Colorado Criminal Lawyer BlogTheft by Colorado Contractors – 38-22-127 – the Trust Law
By H. Michael Steinberg Colorado Theft Crimes Criminal Defense Lawyer
An Introduction to Understanding the “Theft by Colorado Contractors Law”- Section 38-22-127
A potential landmine that can lead to felony criminal theft charges for Colorado general and/or subcontractors lies in Colorado’s Construction Trust Fund Statute C.R.S. Section 38-22-127 (the Trust Statute).
The Trust Statute establishes a legal framework that sets up the important requirements for accepting and accounting for monies – “contracted funds” – provided to contractors for construction projects. Essentially the law provides that “generals” or “subs” that receive funds for work on a specific construction project can only use those monies for that project.
General contractors and subcontractors that illegally use money paid to them a project may be criminally charged under Colorado’s Construction Trust Fund Statute. This law was designed to make certain that subcontractors, material suppliers, rental companies, construction laborers, and others who have contributed value to a construction project receive compensation for their work and the materials used for the project.
Contractors cannot use “contracted funds” for any other purpose than for the job for which they were intended, even if the use of those funds was for legitimate business overhead expenses.... until and when all of the existing and potential claims have been fully satisfied.
Construction proceeds are held “in trust” for those who have or who contributed to that specific construction project. If the general or the subcontractor uses contracted funds for other projects such as:
1. General business operation and overhead expenses – (even if legitimate);
2. Other unrelated projects; or
3. Personal expenses.
….those who control the contracted funds may be charged with the crime of theft and may also be civilly liable for treble damages (three times the amount in dispute) as well as attorney fees and costs. Declaring bankruptcy most often is not a way out of liability. Civil judgments under this law are not dischargeable in a bankruptcy proceeding and restitution ordered in criminal cases… likewise.
A Closer Look at “Section 127″ – §3 8-22-127 – The Creation of a Trust-Based Relationship
A Colorado general contractor holding contracted funds acts as a “trustee” for his or her subcontractors and has a duty to pay those sub-contractors for the specific job from the money that was intended to be used for that job. Trust obligations are very different from standard contractual obligations. Trust obligations create a fiduciary relationship which greatly enhances the legal duty of the holder of trust funds to account for those funds to the parties who have earned them.
The focus of this article is to address criminal charges provided for a violation of the Trust Statue.
The Law: Section 38-22-127 – “Section 127″
(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.
The Colorado Crime of Theft 18-4-401 – Defined
A person who violates “Section 127 – Sub-section (5)” commits theft, as defined in section 18-4-401 of the Colorado Revised Statutes.
A person commits theft when he or she knowingly obtains, retains, or exercises control over anything of value of another without authorization or by deception; and intends to deprive the other person permanently of the use or benefit of the thing of value.
Theft, in this context, and as further examined more closely below, may be difficult to understand. One begins with the intent behind the law itself. Colorado’s Construction Trust Fund Statute C.R.S. § 38-22-127 was enacted to protect the public from “dishonest or profligate contractors.” It is an old law (1975) and was enacted to address the common practice of unscrupulous contractors that diverted funds from a construction project to pay the liabilities of a different project… a kind of Ponzi or rob Peter to pay Paul scenario.
It comes down to a simple matter of accounting but to truly comprehend the threat the law poses, a closer look at the mechanics behind the compliance of the law is necessary.
The Mechanics of Accounting Under the Colorado Contractor’s Trust Fund Statute – How This Works
Contractors often have multiple simultaneous ongoing construction projects. It is always tempting to use contracted funds from Job A to pay obligations unrelated to that project. While a contractor does not have to maintain a separate deposit account for construction proceeds, the contractor, if called upon, must be able to fully account for every dollar of the funds entrusted to them.
The Trust Statute requires the maintenance of separate financial records with respect to each individual project to make certain that the source and application of monies can be readily determined by an accounting.
Best practices would suggest that contractors set up separate banking accounts for each project. While this may seem difficult at first, funds could then be deposited into clearly defined accounts and disbursements made specifically for the projects designated. “Subs” would then be paid from the designated account for that project for which that sub did work on that job.
General business expenses accounts should be separately maintained for those business expenses and careful records maintained.
On the other hand, if a contractor uses a single bank account into which contracted funds are deposited, that contractor must compensate for this single use account by keeping separate books and records on either a project or a contract basis.
Once again, a contractor may not use ANY of the trust account funds on a project to pay its general overhead costs, self-compensation (profit), vendors on other projects, or for any other use. Until the workers and vendors on a specific project are paid in full, all funds disbursed on a project must go to the workers and vendors on that project.
As long as all funds are disbursed in this manner, even if the funds received were originally insufficient to pay all suppliers and workers in full under the original contract, the contractor would face no criminal or civil liability under the statute. Put a little differently, if a contractor receives insufficient trust funds to fully pay its suppliers and workers, the law imposes no criminal or civil liability.
Similarly, if a contractor receives trust funds and uses them to prefer certain subcontractors over others on a specific project over others, there should be no liability unless the trust funds are specially earmarked for a particular subcontractor or supplier. To be clear, civil or criminal liability only attaches when a contractor receives funds in trust but then redirects them to another purpose. The timing or the order in which the work was done and the subcontractor compensated, is not relevant.
