Scott Turner: A statute for protecting homeowners
A recent column in the Summit Daily News (Mountain Law by Noah Klug, March 2) discussed Colorado’s Mechanic’s Lien Trust Fund statute and how contractors can protect themselves against lawsuits. However, the column leaves out one important party – the homeowner who hired the contractor to begin with and who has put their money on the line.
It is a story that occurs all too frequently. A person takes a lot of money and puts it toward their dream home. They hire a contractor to make these dreams come true. Six months down the road, after they have paid out tens or sometimes hundreds of thousands of dollars, they visit the home site to see what progress has been made. Only when they get there they find that the only thing their money has bought is a hole in the ground or maybe part of the foundation. The subcontractors call and say they haven’t been paid and are going to be placing liens on the property. When they get a hold of the contractor, he says he’s broke and has no more money.
Under the Mechanics Lien Trust Fund statute, any money that is given to a contractor or subcontractor for a project must be placed into a trust account which is separate from the account they use for business operations. The trust fund is to hold the funds for payment of the work to be performed. The funds can be combined into one trust fund, which holds the money for all of the projects the contractor is working on. However, the contractor must maintain separate records of account for each project.
As mentioned in the previous column, “[a] common practice of contractors is to juggle funds between various projects as a way of managing cash-flow issues….” This is a very dangerous practice for both the contractor and the person who hired him. Essentially what the contractor is doing is robbing Peter to pay Paul. He gets money for Project B and uses it to pay for Project A. Then Project C will pay for Project B. And so on, and so on. But what happens when Project D doesn’t come? Then the well runs dry. The contractor has no money left to pay the subcontractors or for materials for the last job in line. The contractor is broke and is going out of business. Lawyers will get involved and lawsuits will be filed. What’s next?
After you call your lawyer, call your local law enforcement agency. The Mechanic’s Lien Trust Fund statute states that if a contractor does not follow the provisions set forth within the statute they have committed theft. Criminal charges could be filed if it is determined that you are out money because the funds you paid to the contractor were used on another project or, even worse, put in contractor’s pocket. If your losses exceed $20,000, the contractor could face up to 12 years in prison.
What can you do to prevent this situation? Hire a reputable contractor. Obtain references and check those references. Verify with references that the contractor performed as expected and accounted for all funds that were given to her. View projects the contractor has been involved with. A contractor with a good reputation will want to keep that reputation as well as be able to list you a reference for future projects.
Ask the contractor to keep your funds in a separate trust account. It will make for a very easy accounting of where your money went as it will not be co-mingled with anybody else’s money. As mentioned in Noah Klug’s column, this would be the best practice for the contractor also. It’s safer for everybody involved.
Ask the contractor to obtain a surety bond for your project. If there is a problem with the project, the party who issued the bond can make good on it. There are performance bonds and payment bonds. A performance bond guarantees the unfinished project will be completed. A payment bond will guarantee that the persons supposed to get paid on the job, such as subcontractors or material suppliers, get their money. The benefit to the homeowner with this type of bond is that it will usually eliminate the problem of liens, as those who would generally file liens get the money owed them.
Do not pay for an entire project up front. Make an agreement with the contractor that the funds will be dispersed in certain amounts whenever part of the project is completed. In a worst-case scenario you would only lose part of your money for a smaller portion of the project should the contractor go broke.
Luckily instances of contractor fraud are rare, though cases against contractors have increased as a result of the economy. The vast majorities of contractors in Summit County do an excellent job and will handle the financial part of the project responsibly. Be smart and limit your exposure before handing over tens of thousands of dollars. Any reliable contractor will address any fears you may have and make sure you are comfortable before engaging in any construction project. But if the worst happens and you lose money, make sure you contact law enforcement to prevent it from happening to anybody else.
Scott W. Turner is an assistant district attorney with the 5th Judicial District in Breckenridge.
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