Construction Trust Fund Statutes by State: When the Money Was Held in Trust — and Who Is Personally Liable When It Disappears
✓ Verified against state statutes · Reviewed August 2026 · By Michael Evan — Founder · 50 states · 799 rules
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What Is a Construction Trust Fund Statute?
A construction trust fund statute changes the legal character of a construction payment. In a trust fund state the payment is not revenue the recipient may spend on payroll, on last month's equipment note, or on the job across town — it is trust property held for the parties downstream who furnished the labor and materials. Texas Property Code Section 162.001 states the rule directly, making construction payments trust funds when made to a contractor or subcontractor, or to an officer, director, or agent of one, under a construction contract for the improvement of specific real property in the state. Michigan's Building Contract Fund Act, MCL 570.151 through 570.153, reaches the identical result and names the contractor or subcontractor as trustee. What is absent from both statutes matters as much as what is in them: there is no requirement that anyone agree to the trust, no clause to negotiate into the subcontract, no notice to serve, and no deadline to calendar before the obligation attaches. The trust arises automatically on receipt, which makes it structurally different from every other remedy in construction payment law.
How Does a Construction Trust Actually Work?
Four operating rules recur. First, the trust corpus is the payment and sometimes the right to receive it — New York Lien Law Section 70 creates a separate trust for each improvement and provides that any right to receive payment at a future time is a right of action and an asset of the trust even though it is contingent upon performance or upon some other event. Second, the permitted uses are narrower than ordinary business expenses: Section 71 directs that trust assets be applied to the cost of improvement, meaning the claims of contractors, subcontractors, architects, engineers, surveyors, laborers, and materialmen, plus enumerated related costs such as premiums on liability and surety bonds for the improvement, certain taxes, unemployment contributions, and wage supplements. Texas approaches the same limit from the defense side with an affirmative defense for a trustee that used trust funds on actual expenses directly related to the project. Robbing job A to fund job B is the paradigm violation. Third, commingling is generally permitted while diversion is not — Colorado Section 38-22-127 requires separate records of account per project but expressly does not require a separate bank account, and Maryland Real Property Section 9-201 states that mere commingling does not constitute a violation. Fourth, on a shortfall several states require proportionate payment: Wisconsin Section 779.02(5) prohibits any other use until claims are paid in full and directs that in case of a deficiency the claims be paid proportionately.
Which States Have a Construction Trust Fund Statute?
Fourteen states were verified as imposing a civil trust on construction money. Nine are general in scope: Texas (Property Code Chapter 162), New York (Lien Law Article 3-A, Sections 70 through 79-a), Michigan (MCL 570.151 to 570.153), Maryland (Real Property Sections 9-201 and 9-202), Colorado (C.R.S. Section 38-22-127), Wisconsin (Section 779.02(5)), Minnesota (Section 514.02), Oklahoma (42 O.S. Sections 152 and 153), and Delaware (6 Del. C. Section 3502). Five are limited and the limitation is the trap: New Jersey's trust under N.J.S.A. 2A:44-148 covers public improvement contracts only; Arizona's trust under A.R.S. Section 33-1005 covers owner-occupied residential work only; Washington's trust under RCW 60.28.011 covers public-works retainage only, with a 45-day notice cutoff after completion; Illinois 770 ILCS 60/21.02 is triggered by a mechanics lien waiver rather than by payment generally; and Tennessee Code Section 66-34-205 runs against the owner rather than the contractor. Six additional states criminalize diversion without creating a civil trust: Virginia (Code Section 43-13, larceny, plus a civil cause of action since 2020), Florida (Statute Section 713.345, felony tiers scaling with the amount), Georgia (O.C.G.A. Section 16-8-15, felony punishable by one to five years), Louisiana (R.S. 14:202), California (Penal Code Section 484b), and South Carolina (Code Section 29-7-20).
Who Becomes Personally Liable When the Money Disappears?
