The Sword and the Shield: Understanding the Colorado Contractor Trust Fund & Mechanic’s Lien Statutes
Construction projects tend to have several parties involved who are responsible for various aspects of the project. Paramount to a successful construction project is a clear understanding of the relationship between costs among the parties. The owner of the project pays a general contractor, who in turn is supposed to pay subcontractors and materialmen that provide work and materials on the project. Aside from other costs related to a construction project, issues arise in the relationship outlined above. Maybe the owner does not pay the general contractor, then the subcontractors and materialmen must find a way to recoup lost time, work, and materials. Conversely, if the owner paid the general contractor who then refuses to pay the subcontractor or materialmen, the owner and the general contractor could still be liable for claims by the subcontractors and materialmen. The Colorado Mechanics Lien Statute is aimed at providing actionable remedies for such situations. The Statute gives a ‘sword’ to the unpaid and a ‘shield’ to those who have already paid.
Using the Statute as a sword
The Colorado Mechanics Lien Statute provides subcontractors and material providers a ‘sword’ used to get paid on jobs they have worked on or for which they have provided materials. The ‘sword’ is the ability to file a mechanics lien on the property worked on if the subcontractor has not been paid. The mechanics lien functions as an incentive for the owner or general contractor to pay the amount owed. If there is still a refusal to pay, the subcontractor may pursue a legal remedy for payment.
The ability to file a mechanics lien begins on the last day of substantive work. Filing a lien on a property places an encumbrance on the property. This means the property owner cannot sell their property without paying off the lien or filing a bond. Filing a mechanic lien is a serious matter accompanied by strict timing requirements and deadlines. For a full breakdown of the requirements to file a mechanics lien see our article: A Preliminary Mechanics Lien Checklist.
Using the Statute as a shield
What if the owner has paid the general contractor, but the general contractor has not paid the subcontractors, materialmen, or laborers? It would be unfair to allow the subcontractors and materialmen to place a lien on the owner’s property due to the dishonesty of the general contractor. To avoid such situations the statute provides a ‘shield’ for owners, subcontractors, materialmen, and laborers to use against dishonest general contractors. Better known as the Trust Fund Statute, this portion of the Mechanics Lien Statute mandates that funds for a project be kept in a trust fund.
A trust is created when a general contractor or subcontractor receives funds under a construction project. The trust fund must hold all funds in trust for payment to any subcontractor, materialman, or laborer who, “furnished labor, materials, or services; have or may have a lien against the property; and claim or may make a claim against any principal or surety that posted a bond.” The general contractor incurs liability if they receive funds in trust but redirect them to another purpose. Incurring liability opens the contractor to criminal theft charges, personal liability, treble damages, and attorneys’ fees.
General contractors can protect themselves from liability or violating the Trust Fund Statute by carefully following a few guidelines:
keep an accurate accounting for each project separately
keep accurate and precise records of potential claimants on a project, who worked on the project, and who provided what materials for the project
keep separate bank accounts and payment systems
Subcontractors, materialmen, and property owners can bring a trust fund violation claim by showing an unpaid claim and that the general contractor received payment meant for the subcontractor or materialman. It would be helpful to demand an accounting of the project before bringing a claim.
If you are paying for a project or beginning to work on one, consider contacting the experienced team at Galvanize Law Group to ensure you use the Colorado Mechanics Lien Statute effectively and do not find yourself or your business in violation of the Colorado Trust Fund requirements.