Chapter 10 - § 10.5 TRUST FUND VIOLATIONS ON PUBLIC WORKS PROJECTS

• Jurisdiction: Colorado

§ 10.5 TRUST FUND VIOLATIONS ON PUBLIC WORKS PROJECTS

C.R.S. § 38-26-109 is the trust fund statute covering public works projects. The public works trust fund statute is very similar to the mechanics' lien trust fund statute at C.R.S. § 38-22-127, discussed previously in § 7.3.

It should be noted that the statute, C.R.S. § 38-26-109, is written broadly to include "any person that has furnished labor, materials, sustenance, or other supplies used or consumed by the contractor in or about the performance of the work contracted to be done or that supplies laborers, rental machinery, tools, or equipment to the extent used in the prosecution of the work." The statute applies to any such person who has filed or may file a verified statement of a claim or who has asserted or may assert a claim against a principal or a surety under the bonding provisions of the public works statute.

The statute imposes a technical trust on funds that are paid to contractors to hold for payment to their subcontractors and suppliers. Violation of the statute can have very dire consequences, including the following:

1) The person who controls the entity that violates the statute can be held personally liable if he or she controlled the financial decisions of the entity.⁵⁷
2) Violation of the statute can subject the offending person to the penalties under the civil theft statute, C.R.S. § 18-4-401.⁵⁸ However, even though the statute reads as though violation of the trust fund statute should automatically trigger a violation of C.R.S. § 18-4-401, the courts have held such a violation to a higher standard of proof.⁵⁹ Thus, violations of the trust fund statute have been found but no violation of C.R.S. § 18-4-401. This is important since C.R.S. § 18-4-401 allows for an award of treble damages and attorney fees.
3) Courts have held that violation of the trust fund statute is non-dischargeable in bankruptcy under 11 U.S.C. § 523(a)(4).⁶⁰

The case of Bemas Construction, Inc. v. Borland (In re Borland)⁶¹ discusses all of the above issues as well as others associated with the trust fund statute and deserves a thorough reading. Bemas involved an adversary proceeding in bankruptcy court where the court applied and discussed C.R.S. § 38-26-109 at length. Further, the analogous mechanics' lien trust fund statute and cases provide more insight into C.R.S. § 38-26-109. See § 7.3.

The 2018 court of appeals case of Franklin Drilling & Blasting, Inc. v. Lawrence Construction Co.⁶² applied the...