Your client is owed money for a construction or remodeling project. The contractor with which your client contracted is a corporation or LLC and the owner, to whom funds were disbursed to pay your client but were never paid over, is ignoring your client. Your client has complied with all of the deadlines in the mechanic's lien statutes and has timely perfected its lien rights. But you need more leverage to convince the contractor to pay your client. Colorado's treble damages statute, C.R.S. § 38-22-127, may be what you are looking for. If you recover under C.R.S. § 38-22-126 and C.R.S. § 38-22-127 your client will get a judgment for three times the amount it is owed, the owner who thought he or she was protected behind a corporation or LLC will be personally liable, and you should be able to obtain judgment for at least some of the attorney's fees and costs incurred by your client.

In Flooring Design Associates, Inc. v. Novick, 923 P.2d 216 (1995), reh'g denied (1996), cert. denied (1996), Novick was the principal of Novick Homes at Broomfield, Inc. and Novick Homes-H.R., Inc., which Novick characterized as "merchant homebuilders." Flooring Design was a subcontractor that entered into two contracts with the corporations. There was no dispute that Flooring Design completed its work satisfactorily and that it provided labor and materials. During the construction of a series of homes on which Flooring Design worked, the two Novick corporations began to experience financial difficulties. When the homes on which Flooring Design worked were sold Flooring Design was not paid from the sale proceeds, the normal practice. When the two corporations ceased doing business Flooring Design was owed $37,251.72. After trial judgment was entered against both corporations and Novick, personally, for the full amount owed. Novick appealed the judgment entered against him personally. Interpreting § 38-22-127, the court stated:

[] § 38-22-127, enacted in 1975, focuses on instances in which the contractors have already been paid. By its language it extends to "all funds disbursed" and to "any" building or construction project. Its purpose is to protect homeowners, laborers, and providers of construction materials from dishonest or profligate contractors. People v. Collie, 682 P.2d 1208 (Colo.App.1983). To meet this purpose, it imposes duties on the contractors to see that the subcontractors are paid.

...

Here, to read the phrase in § 38-22-127(1) to require that disbursers must specifically intend that disbursement funds be used to pay subcontractors before a statutory trust can arise for the benefit of the subcontractors would be similarly inconsistent. Such a distinction would permit a trust to arise only when the subcontractors were able to prove specific intent. Such an arbitrary classification would not be consistent with either the broad remedial purposes underlying both the mechanics' lien statute in general, see Ragsdale Brothers Roofing, Inc. v. United Bank, 744 P.2d 750 (Colo.App.1987), and the specific provisions of § 38-22-127(1). See People v. Collie, supra; see also First Commercial Corp. v. First National Bancorporation, Inc., 572 F.Supp. 1430 (D.Colo.1983).

Therefore, for a subcontractor to avail itself of § 38-22-127, it need not be shown that the disburser of funds specifically intended that a trust be created; nor need it be shown that the disburser intended the disbursements to be allocated for the payment of subcontractors. See generally 1 A. Scott, Trusts § 17.5 (3d ed. 1967) (as a general rule, statutory trusts do not require demonstration of settlor's intent to create a trust).

923 P.2d at 219, 220-1.

See also, AC Excavating, Inc. v. Yale, No. 09CA2184 (Colo.App. September 2, 2010), cert. granted (2011)[1], in which the Colorado Court of Appeals stated:

A contractor breaches the statutory trust relationship by diverting the trust funds from the suppliers and laborers on the project to other corporate obligations. Novick, 923 P.2d at 221; Alexander Co. v. Packard, 754 P.2d 780, 782 (Colo.App. 1988). Unless and until the suppliers and laborers are paid in full, the contractor cannot use any of the funds on a project to pay corporate overhead, compensation, or put them to any other use. In re Gamboa, 400 B.R. 784, 790 (Bankr. D. Colo. 2008); see First Commercial Corp. v. First Nat'l Bancorporation, Inc., 572 F.Supp. 1430, 1434-35 (D. Colo. 1983) (because the clear policy underlying the Trust Fund Statute is that laborers and suppliers of materials in construction projects are to be paid, "[a]n unsecured supplier claiming an interest under this Act takes priority over a prior perfected security interest in all present and future accounts receivable and proceeds of accounts.").

Novick, supra, is instructive as well on the issue of personal liability:

Finally, Novick contends that the trial court erred in concluding that he was personally liable for the corporations' debts to Flooring Design. We disagree.

The trial court relied on Alexander Co. v. Packard, 754 P.2d 780 (Colo.App.1988). There, a corporate vice-president controlled corporate finances and made the corporation's financial decisions. The corporation had received funds from Alexander Company for completed work. However, the vice-president diverted those funds from their intended purpose of paying suppliers and used them to pay the corporation's general obligations. There was no evidence that the vice-president personally gained from the diversion of funds. Nevertheless, a division of this court concluded that, pursuant to the trust obligations imposed by § 38-22-127, the vice-president was personally liable for the corporation's breach of trust to pay its suppliers from the funds it had received from the Alexander Company.

Here, the record shows that Novick made financial decisions for the corporations and controlled their finances. Funds received from the sales of homes were not held in trust pursuant to § 38-22-127 to pay debts. Instead, these funds were diverted for other purposes, such as: payments on corporate vehicles, repayment of a corporate loan to an entity in which Novick was an investor, corporate credit cards, and payment for Novick's personal health club membership, which he used for business purposes.

