The Texas Construction Trust Fund Act: Misapplied Payments and Personal Liability

What money is a trust fund?

Construction payments and construction loan proceeds. Under Property Code § 162.001, payments made to a contractor or subcontractor, or to an officer, director or agent of one, under a construction contract for the improvement of specific real property in Texas are trust funds. So are loan receipts borrowed by a contractor, subcontractor or owner to improve specific real property when the loan is secured in whole or part by a lien on that property. The money keeps its character when it moves down the chain: the owner's payment to the general contractor is trust funds in the general contractor's hands, and the general contractor's payment to a subcontractor is trust funds in the subcontractor's hands.

One exclusion matters for commercial work. A contractor's fee is not trust funds if the owner and contractor signed a written contract before work began providing for payment of the construction costs plus a reasonable fee stated in the contract, and the fee has been earned and paid as the contract provides (§ 162.001(c)). On a stipulated-sum contract there is no such carve-out; the whole payment is trust funds until the project's obligations are paid.

The chapter applies to public and private projects alike, whether or not a payment bond covers the job (§ 162.004(c)). It does not apply to banks and other lenders, title companies and closing agents, or the surety that issued a payment bond (§ 162.004(a)). Trust funds paid to a beneficiary are not property of a trustee who later files for bankruptcy (§ 162.001(d)).

Who is a trustee, and who is a beneficiary?

The trustee is anyone who receives or controls the money: a contractor, subcontractor or owner, and an officer, director or agent of any of them who receives trust funds or has control or direction of them (§ 162.002). That sentence is the source of personal liability. A company's president who decides which bills get paid from a draw is a trustee in his or her own right, separate from the company, and the corporate form does not stand between that person and the beneficiaries.

The beneficiaries are the people who labored or furnished labor or material for the improvement: artisans, laborers, mechanics, contractors, subcontractors and materialmen, and since September 2025 a beneficiary's qualified assignee as well (§ 162.003(a)). On a residential construction contract the property owner is also a beneficiary of the trust funds, including money deposited in a construction account (§ 162.003(b)), which gives a homeowner whose builder took a deposit and did not build a direct trust fund claim.

What counts as misapplication?

A trustee misapplies trust funds when it intentionally or knowingly or with intent to defraud, directly or indirectly, retains, uses, disburses or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries (§ 162.031(a)). Current or past due obligations are those incurred for labor or materials furnished in the direct prosecution of the work before the trust funds were received and due and payable within 30 days after receipt (§ 162.005(2)). In plain terms: when the draw arrives, the subcontractor invoices for that job that are due within 30 days come first, and using the money for payroll on another project, a truck payment or the owner's distribution before those invoices are paid is misapplication.

Intent to defraud is defined, not left to inference. A trustee acts with intent to defraud when it diverts trust funds intending to deprive the beneficiaries of them, when it diverts funds while failing to keep a required construction account or its records, or when it uses funds paid in reliance on a false bills-paid affidavit under § 53.085 (§ 162.005(1)). Commingling trust funds with other money does not defeat the trust (§ 162.031(d)), so a single operating account is no defense.

Example

Suppose a Dallas general contractor receives a draw on a retail build-out that includes $60,000 billed by its electrical subcontractor for the prior month. The contractor's owner uses most of the draw to cover payroll and a past-due supplier on a different project and pays the electrician $10,000. The electrician's unpaid $50,000 was an obligation incurred before the draw and due within 30 days, so the diversion is misapplication unless the contractor can prove a defense. The electrician sues the company for breach of the subcontract and sues the company and its owner personally under chapter 162. The owner's defense depends on the job cost records: if the rest of the draw went to expenses directly related to the retail build-out, the defense applies; if it went to another project, it does not.

What defenses does the statute give a trustee?

Three, and they are affirmative defenses, so the trustee must plead and prove them (§ 162.031(b), (c)):

• The funds not paid to the beneficiary were used to pay the trustee's actual expenses directly related to the construction or repair of the improvement. Money spent on this project's other subcontractors, materials, permits or labor qualifies; general overhead and other projects do not. The defense lives or dies on job cost accounting.
• The funds were retained, after notice to a beneficiary who had requested payment, because the trustee reasonably believed the beneficiary was not entitled to them, for example because of defective work or a back-charge, or were retained as chapter 53 authorizes or requires, such as statutory reserved funds.
• The trustee paid the beneficiaries everything they were entitled to within 30 days after written notice that a criminal complaint had been filed or an investigation was pending.

A contractor that keeps project-level books, pays each job's obligations from each job's draws and documents every withholding decision in writing has the materials for these defenses. One that runs every project through one account and pays whichever creditor is loudest usually does not.

Criminal penalties and civil liability

Misapplication of trust funds of $500 or more is a Class A misdemeanor, and a third-degree felony when done with intent to defraud (§ 162.032(a), (b)). A contractor that fails to keep a required construction account or its records commits a Class A misdemeanor with no dollar threshold (§ 162.032(c)). Prosecutions happen, usually on residential jobs with a sympathetic homeowner, but the chapter's everyday use is civil.

The statute speaks of a prosecution or other action for misapplication, and the civil action is the beneficiary's suit against the trustee for the misapplied amount. Because officers, directors and agents who control the funds are trustees themselves, that suit names them personally alongside the company, which is what makes the claim valuable when the company is insolvent. When officers and directors are personally liable in Texas places this among the other routes to individual liability. The trust fund claim travels with the contract claim, the lien or bond claim and the Prompt Payment Act interest claim; a subcontractor's options when the general contractor was paid but did not pay shows how they fit together, and the Texas Prompt Payment Act covers the seven-day pass-through rule that the trust fund claim backs up.

Residential construction accounts

A contractor with a written contract to construct improvements to a residential homestead for more than $5,000 must deposit the trust funds in a construction account at a financial institution, and the bank statements must call it a construction account (§ 162.006). The contractor must keep an account record showing the source, amount and date of every deposit, the date, amount and payee of every disbursement and the running balance; keep a record for each project of the direct and indirect costs charged to the owner; retain invoices and supporting documents; tie every deposit and disbursement document to the account; and keep all of it for at least a year after the improvement is completed (§ 162.007). Failing to keep the account or the records is itself a misdemeanor and is one definition of intent to defraud, so a residential builder's bookkeeping is part of the liability analysis, not a side issue.

A homeowner's trust fund claim is one of the few that the Residential Construction Liability Act leaves alone: chapter 27's notice-and-offer procedure does not apply to an action for violation of chapter 162 (§ 27.002(d)). The Texas Residential Construction Liability Act describes that procedure for defect claims.

How the claim is used, and common mistakes

• By subcontractors and suppliers: to reach the general contractor's principals when the company cannot pay, and to put pressure on a contractor that received the owner's money and is slow-walking payment.
• By owners: on residential projects where a deposit or draw was taken and the work or the subcontractors were not paid, and on commercial projects where liens appear after the owner has paid the general contractor.
• By contractors as a defense: documenting that each draw was spent on that project's costs, and sending written notice of any withholding with reasons, which preserves the statutory defenses.
• Mistakes: pleading the claim against the company only and discovering the company is empty; assuming a payment bond or a lien makes the trust fund claim unnecessary; on the defense side, producing commingled bank statements with no job cost ledger behind them.

Tina Wysk represents subcontractors, owners and contractors in Construction Trust Fund Act claims and defenses in Dallas–Fort Worth.