What Is Colorado’s Construction Trust Fund Statute?

Colorado’s construction trust fund statute, C.R.S. 38-22-127, treats every dollar a contractor or subcontractor receives on a building, construction, or remodeling project as money held in trust for the subcontractors, suppliers, and laborers who earned it.¹ Spending those funds on anything else before downstream parties are paid can trigger criminal theft charges, treble damages in civil court, and personal liability for the officers who signed off on the diversion. No contract language is required to create the trust. It attaches by operation of law the moment the money hits your account.

Who Holds the Money in Trust

The statute applies to any contractor or subcontractor who receives funds under a construction contract.¹ The beneficiaries are the subcontractors, material suppliers, and laborers who hold a lien, could hold a lien, or could claim against a payment bond on the project.

The statutory text names “contractor or subcontractor” and does not explicitly name developers or owners as trustees. A developer who is also serving as the general contractor falls within the statute, because they are functioning as the contractor receiving the disbursements.

Corporate form is not a shield. Colorado courts have held that officers and directors who actively participate in diverting trust funds are personally liable for the loss, a principle traced to Alexander Co. v. Packard (1988). A claimant does not have to pierce the corporate veil through the usual analysis; participation in the wrongful act is enough.

What “Held in Trust” Actually Means

The statute creates a fiduciary relationship. Project funds in your operating account are not working capital. They belong to the people below you on the payment chain until those people have been paid for the work and materials that produced the draw.¹

That reclassification is the whole point of the law. In People v. Mendro, a contractor used client advance payments to cover operating expenses and bank loans. The Colorado Supreme Court upheld his conviction for theft of trust funds rather than treating the dispute as an ordinary business debt.² Financial hardship is not a defense to spending someone else’s trust money on your own overhead.

The mental state the prosecution has to prove is “knowingly,” not “intentionally.” In People v. Anderson, the Colorado Supreme Court held that prosecutors do not need to show you meant to permanently deprive anyone of the funds. It is enough that you were aware your use of the money was practically certain to leave someone unpaid.³ That is a lower bar than many contractors assume.

When the Trust Obligation Does Not Apply

The statute contains two exemptions that remove the trust fund obligation entirely:¹

A payment bond or performance bond has been furnished for the project. The bond replaces the trust as the protection mechanism for downstream parties.
The property owner has executed a written release to the contractor or subcontractor.

If you regularly work bonded projects, confirm with your surety that the bond is actually in place on the specific project before assuming the exemption applies.

Subsection (2) also provides a good-faith defense. You do not violate the statute by withholding funds from a sub or supplier when you have a good-faith belief that the lien or claim is invalid, or when you in good faith claim a setoff (for defective work, for example) up to the amount of that setoff.¹ Construction disputes about workmanship and scope are common, and the statute was never meant to force payment of a claim you legitimately dispute. The defense only works if you can later show the dispute was real, so document it in writing while it is live.

Recordkeeping and Commingling

Every contractor and subcontractor must maintain separate accounting records for each project.¹ A separate bank account for each job is not required. The statute is explicit about that. What is required is records detailed enough to show, for any specific project, how much came in, from whom, and where it went.

Commingling funds from multiple projects in one operating account is permitted, but it raises the stakes on documentation. You will need to demonstrate which dollars in the account belonged to which project and that each project’s trust funds were spent on that project’s beneficiaries. If a dispute arises months later and you cannot produce clear per-project records, courts will treat the gap as evidence that the funds were handled improperly.

In practice, that means tracking every draw received, every payment made to subs and suppliers, and every retention held, with invoices, pay applications, and lien waivers organized by job. Construction accounting software that assigns job numbers to every entry and generates per-transaction audit trails is the realistic way to do this at any volume.

What Counts as Misuse

Any use of project funds for something other than paying the subcontractors, suppliers, or laborers who earned them on that specific project is a potential violation. The patterns that generate most of the cases are familiar:

Using one project’s draws to cover shortfalls on another project.
Paying office rent, overhead, or owner salaries out of project funds before the subs are paid.
Using project money to pay down personal loans or company debt unrelated to the job.
Selectively paying some subs while stiffing others without a documented dispute.

The statute does not prescribe an order of payment among beneficiaries, and it does not forbid you from running your business out of the same account. What it forbids is spending the trust portion of what sits in that account on anything other than the project’s beneficiaries. Mendro is the archetypal case: operating expenses and bank loans got paid, subcontractors did not, and the Colorado Supreme Court affirmed the theft conviction.²

Criminal Exposure

Subsection (5) makes a violation theft under C.R.S. 18-4-401.¹ The classification scales with the dollar amount diverted, running from a petty offense under $300 through felonies that escalate at $2,000, $5,000, $20,000, $100,000, and $1 million.⁴ On commercial projects the amounts in play push violations into felony territory quickly.

A class 3 felony, for example, carries a presumptive prison sentence of 4 to 12 years, three years of mandatory parole, and fines from $3,000 to $750,000.⁵ Prosecutors have brought these cases where contractors received adequate funding and failed to pass it along, and the Anderson and Mendro decisions confirm that Colorado courts treat the charges as straightforward theft rather than contract disputes dressed up in criminal clothing.

Civil Exposure and Treble Damages

Criminal prosecution is not the only risk, and in practice it is not the most common one. Because a trust fund violation is classified as theft, the civil theft statute (C.R.S. 18-4-405) gives an unpaid sub or supplier the right to sue for three times their actual damages or $200, whichever is greater, plus reasonable attorney fees and costs. Courts have read the treble award as mandatory once civil theft is proved by a preponderance of the evidence, which leaves the trial court no discretion to reduce it.

That multiplier changes settlement dynamics. A subcontractor owed $50,000 who proves trust fund theft recovers $150,000 plus legal fees. Combined with personal liability for the officers who directed the diversion, the civil remedy often does more work than the criminal one.

Bankruptcy Does Not Clear the Debt

A contractor sued for a trust fund violation may consider bankruptcy as a way out. It usually is not. Federal bankruptcy law excepts from discharge any debt arising from “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”⁶

The Colorado statute explicitly creates a fiduciary relationship and labels violations as theft, which lines up directly with the federal exception. The U.S. Supreme Court in Bullock v. BankChampaign (2013) held that defalcation under this provision requires at least reckless disregard for the wrongful nature of the fiduciary conduct, a standard that is typically met where a contractor knowingly spent trust funds on non-project expenses while subcontractors went unpaid. Filing for bankruptcy will not usually erase what you owe to the people who did the work.

How to Stay on the Right Side of the Statute

Compliance comes down to a handful of habits. Treat every draw as money you are holding for someone else until every sub, supplier, and laborer on that project has been paid. Keep per-project records that can trace each dollar from receipt to disbursement, even if you bank out of a single operating account. Do not use one project’s funds to float another, however temporary the shortfall seems. That single practice is the most common path into a criminal case.

When you have a genuine dispute with a sub over workmanship or scope, put it in writing while it is live. The good-faith setoff defense protects you only if you can later demonstrate the dispute was real.¹ Lien waivers, change orders, inspection reports, and contemporaneous correspondence are what will carry that argument if the withholding is challenged.

1
Justia. Colorado Code 38-22-127 – Moneys for Lien Claims Made Trust Funds
2
Justia. People v. Mendro
3
Justia. People v. Anderson
4
Justia. Colorado Code 18-4-401 – Theft
5
Justia. Colorado Code 18-1.3-401 – Felonies Classified, Presumptive Penalties
6
Office of the Law Revision Counsel. 11 U.S. Code 523 – Exceptions to Discharge