Construction Trust Fund Claims Under Texas Property Code Chapter 162

By Hank FasthoffJuly 5, 2026

A contractor receives a $500,000 progress payment from the owner. The payment includes work performed by the drywall subcontractor, the electrician, and the supplier that delivered materials weeks ago. Instead of paying those project bills, the contractor sends the money to another job, covers payroll, pays a truck note, or takes an owner distribution.

Chapter 162 treats that payment as trust money. Texas construction trust funds belong to the people whose labor and materials generated the payment, and a person who controls those funds can face personal civil liability and criminal exposure when the money goes somewhere else.

Trust Funds Under Chapter 162

Property Code § 162.001 makes construction payments trust funds when they are made to a contractor, subcontractor, or an officer, director, or agent of a contractor or subcontractor under a construction contract for the improvement of specific real property in Texas. The statute also treats certain loan receipts as trust funds when a contractor, subcontractor, owner, or their officer, director, or agent borrows money to improve specific Texas real property and the loan is secured in whole or in part by a lien on that property.

Owners need that distinction. An owner who receives construction loan proceeds secured by the property can become a trustee of those loan receipts. An owner who simply refuses to pay from non-loan funds may have a contract problem, a lien problem, or a prompt payment problem, but Chapter 162 trust fund liability usually starts with receipt or control of trust funds.

Fees payable to a contractor can fall outside the trust fund definition when § 162.001(c) applies. The owner and contractor must have a written construction contract before construction starts, the contract must provide for the costs of construction and a reasonable contractor fee specified in the contract, and the fee must be earned and paid as the contract provides. That exception protects documented contractor compensation. It doesn't turn project payments into general operating money before current and past due beneficiary obligations are handled.

Trustees

Section 162.002 defines a trustee as a contractor, subcontractor, or owner, or an officer, director, or agent of one, who receives trust funds or has control or direction of trust funds. The statute attaches responsibility to control, not just title.

Individual exposure can extend beyond the company that signed the contract. A company owner who determines which vendors get paid, a project manager with authority over disbursements, or an officer who directs payment away from project beneficiaries may become a trustee. The entity form doesn't erase that statutory duty.

Chapter 162 also applies to public and private projects whether or not a payment bond exists. Section 162.004(c) says the chapter applies to a public or private construction contract for the improvement of specific Texas real property regardless of whether the contract is covered by a statutory or common law payment bond. In Dealers Electrical Supply Co. v. Scoggins Construction Co., 292 S.W.3d 650 (Tex. 2009), the Texas Supreme Court allowed a supplier's trust fund claim to proceed even though the project involved a public payment bond and the supplier missed the bond claim deadline. One boundary runs the other way, because § 162.004(a) excludes a corporate surety that issues a payment bond covering the contract, so the trust fund claim targets the trustee rather than the surety.

Beneficiaries

A trust fund beneficiary includes an artisan, laborer, mechanic, contractor, subcontractor, or materialman who labors or furnishes labor or material for construction or repair of an improvement on specific Texas real property. After SB 841, effective September 1, 2025, a qualified assignee under § 162.0031 can also be a beneficiary.

SB 841 helps when an upstream party pays a downstream beneficiary and wants to pursue the unpaid trust fund claim. The assignment must be in writing, must be made no earlier than the date the assignee pays the beneficiary in good and sufficient funds for the assignment, can't be part of the beneficiary's construction contract, and must run to a beneficiary, trustee, or property owner involved in the project. Written notice of the assignment must go to the property owner and the contractor by the seventh day after the assignment is made.

Owners have a narrower beneficiary role. Section 162.003(b) makes a property owner a beneficiary of trust funds described by § 162.001 in connection with a residential construction contract, including funds deposited into a required construction account.

Misapplication

A trustee misapplies trust funds when the trustee intentionally, knowingly, or with intent to defraud directly or indirectly retains, uses, disburses, or diverts trust funds without first fully paying all current or past due obligations owed to the trust fund beneficiaries. Chapter 162 defines current or past due obligations as obligations incurred or owed by the trustee for labor or materials furnished in the direct prosecution of the work before receipt of the trust funds and due and payable no later than 30 days after receipt of the trust funds. The statute protects project debts that are already due or become due shortly after the trustee receives the money. Commingling doesn't help a trustee either, because § 162.031(d) says a trustee who commingles trust funds with other funds doesn't defeat the trust.

Cross-project diversion is often easy to prove. A contractor receives Project B funds and uses them to pay Project A bills before paying Project B subcontractors and suppliers whose obligations are current or past due. Chapter 162 treats the Project B payment as trust funds for Project B beneficiaries. The trustee doesn't get to solve an old job with money earned by a new one unless the Project B beneficiaries are first paid.

Intent to Defraud

Chapter 162 uses a specific definition of intent to defraud. A trustee acts with that intent when the trustee retains, uses, disburses, or diverts trust funds with intent to deprive beneficiaries of the funds.

