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The Texas Construction Trust Fund Act

Introduction

The Texas Construction Trust Fund Act (TCTFA), found in chapter 162 of the Texas Property Code, establishes fiduciary responsibilities for contractors, subcontractors, and officers, directors, or agent of a contractor or subcontractor (their “authorized representative”), who receive and/or control construction funds under a construction contract for the improvement of specific real property in this state. The TCTFA aims to prevent misappropriation of construction trust funds and ensure that funds are utilized properly to compensate subcontractors, laborers, and material suppliers for their labor and supplies as intended. 

What Funds Count As “Trust Funds?”

The TCTFA makes construction payments “trust funds” if the payments are made to a contractor, subcontractor, or their authorized representative under a construction contract that is for the improvement of specific real property in Texas. See Tex. Prop. Code § 162.001(a). Trust funds under the TCTFA also includes payments made to contractors, subcontractors, or their authorized representatives via a loan as long as the funds are borrowed for the purpose of improving specific real property in Texas and the loan is secured either in whole or in part by a lien on the property. See Tex. Prop. Code § 162.001(b).

Notably, certain fees paid to a contractor may not be considered trust funds, but the contract must provide for these fees, and they must be reasonable. See Tex. Prop. Code § 162.001(c).

Who is a Trustee?

Trustees are those that receive trust funds or have control or direction of trust funds. This includes:

  • Contractors and their authorized representatives;

  • Subcontractors and their authorized representatives; 

  • Owners of real property.

See Tex. Prop. Code § 162.002.

Who is a Beneficiary?

A beneficiary can be any person that provides labor or material for a construction project or for an improvement on specific real property in Texas. Beneficiaries include:

  • Artisans

  • Laborers

  • Mechanics

  • Contractors

  • Subcontractors

  • Materialman

  • Property Owners (but only if funds are paid in connection with a residential construction contract)

See Tex. Prop. Code § 162.003(a).

Actions a Trustee Must Take to Avoid Violating TCTFA.

If you are a trustee, you must set up a separate “construction account” for each construction project that is for the improvement of specific real property in Texas. See Tex. Prop. Code § 162.007(a). A “construction account” is defined by the TCTFA as “an account in a financial institution into which only trust funds and funds deposited by the contractor that are necessary to pay charges imposed on the account by the financial institution may be maintained.” Tex. Prop. Code § 162.005(6).

Additionally, TCTFA requires that you set up a “construction account” when you enter a contract with a residential homeowner for improvements on their home (specifically, their homestead) for an amount exceeding $5,000.00. See Tex. Prop. Code § 162.006(a). Furthermore, you should ensure that the periodic statement you receive from your bank or financial institution refers to the account as a “construction account.” See Id.

Moreover, in addition to setting up an account, you must keep an account record for the construction account that includes:

“(1) the source and amount of the funds in the account and the date the funds were deposited;

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

(3) the current balance of the account.”

Tex. Prop. Code § 162.007(a).

You also must maintain an account record for all charges to the owner, retain all invoices and other supporting documentation of disbursements, and ensure all invoices and supporting documentation includes the construction account number or a direct connection to the account. See Tex. Prop. Code § 162.007(b–d).

You must maintain, and not destroy, any of the above information until after a year has passed since the completion of the contracted project. See Tex. Prop. Code § 162.007(e).

Misapplication and Penalties

Misapplication of construction trust funds can carry steep penalties. Criminal penalties can include imprisonment up to ten years and a fine up to $10,000.00. See Tex. Prop. Code § 162.032. Additionally, civil litigation can be brought against contractors or trustees for misapplication of construction trust funds. 

Contact Us

Whether you are a contractor looking to ensure compliance with the Texas Construction Trust Fund Act, or someone that has had their construction funds misapplied, an experienced construction attorney is a valuable relationship to have. We invite you to call us.  

The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation.
This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship. 

By: Caleb Waller and Paige Quick

Maddie Benson