04 February 2013

Colorado Supreme Court holds that LLC member is not liable for theft of construction funds

The Colorado Supreme Court ruled today that an LLC member's voluntary injection of capital into a failing construction company did not constitute funds disbursed to a contractor on a construction project for purposes of Colorado's trust fund statute. As such, the company did not need to hold the capital in trust for the benefit of its subcontractors, and the member's use of the capital to pay operating expenses did not support a civil theft claim.

The decision in Yale v. AC Excavating, Inc. reversed a 2010 opinion from the Colorado Court of Appeals, which had surprised many observers by concluding that the owner of a construction company could be liable for theft of money he had loaned to the company in an unsuccessful effort to keep the company from going out of business. The court of appeals had ruled that he was required to hold all funds in trust for an unpaid subcontractor, even though he had not contributed the funds for that purpose.

Although the supreme court's ruling in this case seems reasonable under the facts, contractors should remain cautious whenever they receive funds for use on a construction project from an owner or other party. Improper management of such funds can lead to personal liability, treble damages, and attorney fees. On public projects, penalty interest can also be imposed. To avoid such risks and ensure compliance with the such statutory requirements, contractors doing business in Colorado should consult promptly with a qualified construction law attorney.