Chapter 162 also treats certain conduct as intent to defraud. A trustee acts with intent to defraud by retaining, using, disbursing, or diverting trust funds while failing to establish or maintain a required construction account or account record. A trustee also acts with intent to defraud by using, disbursing, or diverting trust funds paid in reliance on a § 53.085 affidavit that contains false information about payment of current or past due obligations.

That last point is narrower than a generic lien waiver problem. The statute ties the rule to the statutory fund-trapping affidavit under § 53.085. If a contractor provides a false affidavit to obtain release of funds and then diverts the money, Chapter 162 treats that conduct as intent to defraud.

Criminal Penalties

Misapplication of trust funds amounting to $500 or more is a Class A misdemeanor. A trustee who misapplies $500 or more with intent to defraud commits a third-degree felony.

A Class A misdemeanor can mean up to one year in jail and a fine up to $4,000. A third-degree felony can mean two to 10 years in prison and a fine up to $10,000.

Residential construction account violations create a separate criminal risk. A trustee who fails to establish or maintain a required construction account under § 162.006, or fails to maintain required account records under § 162.007, commits a Class A misdemeanor.

Residential Construction Accounts

Sections 162.006 and 162.007 apply to a contractor who enters a written contract with a property owner to construct improvements to a residential homestead for an amount exceeding $5,000. That contractor must deposit trust funds in a construction account at a financial institution, and the periodic statement from the financial institution must refer to the account as a construction account.

Section 162.007 requires account records. Contractors must maintain records showing the source and amount of deposits, the date and amount of each disbursement, the payee, the current balance, and the direct and indirect costs charged to the owner. They must also retain invoices and supporting documentation for disbursements, and must keep the required information until at least the first anniversary of project completion.

Commercial projects don't have the same statutory construction account requirement. Even so, you should keep project-level accounting, because Chapter 162 defenses turn on where the money went.

Defenses

Section 162.031(b) provides an affirmative defense when trust funds not paid to beneficiaries were used to pay the trustee's actual expenses directly related to the construction or repair of the improvement. It also provides a defense when funds were retained, after notice to the beneficiary who requested payment, because the trustee reasonably believed the beneficiary wasn't entitled to the funds. Funds retained as authorized or required by Chapter 53 can also support the defense.

Trustees bear the burden of proving the affirmative defense. In Kirschner v. State, 997 S.W.2d 335 (Tex. App. Austin 1999, pet. ref'd), the court treated the actual expense defense as an affirmative defense and rejected the idea that beneficiaries must follow the contractor's funds to disprove it.

In In re Monaco, 839 F.3d 413 (5th Cir. 2016), the Fifth Circuit read the actual expense defense broadly enough to cover some project-related overhead, but the court didn't treat every business expense as protected. If you want to rely on the defense, you should be prepared to tie the expense to the specific improvement that generated the trust funds.

Section 162.031(c) provides another defense when the trustee pays beneficiaries all trust funds they are entitled to receive no later than 30 days after written notice to the trustee of the filing of a criminal complaint or other notice of a pending criminal investigation. That provision can reduce criminal exposure, but it isn't a payment plan strategy. By that point, the dispute has already become dangerous.

Civil Claims

Chapter 162 doesn't spell out a private cause of action in the same way some statutes do, but Texas courts have allowed beneficiaries to bring civil trust fund claims against trustees. The practical value is individual liability. A subcontractor or supplier may be able to pursue the person who controlled the funds, not just the insolvent company that failed to pay.

Chapter 162 imposes duties on the individual directly, without ordinary corporate veil piercing, because the statute makes a person who receives, controls, or directs trust funds a trustee. The claim follows the statutory duty, not merely the company debt.

Trust fund claims often travel with other payment claims. A subcontractor may assert breach of contract against the party it contracted with, lien or bond rights when preserved, prompt payment interest when available, and Chapter 162 claims against the people who controlled trust funds.

2025 Assignment Change

SB 841, effective September 1, 2025, added § 162.0031 and amended § 162.003 to recognize qualified assignees of unpaid trust fund interests. The change is useful when one project participant pays a beneficiary and then seeks to pursue the trust fund claim against the trustee who failed to pay.

As of the date of this article, current Chapter 162 includes SB 841's assignment rule. It doesn't contain a new § 162.034 attorney fee rule or an enacted 2025 expansion of trust funds to Chapter 53 reserved funds held by owners. A prior SB 1612 version contained those proposals, but that bill never passed, and the language doesn't appear in the current statute.

What You Should Do

If you control construction funds, you should treat each project payment as tied to that project until current and past due beneficiary obligations are paid. You shouldn't use one project's money to solve another project's cash problem unless you have already paid the beneficiaries tied to the funds you received.

You should keep project-level records showing each payment received, each beneficiary paid, each disputed amount, and each project expense paid from trust funds. For residential homestead contracts over $5,000, you must also comply with the construction account and account record requirements.

If you are unpaid and suspect diversion, you should gather the paper trail. You should request pay applications, payment confirmations, owner payment information, lien waivers, § 53.085 affidavits if used, project accounting, and communications about payment. The central question is simple. Did the trustee receive or control trust funds connected to your work and send that money somewhere else before paying current or past due obligations to the project beneficiaries?