Misapplication of Trust Funds under the Texas Construction Trust Fund Act

PJC 101.60 Question and Instruction—Misapplication of Trust Funds under the Texas Construction Trust Funds Act

QUESTION_____

Did Don Davis misapply trust funds of which Paul Payne was a beneficiary?

Misapplication of trust funds occurs if Don Davis—

1. [intentionally or knowingly or with intent to defraud]

2. directly or indirectly retained, used, disbursed, or otherwise diverted trust funds

3. without first fully paying all current or past-due obligations incurred by Don Davis to the beneficiaries of the trust funds.

“Current or past-due obligations” are those obligations incurred or owed by Don Davis for labor or materials furnished in the direct prosecution of the work under the construction contract prior to the receipt of the trust funds and which are due and payable by Don Davis no later than thirty days following receipt of the trust funds.

“Trust funds” are—

1. construction payments made to a [contractor or subcontractor or to an officer, director, or agent of a contractor or subcontractor], under a construction contract for the improvement of specific real property; or

2. loan receipts borrowed by a [contractor, subcontractor, or owner or by an officer, director, or agent of a contractor, subcontractor, or owner] for the purpose of improving specific real property, and the loan is secured in whole or in part by a lien on the property.

A “beneficiary” is an [artisan/laborer/mechanic/contractor/subcontractor/materialman] who labors or who furnishes labor or materials for the construction or repair of an improvement on specific real property.

Answer “Yes” or “No.”

Answer:__________ COMMENT

When to use. This question submits the liability of a defendant for the misapplication of construction payments or loan receipts as trust funds. PJC 101.60 is a basic question appropriate in cases brought under the Texas Construction Trust Funds Act. Tex. Prop. Code § 162.031. Texas recognizes that the

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Texas Construction Trust Funds Act creates civil as well as criminal liability. Dealers Electrical Supply Co. v. Scoggins Construction Co., 292 S.W.3d 650, 657 (Tex. 2009) (“[a] party who misapplies trust funds under the [Texas Construction] Trust Fund[s] Act is subject to civil liability to trust-fund beneficiaries whom the Act was designed to protect.”). This question applies to public or private construction contracts for the improvement of specific real property in Texas, regardless of whether a construction contract is covered by a statutory or common-law payment bond. Tex. Prop. Code § 162.004(c). This question does not apply to (1) a bank, savings and loan, or other lender; (2) a title company or other closing agent; or (3) a corporate surety who issues a payment bond covering the contract for the construction or repair of the improvement. Tex. Prop. Code § 162.004(a).

Multiple construction payments or loan receipts. When there are multiple construction payments or loan receipts alleged to have been misapplied, submit a separate answer blank for each.

Broad-form submission. The broad form of this question follows the mandate of Tex. R. Civ. P. 277, which states: “In all jury cases the court shall, whenever feasible, submit the cause upon broad-form questions.”

Use of statutory language. The supreme court has held that “[w]hen liability is asserted based upon a provision of a statute or regulation, a jury charge should track the language of the provision as closely as possible.” Spencer v. Eagle Star Insurance Co. of America, 876 S.W.2d 154, 157 (Tex. 1994), cited in Felton v. Lovett, No. 11–0252, 56 Tex. Sup. Ct. J. 122 n.18 (Tex. Nov. 30, 2012).

Source of question. The question is adapted from Tex. Prop. Code §§ 162.001, 162.005, and 162.031 and Dealers Electrical Supply, 292 S.W.3d at 657. The definitions are derived from Tex. Prop. Code §§ 162.001 and 162.003.

Trust funds. If there is no fact issue regarding the existence of trust funds, the definition of trust funds should be omitted and the court should instruct the jury that the funds in question are trust funds.

Certain fees payable to contractor not considered trust funds. The statute provides an exception to the definition of trust funds. Fees payable to a contractor are not considered trust funds if—

(1) the contractor and property owner have entered into a written construction contract for the improvement of specific real property before the commencement of construction of the improvement and the contract provides for the payment by the owner of the costs of construction and a reasonable fee specified in the contract payable to the contractor; and (2) the fee is earned as provided by the contract and paid to the contractor or disbursed from a construction account described by Section 162.006, if applicable.

Tex. Prop. Code § 162.001(c).

If there is a fact issue regarding this exception, additional instructions should be given.

Beneficiary. If the existence of a person as a beneficiary is not disputed, the definition of “beneficiary” should be omitted and the court should instruct the jury that the person is a beneficiary.

Intent to defraud. If there is a fact issue regarding intent to defraud, the following instruction should be submitted:

A person acts with “intent to defraud” if he—

[Insert one or more of the following instructions.]

1. retains, uses, disburses, or diverted trust funds with the intent to deprive the beneficiaries of the trust funds; [or]

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2. retained, used, disbursed, or diverted trust funds and failed to establish or maintain a construction account or failed to establish or maintain an account record for the construction account; [or]

3.. used, disbursed, or diverted trust funds that were paid to him in reliance on an affidavit furnished by him if the affidavit contains false information relating to his payment of current or past due obligations.

The foregoing instructions are prescribed in Tex. Prop. Code § 162.005. Submit only the appropriate instruction(s) raised by the circumstances.

