Chapter 9 - § 9.4 • CONSTRUCTION LOAN ADMINISTRATION

• Jurisdiction: Colorado

§ 9.4 • CONSTRUCTION LOAN ADMINISTRATION

In Colorado, an important part of construction loan administration is the disbursement of loan proceeds. Where the land owner enters into an agreement with a developer for the construction of a project on the land owner's property, and where that developer obtains a construction loan to build the project, some states have recognized a common law duty of care on the lender during disbursement to ensure compliance with the terms of the agreement between the land owner and the borrower-developer. This is not so in Colorado. Colorado follows the general rule that where a land owner agrees to subordinate his or her interest to a lien of the construction loan, without an express promise by the construction lender to protect the land owner during disbursement of funds, the diversion of funds by the borrower-developer from the construction project to other uses is a risk assumed by the land owner, unless there is fraud or collusion between the borrower-developer and the construction lender.²⁷ Colorado follows this general rule even if the lender knows there is an agreement between a land owner and a borrower-developer that the construction loan is to be used solely to improve the property.²⁸

Of course, the construction lender could owe a contractual duty of care to the land owner during the construction administration process if that duty is imposed on the construction lender in the construction loan documentation. Additionally, the Colorado legislature has enacted two statutes that affect construction lenders during the disbursement process. In 1965, the Colorado legislature enacted legislation that imposes certain duties on a construction lender who has agreed to make a loan to the owner or contractor, the proceeds of which are to be disbursed from time to time as construction progresses.²⁹ Under this statute, the construction lender, called a "disburser," has a duty to see that subcontractors receive payment for their labor and materials. This duty is satisfied by the disburser's recording a disburser's notice on the title to the real property and thereafter paying the subcontractor directly if the subcontractor serves a notice to disburser upon the construction lender in accordance with C.R.S. § 38-22-126(4) through (6). If the disburser fails to pay such subcontractor as required by C.R.S. § 38-22-126(6), the disburser is liable to the subcontractor for the amount that the disburser should have paid, up to the extent...