THE TEXAS CONSTRUCTION TRUST FUND ACT AND BANKRUPTCY PREFERENCES

• Introduction
• The Texas Construction Trust Fund Act
• Bankruptcy Preferences Under 11 U.S.C.547
• Debtor’s Interest in the Property Transferred
• Federal Application of Trust Fund Law to the Bankruptcy Code
• The Fifth Circuit - Boyle and Nicholas
• Proving a Technical Trust Under Boyle and Nicholas for §523
• Chapman, Davis and Their Progeny
• The Interaction of Trust Fund Rights and Bankruptcy Preferences
• Commingling
• The Construction Trust Fund Act and §547
• Conclusion

Abstract

The Texas Construction Trust Fund Act benefits those furnishing labor or materials for the construction or repair of a house, building, or improvement by providing that any funds to a contractor, subcontractor or supplier made in payment of labor and materials are held in trust for all parties in the construction chain. The Construction Trust Fund Act recognizes that general contractors typically deposit project monies into a few common accounts, and allows subcontractors and suppliers to get paid from these accounts without first pleading entitlement to those funds, under a constructive trust, and then tracing their entitlement to the payments received by the general contractor. The Act provides for civil and criminal penalties to those who misappropriate trusts funds and fail to pay for labor and materials.

The language of the Act as well as amendments affecting the Construction Trust Fund Act reemphasize the Texas Legislature’s intent that an identifiable construction fund exists for the sole purpose of protecting payments due downstream subcontractors and suppliers, from being diverted away from them through misappropriation by upstream parties such as general contractors.5 Nevertheless, the intent of the Legislature is not followed in every instance. In bankruptcy adversary proceedings, bankruptcy courts have been hesitant to give full meaning to the words of the Construction Trust Fund Act, and as a result, payments rightly belonging to downstream subcontractors and suppliers are being treated as if they belonged to the general contractor.

Numerous cases give guidance regarding the interplay of the Construction Trust Fund Act and § 523 of the Bankruptcy Code, that part of the Bankruptcy Code that provides for exceptions to the discharge of a debt in bankruptcy. However, the interplay of the Construction Trust Fund Act and 11 U.S.C. §547, that part of the Bankruptcy Code that deals with preferences, is not clear in the Fifth Circuit. This article will explore the relationship of the Construction Trust Fund Act and 11 U.S.C. §547 by analyzing how federal courts outside of the Fifth Circuit have applied their state trust fund laws to §547 and by exploring how the Fifth Circuit has interpreted the effect of the Act on 11 U.S.C. §523. To understand the relationship between the Construction Trust Fund Act and §547, a review of pertinent portions of both statutes is appropriate.

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