A LAWYER'S GUIDE TO THE TRUST FUND STATUTE

1. Introduction
2. The Trust Fund Statute
1. Elements of the Statute
2. Penalties Under the Statute
3. Civil Cause of Action Under the Statute
3. Pursuit and Defense of a Civil Trust Fund Claim
1. A Demand for Payment Under The Trust Fund Statute
2. Defense of Client Accused of Trust Fund Violation in a Civil Matter
3. Assisting the Client in Prosecuting a Criminal Charge
4. Malicious Prosecution
5. Lawyers as Trustees
4. Contract Drafting Considerations And The Trust Fund Statute
5. Conclusion

Chapter 162 of the TEXAS PROPERTY CODE is commonly referred to as the Trust Fund Statute. Even though the Trust Fund Statute is found in the Property Code, it provides for criminal sanctions for violations. Among other things, application of the Trust Fund Statute prohibits the transfer of construction funds outside the chain of companies that perform work on construction projects in Texas. The Trust Fund Statute also mandates accounting of funds on residential homestead construction projects that involve more than $5,000.

The criminal penalties for violation of the statute range from a Class A Misdemeanor (up to a $4,000 fine and a year in jail) to a Third Degree Felony (up to a $10,000 fine and 10 years in jail). Because it is a universal proposition that imprisonment of our clients is bad for business, the construction lawyer needs to understand this statute. As with any case on the criminal side of the docket, the defense of criminal Trust Fund cases should be handled by a qualified criminal defense lawyer.

Texas courts have created a civil cause of action under the Trust Fund Statute. Lawyers seeking payment of construction funds have picked up this powerful weapon and added it to their arsenal of claims in payment disputes. If this weapon is used in a civil contest, all parties need to be aware of its legal, ethical and criminal implications.

Unfortunately, not only does the statute apply to our clients, it can arguably apply to the agent of the construction client, the construction lawyer. Despite our self-preservation instincts in drafting legislation, lawyers are not among the class of parties exempt from the applicability of the statute. If we are handling trust funds, we can be liable for a violation of the statute, just like our clients.

This paper will focus on the application of this criminal statute in a civil context. Hopefully, understanding the statute and the pitfalls in dealing with the statute in the civil arena will help keep our clients out of jail and our licenses on the walls of our offices.

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