This article provides an overview of Colorado's mechanics' lien trust fund statute and discusses civil liability that may arise if a contractor violates the statute.
Under Colorado's mechanics' lien trust fund statute, CRS ' 38-22-127 (trust fund statute or statute), a contractor who fails to pay its subcontractors, despite having been paid by the owner, can face criminal and civil liability. This article provides an overview of civil liability under the trust fund statute.
A contractor can face significant civil liability for violating the statute, including treble damages and reasonable attorney fees (in addition to costs and interest generally recoverable). In addition, corporate representatives could be personally liable if they personally participated in failing to pay subcontractors the funds received from a property owner. Further, civil liabilities incurred pursuant to the trust fund statute may be non-dischargeable in bankruptcy. As a result, property owners facing mechanics' liens and subcontractors who have not been paid often use the statute's strong mechanism.
The Trust Fund Statute: Overview
The trust fund statute requires that all funds disbursed to a contractor or subcontractor on any construction project be held in trust for the payment of subcontractors, laborers, or material suppliers.1 Although the statute requires each contractor to maintain separate accounting records for each project or contract, it does not require the contractor to maintain a separate bank account for each project.2 To recover under the statute, a claimant is not required to have a properly perfected lien, or to still be able to perfect a lien.3 However, the statute does not apply if the contractor who received the disbursement posts a bond, or if the property owner has executed a written release.4
The Colorado Supreme Court described the legislative intent in enacting the statute as follows:
Although this provision provides assurances of payment to subcontractors, laborers, and suppliers, the general assembly's "primary concern" in enacting it was "the protection of property owners against unscrupulous contractors." The trust obligation protects owners from having to pay for labor or materials twice in an effort to avoid mechanics' liens if a dishonest contractor collects an initial payment from the owner but fails to pay a subcontractor, laborer, or supplier, thereby leaving the owner with little choice other than to make a second payment directly to the unpaid potential lienholder. Section 38-22-127(1) effectuates this purpose by requiring contractors and subcontractors to hold certain funds in trust for the payment of subcontractors, laborers, and suppliers'namely, all funds "disbursed to any contractor or subcontractor under any building, construction, or remodeling contract or on any construction project."5
Moreover, the statute explicitly provides that a violation of the statute constitutes theft as defined in CRS ' 18-4-401.6
Liability for Civil Theft
Violation of the trust fund statute could result in liability for treble damages and attorney fees because of the statute's explicit tie to civil theft under CRS ' 18-4-401.7 Recovery of treble damages and attorney fees is not automatic; rather, a claimant must prove that the contractor committed acts constituting the statutory crime of theft.8 If all elements of civil theft have been proven by a preponderance of the evidence, the trial court lacks discretion to decline to award treble damages.9 Someone commits civil theft if they knowingly obtain, retain, or exercise control over anything of value of another without authorization or by threat or deception; receive, loan money by pawn or pledge on, or dispose of anything of value or belonging to another that they know or believe to have been stolen; and
- intend to deprive the other person permanently of the use or benefit of the thing of value;
- knowingly use, conceal, or abandon the thing of value in such manner as to deprive the other person permanently of its use or benefit;
- use, conceal, or abandon the thing of value intending that such use, concealment, or abandonment will deprive the other person permanently of its use or benefit;
- demand any consideration to which they are not legally entitled as a condition of restoring the thing of value to the other person;
- knowingly retain the thing of value more than 72 hours after the agreed-upon time of return in any lease or hire agreement or
- intentionally misrepresent or...
