Funds Trapping

Trapping funds is part of life as a subcontractor, and few tools work faster when you have not been paid.

We have had subcontractor clients walk in with collections problems that cleared up quickly once they understood how funds trapping works.

Why Funds Trapping Is Time-Sensitive

Funds trapping is the most time-sensitive tool in a subcontractor’s collection toolkit. Unlike a mechanic’s lien, which can be filed after the project is complete, a funds trapping notice is only effective against money that is still in the property owner’s hands. Once the owner makes a payment to the general contractor, that money is gone from the owner’s control. A trapping notice sent after that payment has no effect on funds already disbursed.

This means that the moment a subcontractor realizes it is not going to be paid is the moment to send the trapping notice.

How Funds Trapping Works

A subcontractor may gain an additional measure of protection under the provisions of the Texas Property Code, which provides for trapping funds due the general contractor while they are still in the hands of the owner. As with retainage liens, however, fund-trapping liens must be asserted in conjunction with the individual original contract under which the work was performed.

Accordingly, if an original contract is terminated or abandoned, and the owner hires a substitute contractor to complete the work, any notice provided by a subcontractor in order to trap funds in the owner’s hands must relate to payments owed by the owner to the original contractor, and not to payments that the owner owes to any substitute contractor.

When funds are trapped in the hands of the owner, the owner must retain the funds until the time for securing a lien has passed. If a lien affidavit has been filed, the funds must be retained until the lien claim has been satisfied or released. The funds may be released sooner if the claim is settled, discharged, indemnified against, or determined to be invalid by a final judgment of a court. The maximum amount of the lien is the amount required to be retained under the statutory retainage method plus the amount of trapped funds.

Payment of Trapped Funds

When a subcontractor has properly sent a funds trapping notice, the property owner is required to withhold from future payments to the original contractor the amount claimed by the subcontractor. Those withheld funds may then be paid directly to the subcontractor on demand, unless the original contractor objects to the payment.

If the original contractor objects, the owner may not pay the trapped funds to either party until the lien claim is settled, released, or resolved by final judgment of a court. The owner holds the funds until the dispute is resolved. Practically speaking, the receipt of a funds trapping notice often brings the general contractor to the table quickly. A GC who knows that the owner is holding funds that cannot be released until the subcontractor’s claim is resolved has a strong incentive to settle.

Failure to Retain

If a property owner receives a valid funds trapping notice and fails to retain the claimed funds, paying the general contractor anyway, the owner becomes personally liable to the subcontractor for the amount that should have been retained. This personal liability means the owner, not just the property, can be sued. A judgment against the owner personally can be enforced against the owner’s other assets, not just the construction project.

The owner’s personal liability for failure to retain is limited to the amount that the owner was obligated to withhold at the time the notice was received. If the owner had already paid out all funds owed to the GC before the notice arrived, the owner is not retroactively liable for those prior payments. This shows why speed matters: the notice must arrive before the owner makes the payment.

Notice to Trap Funds

To trap funds, a subcontractor must send a written notice to the property owner. The notice must be in writing; must state the claimant’s name and address; must state the amount claimed; must identify the original contractor under whose contract the claimant performed work or furnished materials; must state that the owner must withhold from future payments to that original contractor an amount sufficient to satisfy the claim; and must be sent to the owner or reputed owner of the property.

The notice must be sent by certified mail, return receipt requested, or by another method that provides written evidence of actual delivery. Keep the certified mail receipt as proof that the notice was sent and received.

Common errors that can invalidate a trapping notice: misstating the owner’s name (use the legal name exactly as it appears in the deed of record); relating the notice to the wrong contract; sending the notice too late after the owner has already made the next payment to the GC; and sending the notice only to the GC rather than to the property owner directly.

How Funds Trapping and a Mechanic’s Lien Work Together

Funds trapping and a mechanic’s lien are complementary tools, not alternatives. A subcontractor who sends a trapping notice and also files a lien affidavit has the broadest possible protection. The trapping notice freezes money still in the owner’s hands and creates personal liability if ignored; the lien affidavit creates a security interest in the property itself and enables a foreclosure lawsuit if the debt is not paid.

In many cases, Cook Keith & Davis sends the funds trapping notice and files the lien affidavit simultaneously. The combination of a frozen progress payment and a cloud on title creates maximum pressure to resolve the claim. Call us at 214-368-4686. We move fast because your deadlines are real.