Colorado Court of Appeals Clarifies that Intent is Not the Only Way to Prove Civil Theft Liability for Trust Fund Violation
Colorado’s trust fund statutes (CRS § 38-22-127 and CRS § 38-26-109) require that all funds paid to any contractor or subcontractor “shall be held in trust for the payment of the subcontractors, laborers, or material suppliers” who have worked on a project. The trust fund also provides that such funds may be comingled in an account with other funds, so long as separate records of account for the project are maintained. Violation of the trust fund statute may be prosecuted as criminal theft under CRS § 18-4-401, and as civil theft under CRS § 18-4-405. Civil theft, if proven, entitles the claimant to three times the amount of actual damages, plus reasonable attorneys’ fees.
In Franklin Drilling v. Lawrence Construction, 2018 COA 59, the Colorado Court of Appeals held that mere violation of the trust fund statute is not sufficient by itself to prove a civil theft claim. “To prove civil theft a plaintiff must prove that the defendant ‘knowingly obtains, retains, or exercises control over anything of value of another without authorization.’” This element is proven by proof of violation of the trust fund statute. However, a claimant must also prove either intent to deprive the other person permanently of the use or benefit of the thing of value (in this case, the funds held in trust) or that the defendant knowingly used, concealed, or abandoned the thing of value in such manner as to deprive the other person permanently of its use or benefit. According to the Franklin decision, “[t]he ‘knowingly uses’ element does not require that the defendant have a ‘conscious objective to deprive another person of the use or benefit of the construction trust funds, but instead requires the [defendant] 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.’” In other words, a claimant need not prove that the defendant intended to permanently deprive it of the trust funds, but merely that the defendant knowingly used the property in a manner that would deprive the claimant permanently of the use or benefit of the property.
A key issue the court of appeals grappled with, is the fact that the trust fund statute does not require segregated accounts, but rather permits funds to be comingled with other funds. Because money is fungible, it may not be obvious when the funds held in trust were misused. No doubt this would be a tricky issue to solve if the contractor remained fully solvent. In the Franklin case, however, the bank account into which the contractor deposited the trust payments had, at various applicable times, either a zero or negative balance. The court of appeals held this was highly relevant to determining whether the contractor had knowingly used the trust funds in a manner that would permanently deprive the subcontractor of those funds. It is no defense for a defendant to demonstrate that it hoped to replenish the funds – the funds themselves are the trust, and they must be held for the benefit of subcontractors and suppliers. Allowing the bank account to be exhausted or even go into negative balance means that the funds had been completely dissipated, and the trust therefore breached.
The Franklin case demonstrates some of the practical realities of proving trust fund violations. Typically, the trust fund act only comes into play when a contractor is insolvent or nearly insolvent. In all likelihood, a solvent contractor will pay subcontractors and the trust fund will never be implicated even if it is technically violated. But in cases where a contractor is insolvent, the trust fund statute can be a valuable weapon for pursuing personal liability against parties responsible for dissipating the funds (typically a principal of the contractor). Additionally, as in the Franklin case, there may be value in pursuing a trust fund violation because of the possibility for triple damages and recovery of attorney’s fees.