Construction trust fund statutes are meant to protect lower-tiered project participants by ensuring they get paid what they’ve earned. These are meant not only to protect payments to contractors, subs, and suppliers; but also owners and other paying parties from having to pay more than the original construction contract price. Many states have enacted their own versions of a construction trust fund statute, and some are more strict than others. Let’s take a look at the rules and requirements under the Oklahoma construction trust fund statutes.
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Oklahoma construction trust fund statute
The Oklahoma construction trust fund statutes are Okla. Stat. §§42-152 and 153. These statutes provide that amounts payable under any building or remodeling contract shall, upon receipt by any contractor or subcontractor, be held as trust funds for the payment of all lienable claims due and owing or to become due and owing to contractors or subcontractors. Since the statute specifically mentions “lienable claims” these regulations only apply to private projects.
Responsibilities under the Oklahoma construction trust fund statutes
The way these statutes work is that any payments received by a general contractor or subcontractor on a construction project are to be “held in trust” (as a trustee) for the benefit of the subcontractors and materialmen. A trust is a legal relationship between one person having equitable ownership in the property and another person owning the legal title to such property.
Being declared a trustee means that there is a fiduciary duty imposed on the trustee for the benefit of the beneficiaries. A fiduciary relationship requires a relationship where there is a weakness on one side and strength on the other resulting in dependence or trust justifiably reposed in the stronger In re Estate of Beal. Since a contractor is gathering money intended for another, there is an imbalance of power, which is why this duty is imposed on them.
They are required to act in the best interests of the subs and suppliers who earned the payment being given to the trustee. Acting in their best interests means actually paying them the money they’ve earned. Any use of the trust funds for any purpose other than paying their subs or suppliers is a violation of the trust.
Mechanics lien rights
These provisions don’t affect the ability to file or enforce a mechanics lien. Filing a mechanics lien and making a claim under the trust fund statute aren’t mutually exclusive. In fact, a mechanics lien is necessary in order to create a “lienable claim” which the trust fund, thus invoking the constructive trust funds statutes. –In re Tefertiller.
There’s an important timing issue to keep in mind here. The trust fund statutes are meant to protect payment for “lienable claims.” If the deadline to enforce the lein claim has passed, the claim for payment is no longer “lienable. A valid lien claim is required to assert a claim on construction trust funds.
Unlike many other state construction trust fund statutes, there are no specific accounting requirements. The statutes don’t require the funds to be deposited separately or placed into interest-bearing or escrow accounts. However, at the very least, it’s advisable to keep these funds separate. The penalties for diversion or misappropriation of these payments can be severe.
How the Oklahoma construction trust fund protects payments
First, and foremost, the construction trust fund imposes personal liability on the trustee who misused the payments. If these funds are used for any other reason besides the payment of the subs and suppliers who earned the money, there is a breach of the fiduciary duty owed. Once this duty is breached, the trustee becomes personally liable for the diverted amounts. Meaning they’ll have to pay out of pocket for any lienable claims by the beneficiaries. If working for a corporation or LLC, this liability can extend to any officers or managers who directed or participated in the misappropriation of such trust funds.
Protection from bankruptcy
When a contractor on project files for bankruptcy, recovering payment can be tricky. However, since the Oklahoma construction trust fund statute converts these payments to trust funds, they are protected from third-party creditors. Property held in trust is protected from bankruptcy and third party creditors. This gives them, the beneficiaries, preference in the event a contractor winds up in bankruptcy court. It’s meant to protect property owners from lien claims that would otherwise be asserted if not granted this preference.
Another protection provided by the construction trust fund statute is the potential for criminal sanctions for the misappropriation of trust funds. Such a person can be charged with embezzlement under 21 OK Stat. §21-1451. Which, depending on the amount in question, can be a misdemeanor or a felony. Either of which includes fines and jail time. As with personal liability, this criminal charge can also extend to any officers or managers of a company if they directed or were otherwise involved in the misuse of such funds.
The Oklahoma construction trust fund is an added layer of payment protection for subcontractors and suppliers on private projects. Anyone working in the construction industry within the state needs to familiarize themselves with these regulations. This is doubly important for middle-tier subcontractors as these statutes regulate both the receipt and the payment of funds. And any non-compliance can lead to some harsh penalties.