Texas Mechanics Lien Laws

What is the Trust Fund Statute and How can it be Used to Enforce Payment?

Texas Property Code Section 162, (referred to as the “Trust Fund Statute”) is another powerful tool that you have in your arsenal (independent from a Mechanics Lien) to enforce payment for unpaid labor/materials provided to a construction Project. 

In summary, an Owner, Contractor or Subcontractor violates the statute when it intentionally, knowingly, or with the intent to defraud, retains, uses, disburses, or diverts trust funds without first fully paying all obligations incurred or owed for labor or materials furnished to the Project.  The statute imposes both civil and criminal liability on any individual who violates it.


When a General Contractor and/or a Subcontractor receives a progress payment and uses the money received to pay non-Project debts, such as those incurred on an unrelated Project, then that Contractor has likely violated the Trust Fund Statute.

In the civil context, the officers, directors and agents of a Property Owner, General Contractor, or Subcontractor are deemed “trustees” of construction funds received for the benefit of another.  If the trustee violates the Trust Fund Statute, he or she becomes personally liable to the Contractor and can be individually sued in civil court and criminally prosecuted by the state

In regard to criminal liability, a trustee who intentionally or knowingly misapplies trust funds amounting to $500 or more, commits a Class A misdemeanor.  A trustee who misapplies trust funds amounting to $500 or more with an “intent to defraud” commits a felony of the third degree. 

There are three primary ways to use the Trust Fund Statute: (1) as an educational threat in your Pre-Lien Notice or Notice of Lien Filing; (2) through a Payment Demand Letter; or (3) by Filing a Lawsuit and alleging a violation of the Trust Fund Statute.

Inside Tip

Since the statute imposes personal liability against those individuals who violate it, you can name those persons in the Lawsuit as individual defendants; of which you may not otherwise be allowed to do on a simple breach of contract claim.  No one likes to be personally sued and most employees think that they can hide behind the company; however, if there is a reasonable basis to believe that an officer, Owner, or employee violated the statute, then you can sue them individually.  Now that’s powerful!

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