Construction Trust Fund Statute: Can You Spend a Client's Deposit?
A construction trust fund statute can make spending one job's deposit on another a crime. See how four states handle it and how to keep job money traceable.
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Key takeaways
- If you mix trust funds into your general account, the trust still exists. Texas says so in its statute, so a large bank balance won't cover money that went to the wrong job.
- Paying your own crew on the same job counts as a valid use of trust money. Paying yourself profit before every beneficiary on that job is paid can count as diversion.
- In Florida, prosecutors get a permissive inference of intentional misapplication once a valid lien is recorded and 45 days pass after you received enough money to pay, without the bill being paid.
- Every week, compare three numbers for each open job: money received, money paid to that job's beneficiaries, and money still owed. Any job that can't cover what it owes needs attention now.
Usually not for another job. Under a construction trust fund statute, money an owner pays you for a specific project is held in trust for the workers, subcontractors and suppliers on that project. Spending it on a different job while they go unpaid is diversion. Texas, New York and Michigan treat building payments this way. Florida gets to a similar place through a criminal misapplication law, and all four states carry criminal penalties.
Think of a deposit as the job's money first. Your overhead and profit come out of it after the people downstream on that job have been paid.
This is general information, not legal or tax advice. Trust fund laws differ by state and change over time. Confirm your obligations with a construction attorney and an accountant licensed in your state.
What a Construction Trust Fund Statute Does to a Deposit
Michigan's version dates to 1931 and is plainly worded. Under the Michigan Builders Trust Fund Act, the building contract fund paid to a contractor is a trust fund. It benefits the person who paid it and the contractors, laborers, subcontractors and material suppliers on the job, and the contractor is the trustee. Texas Property Code Chapter 162 treats construction payments the same way. Its beneficiaries are anyone who furnishes labor or material for the improvement: artisans, laborers, mechanics, contractors, subcontractors and materialmen. New York's Lien Law Article 3-A makes whoever receives the money the trustee, whether that's the owner, the contractor or a subcontractor. The trust lasts until every beneficiary's claim is paid or discharged.
The trust runs down the chain, so the sub you pay holds that money for its own suppliers. It also attaches to each project separately. A healthy bank balance doesn't help if Job A's money paid Job B's bills. Texas says this outright in Section 162.031(d): a trustee who mixes trust funds with other money does not defeat the trust.
Disputes are decided on tracing: what came in for the job and where it went. In a 2025 New York appellate decision, the Second Department reversed a summary judgment because the plaintiff hadn't proved diversion as a matter of law. Evidence decides these cases, and clean job records are the contractor's evidence.
Construction Trust Fund Laws in Four States
| State | Law | What Creates Liability | Possible Consequences |
|---|---|---|---|
| Texas | Property Code Ch. 162 | Intentionally or knowingly keeping, using or diverting trust funds before paying current or past-due obligations to beneficiaries | Civil claim; Class A misdemeanor at $500 or more; third-degree felony with intent to defraud |
| New York | Lien Law Article 3-A | Using trust funds for a non-trust purpose before beneficiaries are paid, regardless of intent | Civil diversion claim, personal liability for principals, possible punitive damages; larceny under Section 79-a |
| Michigan | MCL 570.151 and 570.152 | With intent to defraud, using a payment for anything other than first paying laborers, subs and suppliers on that improvement | Felony |
| Florida | Fla. Stat. 713.345 | Knowingly and intentionally failing to apply payments to amounts owed for the improvement | Felony graded by amount; discipline for licensed contractors |
Texas. Misapplying $500 or more is a Class A misdemeanor. Doing it with intent to defraud is a third-degree felony, which Porter Hedges notes carries up to 10 years in prison. Texas requires a dedicated construction account for certain residential contracts. According to a summary of Chapter 162 by the Fasthoff Law Firm, failing to set up or keep a required construction account or account record counts as acting with intent to defraud.
The same Fasthoff summary reports that SB 841, effective September 1, 2025, added Section 162.0031, which recognizes qualified assignees of unpaid trust fund interests as beneficiaries. As the National Law Review explains the amendment, a second-tier sub with a trust fund claim against a first-tier sub can now assign that claim to the general contractor or another party on the project.
