Contractor Fraud and Unlicensed Contractors in Texas: What Homeowners Need to Know

Following severe weather events in Houston, homeowners are often desperate to repair their properties quickly. Unfortunately, this urgency creates an environment where unscrupulous “fly-by-night” contractors thrive. Contractor fraud is a significant issue in Texas, leaving homeowners with unfinished projects, substandard work, and depleted savings.

Unlike many other states, Texas does not require a statewide license for general contractors. While this reduces bureaucratic hurdles, it also places the burden entirely on the homeowner to vet the people they hire. If you find yourself the victim of a dishonest contractor, understanding the legal landscape—and the severe penalties these bad actors face—is critical to recovering your losses.

The Licensing Landscape in Texas

In Texas, anyone can call themselves a general contractor. There is no state-level licensing board or competency exam required to manage a construction project. However, specific specialty trades—such as electricians, plumbers, and HVAC technicians—are strictly regulated and must hold valid licenses issued by the Texas Department of Licensing and Regulation (TDLR) or the Texas State Board of Plumbing Examiners.

When a general contractor hires unlicensed tradespeople to perform electrical or plumbing work, they are not only violating state law but also putting your home at severe risk of fire, water damage, and code violations. Our firm frequently handles construction defect claims arising directly from the use of unqualified, unlicensed labor.

The Texas Construction Trust Fund Act

One of the most potent weapons against contractor fraud is the Texas Construction Trust Fund Act, found in Chapter 162 of the Texas Property Code. Under this statute, payments made to a contractor under a construction contract for the improvement of specific real property are legally considered “trust funds” [1].

The contractor acts as a trustee of these funds. Their primary legal duty is to use that money to pay the subcontractors, laborers, and suppliers who performed the work. A contractor misapplies trust funds when they intentionally, knowingly, or with intent to defraud, divert those funds to other purposes—such as paying for another project, covering personal expenses, or simply pocketing the cash—before fully paying the project’s bills [1].

Crucially, Chapter 162 imposes personal liability. A company owner or officer who controls the disbursement of these funds cannot hide behind the corporate veil if they intentionally misapply trust money. Furthermore, misapplication of trust funds amounting to $500 or more with intent to defraud is a third-degree felony in Texas [1].

Criminal Consequences: Misapplication of Fiduciary Property

Beyond civil remedies, Texas prosecutors are increasingly aggressive in pursuing criminal charges against fraudulent contractors. Under Section 32.45 of the Texas Penal Code, it is a crime to intentionally, knowingly, or recklessly misapply property held as a fiduciary [2].

Because construction payments are classified as trust funds under the Property Code, a contractor who takes a large deposit and disappears without performing the work, or who fails to pay subcontractors, can be prosecuted for misapplication of fiduciary property. Depending on the amount of money stolen, this offense can carry severe prison sentences [2].

Taking Action Against Fraud

If a contractor has abandoned your project, performed defective work, or left your property burdened with mechanic’s liens from unpaid subcontractors, you must act swiftly. Document everything: the contract, all payments, communications, and the current state of the project.

In addition to trust fund claims, homeowners may also pursue remedies under the Deceptive Trade Practices Act (DTPA) for false representations, and the Residential Construction Liability Act (RCLA) for defective work. Navigating these overlapping statutes requires precise legal strategy.

At Nixon Law PLLC, we hold fraudulent contractors accountable. We understand how to pierce the corporate veil, trace misapplied funds, and aggressively litigate to recover your money.

About the Author: Jonathon G. Nixon is the managing attorney of Nixon Law PLLC, a Houston-based litigation firm focused on property insurance disputes, construction defects, personal injury, and commercial litigation. Contact Nixon Law PLLC at (713) 482-1523 or jnixon@nixon-law.com.

This article is provided for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. Every situation is unique; you should consult a licensed Texas attorney about your specific circumstances.

References

• [1] Tex. Prop. Code § 162.001 et seq.
• [2] Tex. Penal Code § 32.45.