Colorado § 38-22-127 - Moneys for lien claims made trust funds - disbursements - penalty.

§ 38-22-127. Moneys for lien claims made trust funds - disbursements - penalty.

(1) All funds disbursed to any contractor or subcontractor under any building, construction, or remodeling contract or on any construction project shall be held in trust for the payment of the subcontractors, laborer or material suppliers, or laborers who have furnished laborers, materials, services, or labor, who have a lien, or may have a lien, against the property, or who claim, or may claim, against a principal and surety under the provisions of this article and for which such disbursement was made.

(2) This section shall not be construed so as to require any such contractor or subcontractor to hold in trust any funds which have been disbursed to him or her for any subcontractor, laborer or material supplier, or laborer who claims a lien against the property or claims against a principal and surety who has furnished a bond under the provisions of this article if such contractor or subcontractor has a good faith belief that such lien or claim is not valid or if such contractor or subcontractor, in good faith, claims a setoff, to the extent of such setoff.

(3) If the contractor or subcontractor has furnished a performance or payment bond or if the owner of the property has executed a written release to the contractor or subcontractor, he need not furnish any such bond or hold such payments or disbursements as trust funds, and the provisions of this section shall not apply.

(4) Every contractor or subcontractor shall maintain separate records of account for each project or contract, but nothing contained in this section shall be construed as requiring a contractor or subcontractor to deposit trust funds from a single project in a separate bank account solely for that project so long as trust funds are not expended in a manner prohibited by this section.

(5) Any person who violates the provisions of subsections (1) and (2) of this section commits theft, as defined in section 18-4-401, C.R.S.

Source: L. 75: Entire section added, p. 1420, § 2, effective October 1. L. 2000: (1) and (2) amended, p. 211, § 13, effective August 2.

ANNOTATION

Law reviews. For article, "The Mechanics' Lien Trust Fund Statute — Theft or Not Theft", see 16 Colo. Law. 1968 (1987). For article, "The Mechanic's Lien Trust Fund Statute: An Underused Tool in Civil Litigation and Bankruptcy Cases", see 31 Colo. Law. 55 (Aug. 2002). For article, "Juggling Hammers: Bankruptcy Issues and the Mechanic's Lien Trust Fund Statute", see 39 Colo. Law. 21 (Dec. 2010). For article, "Contractors' Civil Liability Under Colorado's Mechanics' Lien Trust Fund Statute", see 54 Colo. Law. 32 (May-June 2025).

Prosecution not imprisonment for civil debt. Because the intent to defraud, necessary to § 18-4-401, must be proven in order to convict an accused, a prosecution for violation of this section does not conflict with the constitutional prohibition of imprisonment for civil debt in § 12 of art. II, Colo. Const. People v. Piskula, 197 Colo. 148, 595 P.2d 219 (1979).

General assembly intended to protect subcontractors, laborers, material suppliers, and homeowners from unscrupulous contractors. In re Regan, 151 P.3d 1281 (Colo. 2007); Syfrett v. Pullen, 209 P.3d 1167 (Colo. App. 2008).

The purpose of this section is to protect homeowners, laborers, and material suppliers from dishonest or profligate contractors by requiring contractors to hold in trust their customers' advanced payments if independent laborers or material suppliers are necessary to complete a particular job. People v. Collie, 682 P.2d 1208 (Colo. App. 1983); In re Regan, 151 P.3d 1281 (Colo. 2007); Syfrett v. Pullen, 209 P.3d 1167 (Colo. App. 2008).

Trade vendors are permitted to waive rights enacted for their benefit and protection. A construction subcontract agreement that unambiguously waived all rights of trade vendors to make claims under this section is not void as against public policy nor is the waiver an unenforceable exculpatory clause. In re Vill. Homes of Colo., Inc., 405 B.R. 479 (Bankr. D. Colo. 2009).

Subsection (1) imposes a statutory trust on all funds disbursed to a contractor or subcontractor for the benefit of laborers and suppliers who have furnished services or supplies on a particular construction project, satisfying the technical trust element of a fiduciary relationship necessary to establish a claim under 11 U.S.C. § 523(a)(4). In re Cupit, 514 B.R. 42 (Bankr. D. Colo. 2014).

Subsection (1) does not require a contractor to hold funds for each of its construction projects in individual trust accounts. Hottinger Excavating & Ready Mix, LLC v. R.E. Crawford Constr., LLC, 175 F. Supp. 3d 1269 (D. Colo. 2016).

Subsection (2) does not require a contractor to hold funds in trust for a subcontractor if the contractor has a good faith belief that the subcontractor's lien or claim is not valid. Hottinger Excavating & Ready Mix, LLC v. R.E. Crawford Constr., LLC, 175 F. Supp. 3d 1269 (D. Colo. 2016).

There is no express statutory prohibition of a waiver of this section. The fact that § 38-22-119 refers to lien waivers, and limits the effect of such waivers to the parties to the agreement, neither authorizes nor prohibits waivers of mechanics' liens. In fact, it recognizes their validity as between the contracting parties. Section 38-22-119 does not give rise to an implication that statutory authorization is required in order to waive rights under this section. In re Vill. Homes of Colo., Inc., 405 B.R. 479 (Bankr. D. Colo. 2009).

