Opinion ID: 1441354
Heading Depth: 2
Heading Rank: 2

Heading: Construction Trust Funds

Text: Texas law concerning construction trust funds is found in Chapter 162 of the Texas Property Code. Pursuant to § 162.001(a), Construction payments are trust funds under this chapter if the payments are made to a contractor . . . under a construction contract for the improvement of specific real property in this state. A contractor . . . who receives trust funds or who has control or direction of trust funds, is a trustee of the trust funds. Id. § 162.002. A subcontractor who furnishes labor or material for an improvement on a specific piece of real property is a beneficiary of any trust funds paid or received in connection with the improvement. Id. § 162.003. Subsequent provisions of Chapter 162 make it a Class A misdemeanor for a trustee to misapply trust funds. Id. § 162.032. The construction trust fund is self-executingin other words, there are no procedures with which a subcontractor must comply before the contractor is obligated to hold the funds in trust. See Exchanger Contractors, Inc. v. Comerica Bank-Tex. (In re Waterpoint Int'l L.L.C.), 330 F.3d 339, 345 (5th Cir. 2003) (noting that funds are required to be held in trust under Chapter 162 without regard to the subcontractor's compliance with any lien procedures). Both the bankruptcy court and the district court used the construction trust fund concept to conclude that Palmetco would have received the same amount in a hypothetical Chapter 7 proceeding as it did from the allegedly preferential transfers. In a hypothetical case, NA Flash would be required to hold the amounts received from property owners in trust for its subcontractors on those projects, including Palmetco, or face criminal liability for misuse of trust funds. TEX. PROP.CODE ANN. §§ 162.001(a), 162.032. Therefore, in the hypothetical bankruptcy proceeding, where the court is to presume everyone will act reasonably, NA Flash would have held any payments it received on Palmetco projects between October 2003 (when the transfers hypothetically never took place) and December 29, 2003 (the date of the bankruptcy), in trust for Palmetco; otherwise, NA Flash would have faced criminal liability. The trust funds would have given Palmetco a priority claim to the funds in the subsequent bankruptcy proceeding. See Southmark Corp. v. Grosz (In re Southmark Corp.), 49 F.3d 1111, 1118 (5th Cir. 1995) (noting that money in a constructive trust gives the claimant priority over the debtor's unsecured creditors); see also Begier v. I.R.S., 496 U.S. 53, 59, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) (stating that money held in trust for another is not property of the debtor for purposes of § 547(b)). Consequently, in a hypothetical proceeding, Palmetco would have received 100% of the money it was owed, and NA Flash's estate would not be depleted of any money that would have otherwise been available to the unsecured creditors. [1] The Trustee's only argument in response is that Palmetco conceded that it could not prove a construction trust fund theory and that the district court refused to make a finding on whether a construction trust fund theory would apply in this case. The Trustee errs, though, by conflating two areas in which construction trust funds and preferential transfers intersect. As described above, construction trust funds can be used in a hypothetical Chapter 7 proceeding to demonstrate that Palmetco would have received the same amount in a bankruptcy case as it did from the allegedly preferential transfers. This is the theory argued by Palmetco and relied upon by the district court. A separate argument concerning construction trust funds is whether the funds that were actually transferred in October 2003 were of an interest of the debtor in property. See 11 U.S.C. § 547(b). The idea behind this second theory is that, to the extent NA Flash transferred trust funds in October 2003, it did not transfer any interest it had in property, as NA Flash would have no interest in funds held in trust for another. See Begier, 496 U.S. at 58, 110 S.Ct. 2258 (The reach of § 547(b)'s avoidance power is therefore limited to transfers of `property of the debtor.'); Vulcan Materials Co. v. Jack Raus, Inc. (In re HLW Enters. of Tex., Inc.), 157 B.R. 592, 596-98 (Bankr. W.D.Tex.1993) (holding that transferred funds were trust funds under Chapter 162 and therefore not the property of the debtor). It is this second theorythat the funds actually transferred to Palmetco were construction trust fundsthat Palmetco conceded and the district court declined to consider, primarily because Palmetco could not prove that the specific funds transferred were funds that NA Flash had been holding in trust for Palmetco. [2] Consequently, Palmetco's concession that it could not refute the Trustee's evidence that the $39,810.50 transferred to Palmetco was NA Flash's property has no effect on Palmetco's other construction trust fund argument regarding the hypothetical Chapter 7 proceeding. As described above, because the law of construction trust funds would provide Palmetco with a full recovery in a hypothetical Chapter 7 proceeding, the Trustee has failed to demonstrate that the transfers at issue were preferential under § 547(b). As a result, we affirm the judgment of the district court and need not consider whether an analysis of the law regarding materialman's liens would lead to the same conclusion.