Construction Law

Trust Fund Claims Are Assignable, But The Treble Damages Are Not

By Tim Gordon

In People v. Adams (Colo. Nov. 30, 2010), the Colorado Supreme Court, in deciding a case regarding the unauthorized practice of law, held that trust fund claims can be assigned, but that the treble damages component of a trust fund claim cannot.

David J. Adams, a debt collector, was taking assignments of contractors' and subcontractors' lien and trust fund claims, and then bringing pro se lawsuits to enforce them.  As part of the assignments, Adams would promise to pay the creditor 50% of any recovery.  In the lawsuits, Adams would assert claims under the Colorado Trust Fund Statute, section 38-22-127, C.R.S. (2010), and seek treble damages under the statute?s incorporation of the civil theft statute, section 18-4-405, C.R.S. (2010).

While the way in which the issue came before the Court is a bit unique, the key part of the decision for contractors, subcontractors, and owners is that trust fund claims are assignable, but that the related civil theft claim that includes the possibility of treble damages is not. In so holding, the Court noted that the mechanics' lien statute specifically allows for the assignment of lien claims.  Section 38-22-117, C.R.S. (2010).  The Court also reasoned that the assignability of trust fund claim is critical to the goals of the statute.  But the law does not allow for the assignment of the treble damages claim under the civil theft statute, in part because it is punitive in nature.

This holding is key for owners wishing to settle with unpaid subcontractors and suppliers and then chase after contractors.  In Syfrett v. Pullen (Colo. App. Dec. 24, 2008), a division of the Court of Appeals held that owners can pursue trust fund claims against contractors who have not paid subcontractors, even though the owner has not yet paid the subcontractor.  But if the owner recovers any money, including treble damages, then it must hold the funds in trust for the unpaid subcontractors and suppliers.  The holding in Adams, coupled with the Court of Appeals' holding in Syfrett, could make it difficult for an owner to collect and retain treble damages from a contractor based on non-payment of subcontractors and suppliers, even if the owner obtains an assignment.  The fact that an owner does not need an assignment in order to bring a trust-fund claim distinguishes Adams, but two cases together raise possible arguments against an owner's right to collect and keep treble damages.

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Full post as published by Colorado Construction Law on November 30, 2010 (boomark / email).