Form Letter: Trust Funds

Subcontractors, suppliers and sub-consultants sometimes have problems collecting amounts due them, even though the owners have fully paid their contractors or architects/engineers.

Colorado law provides an effective tool for unpaid parties by "trust fund" provisions in the mechanic's lien statutes. Those provisions establish that all monies paid to contractors and subcontractors involved in construction are trust funds, the misapplication of which can result in criminal as well as civil liability.

Since some contractors or architects/engineers may not be aware of these provisions, an unpaid party might consider placing his debtor on notice with a letter reading somewhat as follows:

Dear Deadbeat:

As you know, your company owes our firm $465,892.31 for the labor and materials furnished in connection with the caulking work on the convention center project. This amount has been due since February 30, 1985.

We have made inquiry to the project owner concerning the status of his payments for construction work on the project, and he reports that he has fully paid your company for all work. Based upon that information, we have concluded that your company is not justified in refusing to make full payment to our company.

You should be aware of the fact that a provision of the Colorado mechanic's lien statute reads:

(1) All funds disbursed to any contractor or subcontractor under any building, construction or remodeling contract or on any construction project shall be held in trust for the payment of the subcontractors, material suppliers, or laborers who have furnished materials, services, or labor, who have a lien, or may have a lien, against the property, or who claim or may claim, against a principal and surety under the provisions of this article and for which such disbursement was made.

(2) This section shall not be construed so as to require any such contractor or subcontractor to hold in trust any funds which have been disbursed to him for any subcontractor, material supplier, or laborer who claims a lien against the property or claims against a principal and surety who has furnished a bond under the provisions of this article if such contractor or subcontractor has a good faith belief that such lien or claim is not valid or is such contractor or subcontractor, in good faith, claims a setoff, to the extent of such setoff.

(3) If the contractor or subcontractor has furnished a performance or payment bond or if the owner of the property has executed a written release to the contractor or subcontractor, he need not furnish any such bond or hold such payments of disbursements as trust funds, and the provisions of this section shall not apply.

(4) Every contractor or subcontractor shall maintain separate records of account for each project or contract, but nothing contained in this section shall be construed as requiring a contractor or subcontractor to deposit trust funds from a single project in a separate bank account solely for that project so long as trust funds are not expended in a manner prohibited by this section.

(5) Any person who violates the provisions of subsections (1) and (2) of this section commits theft, as defined in section 18-4-401, C.R.S. 1973.

If you intend to persist in refusing to pay sums due our company, we suggest that you consult your attorney concerning the possible consequences of a violation of the above-quoted statute.

Very truly yours,

A letter of this nature should get the deadbeat's attention. If not, the creditor would be well-advised to consult with his attorney concerning the ramifications of the "trust fund" statute, including the possibility of recovering damages and attorney's fees in excess of the amount of the debt itself.

One word of caution: Since the trust fund statute does provide for a possibility of criminal sanctions, the creditor should avoid making any threats of criminal prosecution. He should also recognize that people in jail are not too likely to pay their debts.