Section is not in itself criminal statute; it merely defines conduct that will be considered theft under § 18-4-401. Any violation of this section must be charged and prosecuted as a violation of the theft statute. People v. Brand, 43 Colo. App. 347, 608 P.2d 817 (1979); People v. Collie, 682 P.2d 1208 (Colo. App. 1983).

Each of the essential elements of theft as set forth in § 18-4-401 must be proven beyond a reasonable doubt to support a conviction even where theft is sought to be proven by showing a violation of this section. People v. Erickson, 695 P.2d 804 (Colo. App. 1984); In re Gamboa, 400 B.R. 784 (Bankr. D. Colo. 2008).

In the context of theft of construction project trust funds, the "knowingly using" element of mental culpability in § 18-4-401 (1)(b) does not require a conscious objective to deprive another person of the use or benefit of the construction trust funds, but instead requires the offender to be aware that his manner of using the trust funds is practically certain to result in depriving another person of the use or benefit of the funds. People v. Anderson, 773 P.2d 542 (Colo. 1989); In re Helmke, 398 B.R. 38 (Bankr. D. Colo. 2008); In re Gamboa, 400 B.R. 784 (Bankr. D. Colo. 2008); In re Cupit, 514 B.R. 42 (Bankr. D. Colo. 2014).

Person who is an owner and officer is personally liable for breach of statute. Alexander Co. v. Packard, 754 P.2d 780 (Colo. App. 1988); Flooring Design Assocs. v. Novick, 923 P.2d 216 (Colo. App. 1995); In re Barnes, 377 B.R. 289 (Bankr. D. Colo. 2007).

An individual in complete control of the finances and financial decisions of an entity that violates the statute is personally liable for such violation. Alexander Co. v. Packard, 754 P.2d 780 (Colo. App. 1988); Flooring Design Assocs. v. Novick, 923 P.2d 216 (Colo. App. 1995); In re Walker, 325 B.R. 598 (Bankr. D. Colo. 2005); In re Barnes, 377 B.R. 289 (Bankr. D. Colo. 2007).

A part owner and vice-president of contractor was personally liable for damages and costs incurred by owner of property in defending materialmen liens on project where vice-president breached the statutory trust relationship by diverting trust funds received from the owner of the property intended for payment to materialmen to pay other obligations of the contractor. Alexander Co. v. Packard, 754 P.2d 780 (Colo. App. 1988).

Once trust funds are identified as having been disbursed to a contractor or subcontractor on a particular project, the burden to account for proper disposition of the funds under subsection (1) rests squarely on the contractor or subcontractor. The inability to meet that burden constitutes a breach of fiduciary duty. Stetson Ridge Assocs., Ltd. v. Tri-C Constr., 315 B.R. 595 (Bankr. D. Colo. 2004), aff'd in part, rev'd in part on other grounds, 325 B.R. 598 (D. Colo. 2005); In re Gamboa, 400 B.R. 784 (Bankr. D. Colo. 2008).

Trust fund claims are limited by the applicable statute of limitations, just as lien claims are limited by §§ 38-22-109 and 38-22-110. In re Regan, 151 P.3d 1281 (Colo. 2007).

Where contractor obtained a surety bond and is later paid by the owner, the contractor receives those payments free of the express trust otherwise imposed by this section. In re W. Urethanes, Inc., 61 Bankr. 245 (Bankr. D. Colo. 1986).

Priority of interests under this section. An unsecured supplier claiming an interest under this section, which imposes a trust fund for materialmen and laborers, takes priority over a prior perfected security interest in all present and future accounts receivable and proceeds of accounts. First Com. Corp. v. First Nat'l Bankcorporation, Inc., 572 F. Supp. 1430 (D. Colo. 1983).

Contractor who received advances from clients but failed to retain them for payment of subcontractors and materialman could be convicted of theft, as set forth in § 18-4-401, though contractor was allegedly ignorant of this section's requirement that such funds be held in trust. However, the prosecution must prove all elements of § 18-4-401 to obtain conviction. People v. Mendro, 731 P.2d 704 (Colo. 1987).

Definition of "disburser" in § 38-22-126 was not intended by the legislature to apply to this section. Flooring Design Assocs. v. Novick, 923 P.2d 216 (Colo. App. 1995).

Merchant homebuilders are "contractors" under this section. Flooring Design Assocs. v. Novick, 923 P.2d 216 (Colo. App. 1995).

All funds disbursed to merchant homebuilder from a construction loan and all funds received by merchant homebuilder from the sale of the property constituted "funds disbursed to a contractor" and are subject to the statute. In re Barnes, 377 B.R. 289 (Bankr. D. Colo. 2007).

Funds made available to the developer of a construction project, including an owner's voluntary loans or capital contributions, are not trust funds under subsection (1). Owner's voluntary injection of his own money as a survival loan did not constitute "funds disbursed to any contractor . . . on [a] construction project". Yale v. AC Excavating, Inc., 2013 CO 10, 295 P.3d 470.