The record fully supports the trial court's conclusion that Novick breached the statutory trust relationship by diverting the trust funds to other corporate obligations, thus depriving Flooring Design of compensation for services rendered and materials provided. As a result, he is personally liable. Alexander Co. v. Packard, supra; cf. Standley v. American Automobile Insurance Co., 136 Colo. 70, 314 P.2d 696 (1957).

923 P.2d at 221.

In AC Excavating, Inc. v. Yale, supra, the Colorado Court of Appealsstated:

A natural person in complete control of the finances and financial decisions of an entity, including a merchant-homebuilder entity, is personally liable if that entity violates the Trust Fund Statute. See, e.g., Novick, 923 P.2d at 221; Alexander Co., 754 P.2d at 782; Gamboa, 400 B.R. at 792.

See also, Alexander Co. v. Packard, 754 P.2d 780, 782 (Colo.App. 1988), where the court stated "As Packard knowingly diverted those funds, he is personally liable for the breach of trust, even if, as he claims, he did not personally benefit."

The related issue is whether the contractor and its owner are liable for three times the amount of the funds diverted. On this issue, People v. Anderson, 773 P.2d 542 (Colo. 1989), an appeal by the prosecution following dismissal of criminal charges after a preliminary hearing, is instructive. The court summarized the relevant facts as follows:

The People's evidence established that on September 13, 1985, the defendant received $24,000 from the MacDonalds for the purpose of paying subcontractors, suppliers, and laborers for work performed on the MacDonald home and that the defendant, with knowledge of outstanding liens and other charges against the property and without any authorization whatever from the MacDonalds, used $16,000 of the $24,000 for purposes totally unrelated to the construction of the MacDonald home. This evidence, when viewed in a light most favorable to the prosecution, clearly establishes probable cause to believe that the defendant, without authorization, knowingly used the money disbursed to him in such a manner as to deprive another person permanently of its use or benefit in violation of 18-4-401(1)(b).

773 P.2d at 545.

Applying the law to the facts, the court stated:

Pursuant to section 38-22-127(1), what is critical to the theft of construction project trust funds disbursed to a contractor for the payment of claims for work on a construction project is the offender's act of knowingly misusing the funds so received, and not the homeowner's ultimate success in defending against claims that should have been previously paid by the contractor. There was no evidence that the defendant, when he made use of the $16,000 to pay off debts unrelated to the MacDonald home, had a good faith belief that the liens and claims for work on the MacDonald construction project were not valid. While a "good faith belief" under section 38-22-127(2) might well be raised as a defense at trial, the record of the preliminary hearing is barren of any evidentiary support for such a claim. Thus, the MacDonalds' ability to reduce the amount of legally enforceable liens to $7,200 did not serve to negate the People's evidence establishing the defendant's knowing use of $16,000 in such manner as to deprive the MacDonalds of the use and benefit of that money which the MacDonalds had disbursed to the defendant for the purpose of paying subcontractors, suppliers, and laborers for work performed on the MacDonald home.

773 P.2d at 546.

Upon entry of a treble damage judgment under C.R.S. § 18-4-405 the successful litigant is entitled to an award of its reasonable attorney's fees and costs. See, Steward Software Company, LLC v. Kopcho, No. 09CA1690 (Colo.App. September 2, 2010), where the court held that an award of attorney fees to a prevailing plaintiff on a civil theft claim is mandatory based upon the statutory language "In any such action, the owner [of the stolen property] may recover two hundred dollars or three times the amount of the actual damages sustained by him, whichever is greater, and may also recover costs of the action and reasonable attorney fees . . . . (emphasis added)."

If you want to be a hero to your client, get them a judgment for three times what they think they are owed. Alternatively, pursuing this theory could motivate the opposing party to settle rather than risk personal liability for treble damages. This is not inexpensive litigation, but it can be rewarding to both the client and counsel.

[1] Cert was granted May 23, 2011, on the following issues:

Whether all funds made available to the developer of a construction project, including an owner's voluntary loans or capital contributions, are subject to the Colorado Trust Fund Statute, section 38-22-127, C.R.S. (2010), thereby requiring those invested funds to be held in trust for subcontractors.

Whether the court of appeals erred when it remanded the issue of whether petitioner was liable for civil theft under section 18-4-401, C.R.S. (2010).

This post discusses a mechanic's lien claimant's ability to recover treble damages and its attorney's fees and costs under certain Colorado statutes

News

Litigation

[02/10] China author Han Han sues over ghostwriting claims
[02/10] Judge hears final arguments in Globes TV dispute
[02/08] Police, Highway Patrol settle case for $292,500
[02/08] Murdoch firm settles 9 more hacking lawsuits
Read More

Real Estate

[02/09] Home Properties Reports Fourth Quarter and Full Year 2011 Results
[02/09] Standard Pacific Homes Announces February 11 Grand Opening of San Mellina in Coconut Creek
[02/09] Green Homes Market Expected to Increase Five-Fold by 2016 - Up From a $17 Billion Opportunity Today - Says New McGraw-Hill Construction Study
[02/09] Investors Cautiously Optimistic for 2012
Read More

Web Resources

FindLaw
Thomson West
U.S. Courts
Westlaw
United States Chamber of Commerce
FirstGov
Library of Congress
White House
Internal Revenue Service
Yahoo!Legal Blog Directory