“Can I use the deposit from this job to buy material for the one I am finishing?” In most small contracting businesses, money is money: it lands in one account and pays whatever is due next. In some states the law sees it differently. Money a customer pays you to improve their property is held in trust for the people who work on and supply that job, and spending it somewhere else before they are paid can be a crime, not just a slow payment.
This article walks through four states that write the rule down (Texas, Michigan, Florida and New York), what “misapplication” means in each, and the job-by-job bookkeeping that keeps you on the right side of all of them.
The idea: you are holding the money, not owning it
A construction trust fund law turns the contractor into a trustee. Texas puts it plainly: construction payments are trust funds if they are made to a contractor or subcontractor under a construction contract for the improvement of specific real property in the state (Tex. Prop. Code §162.001(a)). Whoever receives them or controls them is the trustee, and that includes an officer, director or agent of the contractor (§162.002), so the person who signs the checks is in the picture, not only the company. The beneficiaries are the artisans, laborers, mechanics, subcontractors and material suppliers who work on or supply the job, and on a residential construction contract the property owner too (§162.003).
Michigan’s building contract fund law, Act 259 of 1931, says the same thing in older words: money paid to a contractor in the building construction industry is a trust fund for the benefit of the person making the payment, contractors, laborers, subcontractors and materialmen, with the contractor as trustee (MCL 570.151). New York’s Lien Law makes funds a contractor receives in connection with a contract for an improvement of real property the assets of a trust, with the contractor as trustee (§70), and lists what those assets must pay for: subcontractors, architects, engineers, surveyors, laborers and material suppliers, payroll-based taxes, benefits and wage supplements owed as an employer, and bond and insurance premiums for the work (§71(2)).
Four states side by side
| State | What counts as misapplying the money | What the law names as the penalty |
|---|---|---|
| Texas | Intentionally, knowingly or with intent to defraud, keeping, using or diverting trust funds without first fully paying all current or past due obligations to the beneficiaries (Prop. Code §162.031(a)). | $500 or more: a Class A misdemeanor; with intent to defraud, a third-degree felony (§162.032). The Penal Code sets a Class A misdemeanor at a fine up to $4,000, jail up to one year, or both (§12.21), and a third-degree felony at 2 to 10 years and a fine up to $10,000 (§12.34). |
| Michigan | With intent to defraud, keeping or using the payment for any other purpose than to first pay the laborers, subcontractors and materialmen on that specific improvement (MCL 570.152). | A felony: a fine of $100 to $5,000 and/or 6 months to 3 years in state prison (MCL 570.152). |
| Florida | Knowingly and intentionally failing to apply a payment to all amounts then due and owing for labor, services and materials furnished on that improvement before the payment came in (Fla. Stat. §713.345(1)). | A felony at every amount: third degree under $1,000, second degree from $1,000 to under $100,000, first degree at $100,000 or more (§713.345(1)(b)). The general limits are up to 5, 15 and 30 years (§775.082) and fines up to $5,000 or $10,000, or double the gain or loss (§775.083). |
| New York | A contractor who applies trust funds for any purpose other than the trust’s and fails to pay a trust claim within 31 days of the time it is due (Lien Law §79-a). | Larceny, punishable as the penal law provides (§79-a). |
Two details in that table matter more than they look. Michigan’s companion section says that a contractor spending money paid for building operations before paying everything “due or so to become due” to laborers, subcontractors and suppliers is evidence of intent to defraud (MCL 570.153). That reaches bills not yet due. And Florida’s smallest category is still a felony; there is no misdemeanor tier for a few hundred dollars.
The question, answered with an example
Say a remodeler signs a $40,000 kitchen and collects a $12,000 progress payment. The cabinet supplier delivered $9,000 of cabinets for this kitchen last week, and the invoice is due in 30 days. Across town, another job is short $6,000 for lumber.
Texas adds a bank account rule for homes
A contractor who signs a written contract with an owner to build improvements to a residential homestead for more than $5,000 must deposit the trust funds in a construction account at a financial institution, and the bank’s periodic statement must call it a “construction account” (§162.006). That account may hold only trust funds, plus the contractor’s own money needed to pay the bank’s charges on it (§162.005(6)). The records the contractor must keep are spelled out in §162.007:
- The source and amount of each deposit and the date it was made.
- The date and amount of each disbursement and who received it.
- The current balance.
- For each project, the direct and indirect costs charged to the owner.
- The invoices and other paperwork behind every disbursement, each tied to the account number or otherwise directly connected to the account.
None of it may be destroyed before the first anniversary of the job’s completion. Failing to open the account or keep the record is its own Class A misdemeanor (§162.032(c)), and using trust funds without the required account or record is one of the ways the statute defines “intent to defraud” (§162.005(1)(B)).
Mixing the money does not end the trust
Outside the Texas homestead rule, none of the sections quoted here requires a separate bank account for each job. But one account does not dissolve the trust either. Texas says a trustee who commingles trust funds with other money “does not defeat” the trust (§162.031(d)). New York requires every trustee to keep books for each trust: what is receivable, what is payable, what came in and from where, and what went out, to whom and for what (§75). Failing to keep those books is presumptive evidence that the trustee used trust funds for purposes other than the trust’s.
So the practical test is this: if everything runs through one account, can your books show, job by job, where each dollar of each customer’s money went? If they cannot, that gap is exactly what these laws presume against.
The bookkeeping that keeps you safe
- Find your own state’s rule. These four are examples, not the whole list. Search your state’s code for “trust fund” or “misapplication” near “construction”.
- Give every job a number and put it on every deposit, invoice, check memo and supplier account statement.
- Keep a running ledger per job: money in from the customer, money out to that job’s crew, subs and suppliers, and the balance.
- Pay the job’s bills from the job’s money first, and well before any deadline. Florida, for example, allows a permissive inference of knowing misapplication when a valid lien has been recorded, the contractor received enough to pay that bill, and 45 days have passed without paying it (§713.345(1)(c)).
- Keep payroll taxes current. New York lists payroll-based taxes and benefits among the trust’s purposes (§71(2)).
- Keep business and personal money apart, as this article on separate accounts explains, and take no more up front than your state allows (how big a deposit you can legally ask for).
If a bill on a job is already late
Pay the oldest bills on that job from that job’s money, and talk to a lawyer before spending any more of it. The statutes recognize some defenses, and whether one fits your facts is for a lawyer and, in the end, a court. Texas allows as a defense that the trustee, after notice to a beneficiary who asked for payment, held back the money in the reasonable belief that the beneficiary was not entitled to it, and also that the trustee paid the beneficiaries everything they were entitled to within 30 days after written notice of a criminal complaint or investigation (§162.031(b) and (c)). Florida allows withholding under the contract’s terms or because of a bona fide dispute over the amount due (§713.345(1)(a)). New York gives a trustee who disputes a claim in good faith until 31 days after the dispute is finally decided (§79-a).
There is a license angle too. In Florida, a contractor licensed under chapter 489 who is convicted of misapplication is subject to discipline under §489.129(1)(r) (§713.345(1)(e)). A late bill on one job can reach the license that covers all of them. If an unpaid sub or supplier files a lien, mechanics’ liens for small residential contractors explains what happens next.
General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.