The Mechanic's Lien Trust Fund Statute: an Underused Tool in Civil Litigation and Bankruptcy Cases

• Publication year: 2002
• Pages: 55
• Citation: Vol. 31 No. 8 Pg. 55

31 Colo.Law. 55 Colorado Lawyer 2002.

2002, August, Pg. 55. The Mechanic's Lien Trust Fund Statute: An Underused Tool in Civil Litigation And Bankruptcy Cases

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55

Vol. 31, No. 8, Pg. 55

The Colorado Lawyer
August 2002
Vol. 31, No. 8 [Page 55]

Specialty Law Columns
Construction Law Forum
The Mechanic's Lien Trust Fund Statute: An Underused Tool in Civil Litigation And Bankruptcy Cases
by Michael Romero

This column is sponsored by the CBA Construction Law Forum Committee. The column addresses various construction-related issues in both public and private areas. The column editor and Committee encourage the submission of substantive law articles addressing issues of interest to practitioners in the field of construction law

Column Editor

James W. Bain of Brega & Winters, P.C., Denver - (303) 866-9408

About TheAuthor

This month's article was written by Michael E. Romero, Denver, a shareholder and director of Pendleton, Friedberg, Wilson & Hennessey, P.C. - (303) 839-1204, mer@penberg.com.

Buried in the Colorado Mechanic's Lien Statute is a tool that may be used by subcontractors, material suppliers, and laborers as an aid to secure payment for their work. This article explains the uses and potential pitfalls of the Trust Fund Statute.

With apologies to William Congreve, hell hath no fury like a subcontractor who has been stiffed.1 Subcontractors and material suppliers (hereafter collectively referred to as "subcontractors") on private construction projects too often find they have completed their work but remain unpaid. To assure payment of these sums, the usual course of action is to sue the general contractor for breach of contract and file a mechanic's lien against the real property where the improvements are located.

Unfortunately, complications often occur. The general contractor may go bankrupt. Foreclosure may not be an option for fear of environmental contamination liability. Perhaps the subcontractor missed the required deadlines and lost mechanic's lien rights. Nonetheless, hope still may exist for those individuals and entities under a provision buried within the Mechanic's Lien Statute,2 CRS § 38-22-127, commonly referred to as the Mechanic's Lien Trust Fund Statute ("Trust Fund Statute").

The majority of cases interpreting the Trust Fund Statute have resulted from criminal prosecutions of violations of its provisions.3 However, the Trust Fund Statute's best use might be as a tool in a civil action attempting to collect monies owed to subcontractors on a private construction project.

The Trust Fund Statute, while simple in concept, is fraught with twists and exceptions, which makes its use somewhat complex - and by no means guarantees success. Nonetheless, the Trust Fund Statute provides an extremely useful tool in the effort to obtain payment for subcontractors. This article reviews the Trust Fund Statute, and addresses ways in which it could be used to benefit unpaid subcontractors and material suppliers on private construction projects.

Overview of Trust
Fund Statute

The Trust Fund Statute, CRS § 38-22-127, was enacted in 1975 and amended in 2000. Generally, the Trust Fund Statute provides that the funds disbursed under any construction project are to be held in trust for the payment of subcontractors, laborers, or material suppliers who have a lien, or may have a lien, against the property. The Trust Fund Statute also has enunciated several exceptions that give contractors an "out" from its applicability.

Who Is Protected?

The Trust Fund Statute's enunciated purpose is to protect homeowners, laborers, and material suppliers from "dishonest or profligate contractors."4 Although there has been no Colorado state court ruling on the subject, the U.S. Bankruptcy Court for the District of Colorado has held that a property owner also is a beneficiary under the Trust Fund Statute.5

Exceptions to the
Trust Fund Statute

There are two important exceptions to the coverage of the Trust Fund Statute. CRS § 38-22-127(2) exempts coverage from the...