Record keeping need only show that payment was made on one or more of the invoices due to the sub or the vendor on that particular project in accordance with the trust’s directives
The “Good Faith” Exception
An exception to the law and funds can be withheld from distribution when a contractor has a “good faith belief” that a subcontractor or the vendor who is making a claim to payment, can establish that the claim is not valid due to the conduct or lack of proper performance.
Piercing the Corporate Veil – Contractors May NOT Be Allowed to Seek Immunity – No Refuge Behind Corporations or LLCs
Violations of the Colorado Trust Fund Statute will lie against contractors and even officers/ owners/ and principals of the corporations and limited liability companies that control from the smallest to the largest construction projects. The traditional “corporate veil” that protects officers of a company from personal liability for the acts of the company will not shield them from the reach of this law.
On the other hand, the law requires a showing that the officer “knowingly” engaged in a violation of the Trust Fund Statute or had complete control over the finances of the company.
The Mental State for the Crime of Theft Charged Under the Colorado Contractor’s Trust Fund Law
The burden of proving the Colorado crime of theft is complex in this context. The State must prove that the contractor failed to pay subcontractors, suppliers, and laborers from the “pot” of contracted funds for the specific project at issue. To understand the crime of theft, here as in all criminal cases, one must understand the way the theft was committed.
Colorado’s theft law has many sections which provide multiple “theories” of prosecuting the case. While subsection 5 of Section 38-22-127 provides that a violation of this statute constitutes theft as defined in section 18-4-401, it does not specify which section of the theft statute, which theory of prosecution applies.
The Colorado statutory definition of theft, as set forth in Section 18-4-401(1), is as follows:
(1) A person commits theft when he knowingly obtains or exercises control over anything of value of another without authorization, or by threat or deception, and:
(a) Intends to deprive the other person permanently of the use or benefit of the thing of value; or
(b) Knowingly uses, conceals, or abandons the thing of value in such manner as to deprive the other person permanently of its use or benefit; or
(c) Uses, conceals, or abandons the thing of value intending that such use, concealment, or abandonment will deprive the other person permanently of its use and benefit; or
(d) Demands any consideration to which he is not legally entitled as a condition of restoring the thing of value to the other person.
Theft is a class 4 felony if the value of the thing involved is $1000.00 or more but less than $20,000, and a class 3 felony if the value of the thing involved is $20,000 or more.
Section 18-4-401(2)(c) and (d),
Colorado’s theft statute requires the “knowing control over the property of another either without authorization or by threat or deception and one of the types of mental culpability as set forth in subsections (1)(a), (b), and (c) of the statute.”
For the purposes of a violation of the Contractor’s Trust Fund Law, the mental state of the contractor misusing trust funds does NOT require intent on the part of the person targeted by the law to permanently deprive another of the use or benefit of the thing of value, section 18-4-401(1)(b).
The crime of theft may be committed when an offender, here a general contractor for example, knowingly obtains control over the property of another without authorization and, even though not intending to deprive the other person permanently of the use or benefit of the property, nonetheless knowingly uses the property in such manner as to deprive the other person permanently of the use or benefit of the property.
Put differently. the “knowingly using” element of the mental culpability required to commit a theft of construction project trust funds 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.
The issue in determining whether a contractor knew that his or her use of trust funds was “practically certain” to deprive the beneficiary of the funds is not whether the contractor reasonably expected to have other funds available to replenish the trust, but whether the contractor’s actions made it practically certain that the party owed these funds would be deprived of the use of the trust funds.
Summary and Conclusion – Theft by Colorado Contractors – 38-22-127 – the Trust Law
The Threat of Colorado Contractor’s Trust Statute is very real and is multi-pronged
Colorado’s Construction Trust Fund Statute provides that “[a]ll funds disbursed to a contractor or subcontractor . . . on any construction project shall be held in trust for the payment of . . . subcontractors, labor or material suppliers. . . .” C.R.S. § 38-22-127(1).
A contractor must exercise strict control of money received under a construction contract. These funds are held in trust for the subcontractors, subcontractors, and vendors who work on the project. If these trust funds are not properly disbursed properly criminal and civil remedies are provided to victims under Colorado’s Construction Trust Fund Statute.
The business of performing on construction contracts can be chaotic. It may be tempting for a contractor to “mix” job funds to make the business “work.” But the law is clear, a Colorado contractor must maintain careful documentation of the disbursements for each specific “job.” Underbidding one job and using funds from another job to “cover” that mistake can have significant lifetime results at many levels.
“A person charged with a crime requires the guiding hand of counsel at every step in the proceedings against him. Without it, though he be not guilty, he faces the danger of conviction because he does not know how to establish his innocence.”
United States Supreme Court – Powell v. Alabama, 287 U.S. 45, 69 (1932)
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ABOUT THE AUTHOR: H. Michael Steinberg – Email The Author at hmsteinberg@hotmail.com – A Denver Colorado Criminal Defense Lawyer – or call his office at 303-627-7777 during business hours – or call his cell if you cannot wait and need his immediate assistance – 720-220-227. Attorney H. Michael Steinberg is passionate about criminal defense. His extensive knowledge of Colorado Criminal Law and his 38 plus years of experience in the courtrooms of Colorado may give him the edge you need to properly defend your case.
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