OCTOBER PAY
TRUST FUNDS
Protecting Your Earnings — A Matter of Trust
What can you do to protect your company’s earnings from creditors
when a client goes bankrupt? One of the most effective ways is to ensure in
advance that the earnings for your work will be held "in
trust" for your company when the owner disburses payment to the
general contractor or construction manager. When the funds are held in
trust for your company, your company will have a priority claim to the
money over anyone else in case of bankruptcy. Even tax liens against the
client will not take priority over your claim.
But how can you obtain the protection afforded by "trust"
arrangements, also known as "trust funds"? Subcontractors in
some states, such as New York and Wisconsin, are lucky in this regard: The
law mandates that payments for a subcontractor’s work be held in trust
for the subcontractor. When working in these states, familiarize yourself
with the legal requirements concerning trust funds. In general, it’s a
good idea to get professional advice on "trust" protections and
other contractual matters, especially in states where you are not familiar
with the law.
Most states do not have statutes affording trust protection to
subcontractors, so a subcontractor’s earnings will be maximally
protected only when the prime contract contains language creating an
"express trust." An express trust is called "express"
because the trust relationship is explicitly and clearly established in a
written agreement. The express trust established in a construction
contract typically would arise from a provision stating that a
"trust" for funds paid by the owner for the subcontractor’s
work shall be created, intentionally for the benefit of the subcontractor.
ASA’s "Addendum to Subcontract" (paragraph 11) endorses
trust protection for payments to subcontractors: "Payment received by
the Contractor for Subcontract Work shall be held in trust and used solely
for the benefit of Subcontractor and those for whom it is
responsible." This provision in your subcontract document may
increase your level of protection. Use opportunities to educate owners
about the benefits of including trust arrangements in the prime contract.
After all, a trust creates powerful incentives for the GC/CM to protect
your money and pay it to you.
Many contract documents simply omit trust protections for
subcontractors or dilute them too much. At the same time, many GCs and CMs
often ask the subcontractor to hold payment to sub-subcontractors and
suppliers in trust. One effective negotiation tactic may be to ask the
GC/CM whether or not it can provide a "trust fund" arrangement
for funds owed to you, especially when the GC/CM is asking you to provide
a trust arrangement to your suppliers and subcontractors.
Consider how your company can benefit from "trust fund"
arrangements for your earnings. ASA’s Payment Advocacy Year (PAY!) Web
page at www.asaonline.com/pay.htm contains many more suggestions, ideas
and payment resources. This article is provided in conjunction with ASA’s
Payment Advocacy Year (PAY!).
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