The Colorado Supreme Court holds that loans made to a construction company are not subject to the Mechanic’s Lien Trust Fund Statute

In a prior blog post, we summarized the Court of Appeals decision in the case of AC Excavating, Inc. v. Yale, ___ P. 3d. ___, 2010 WL 3432219 (Colo. App. Sept. 2, 2010) which provided an interpretation of the Colorado Mechanic’s Lien Trust Fund Statute, C.R.S. § 38-22-127 (hereafter “the Trust Fund Statute”).  A divided Court of Appeals reversed the trial court, and held that capital loans infused into a limited liability company which performed construction could be subject to the provisions of the Trust Fund Statute. 

The Court of Appeals reasoned that this determination was necessary because the statute was considered applicable to “all funds disbursed on a construction project.” Additionally, the Court of Appeals held that the intent of the provider of funds was not relevant, and that the statute applied “irrespective of the [originator of the funds]’s intended use of the funds.”

This decision was reviewed by the Colorado Supreme Court in an opinion released on February 4, 2013, and it reversed the Court of Appeals’ decision. See, Yale v. AC Excavating, Inc., ___ P. 3d. ___, 2013 WL 441895 (Colo. Feb. 4, 2013). The Supreme Court strongly disagreed that loaned or infused capital funds which were obtained by the general contractor entity were “funds disbursed on a construction project,” simply because some of the infused monies were used for operational purposes to pay down specific project obligations.  The Supreme Court held, contrary to the Court of Appeals, that only certain funds were subject to the constraints of the Trust Fund Statute and that capital loans were not included among such funds and sources of funds.

The Supreme Court’s decision was one of statutory construction applied to largely undisputed facts.  In holding that capital funds received or loaned to a contactor entity were not subject to statutory claims under C.R.S. § 38-22-127,  the Court stated that the Trust Fund Statute requires that contractors and subcontractors hold only certain funds in trust for payment of subcontractors, laborers, and suppliers.  The funds held in trust for those purposes are limited to all funds disbursed to any contractor or subcontractor under any building, construction, or remodeling contract on any construction project.  

This applied interpretation of the statute necessarily excluded any funds that were received to fund general operations of a construction company, as distinct from funds received in the usual course of payment for work performed in connection with construction.  The Supreme Court also held that the testimony of a company manager for the construction company concerning the purpose and source of the funds in question was proper evidence to be heard by the trial court.  The Court further held that a construction business does not hold all funds in trust, even where the company is generally in the construction business, has only a single project, and has only a single bank account for that project.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com