Tennessee Business Litigation Lawyers Blog
In breach of contract cases involving construction contracts, the Tennessee Trust Fund Statute, T.C.A. §66-11-138, may provide a subcontractor with a way to recover the attorneys’ fees and expenses incurred in collecting amounts owed to it, but not paid. To recover attorneys’ fees and expenses using that Statute, it is not enough to prove just a breach of the contract by the contractor or subcontractor with whom you contracted. You have to prove that you were not paid because the contractor or subcontractor who owed you money violated the Statute and did so with the intent to defraud.
The Statute also provides protection to project owners by allowing them to recover any attorneys’ fees and expenses, as well as any other damages, incurred as the result of the contractor using funds of the owner for improper purposes (purposes prohibited by the Statute).
Under the Tennessee Trust Fund Statute, any contractor or subcontractor who, with intent to defraud, uses monies paid to it for any purpose other than to pay for labor, materials, services, equipment, machinery or for related overhead or profit, while any subcontractor remains unpaid, has violated the Statute (subject to the exceptions discussed below). A violation of the Statute, besides amounting to a Class E felony, entitles the injured party to recover any damages caused to it as the result of the misuse of the funds, including attorneys’ fees and expenses.
There is no liability under the Statute if the funds were disbursed pursuant to a written agreement or the funds were deposited into an account used for multiple construction projects where the funds in the account are allocated in accordance with generally accepted accounting principles.
T.C.A. §66-11-140, a companion statute to the Tennessee Trust Fund Statute, creates a presumption that any payments made to the contractor or subcontractor which were not applied in a way that was allowable under the Tennessee Trust Fund Statute were used with the intent to defraud. That presumption, however, does not apply just because the funds were placed in a bank account which contained funds from multiple projects.
As stated above, the Statute is intended to protect against fraud and does not apply to bona fide contractual disputes. A case which illustrates that point is National Door & Hardware Installers, Inc. v. Mirsaidi (Tenn. Ct. App. 2014). In that case, the plaintiff subcontractor filed a breach of contract lawsuit against the general contractor. The subcontractor alleged that the contractor had violated the Tennessee Trust Fund Statute.
The court in the Mirsaidi case pointed out that, to prevail under the Statute, the plaintiff had to prove that the contractor had committed fraud, and that fraud was a question of fact. The trial court in that case, the Chancery Court for Davidson County, Tennessee, held that the subcontractor had not proven the payments made to the contractor by the owner were misapplied with the required intent to deceive. The trial court believed the testimony of the contractor that he never intended to defraud the owner or the subcontractor and that his failure to pay the subcontractor was the result of his dissatisfaction with the quality and quantity of the work performed by the subcontractor. The Court of Appeals of Tennessee upheld the decision of the trial court.
Whether you can use the Tennessee Trust Fund Statute to your benefit will depend on the unique facts and circumstances of your case. Before you reach any conclusions, be sure and obtain the advice of an experienced construction dispute law firm.