This is why the theory exists. The ordinary problem with a judgment against a failed contractor is not proving the debt but collecting it from an LLC with no assets and a principal who has already formed a new entity. Piercing the corporate veil usually requires proving fraud or abuse of the corporate form as a separate matter. The trust statutes route around that by imposing the duty on the individual who controlled the funds, in the statute itself. Maryland Real Property Section 9-201 makes an officer, director, or managing agent with direction over or control of trust money a trustee, and Section 9-202 makes one who knowingly retains or uses it for another purpose personally liable to any person damaged by the action. Oklahoma Section 153 provides that where the recipient is an entity having the characteristics of limited liability, the entity and the natural persons having the legally enforceable duty for its management are liable for proper application of the funds. Texas names officers, directors, and agents as trustees and treats diversion of $500 or more without first fully paying current or past-due obligations as a Class A misdemeanor, or a third-degree felony with intent to defraud. Colorado's violation may be pursued as civil theft under Section 18-4-405 for treble damages plus reasonable attorney fees. Minnesota reaches a responsible shareholder, officer, director, or agent on licensed residential work, and Virginia Code Section 43-13 names any officer, director, or employee.
How Is a Trust Fund Claim Different from a Mechanics Lien?
A mechanics lien attaches to the real property. A trust fund claim attaches to the money and, in several states, to the people who moved it. They fail under opposite conditions, which is why a claimant wants both rather than choosing between them. A lien is worthless when a prior mortgage swallows the equity, when the lien has been bonded off, or when a notice or recording deadline was blown. A trust fund claim does not care about the property at all — it asks where the money went and who directed it there. Conversely a trust fund claim is weak when the money never arrived, because if the owner never paid the general contractor there is usually no trust corpus to trace, and that is precisely the scenario in which the lien is strongest. There is also a timing difference: lien and notice deadlines are unforgiving and typically run from first or last furnishing, while a trust fund claim generally runs on the limitations period for the claim asserted, so it sometimes survives a missed lien deadline. The correct sequence is to perfect the lien first, because it runs on the tighter clock and is the leverage most likely to produce payment without litigation, then develop the trust theory, which usually requires discovery into records the claimant does not yet have.
What Evidence Proves a Trust Fund Violation?
The obvious objection is that a claimant does not have the contractor's bank records. Three states anticipated that and shifted the burden onto the trustee. New York Lien Law Section 79-a provides that failure of the trustee to keep the books or records required by Section 75 is presumptive evidence that trust funds were applied for purposes other than the trust purposes, and supplies a clean trigger date by making a contractor or subcontractor trustee liable for larceny on failure to pay trust claims within 31 days of when due, subject to a good-faith-dispute safe harbor if payment follows within 31 days of final determination. Georgia's O.C.G.A. Section 16-8-15 requires intent to defraud but provides that failure to pay for the material or labor furnished is prima facie evidence of that intent. Florida Statute Section 713.345 creates a permissive inference of knowing and intentional misapplication where a valid lien has been recorded, the person received sufficient funds to pay for the labor, services, or materials, and the person failed for at least 45 days from receipt of the funds to remit sufficient funds. Every element of the Florida inference is something a claimant can create or document deliberately. Elsewhere the practical evidence set is the draw schedule and approved pay applications showing the owner funded the work, the lien waivers exchanged for payments, furnishing records, and correspondence establishing that the trustee knew the invoice was outstanding when the money moved.
Does a Trust Fund Claim Survive Bankruptcy?
It can, but the answer is not automatic and should not be assumed. Section 523(a)(4) of the Bankruptcy Code excepts from discharge any debt for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. In Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013), the Supreme Court held that defalcation includes a culpable state of mind requirement — knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior — so a contractor whose business simply failed has not committed defalcation. A second and more fundamental limit is often glossed over: whether a particular state construction trust makes the recipient a fiduciary in the federal sense that Section 523(a)(4) requires is itself a contested question, answered differently depending on the statute and the circuit. Treat nondischargeability as a real and often decisive possibility that requires bankruptcy counsel in the specific forum, not as a settled rule, and move early, because the deadline to file a nondischargeability complaint is short and runs from the meeting of creditors. Tennessee Code Section 66-34-205 is the one statute in this survey that addresses insolvency in its own text, providing that the bankruptcy or insolvency of any party is not a valid defense to the failure to release the trust sums, including all retainage, when they are otherwise due.
Frequently Asked Questions
What is a construction trust fund statute?
