Thinking of lending money to your business? Think again. It could cost you a lot more than you think.

In AC Excavating v. Yale, 2010WL3432219 (Colo. App. September 2, 2010), Donald Yale, a 44% shareholder of Antelope Development, LLC realized that his golf course development and management company was in trouble. Antelope had a bank account balance of just under $100,000 and liabilities to subcontractors and general business expenses of over $250,000. Yale decided to loan $157,500 of his own money to Antelope in hopes of getting out of the red. Antelope used that money to both pay general business expenses and some of the subcontractor debts.

Several months later, Yale gave up on Antelope, withdrew the last $50,000 in Antelope’s bank account, and foreclosed on the collateral for the loans he made to the company. AC Excavating, a subcontractor that Antelope owed approximately $40,000, filed suit against Yale for violations of the Colorado Mechanics’ Lien Trust Fund Statute [1] and civil theft [2].

Colorado’s Mechanics’ Lien Trust Fund Statute mandates that all funds disbursed to any contractor or subcontractor under any building, construction, or remodeling contract or on any construction project shall be held in trust for the subcontractors, laborers, and material suppliers of the project. The statute also requires the money to be “for which such disbursement is made,” meaning for the project the plaintiff-subcontractor worked on.

The statute’s purpose is to prevent general contractors from taking payment for subcontractor work and not paying its subcontractors. The statute establishes a trust of all money paid to the general contractor for a project. In addition, if a person is in complete control of the finances of the general contractor, that person can be held personally liable for any breaches of the statute.

The court broke the Trust Fund Statute analysis into three parts: 1) the source of disbursements; 2) the purpose behind disbursements, and; 3) the project itself. The court then analyzed AC Excavating’s claim of civil theft.

Yale’s final argument was that the loan was not made specifically for the development that AC excavating worked on. However, the court pointed out that Antelope had only one development and it used a single bank account for all of its operations. Therefore, the money was for that development.

Last, the court ruled that Yale was also liable for the civil theft statute because when he withdrew the last of Antelope’s bank balance, he knowingly used the money in a manner that would deprive AC Excavating of its use or benefit.

I do not know Donald Yale, but I assume that he did not know he was breaking any laws when he reached into his pockets in an attempt to save his company. He certainly was entitled to keep his money and let the company sink. Instead, he is now personally liable for the debts Antelope owed to AC Excavating and any other subcontractor that files suit. Make sure you and your clients learn from this harsh lesson.