Colorado’s Construction Trust Fund Statute – What is it and Who does it Protect?

Construction lawyers often receive calls from property owners, subcontractors, sub-subcontractors, vendors, and suppliers about difficulties related to obtaining payment on construction projects. Prudent owners, contractors, subcontractors, and material vendors are constantly attempting to allocate risk, obtain payment and maximize profit margins. Colorado’s Construction Trust Fund Statute can be a useful tool for Owners, Subcontractors and Suppliers to obtain relief for non-payment on construction projects. 

The statute requires funds distributed under a construction contract be held in trust for the subcontractors, sub-subcontractors and vendors.  If a contractor does not distribute funds received from the owner due to a subcontractor or supplier, the owner, subcontractor or supplier may use Colorado’s Construction Trust Fund Statute to obtain payment.

For example, an owner distributes funds to a contractor for work on the owner’s project. The contractor, being a contractor on multiple projects, uses those funds to pay obligations unrelated to the owner’s project. The contractor in turn does not pay the roofing subcontractor for the work performed because the funds were used elsewhere. Under this scenario, the owner and the roofing subcontractor would have a claim against the contractor for a violation of the Trust Fund Statute. The roofing subcontractor may not need to resort to filing a mechanic’s lien on the owner’s property for the contractor’s failure to pay. A variation to this example would produce a similar outcome. For example, once the general contractor pays its roofing subcontractor for the work performed the subcontractor has an obligation to disburse the funds owed to any of its sub-subcontractors.  Here, the sub-subcontractor may have a claim against the subcontractor for a violation of the Trust Fund Statute.

There are exceptions to the statute’s enforceability.  A contractor may withhold funds if there is a “good faith belief” that a subcontractor or vendor claim to payment is not valid due to the conduct or lack of proper performance entitled the contractor to a setoff.  There are additional potential exceptions for consideration.

When successful, the statute allows the claimant to recover its attorney fees, costs and three times the amount of damages.  Additionally, officers, directors, owners, managers and others who control funds subject to Colorado’s Construction Trust Fund Statute, and fail to pay pursuant to the statute, are exposed to personal liability.  It is important to also note that where a judgment is obtained against an individual for violation of Colorado’s Construction Trust Fund Statute, the judgment is not the type of debt typically subject to relief in bankruptcy proceedings.

Trust Fund Statute, C.R.S. §38-22-127

For more information about construction law and construction claims, contact Miller|Kabler, P.C. at 720-306-7733 or visit our website at www.millerkabler.com

Preserving Miller Act Rights to Obtain Payment on Federal Construction Projects

Unlike private construction projects, construction professionals may not file or enforce mechanic’s lien rights on public construction projects. The Miller Act is a federal law designed to afford certain subcontractors and suppliers rights to obtain payment on a federal construction project when the prime contractor fails to pay them. The mechanism to recover payment is the prime contractor’s payment bond which is required on federal construction projects that exceed $100,000. The VA hospital in Aurora is an example of a federal construction project in the Denver area where subcontractors availed themselves of their Miller Act rights.

The Miller Act only provides remedies to certain subcontractors or suppliers depending on their position in the interrelated network of construction contracts. First-tier subcontractors and second-tier subcontractors and material suppliers may make a Miller Act claim. First-tier subcontractors and material suppliers are parties who have contracts directly with the prime contractor. Second-tier subcontractors and material suppliers are parties who have contracts directly with first-tier subcontractors. Lower tiered subcontractors and suppliers cannot assert a Miller Act Claim.

Miller Act Claims may be waived only in a writing signed by the party waiving its rights and only after the party waiving the right has provided labor or furnished material in the performance of the construction contract.

A Miller Act claim is governed by specific notice, timing and perfection requirements and if not followed strictly, can work to prevent a recovery and payment. However, when the requirements are met, the Miller Act can serve as an excellent method to obtain payment on a federal construction project. An experienced construction lawyer can assist in evaluating the validity and viability of a Miller Act Claim.

For more information, contact Miller Kabler, P.C.