CONTRACTOR LIABILITY FOR MISUSE OF CONSTRUCTION PAYMENTS IN TEXAS

November 23, 2011

index.jpegIf you hire a contractor to build a home or make repairs or alterations to an existing home you may be asked by the contractor to make construction payments up front before the contractor begins the work. While most contractors are generally honest, you frequently see stories in the news about a dishonest contractor who has taken money from the trusting property owner and failed to complete the work required by the contract. Many times victims of such scams feel they are left with no relief. That is not the case in Texas. Chapter 162 of the Texas Property Code governs contractor liability for misuse of construction payments. Unfortunately, Chapter 162 of the Texas Property Code does not provide the injured victim with any civil remedies against the contractor. However, it does provide for criminal penalties that can be imposed against a contractor who misapplies construction payments.

Under Chapter 162 of the Texas Property Code a contractor, subcontractor, or owner or an officer, director, or agent of a contractor, subcontractor, or owner, who receives "trust funds" or who has control or direction of "trust funds", is a trustee of the "trust funds".


Construction payments are considered 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 real property.

Construction loan payments are trust funds if the funds are borrowed by a contractor, subcontractor, or owner or by an officer, director, or agent of a contractor, subcontractor, or owner for the purpose of improving real property and the loan is secured in whole or in part by a lien on the property.

However, a fee payable to a contractor is not considered trust funds if the contractor and property owner have entered into a written construction contract for the improvement of real property before the commencement of construction of the improvement and the contract provides for the payment by the owner of the costs of construction and a reasonable fee specified in the contract payable to the contractor and the fee is earned as provided by the contract and paid to the contractor or disbursed from a construction account. A construction account means an account in a financial institution into which only trust funds are deposited by the contractor.

A contractor that maintains a construction account is required to keep an account record for the construction account that provides information relating to:


  • the source and amount of the funds in the account and the date the funds were deposited;

  • the date and amount of each disbursement from the account and the person to whom the funds were disbursed; and

  • the current balance of the account.

The contractor must keep an account record for each construction project that specifies the direct costs and indirect costs charged to the owner and retain all invoices and other supporting documentation received relating to funds that were disbursed from the construction account. The contractor is prohibited from destroying any information required to be maintained for the construction account for one year following the date the improvement that is the subject of the contract is completed.

A contractor who, intentionally or knowingly or with intent to defraud, directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the contractor to the beneficiaries of the trust funds, has misapplied the trust funds.

An artisan, laborer, mechanic, contractor, subcontractor, or materialman who labors or who furnishes labor or material for the construction or repair of an improvement on the real property is a beneficiary of any trust funds paid or received in connection with the improvement. A property owner is a beneficiary of trust funds if the funds are received in connection with a residential construction contract.

A contractor who misapplies trust funds amounting to $500 or more commits a class A misdemeanor.

A contractor who misapplies trust funds amounting to $500 or more, with intent to defraud, commits a felony of the third degree.

A contractor who fails to establish or maintain a construction account or fails to establish or maintain an account record for the construction account commits a class A misdemeanor.

At the Law Office of Stephen O'Rear, P.C. we help people when they have disputes with their contractor.