In AC Excavating, Inc. v. Yale (Colo. App. Sept. 2, 2010), the Colorado Court of Appeals held that money loaned to an LLC by its manager qualifies as a disbursement, and can be the basis of a trust fund violation and theft claim against the manager if the funds are not used to pay subcontractors and suppliers. As the dissent notes, "[a] lawyer familiar with today's holding likely would advise the manager not to recapitalize the company if there was any doubt as to the project's ultimate success."
The basic facts, as presented by the Court of Appeals, are as follows:
Antelope Development, LLC ("Antelope"), was a single-purpose LLC created for the sole purpose of developing a residential community. And Antelope entered into a contract with AC Excavating to perform work on the project.
The LLC originally financed the project through construction loans, but reached its limit. Later, Donald Yale, a member/shareholder of Antelope, became Antelope's manager. After learning that Antelope was short on cash, Yale personally loaned Antelope $157,500, and applied that money to pay both general expenses and some outstanding subcontractor invoices. But Antelope did not have enough money to pay all of its debts. So, with debts still owing:
"Yale gave up on antelope and foreclosed on a series of municipal bonds held as collateral for loans he had made to Antelope before assuming the role of sole manager. Yale withdrew $50,000 from the Antelope account to cover the interest on the municipal bonds."
Antelope did not pay AC Excavating in full, leaving $48,387.80 unpaid. So AC Excavating sued Yale, alleging violation of the trust fund statute and the civil theft statute. The trust fund statute provides as follows:
All funds disbursed to any contractor or subcontractor under any building, construction, or remodeling contract or on any construction project shall be held in trust for the payment of the subcontractors, laborer or material suppliers, or laborers who have furnished laborers, materials, services, or labor, who have a lien, or may have a lien, against the property, or who claim, or may claim, against a principal and surety under the provisions of this article and for which such disbursement was made.
C.R.S. ยง 38-22-127(1).
The trial court found in favor of Yale, reasoning that Yale's loans to Antelope were not covered by the trust fund statute. The Court of Appeals disagreed, and reversed. In doing so, the Court gave no deference to Yale's testimony that his loan to Antelope was not a construction loan, but instead for general business purposes, including marketing, payment of wages, and payment of subcontractors. According to the Court, the "disburser's intended use of the funds" is irrelevant.
The Court's reasoning seems to turn the analysis around. Yale's position was that his loan was not a "disbursement" in the first instance, because the loan was not specifically for the construction project at issue. But the Court addressed this as well. The Court noted that Antelope had only one project, had only one bank account, and was formed solely to develop the one project. Thus, all of Antelope's money was used to fund the one project.
Taking this opinion to its extreme, it could be argued that, for a developer that is a single-purpose entity, every cent coming in may be a "disbursement" under the trust fund statute. Also, followed to its logical conclusion, an argument could be made that a contractor cannot front costs and then recover them when later paid by the owner -- at least not until the project is completely closed out and all subcontractors paid.
Comments