Intentionally or knowingly. The property code does not define “intentionally” or “knowingly,” so the committee has not provided a definition of these terms.

Use of “or.” If any of the alternative instructions noted above regarding intent to defraud are submitted conjunctively, they must be connected by the word or, because a finding of any one of the acts or practices defined in the instructions would support recovery under the Texas Construction Trust Funds Act. Because each of these acts or practices is actionable under the Act, the intent-to-defraud instruction should be adapted to include the kind of conduct involved in a given case.

Issue of trustee is disputed. If the existence of a trustee is disputed, the following question should be submitted:

Was Don Davis a trustee who misapplied trust funds of which Paul Payne was a beneficiary?

A trustee is a contractor, subcontractor, or owner or an officer, director, or agent of a contractor, subcontractor, or owner, who receives trust funds or who has control or direction of trust funds.

Tex. Prop. Code § 162.002.

Residential construction contract. If the contract is a residential construction contract, insert the following instructions:

A property owner is a beneficiary of trust funds in connection with a residential construction contract, including funds deposited into a construction account.

Tex. Prop. Code § 162.003(b).

“Construction account” means an account in a financial institution into which only trust funds and funds deposited by the contractor that are necessary to pay charges imposed on the account by the financial institution may be maintained.

Tex. Prop. Code § 162.005(6).

“Financial institution” means a bank savings association, savings bank, credit union, or savings and loan association authorized to do business in the state.

Tex. Prop. Code § 162.005(5).

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PJC 101.61 Affirmative Defenses—Basic Question

If you answered “Yes” to Question ______ [101.60], then answer the following question. Otherwise, do not answer the following question. QUESTION_____

Is Don Davis’s misapplication of trust funds excused?

[Insert instructions; see PJC 101.62]

Answer “Yes” or “No.”

Answer:__________ COMMENT

When to use. PJC 101.61 poses the controlling question for cases where a defendant asserts one or more affirmative defenses provided by the Texas Construction Trust Funds Act.

Broad-form submission. The broad form of this question follows the mandate of Tex. R. Civ. P. 277. When feasible, the courts are urged to submit the controlling issues of a case in broad terms in order to simplify the charge. Island Recreational Development Corp. v. Republic of Texas Savings Ass’n, 710 S.W.2d 551, 555 (Tex. 1986). A single broad question may include one or more independent grounds. Island Recreational Development Corp., 710 S.W.2d at 554–55. The dissenting opinions agree but would require instructions referring to the grounds. Island Recreational Development Corp., 710 S.W.2d at 557–58, 561. If there is legal uncertainty on one or more theories of recovery, broad-form submission may not be feasible and separate questions may be required. See Crown Life Insurance Co. v. Casteel, 22 S.W.3d 378, 388–89 (Tex. 2000) (broad-form submission combining valid and invalid theories was harmful error).

Instructions on grounds of defense required. In the absence of one or more independent grounds of defense, the jury is not permitted to excuse the trustee from misapplying trust funds. Standing alone, PJC 101.61 does not encompass any grounds of defense, so it is mandatory that grounds raised by the pleadings and evidence be submitted by including one or more instructions from PJC 101.62. See, e.g., Traeger v. Lorenz, 749 S.W.2d 249 (Tex. App.—San Antonio 1988, no writ) (separate grounds of waiver and abandonment should have been submitted in deed restriction case).

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PJC 101.62 Affirmative Defenses—Instructions

Misapplication of trust funds by Don Davis is excused if—

1. the trust funds were used by Don Davis to pay Don Davis’s actual expenses directly related to the construction or repair of the improvement, [or]

2. the trust funds have been retained by Don Davis, after notice to the beneficiary who has made a request for payment, as a result of Don Davis’s reasonable belief that the beneficiary is not entitled to such funds, [or]

3. Don Davis paid the beneficiaries all trust funds which they are entitled to receive no later than thirty days following written notice to Don Davis of the filing of a criminal complaint or other notice of a pending criminal investigation.

COMMENT

When to use. PJC 101.62 is to be used in conjunction with PJC 101.61 if the defendant raises a statutory defense prescribed in Texas Property Code section 162.031(b)-(c).

Source of instruction. The affirmative-defense instruction is derived from Tex. Prop. Code § 162.031(b)-(c), as well as Dealers Electrical Supply Co. v. Scoggins Construction Co., 292 S.W.3d 650, 657 (Tex. 2009) (“[a] party who misapplies trust funds under the [Texas Construction] Trust Fund[s] Act is subject to civil liability to trust-fund beneficiaries whom the Act was designed to protect”).

Use of “or.” Each of 1, 2, and 3 should be used only when raised by the evidence. If any of the alternative instructions noted above are submitted conjunctively, they must be connected

by the word or, because a finding of any one of the acts or practices defined in the instructions would constitute an affirmative defense under the Texas Construction Trust Funds Act. Because each of these acts or practices constitutes an affirmative defense under the Act, the instruction should be adapted to include the kind of conduct involved in a given case.

Trust funds retained as authorized or required by law. Texas Property Code section 162.031(b) provides an affirmative defense if the trust funds have been retained as authorized or required by chapter 53 of the Texas Property Code. This affirmative defense is a question of law for the court.

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