The assignee has to be a beneficiary, trustee or property owner under the construction contract. Before SB 841, a general contractor that paid the stiffed party had no trust fund claim of its own. If you're a first-tier sub, expect that diverted money can now be pursued by the GC above you as well as by the supplier below you.
New York. Article 3-A beneficiaries must be paid in full before trust money goes anywhere else, and taxing authorities count as beneficiaries. A trustee who diverts the funds can be prosecuted for larceny under Lien Law Section 79-a, as this Mondaq article on criminal liability explains.
Florida. Florida has no trust fund statute as such. Instead, Section 713.345 requires anyone paid to improve real property to apply that money to what's owed for the work. Knowingly and intentionally failing to do so is misapplication of construction funds, and contractors licensed under Chapter 489 who are convicted face discipline. In the 2010 text published by the Florida Senate, misapplying $1,000 to under $100,000 is a second-degree felony and $100,000 or more is a first-degree felony. Have your attorney confirm the current grading.
Other states have their own versions, narrower ones or none at all, so look yours up by name with your attorney. In California, also read the California contractor down payment limit rules, because deposit caps are separate from trust obligations.
Three Assumptions That Turn a Cash Crunch Into Diversion
"I'll Put It Back Before Anyone Notices"
A short-term borrow from one job to cover another is the textbook diversion pattern. In New York, using trust money for an unauthorized purpose before all trust claims are paid is diversion regardless of intent. Texas requires intent or knowledge, but a missing required construction account supplies the intent. Florida lets prosecutors infer knowing, intentional misapplication when three things are true: a valid lien has been recorded, the contractor received enough to pay for the labor or materials, and at least 45 days have passed since the contractor got the funds without paying.
"My LLC Protects Me"
It may not. Texas Section 162.002 reaches individuals who control or direct trust funds, which Porter Hedges points out widens personal exposure. In New York, the First Department's 2024 Flintlock decision held a subcontractor's principal personally liable for diverting trust assets, as Duane Morris summarized. Debts from misusing money held as a fiduciary can also be hard to discharge in bankruptcy, so talk to a bankruptcy attorney before you ever need one.
"My Own Crew Gets Paid Last"
The reverse is closer to the rule. Under New York's Article 3-A, a contractor's own laborers on the project are in the same class as its subs and vendors, so paying them is a valid trust purpose. A trustee may also pay one beneficiary in a class ahead of another, according to this Legal 500 analysis. What comes last is the company's profit. Paying yourself profit before every beneficiary is paid in full may itself be diversion. Texas gives an affirmative defense when unpaid trust money went to the trustee's actual expenses directly related to that improvement. Payroll on the same job qualifies. Payroll on a different job does not.
Worked Example: One Deposit, Three States
Illustrative figures, not from a real job. A remodeler collects a $20,000 deposit for the Smith bathroom. That week, $12,000 of it covers payroll on the Jones addition, which is behind schedule. Two weeks later, the tile supplier and plumbing sub on the Smith job send invoices totaling $14,000. The Jones draw hasn't arrived, and the operating account holds $9,000.
| Smith Job Ledger | Amount |
|---|---|
| Deposit received | $20,000 |
| Moved to Jones payroll | −$12,000 |
| Paid to Smith subs and suppliers | $0 |
| Smith invoices now due | $14,000 |
| Cash available | $9,000 |
| Shortfall on Smith obligations | $5,000 |
The owner paid on time, and the Smith subs and suppliers still can't be paid in full. In New York, the $12,000 went to a non-trust purpose while they were unpaid, which is enough for a civil diversion claim without proof of intent. In Texas, the actual-expenses defense doesn't apply, because Jones payroll isn't an expense of the Smith improvement, and the amount is far past the $500 line.
Whether it becomes a crime turns on intent or knowledge, and a missing required construction account settles that question against the contractor. In Florida, suppose the plumber records a valid lien and 45 days pass after the remodeler received the $20,000 with the plumber still unpaid. At that point the inference of intentional misapplication applies.
Done cleanly, the deposit goes into a project account, the $14,000 goes out when the invoices arrive, and $6,000 stays with the Smith job for its remaining costs and margin. Financing or a faster Jones draw covers the Jones payroll. Comparing a business line of credit vs. a term loan is the right place to start, because cash borrowed from another client's project can come with criminal exposure.
