The New Jersey construction trust fund requirements on public projects were enacted in an effort to minimize the financial risk for subs and suppliers. Many states have their own regulations which vary in degree of requirements and applicability. It’s important to understand the effects of these statutes since they have a significant impact on a construction project’s cash flow and remedies in case of non-payment.
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New Jersey construction trust fund overview
There are actually two different types of New Jersey construction trust fund acts; each applicable in different situations and circumstances. The main difference being public and private projects.
The statute covering public projects, NJ Rev. Stat §2A:44-148, is a more traditional construction trust fund statute. These provisions were enacted to protect those who have claims for labor, material, and other charges incurred in fulfilling the contract between the governmental body and its contractor. This is accomplished by imposing liability on contractors who receive project funds that are meant as payment to any subcontractors or suppliers hired by that contractor.
New Jersey does have a construction trust fund statute for private projects. This is codified in NJ Stat. Ann. §2A:29A et. al. However, these trust obligations are very specific and narrowly tailored to apply to money deposited or forwarded in advance for the purchase of dwelling house. For the purposes of this article, we will focus on the public project construction trust fund requirements.
For further reading on construction trust fund statutes:
Public project requirements
They require that when public project funds are paid to a general contractor are to be deemed trust funds and can’t be used for any other purpose besides paying for labor or materials provided to the public project. The scope of protection is limited to those who furnished labor or materials through a direct contract with the prime contractor. These provisions do not extend to those who have furnished labor or materials for the project through a contract with any subcontractors down the ladder- Universal Supply Co. v. Martell Constr. Co. Inc.
When a contractor receives project funds, they are considered a trustee of the funds. A trustee is someone who has a fiduciary duty to act in the best interests of the beneficiaries. In this scenario, the beneficiaries are the subs and suppliers who earned the money that was released for them on the project.
Some other state construction trust fund statutes state that payments need to be held in a separate account or meticulous accounting practices. This is to avoid any intermingling of funds to better keep track of it all. New Jersey has no such requirements, as long as the money is paid.
How the New Jersey construction trust fund protects payments
Imposing a fiduciary duty on a contractor and deeming the funds as trust funds offer many extra protections to ensure that the funds get to where they are supposed to be. But how does this actually work in practice? This offers other avenues of recovery of payments and damages. That’s because it imposes personal liability, protection from bankruptcy, and also can be the basis of criminal charges as well.
Personal liability means that the prime contractor will be held personally responsible for the payments. Meaning even if the project funds are depleted, or the construction company doesn’t have enough money to cover the amount; then recovery can come directly from the contractor’s personal assets.
Using New York as an example, the New Jersey courts have also gone as far to state that officers of a corporation can also be held personally responsible for participating in the diversion of those funds.
Effect of contractor bankruptcy
When a contractor files for bankruptcy, recovering payment can become a nightmare. Which also happens to be the biggest advantages of having the funds held in trust. Trust funds are immune. Not only from third-party creditors but also any bankruptcy proceedings.
According to U.S. v. Whiting Pools, Inc., any property held in trust at the time of filing its bankruptcy petition is excluded from the bankruptcy estate. That money is specifically held in trust for the benefit of the subs and suppliers who earned it. This goes the same for construction trust fund payments received after filing bankruptcy, as the payments are automatically converted to trust funds.
Another cause of action under the trust fund statute is that the contractor who uses the funds for any other purpose than paying their subs or suppliers is potential criminal liability. A breach of the fiduciary duty can result in a charge for “theft, by failure to make a required disposition” under NJ Stat. Ann. §2C:20-9. A person can be found guilty of this kind of this type of theft if three things are present:
- Purposefully obtains or retains property upon agreement or subject to a known legal obligation to make a specified payment or other disposition;
- Deals with the property obtained as their own; &
- Fails to make the required payment or disposition.
The penalties for theft by failure to make a required disposition will vary depending on the amount of misappropriated project funds.
The rules and requirements under the New Jersey construction trust fund statutes aren’t overly complicated compared to other state approaches. However, its important for contractors to familiarize themselves with the act. Non-compliance with these regulations can lead to some steep financial liability and penalties. If you are a contractor working under a public construction contract in New Jersey, be sure that you aren’t using project funds for any other purpose besides paying their subs and suppliers can result in some steep penalties. This includes diverting the funds any overhead or operating costs, even if related to the project at hand.