Because personal funds owner made available were not trust funds, owner as a member and manager of the limited liability company cannot be held civilly liable for theft under subsection (5) for using those funds to pay company obligations instead of paying in full the amounts owed to a subcontractor. Yale v. AC Excavating, Inc., 2013 CO 10, 295 P.3d 470.

The failure to fully account for all disbursements from the construction loan and the use of proceeds from the sale of the property in a manner inconsistent with the statute constitute violations of the statute. In re Barnes, 377 B.R. 289 (Bankr. D. Colo. 2007).

Merchant homebuilder committed a defalcation pursuant to 11 U.S.C. § 523(a)(4) by failing to ensure that all such disbursements were held in trust for the unpaid suppliers of material and labor. In re Barnes, 377 B.R. 289 (Bankr. D. Colo. 2007).

An individual in complete control of the finances and financial decisions of an entity that violates the statute is personally liable for such violation. In re Barnes, 377 B.R. 289 (Bankr. D. Colo. 2007).

The debts owed by debtor merchant homebuilder to suppliers of material and labor that result from this defalcation are non-dischargeable under 11 U.S.C. § 523(a)(4). In re Barnes, 377 B.R. 289 (Bankr. D. Colo. 2007).

A trust fund claimant is not required to have a properly perfected lien or still be able to perfect a lien to seek access to money held in trust under this section. By its plain language, this section allows subcontractors, laborers, and material suppliers to assert claims directly against contractors if they have a lien or may have a lien, which means they have added value to a property or may have added value to a property. In re Regan, 151 P.3d 1281 (Colo. 2007); In re Regan, 477 F.3d 1209 (10th Cir. 2007); In re Barnes, 377 B.R. 289 (Bankr. D. Colo. 2007); Syfrett v. Pullen, 209 P.3d 1167 (Colo. App. 2008).

The section protects subcontractors, laborers, and material suppliers who add value to property but are unable to recover money owed to them through the lien claim process. In re Regan, 151 P.3d 1281 (Colo. 2007).

The procedural requirements for perfecting a lien contained in §§ 38-22-109 and 38-22-110 do not apply to claims against money held in trust under this section. In re Regan, 151 P.3d 1281 (Colo. 2007); In re Regan, 477 F.3d 1209 (10th Cir. 2007).

General contractor does not have standing under subsection (1) to pursue claims against subcontractors. AMEC Earth & Envtl. v. SolSource Energy Solutions, 854 F. Supp. 2d 1014 (D. Colo. 2012) (distinguishing bankruptcy cases).

An owner of a project or a general contractor has standing to sue under subsection (1) to contest the dischargeability of a subcontractor-debtor under 11 U.S.C. § 523(a)(4). Stetson Ridge Assocs., Ltd. v. Tri-C Constr., 325 B.R. 598 (D. Colo. 2005).

General contractor that paid subcontractor to release its lien on property had standing to sue contractor for contractor's failure to pay subcontractor and to establish that debt was not dischargeable pursuant to 11 U.S.C. § 523(a)(4). Allowing general contractor recourse under this section merely subrogates it to the rights of the subcontractor whom it paid when the contractor failed to do so. Subcontractor is among the identified class for whom funds shall be held in trust under subsection (1)(a). In re Brennan, 449 B.R. 114 (Bankr. D. Colo. 2011).

Property owner had standing to sue contractor for contractor's failure to make payments to subcontractors, laborers, and material suppliers. Material supplier's lien on property owner's house amounted to an injury in fact, and the property owner of a construction project, as well as the subcontractors, material suppliers, and laborers, has a legally protected interest to enforce the trust created under subsection (1). Syfrett v. Pullen, 209 P.3d 1167 (Colo. App. 2008).

As beneficiaries, property owners are able to enforce this section against a contractor separate from the lien claim laws. In re Regan, 151 P.3d 1281 (Colo. 2007); Syfrett v. Pullen, 209 P.3d 1167 (Colo. App. 2008).

Property owner does not have the right to retain damages awarded against contractor. Instead, property owner is entitled to a judgment imposing a constructive trust on the funds that should have been paid to subcontractors, material suppliers, and laborers. Syfrett v. Pullen, 209 P.3d 1167 (Colo. App. 2008).

Claims under this section are not assignable on a contingency fee basis for collection purposes. In re Thomas, 387 B.R. 808 (D. Colo. 2008).

Although a claim for breach of trust under this section is assignable, even on a contingency payment basis, the right to the penalty of treble damages and the incorporated civil theft remedies under §§ 18-4-401 and 18-4-405 are not assignable. People v. Adams, 243 P.3d 256 (Colo. 2010) (disagreeing with In re Thomas cited above).

A lien release bond is not equivalent to payment or performance bonds. Because only payment or performance bonds are included in subsection (3), it must be presumed that the legislature intended to exclude lien release bonds from the exemption. Accordingly, defendant's lien release bonds did not support an exemption from the trust fund statute. Weize Co., LLC v. Colo. Reg'l Constr., 251 P.3d 489 (Colo. App. 2010).

Applied in Climax Molybdenum Co. v. Specialized Installers, Inc., 12 B.R. 546 (D. Colo. 1981).