{"id":1296,"date":"2013-02-05T08:18:46","date_gmt":"2013-02-05T15:18:46","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=1296"},"modified":"2013-02-05T08:21:37","modified_gmt":"2013-02-05T15:21:37","slug":"construction-claims-trust-funds-can-go-poof","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/construction-claims-trust-funds-can-go-poof\/","title":{"rendered":"Construction Claims: Trust Funds can go\u00a0Poof"},"content":{"rendered":"

Vicki R. Harding – January 24, 2013<\/p>\n

A typical trust fund statute provides that payments to a construction contractor are treated as funds held in trust until its subcontractors and suppliers have been paid.\u00a0 In the case of a contractor bankruptcy this can be a significant benefit, since the subcontractors and suppliers can argue that the trust funds should be turned over for payment since they are not even part of the bankruptcy estate since.\u00a0 However, sometimes the value of this protection can be illusory, as a material supplier discovered in this case \u00a0while trying to defend against a preference claim.<\/p>\n

In Powers Lake, the prime contractor (C.D. Smith Construction, Inc.) hired the debtor (Powers Lake Construction Company, Inc.), which in turn had a contract with material supplier (Little Limestone, Inc.) to supply limestone, for a wastewater treatment plant project.<\/p>\n

Although the supplier submitted four separate invoices over the course of four months, the supplier contended that the parties agreed it would be paid once all the materials had been delivered.\u00a0 On February\u00a025, 2010 (which was after all of the limestone had been delivered), the prime contractor issued a check to the debtor, the debtor issued a check to the supplier for the full amount of the four invoices, and the supplier gave a lien waiver.<\/p>\n

When the debtor subsequently filed bankruptcy and its chapter 7 trustee attempted to recover the payment from the supplier as a preference, the supplier\u2019s first argument was that the payment involved a transfer of funds held in trust for the supplier (under the applicable state statute), and thus did not constitute property of the bankruptcy estate.\u00a0 (See\u00a0Construction Lien Payments: Trust Funds or Not? for discussion of a similar argument<\/a>.)\u00a0 In response, the trustee noted that the debtor comingled the trust funds so that the supplier was required to trace the funds in order to obtain the benefit of the trust status.<\/p>\n

The court agreed with the trustee and held that the rule for determining whether there were any trust funds was the \u201clowest intermediate balance test.\u201d\u00a0 Under this test, when trust funds are comingled with other funds in an account, if at any time\u00a0the balance goes below the amount of the trust funds, only the lowest intermediate balance is considered to be trust funds.\u00a0 This is based on the fiction that non-trust funds would be used first, and also means that if all of the money is withdrawn, the trust fund status is lost.<\/p>\n

In this case the timeline was as follows:<\/p>\n

The prime contractor\u2019s February\u00a025 check was credited to the debtor\u2019s account on February\u00a026.<\/p>\n

Debits reduced the account balance so that on\u00a0March\u00a01and 2 it showed a negative balance.<\/p>\n

The debtor made two large deposits on March\u00a03, so that the check to the supplier was able to clear on that date.<\/p>\n

The court noted that the date a check clears is the relevant date for determining whether a payment by check is a preference.\u00a0 So, the payment to the supplier was evaluated as of March\u00a03.\u00a0\u00a0Since the lowest intermediate balance between that date and the date that the trust funds were deposited was less than zero, there were no trust funds.\u00a0 Consequently, the payment involved a transfer of assets of the bankruptcy estate and was potentially recoverable as a preference (since all of the other elements of a preference were met).<\/p>\n

The supplier also argued that it had a defense in that the transfer involved a contemporaneous exchange for new value.\u00a0 However the limestone material\u00a0was not delivered contemporaneously with the payment, and the lien release benefited the property owner, not the debtor.<\/p>\n

The supplier\u2019s final defense was that the payment was in the ordinary course of business.\u00a0 The court concluded that it was not appropriate to grant summary judgment on this issue since it was so fact intensive.\u00a0 So, that final issue was left for a trial.<\/p>\n

As illustrated by this case, anyone doing business with a troubled construction contractor should recognize that notwithstanding the potential benefit of trust fund treatment of money received by the contractor, there is still a preference exposure.<\/p>\n

Theoretically there are steps that could be taken to reduce this exposure (for\u00a0example, perhaps requiring that payment received by the contractor be deposited in a designated trust account). \u00a0However, under normal circumstances\u00a0a subcontractor or supplier will not have sufficient leverage to negotiate any special protection \u2013 although it may be able to get the contractor\u2019s attention by reminding the contractor\u2019s principals that they face potential personal liability for misuse of trust funds (assuming that is the case under applicable state law).<\/p>\n

via Construction claims: trust funds can go\u00a0poof – Lexology<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Vicki R. Harding – January 24, 2013 A typical trust fund statute provides that payments to a construction contractor are treated as funds held in trust until its subcontractors and suppliers have been paid.\u00a0 In the case of a contractor bankruptcy this can be a significant benefit, since the subcontractors and suppliers can argue that… Continue reading Construction Claims: Trust Funds can go\u00a0Poof<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[14,172],"tags":[188,292],"class_list":["post-1296","post","type-post","status-publish","format-standard","hentry","category-construction-2","category-construction-law-2","tag-construction-claims","tag-trust-fund-statute","entry"],"jetpack_publicize_connections":[],"yoast_head":"\nConstruction Claims: Trust Funds can go\u00a0Poof - Advise & Consult, Inc.<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.myconstructionexpert.com\/blog\/construction-claims-trust-funds-can-go-poof\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Construction Claims: Trust Funds can go\u00a0Poof - Advise & Consult, Inc.\" \/>\n<meta property=\"og:description\" content=\"Vicki R. 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