Trust Monies

In the next Brief, we discuss the Colorado statute which creates trust funds in those monies paid to contractors and subcontractors on construction projects. Specifically, we discuss the criminal aspects of that statute.

A recent Florida appellate court decision [Aetna Casualty & Surety Co. v. Bank of Palm Beach & Trust Co., 373 So. 2d 687 (Fla. 1979)] leads us to consider certain civil aspects of the trust fund statute as well.

In the Florida case, a surety company which had posted a bond on a particular project was required to pay substantial sums because its bond principal, the general contractor, failed to make required payments to subcontractors and materialmen. Progress payments which had been made to the general contractor were deposited in its bank account, but the bank took those monies in payment of the general contractor's bank loan.

The bonding company sued the bank, claiming that the bank's action was improper in that it knew or should have known that those monies should have been used by the general contractor to pay subcontractors and material suppliers. The Florida court disagreed, ruling that the general contractor's funds on deposit were not untouchable and that the bank was entitled to offset those monies against its loan balance.

Under the Colorado trust fund statute, the result would probably be contrary. That is because the Colorado statute makes progress payments, "trust funds" which cannot be used by the contractor for any purpose until so much of those monies as necessary have been paid to subcontractors and material suppliers who would have lien rights.

Florida does not appear to have a comparable statute. Accordingly, the funds on deposit in the general contractor's bank account were held available to any creditor of the general contractor, even its bank.

The argument available to a bonding company under the Colorado statute would be that the statute gave notice to the bank that funds on deposit in the general contractor's bank account were trust funds. Therefore, they could not be taken by the bank for payment of the debt due it until the general contractor's subcontractors and material suppliers were fully paid.

Many forms of subcontracts generally in use in Colorado likewise contain provisions to the effect that monies paid the general contractor (or subcontractor) are trust funds and cannot be used until lienable claims have been paid. Whether those contract provisions, absent the statute would alone be sufficient to prevent a bank from taking monies on deposit to pay a debt due is debatable.

A Colorado Supreme Court case did rule that a subcontractor's assignee did not have any right to contract funds until the subcontractor's materials bills were paid. Farmers Acceptance Corp. v. DeLozier, 178 Colo. 291, 496P.2d 1016 (1972). That ruling was made before enactment of the trust fund statute.

The Colorado statutory trust fund section provides an important protection available to owners, general contractors and others who look to construction payments for the own payment. Everyone dealing with construction payments should be aware of its provisions and possible effect upon their rights.