Yale v. AC Excavating, Inc., 259 P.3d 470 (Colo. 2013) involved interpretation of the Colorado Trust Fund Statute (C.R.S. sec. 38-22-127). The Colorado Trust Fund Statute requires all funds disbursed to a contractor on a construction project be held in trust for the payment of subcontractors, laborers, and material suppliers. The statute is designed to protect owners from having to pay for work twice. The specter of paying twice arises where a contractor fails to pay subcontractors, laborers, and material suppliers and those parties file mechanic's liens against the property. The statute provides that violation of this statutory trust constitutes civil theft for which treble damages are recoverable - a significant hammer against dishonest contractors and their management.
The issue in Yale was whether a loan to a developer (LLC) made by one of its members was subject to the Colorado Trust Fund Statute. During the course of developing a residential project, the LLC was struggling to meet its obligations. Realizing this, Yale, a member of the LLC and its sole manager, deposited $157,500 into the LLC's account, which he described at trial as a "survival loan." A portion of the funds were applied to general business expenses and to some outstanding invoices related to the project. Yale later gave up on the project and paid the remaining funds back to himself in partial repayment of the "survival loan."
The trial court held that Yale's loan was not made to the LLC for the purpose of funding the construction project, but rather was a loan made to a struggling entity to keep it afloat, and, therefore, Yale could not be held personally liable for the LLC's debt to the plaintiff (AC Excavating) under the Colorado Trust Fund Statute. The trial court also noted that applying the Colorado Trust Fund Statute to loans made by members or managers regardless of the purpose for which the funds were advanced would provide a disincentive for managers and members of development companies from investing additional funds to salvage them.
The Court of Appeals reversed the trial court's decision, reasoning that the Colorado Trust Fund Statute applies "irrespective of the disburser's intended use of the funds." The Supreme Court rejected this reasoning and ruled that the purpose of the loan was a relevant factor. Reversing the Court of Appeals decision, the Supreme Court determined that the record established that the loan was not disbursed "on [a] construction project," but instead was made to the LLC to be used at the discretion of the manager to pay general obligations. The Supreme Court stated that trial courts should consider a "totality of circumstances" for determining whether funds were disbursed "on a construction project," including, who disbursed the funds, the relationship of the disburser and the contractor, whether the funds were earmarked for the project, whether conditions were placed on disbursement, and any other evidence of the disburser's intent.
Posted By: Brent W. Houston, Esq.
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