Correcting a False Step: Rethinking Overhead for the 'Actual Expenses' Affirmative Defense to the Texas Construction Trust Fund Act
44 Pages Posted: 3 Sep 2014 Last revised: 26 Sep 2016
Date Written: September 2, 2014
In a typical construction project, an owner contracts with a general contractor to construct improvements or make repairs to real property. The owner agrees to pay a total contract price for the work. Often, the general contractor then contracts with subcontractors, laborers, materialmen, and other suppliers to do aspects of the job. These are part of the contractor’s costs to do the work for owner, and the expectation is that the contractor will pay his subcontractors and laborers from the money received from the owner. All too frequently, unfortunately, contractors receive the payment from the owner and then do not pay the subcontractors and other laborers who performed the work, but rather use the money for other purposes. This causes a problem for the subcontractors (who are not promptly paid) and the owner (who may be called upon to "pay twice"). The purpose of the Texas Construction Trust Fund Act (Chapter 162 of the Property Code) is to ensure that these subcontractors, laborers, and materialmen are paid from the funds received from the owner. The Act provides that the funds paid by the owner to the contractor are trust funds, and that the contractor misapplies the trust funds when the subcontractors – i.e., the beneficiaries of the trust – are not paid from the money. Such misapplication is subject to criminal penalties and civil liability. The Act provides that the contractor has an affirmative defense if he uses the trust funds to pay "actual expenses directly related to the construction or repair of the improvement." This language suggests that only expenses incurred for actual project-specific expenses would suffice to avoid liability. However, an influential Attorney General opinion interpreted the statute to allow general overhead expenses to suffice, and this has been unfortunately followed by the majority of courts interpreting the provision. Allowing overhead from the trust funds before beneficiaries are paid, however, is antithetical to the policy goals of the statute. Moreover, a closer examination of the Attorney General opinion and the legislative history of the affirmative defense surprisingly reveals that the Attorney General’s reading of the legislators’ intent was questionable, at best. The courts should remedy this by reforming their interpretation of the affirmative defense to disallow overhead to qualify; instead requiring project-specific expenses only. Alternatively, the Texas Legislature should resolve the issue by amending section 162.031 of the Property Code.
Keywords: construction, contractor, subcontractor, trust fund
Suggested Citation: Suggested Citation