A recent CBS 4 News story presents a cautionary tale for those thinking about hiring a contractor to remodel or expand their homes.
As reported by KCNC in Denver, Christina and Scott Latimer paid a contractor nearly $300,000 to build an accessory dwelling unit for Christina’s mother. The contractor stopped work midway through the job and promised to come back, but the Latimers soon began receiving lien notices from unpaid subcontractors and suppliers. Within a few months, the contractor had shut down his company and filed bankruptcy. Frascona is currently representing the Latimers as they simultaneously defend multiple lien claims in state district court and sue their contractor for relief in federal bankruptcy court.
What Colorado Homeowners Should know About Mechanics’ Liens
Property owners in Colorado should be aware that, whenever a person provides labor, materials, tools, or equipment to a construction site, that person may acquire a statutory mechanics’ lien.[1] There are exceptions for government projects and bonded work, but most private construction jobs are subject to lien claims. Unlike like some other states such as California, Colorado does not have a pre-lien notice requirement. Thus, a lien may arise even if the owner never spoke to the subcontractor or other party demanding payment.
Owners who think they already paid for a project may get an unwelcome surprise if they receive a lien notice alleging that the contractor failed to pay its subcontractors and suppliers. In some situations, this can force an owner to pay twice for the same work.
Owners of single-family homes may be able to assert a defense by proving that they paid the contractor in full.[2] The scope of this defense not always clear, however. Although the legislative history suggests that this statute should protect eligible homeowners from paying twice for the same work, there is little caselaw interpreting its application or addressing what happens when a contractor abandons a job prior to final completion. The statute does not apply to condominiums, commercial buildings, or other types of property.
Construction Trust Funds: Misuse May Constitute Theft
One remedy, however is clear: If a contractor fails to hold an owner’s funds in trust for payment of subcontractors, laborers, and suppliers, that is defined by statute to be an act of theft.[3] When an owner makes an advance payment for construction work, the money does not belong to the contractor; the contractor instead becomes a trustee who must hold the funds for the benefit of those working on the job. If the contractor takes funds out of trust before paying workers, the contractor is stealing someone else’s money. This is true even if the contractor uses the funds for overhead or for otherwise legitimate business expenses; that is no defense to misusing an owner’s trust funds.[4]
In extreme cases, a contractor who violates this statute may face criminal prosecution.[5] More often, the contractor will face liability for civil theft claims, which can result in judgments for treble damages and attorney fees.[6] Such claims may be brought by homeowners as well as unpaid subcontractors and suppliers.[7] Although such claims most commonly arise when a contractor fails to pay for labor or materials, a violation may also occur if a contractor takes an owner’s deposit and performs no work.[8] The corporate form is no shield, since the statute imposes liability on whichever employees or officers controlled the funds.[9]
Proving a theft claim can be significant, because bankruptcy may not provide refuge. It is often said that bankruptcy is intended to give a fresh start to the “honest but unfortunate debtor.” If a contractor knowingly steals a deposit intended for use on someone’s home, the contractor may not be eligible for a bankruptcy discharge.[10]
Proceed With Caution: Not Every Dispute is Theft
That said, property owners should be cautious not to overreach with theft allegations, since not every construction dispute implicates the trust fund statute. Even when a company runs out of money or pays off loans prior to paying subcontractors, that does not necessarily establish a violation of the trust fund statute.[11] Likewise, our firm has successfully defended contractors in disputes where opposing parties alleged theft, but the facts ultimately showed nothing more than an honest disagreement over job costs.
How homeowners can protect themselves from mechanics’ liens
Most parties, of course, would prefer to avoid having to go to court at all. Litigation is expensive, and, even if a judgment is not dischargeable in bankruptcy, there is never a guarantee that a bankrupt party will have the ability to pay. To help reduce the risk of liens, homeowners may wish to consider taking certain precautions:
- Check a contractor’s references.
- Ask the contractor to provide lien releases with each progress payment.
- Ask the contractor for receipts when making progress payments, to confirm that the contractor has actually paid for materials and labor.
- Post a sign disclaiming lien rights in a conspicuous place on the jobsite at the outset of work and keep it there for the duration of the project, taking photographs with time stamps.[12]
- Have an attorney review all contracts and payment forms.
Best Practices for Contractors
On the other side of the aisle, contractors may likewise benefit from quality documentation. Using clear language in contracts and payment draws avoids confusion, keeps customers happy, and reduces the risk of liability for inadvertent statutory violations.
Legal Guidance Matters
Whether you’re a homeowner facing construction fraud, a contractor managing a project dispute, or a supplier asserting a mechanics’ lien, consulting with a knowledgeable construction attorney is critical. For additional protection and peace of mind, contact Frascona, Joiner, Goodman and Greenstein, P.C.
To view the full news story from CBS 4, please click this link.
[1] C.R.S. § 38-22-101(1).
[2] C.R.S. § 38-22-113(4).
[3] C.R.S. § 38-22-127(5).
[4] Alexander Co. v. Packard, 754 P.2d 780, 781 (Colo. App. 1988).
[5] People v. Anderson, 773 P.2d 542, 546 (Colo. 1989).
[6] C.R.S. § 18-4-405.
[7] In re Regan, 151 P.3d 1281, 1286 (Colo. 2007); Syfrett v. Pullen, 209 P.3d 1167, 1171 (Colo. App. 2008).
[8] People v. Collie, 682 P.2d 1208, 1211 (Colo. App. 1983).
[9] Flooring Design Assocs. v. Novick, 923 P.2d 216, 221 (Colo. App. 1995).
[10] See, e.g., In re Cupit, 514 B.R. 42, 54 (Bankr. D. Colo. 2014).
[11] See Yale v. AC Excavating, Inc., 295 P.3d 470, 479 (Colo. 2013).
[12] C.R.S. § 38-22-105(2).
