May 24, 2018

Colorado Court of Appeals: Complete Exhaustion of Funds by Contractor Without Paying Subcontractor Violates Trust Fund Statute

The Colorado Court of Appeals issued its opinion in Franklin Drilling & Blasting, Inc. v. Lawrence Construction Co. on Thursday, April 19, 2018.

Construction Law—Public Works Trust Fund Statute—Civil Theft Statute—Directed Verdict—Culpable Mental State.

Lawrence Construction Company (Lawrence) was the general contractor on a Colorado Department of Transportation (CDOT) road project. Franklin Drilling and Blasting Inc. (Franklin) was a subcontractor. Lawrence was paid in full by CDOT but refused to pay Franklin. Franklin sued Lawrence on a variety of claims, and all but the claim for civil theft were arbitrated in favor of Franklin.

Following arbitration, the parties tried the civil theft claim to the court. Franklin alleged that Lawrence violated the Public Works Trust Fund statute (trust fund statute). The trial court granted Lawrence’s motion for directed verdict, finding that Franklin had not proved that Lawrence intended to permanently deprive Franklin of the monies it was owed. The court also awarded Lawrence costs.

Franklin appealed the judgment in favor of Lawrence on the civil theft claim and the costs awarded to Lawrence. The court of appeals first concluded that C.R.C.P. 50 is unavailable when a trial is to the court. Instead, the governing rule is C.R.C.P. 41(b). Under that standard, the court must find that upon the facts and the law the plaintiff has shown no right to relief.

As relevant here, the theft statute, C.R.S. § 18-4-401(1), provides two ways that Lawrence could possess the culpable mental state required for civil liability: knowing use (C.R.S. § 18-4-401(1)(b)), or intent to deprive (C.R.S. § 18-4-401(1)(a)). On the knowing use element, the Court focused on the “res” created when the government entity (CDOT) pays monies to the contractor to be held in trust for its subcontractors and suppliers. When the res is exhausted before payment to the subcontractor, a violation of the trust fund statute, and perhaps the civil theft statute, may be established. Here, the evidence Franklin presented at trial established that at various relevant times the bank account into which Lawrence deposited the CDOT payments had a zero or negative balance. The trial court’s findings do not resolve the “knowingly uses” alternative mental state, and the trial court erred by not addressing this element of the civil theft claim.

Franklin also argued that the trial court’s ruling in Lawrence’s favor regarding the intent to deprive element was unsupported by the record. The trial court made extensive findings regarding Lawrence’s intent to permanently deprive. Reasonable minds could differ about whether Franklin proved that Lawrence intended to permanently deprive Franklin of the CDOT funds, so the court could not conclude that the trial court findings and conclusion were “so manifestly against the weight of evidence as to compel a contrary result.”

The court denied Franklin’s request for attorney fees because it did not enter judgment in Franklin’s favor.

The judgment was affirmed to the extent the trial court determined that Franklin failed to prove Lawrence’s culpable mental state under C.R.S. § 18-4-401(1)(a). It was reversed and the case was remanded with directions for the trial court to determine whether Lawrence possessed the culpable mental state defined by C.R.S. § 18-4-401(1)(b).

Summary provided courtesy of Colorado Lawyer.

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