Whether you’re a prime contractor, subcontractor, owner, officer, director, or agent of a contractor, subcontractor, or owner who receives construction payments or who has control or direction of construction payments, you are a trustee under Tex. Prop. Code § 162.002. This means that you have a responsibility to correctly apply trust funds.

Misapplication of Trust Funds

Under the statute, 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. Tex. Prop. Code § 162.031. Plainly stated, this means that if you fail to pay any 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 you have misapplied trust funds and opened yourself up to consequences of this action; but what are the consequences?

Consequences of Misapplication

There are criminal and civil consequences to misapplying trust funds. Under Tex. Prop. Code § 162.032:

(a)  A trustee who misapplies trust funds amounting to $500 or more commits a Class A misdemeanor.

(b)  A trustee who misapplies trust funds amounting to $500 or more with intent to defraud, commits a felony of the third degree.

(c)  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 Tex. Prop. Code § 162.007 commits a Class A misdemeanor.

Obviously, there are multiple claims that can be brought against a Trustee who misapplies funds. Breach of contract, fraud, and breach of fiduciary duty are just a few claims that are likely to be in a plaintiff’s petition.

What Should You Do

Understand your role and responsibility as a Trustee. Be diligent with your accounting and pay all beneficiaries before withholding or retaining any trust funds as your own. Consult with your attorney if there is any confusion regarding payment and your rights to funds from the trust.

Nothing here is intended to be legal advice and should not be interpreted as such. If you or someone you know is has a potential construction dispute or would like advice regarding construction, give us a call at 832-930-0529. You can also visit our website www.StephensBell.com

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