Contractors/Project Owners Can Be Personally Liable for Furnished Labor and Material authored by Leslie Werner de Soliz

The general rule of law in Texas is that the incorporation of your business will insulate you personally from liability incurred by your company. That is not the case for contractors, owners and others who owe money under a construction contract.

In 1983, the Texas Legislature passed the Construction Trust Fund Act ("the Act"), the purpose of which is to protect beneficiaries - artisans, laborers, mechanics, contractors, subcontractors and materialmen - from being deprived of their ability to collect for labor and/or material furnished for the construction or repair of an improvement to real property.

The Act provides that a contractor, subcontractor, or owner, or an officer, director, or agent of a contractor, subcontractor, or owner who receives trust funds or who has control or direction of trust funds, is a trustee of the trust funds. Trust funds are defined as construction payments made to a contractor or subcontractor or to an officer, director, or agent of a contractor or subcontractor, under a construction contract for the improvement of specific real property. Trust funds are also defined as loan receipts 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 specific real property in this state, and the loan is secured in whole or in part by a lien on the property.

The Act requires 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 to deposit the trust funds in a construction account in a financial institution, and to maintain an account record for that account.

The Act has sharp teeth. A trustee who misapplies trust funds amounting to $500 or more in violation of this chapter commits a Class A misdemeanor. If this is done with intent to defraud, the trustee commits a felony of the third degree.

A trustee who fails to establish or maintain a construction account in violation of the Act or fails to establish or maintain an account record for the construction account in violation of the Act commits a Class A misdemeanor.

The courts in Texas have liberally interpreted the Act to provide for not only criminal penalties, but also to serve as the basis for supplies of material and labor to file civil suits against trustees without first having to file or otherwise perfect a mechanics and materialmen lien.

Therefore, if you are either a trustee or a beneficiary under the Act and have a question concerning your rights or obligations under the Act, you should consult an attorney.