Construction Lien Payments: Trust Funds Or Not?

Lain v. V3 Construction Group Ltd. (In re Erickson Retirement Communities, LLC), 475 B.R. 762 (Bankr. N.D. Tex. 2012) –

The trustee of a liquidating trust under a general contractor's confirmed chapter 11 plan tried to recover pre-petition payments made to a subcontractor as either a preference or a fraudulent conveyance.  The court's decision turned on whether the payments were trust funds under the Illinois Mechanics Lien Act.

On February 11, 2009, the subcontractor submitted an application to the general contractor which certified that the subcontract work was finished and requested payment of the contract amount less a 10% retainage.  The subcontractor recorded a lien after the general contractor failed to pay.  On June 30 the subcontractor provided an invoice for the remaining 10% balance, and the general contractor paid both invoices on July 17 by check.  The subcontractor released its lien on July 22, which was before the checks cleared on July 23.