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Duties to Pay Subcontractors Under the Colorado Trust Fund Statute

03/27/2009

This is the thirteenth in a series of brief articles that Moye White is sending to its clients and friends to provide practical advice about the opportunities and challenges presented by today's economy.

Several years ago, the Colorado legislature enacted the Colorado Trust Fund Statute (the “Trust Fund Statute”) to ensure that construction subcontractors, laborers, material suppliers, and others are paid by the contractor that hired them. If the contractor is paid by the construction project owner or lender, then the contractor is obligated to hold those funds in trust for payment of its subcontractors and others. Under Colorado law, the Trust Fund Statute imposes a fiduciary duty on the contractor.

The Trust Fund Statute states that all funds disbursed to any construction contractor or subcontractor shall be held in trust for payment of the subcontractors, laborers, materialmen, etc., who have a lien or may have a lien against the property. To be entitled to the protections of the Trust Fund Statute, it is not necessary that the subcontractor has actually filed a mechanics’ lien.

Any person that violates the statute commits theft. This part of the Trust Fund Statute gives the claimant the right not only to recover the amount due from the contractor, but possibly even treble (triple) damages and attorneys’ fees. While recovery of such additional sums is certainly not assured, it is an attractive remedy.

Liability for a violation of the Trust Fund Statute may be imposed not only on the contractor, but possibly even its officers. Most contractors are corporations and limited liability companies. In most other circumstances, the “corporate veil” protects individual officers of the company from personal liability for the acts of the company. However, the Trust Fund Statute can effectively “pierce” the corporate veil and make certain officers of the company personally liable for violations of the statute. In order to impose personal liability on an officer of the company, it must be shown that he or she knowingly engaged in conduct constituting a violation of the Trust Fund Statute and/or that the officer had complete control over the finances and financial decisions of the company.

The right to bring a claim under the Trust Fund Statute does not belong only to subcontractors and material suppliers. Owners of construction projects may also bring claims against the contractor for a violation of the statute. An owner who has already paid a dishonest contractor faces having to write another check to the unpaid subcontractor to avoid a mechanics’ lien being filed against his or her property. Therefore, the Colorado Courts have determined that the Trust Fund Statute should work not only to protect subcontractors, etc., but also to protect owners.

For more information contact: David Laird or Jim Miller, Chair, Litigation Section at (303) 292-2900.

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Moye White LLP has prepared this bulletin to provide general information; however this bulletin does not provide legal advice and does not create an attorney-client relationship between the reader and Moye White. No legal or business decision should be based solely on the content of this bulletin.

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