Keep Each Job's Money Traceable
| Account Structure | How It Works | Trade-Offs |
|---|---|---|
| One account per job | Each project gets its own bank account | Clearest trail, most administration; suits large jobs |
| Project account plus operating account | Client payments land in a project account; only earned amounts move to operating | Workable balance for most small contractors |
| Single account with strict job costing | Every dollar tagged to a job in accounting software | Least administration; weakest if records slip |
If your state requires a construction account, as Texas does for certain residential contracts, that decides it. Otherwise, choose with your accountant.
Whatever the structure, put a job number on the contract, every invoice and every payment, and code payroll, materials and sub invoices to it. Each week, run each job's balance: money received, minus money paid to its beneficiaries, minus money still owed. Move overhead and profit to operating only after the job's obligations are paid or clearly covered. File each lien waiver with its proof of payment. The guide to conditional vs. unconditional lien waivers covers which to collect and when. MannyPay supports a QuickBooks integration, which cuts down on re-entering card payments into your books by hand.
Match Card and ACH Settlements to Jobs
One card settlement can combine payments from several jobs. If your pricing takes fees out of each batch, deposits won't equal invoice totals either. A chargeback on one job can be debited from a batch that holds another job's money; see contractor chargebacks when a homeowner disputes a deposit. Large deposits can also trigger a review that delays funding, explained in why your processor held funds on a big remodel deposit. A four-step routine:
- Enter the job or invoice number in the reference field when you take the payment, whether you key the card into a virtual terminal for phone and office payments or send an online invoice.
- Pull the transaction-level report for each settlement, not just the bank deposit total.
- Split each deposit by job in your books, and record fees the same way every time, as job or overhead costs, following your accountant's advice.
- Ask ACH payers to include the invoice number, and reconcile every settlement before the month closes. For large jobs, compare card vs. ACH vs. check for $50,000 remodel payments on traceability as well as cost.
Close the Cash Gap Before It Reaches Another Client's Deposit
Trust fund trouble usually starts as a timing problem: a job's costs come due before its money arrives. A construction draw schedule tied to milestones brings money in ahead of each phase. Pricing change orders before the extra work keeps added costs from eating into base-contract funds. A 13-week cash flow forecast shows the gap while there's still time to arrange financing.
This week, pull every open job and compare three numbers: what you've received, what you've paid that job's subs, suppliers and crew, and what you still owe them. If cash on hand can't cover what a job owes, call your attorney and your lender about that job first. If you also want card and ACH payments that tie back to each job, MannyPay works with construction and contracting businesses on payment processing solutions, including virtual and mobile terminals. Request a free quote, and a MannyPay specialist will respond within one business day.
Sources
- Michigan Legislature, MCL 570.151 Building Contract Fund
- Michigan Court of Appeals opinion quoting MCL 570.152 (2002)
- Texas Property Code Chapter 162 (Justia, 2017)
- Texas Property Code § 162.031 (FindLaw)
- Porter Hedges, A Matter of Trust: Avoiding the Pitfalls
- Fasthoff Law Firm, Construction Trust Fund Claims Under Texas Property Code Chapter 162
- National Law Review, Texas Clarifies Defect Claim Accrual, Expands Trust Fund Rights (2025)
- Mondaq, Criminal Liability for Construction Trust Fund Diversion & Fraud
- Duane Morris, Trust Fund Diversion Claims Require Clear Evidence of Unauthorized Expenditures (2025)
- Duane Morris, Key Takeaways Under Article 3-A of the Lien Law (2024)
- Legal 500, Lien Law Trust Fund Diversions: Can You Pay Your Own Laborers Before You Pay Your Subs?
- Florida Statutes § 713.345 (Florida Legislature, current)
- Florida Statutes § 713.345 (Florida Senate, 2010)
- FindLaw, Florida Statutes § 713.345
- Levelset, Does Florida Have a Construction Trust Fund Statute?
This article is for general educational purposes and is not legal, tax or financial advice. Card network rules and state laws change; confirm current requirements for your business.
