Contractor’s officer successfully defends against claims for misapplication of trust funds

May 17, 2017

The U.S. Court of Appeals for the Fifth Circuit recently analyzed a defense against a subcontractor’s claims asserted under the Texas Construction Trust Fund Act. Under the Act, contractors can be held liable as trustees for misapplication of payments received for the benefit of downstream contractors. Tex. Prop. Code § 162.031 (a). Owners, officers, and agents of contractors who have control or direction of trust funds can also be held individually liable as trustees. Id. § 162.002. However, the trustees can defend against the claims by showing that the trust funds were used to pay the contractor’s actual expenses directly related to the construction of the improvement. Id. § 16.031(b).

In this case, a contractor applied for and received funds for a construction project that included funds requested by a subcontractor. The subcontractor never received the funds and asserted claims against the contractor’s officer individually for misapplication of funds under the Act. The contractor’s officer showed that the funds at issue were spent on the contractor’s salaries, overhead, and supervision for the project. The Fifth Circuit found this showing was sufficient to support his defense and to defeat the subcontractor’s claims under the Act.

Monaco v. TAG Invs., Ltd. (In re Monaco), 839 F. 3d 413 (5th Cir. 2016).

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