It is a statute that converts a construction payment into trust property the instant it is received, so the recipient holds it for the people downstream who furnished the labor and materials rather than owning it outright. Texas Property Code Section 162.001 provides that construction payments are trust funds if the payments are made to a contractor or subcontractor, or to an officer, director, or agent of a contractor or subcontractor, under a construction contract for the improvement of specific real property in Texas. Michigan reaches the same result through MCL 570.151, under which the building contract fund paid to a contractor or subcontractor is a trust fund for the person making the payment and for contractors, laborers, subcontractors, and materialmen, with the contractor or subcontractor as trustee. The obligation arises automatically on receipt and does not have to appear in the contract.
Which states have construction trust fund statutes?
Fourteen states impose a civil trust on construction money, four of them in a limited scope. The broad ones are Texas, New York, Michigan, Maryland, Colorado, Wisconsin, Minnesota, Oklahoma, and Delaware. The limited ones are New Jersey (public projects only, N.J.S.A. 2A:44-148), Arizona (owner-occupied residential only, A.R.S. Section 33-1005), Washington (public-works retainage only, RCW 60.28.011), Illinois (triggered by a lien waiver, 770 ILCS 60/21.02), and Tennessee (running against the owner, Section 66-34-205). Six additional states criminalize diversion without a civil trust: Virginia, Florida, Georgia, Louisiana, California, and South Carolina.
Can I sue the owner of the contractor's LLC personally for unpaid construction money?
In several trust fund states, yes, and it is the most valuable feature of these statutes because it steps around the corporate shield without requiring you to pierce the veil. Maryland Real Property Section 9-201 makes an officer, director, or managing agent with direction over or control of trust money a trustee, and Section 9-202 makes one who knowingly retains or uses it for any purpose other than paying the subcontractors personally liable to any person damaged. Oklahoma Section 153 imposes liability on the entity and the natural persons having the legally enforceable duty for its management where the recipient is a limited-liability entity. Wisconsin's theft-by-contractor statute reaches corporate officers personally in defined circumstances, and Minnesota Section 514.02 names a responsible shareholder, officer, director, or agent on licensed residential work.
Does a construction trust fund claim survive the contractor's bankruptcy?
It can, but not automatically. Section 523(a)(4) of the Bankruptcy Code excepts from discharge debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013), held that defalcation requires a culpable state of mind — knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior — so a business that simply failed is not enough. Whether a given state construction trust creates a fiduciary in the federal sense is a separate contested question that courts have answered differently by statute and by circuit. Treat nondischargeability as a real possibility requiring bankruptcy counsel in the specific forum, and act quickly, because the complaint deadline is short and runs from the creditors' meeting.
How is a construction trust fund claim different from a mechanics lien?
A mechanics lien attaches to the real property; a trust fund claim attaches to the money and, in several states, to the people who moved it. They fail in opposite conditions. A lien is worthless when a prior mortgage swallows the equity, when the lien got bonded off, or when a deadline was blown. A trust fund claim ignores the property entirely and asks where the money went and who directed it there. Conversely, a trust claim is weak when the money never arrived, because there is no corpus to trace — which is exactly when the lien is strongest. Lien deadlines are also far less forgiving, so perfect the lien first and develop the trust theory second.
What proves that a contractor misapplied construction trust funds?
Several states shift the evidentiary work onto the trustee. New York Lien Law Section 79-a makes failure to keep the books required by Section 75 presumptive evidence that trust funds were applied to non-trust purposes. Georgia's O.C.G.A. Section 16-8-15 makes failure to pay for the material or labor furnished prima facie evidence of intent to defraud. Florida Section 713.345 creates a permissive inference where a valid lien has been recorded, the person received sufficient funds, and 45 days passed from receipt without remittance. The practical instruction is to build the record that triggers those presumptions: document the furnishing, record the lien where the right exists, and put the demand for an accounting in writing with a date on it.
Does a contractor have to keep construction trust funds in a separate bank account?
Usually no, and commingling by itself does not prove a violation. Colorado Section 38-22-127 requires separate records of account for each project but expressly does not require depositing a project's trust funds in a separate bank account, so long as they are not expended in a prohibited manner. Maryland Real Property Section 9-201 states that mere commingling does not constitute a violation of the subtitle, and Illinois 770 ILCS 60/21.02 likewise does not require a separate account. The violation is defined by where the money went, not by which account it sat in. Wisconsin Section 779.02(5) makes the related point that on a deficiency the claims must be paid proportionately rather than first-come, first-served.