disbursements
- They fail to ensure lien releases are obtained
Owners should ensure that payments go through proper channels and that general contractors comply with their obligations under the Act.
🛡 How Guerra Days Law Group Can Help
We represent contractors, subs, and owners in construction law disputes involving:
- Texas Trust Fund Act violations
- Lien and bond claims
- Payment disputes and collections
- Defending or prosecuting misapplication claims
Our goal is to protect your rights and reputation—whether you’re enforcing your claim or defending against one.
✅ Final Thoughts
The Texas Trust Fund Act is a powerful law with serious implications. Whether you’re receiving or relying on construction funds, you must treat them with care and follow the law—or risk serious consequences.
📞 Facing a Trust Fund Dispute?
Contact Guerra Days Law Group today. We’ll help you navigate your rights and responsibilities under Texas construction law.