It is a crime in Colorado for a contractor or subcontractor to use any monies received in payment for construction before his subcontractors, suppliers and others who have lienable rights on the job have been paid.
This provision appears in a 1975 amendment to the Colorado Mechanic's lien statutes, Section 38-22-127, C.R.S. The law makes monies paid to contractors and subcontractors' trust funds and limits their use first to payment for labor, materials and other lienable items furnished to the holder of the funds before any portion is available to the contractor or subcontractor for other purposes.
An exception is provided where the contractor or subcontractor has furnished bonds to protect the owner's property against mechanic's liens and wishes to contest lien claims of others.
The philosophy behind this law is to assure that when the contractor or subcontractor is paid he will apply those monies first to avoid lien claims against the property of the owner who was probably the source of those funds.
Misapplication of these trust funds may lead to criminal prosecution. Additionally, persons who participate in misapplication of any such monies may be personally liable in a civil suit. See, Standley v. American Automobile Insurance Co., 136Colo. 70, 314P.2d 696 (1957). Laws are usually strict when trust funds are involved and even innocent participants may be liable for misapplication.
To date the precedent-setting appellate courts of Colorado have not interpreted this recently-enacted trust fund provision either in a civil or criminal context. Accordingly, every person handling construction progress payments should be fully aware of the consequences, both civil and criminal, which might apply should those funds be diverted before the payment of lienable claims on the specific project for which the monies were received. The statute does not require a segregation of monies received by a contractor or subcontractor into separate accounts. However, the statute does require the maintenance of separate financial records with respect to each project by contractors and subcontractors-obviously so that the source and application of monies can be readily determined.
The possible penalties which might be imposed upon conviction for a violation may be fines, jail or penitentiary sentences. The crime may be either a felony or misdemeanor, depending upon the amount of money involved.
Those handling construction payment funds should thoroughly familiarize themselves with the provisions of this statute. Similarly, owners and others involved in the construction industry should be aware of the existence of this law and its potential advantages in avoiding credit losses and providing additional methods of collection.