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2011 Texas Land Title Institute – Page 1 of 19 Construction Retainage and Lien Waivers
Construction Retainage and Lien Waivers
Thomas J. Walthall, Jr.
The Gardner Law Firm,
A Professional Corporation
745 E. Mulberry, Suite 500
San Antonio, Texas 78212-3149
(210)733-8191
Facsimile: (210)733-5538
Email: [email protected]
www.tglf.com
Texas Land Title Institute
December 1, 2011
mailto:[email protected]://www.tglf.com/
2011 Texas Land Title Institute – Page 2 of 19 Construction Retainage and Lien Waivers
BIOGRAPHY
of
Thomas J. Walthall, Jr.
Thomas J. “Tom” Walthall, Jr. has widely regarded expertise in construction law and lien
and bond claims. He has practiced in the San Antonio area since 1980, and became a
member of The Gardner Law Firm in 1991 upon a merger with his former law firm. Mr.
Walthall’s practice consists primarily of representation of contractors, subcontractors,
and owners in construction law area, concentrating in mechanic’s liens, bond claims,
defect litigation, engineer and architect defense, delay claims, and related litigation in the
Courts and in arbitration.
Mr. Walthall is experienced in arbitration and court trials in the construction law area,
including subcontract breach and delay claims, bond claims, lien claims, Prompt Pay Act
claims, Texas Construction Trust Fund cases for subcontractors and suppliers,
delay/impact litigation, Miller Act litigation, bankruptcy discharge litigation regarding
the Texas Construction Trust Fund Act and construction defect litigation. He regularly
counsels clients in the negotiation and preparation of subcontracts, construction contracts,
purchase and supply orders and related construction documents.
Mr. Walthall has served for over ten years on the State Bar’s Real Estate Forms
Committee, which prepares and publishes the Texas Real Estate Forms Manual, and has
been responsible for Ch. 28, Texas mechanic’s liens, of the Forms Manual. Mr. Walthall
gives several seminars each year to local construction trade organizations (including the
American Subcontractor’s Association, the National Association of Credit Managers, and
the United States Tennis Court & Track Builders Association) regarding construction
contracting and contracts, mechanics liens, and bond claims. He also has made frequent
presentations on mechanic’s lien, construction bond claims and related topics at the State
Bar of Texas continuing legal education seminars, including the Advanced Real Estate
and the Advanced Real Estate Drafting Courses, and at the University of Texas Law
School’s Mortgage Lending Institute.
Mr. Walthall is licensed to practice law in Texas before all the state courts, and the
United States District Courts for the Eastern, Southern and Western Districts of Texas,
and before the 5th U.S. Circuit Court of Appeals. He is a member of the Texas Bar
Association (Construction Law Section, Real Estate, Probate and Trust Law Section), and
is chapter attorney for the American Subcontractors Association, San Antonio, Texas.
2011 Texas Land Title Institute – Page 3 of 19 Construction Retainage and Lien Waivers
TABLE OF CONTENTS
Overview- Mechanic’s Lien Liability for Retainage; Lien Waivers;
2011 Legislation . . . . . . . . . . . . . . . . . . . . . . . . ………………… . . . . . . . . . . . . . . . . . 5
1. Retainage Legislation HB 1390... .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.1 Statutory Retainage (“Owner Statutory Retainage”). . . . . . . . …. . . . . . . . . 5
1.2 Owner Liability on Mechanic’s Lien Claims.. . . . . . …. . . . . . . . . . . . . . . . . 7
1.3 Contract Retainage – the Lien Notice Problem……………….. . . . . ... . . . 7
1.4 Owner’s Statutory Retainage –Problem with Filing Deadline for
Lien Affidavit……….………………………….. . . . . . . . . . . . . . . … . . . 8
1.5 New Retainage Legislation Revising §53.057 and related Provisions. . . .. 9
1.5.1 New Optional Notice of Contractual Retainage Deadlines……. .. 9
1.5.2 Lien Affidavit Filing Deadline Changes………………………... 10
1.5.3 Application……………………………………...………….....….10
1.5.4 Owner Failure to Withhold Retainage
– §53.052 Deadlines apply. . . . . . . . ……………………... . . . . . .11
1.5.5 “Final Completion”………………………...…………………….11
1.5.6 Request for Information to Owner – Date of original contract
execution – Effective Date.. . . . . . . . . . . . . . ... . . . . …….. . . . . . . . 12
1.5.7 Grounds for Removal of Lien, §53.160 – Retainage Deadlines
Expired……………………………………………. . . . . . . . . . . . . 12
2. “Shall” vs “May” Award Attorneys Fees……... . . ………………. . . . . . . . . . . . . 12
3. Release of Mechanic’s Liens. New Statutory Forms. No enforceable release in
advance of collection.. . . . …………………………………………... . . . . . . . . . .13
4. Ch. 12 Texas Civil Practice and Remedies Code. The Fraudulent Lien Act . . . 14
5. Construction Trust Funds Liability – Residential Construction. . . . . .……….. . . 16
5.1 Basics and Bank Exemption.. . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . ... . 16
2011 Texas Land Title Institute – Page 4 of 19 Construction Retainage and Lien Waivers
5.2 Accounting – Residential Homesteads…………… . . . . . . . . . . . . . . ... . . 17
5.3 Trust Fund Act Litigation – Cause of Action and Limitations Clarified...17
2011 Texas Land Title Institute – Page 5 of 19 Construction Retainage and Lien Waivers
OVERVIEW- MECHANIC’S LIEN LIABILITY
FOR RETAINAGE; LIEN WAIVERS; 2011
LEGISLATION
This presentation covers the 2011 Legislation
impacting construction claims in Texas. Three
basic areas will be discussed: significant
Legislation effecting mechanic’s lien claims and
retainage, the new Legislation on mechanic’s
lien and bond claim waivers, and the Texas
Property Code Ch. 162 (the Texas Construction
Trust Funds Act). Several important bills
effecting the construction industry passed this
2011 Legislative Session. This paper will focus
on mechanic’s lien related legislation, including
the new retainage bill (HB 1390) and the lien
waiver bill (HB 1456). The passage of
construction industry related matters is
incredible and amazing due to all the other
hubbub this past session, including the budget
cutting, voter id, sanctuary cities etc. etc. We
will also re-visit the application of Texas
Property Code Chapter 162, the Construction
Trust Funds Act and its provisions.
1. Retainage Legislation HB 1390.
The 2011 Leg. passed wholesale changes to the
mechanic’s lien law dealing with retainage. The
intent was to simplify and clarify retainage claim
procedure. The result, as we’ll see, is a complex
compromise bill accommodating several
competing interest groups in the construction
business. The new legislation introduces some
clarity but also added some interesting questions
about how all this new stuff is going to work as
a practical matter. The world of owner liability
for mechanic’s liens and retainage has changed
dramatically due to HB 1390 (Deshotel).
Before launching into the details of HB 1390,
we will first get a historical perspective to “set
the scene”.
1.1 Statutory Retainage (“Owner
Statutory Retainage”).
When originally drafted the early versions of the
Texas Mechanic’s Lien statute provided limited
liability for owners. Lien claimants were to be
paid on their perfected lien claims out of the
remaining undisbursed funds in the Owners’
hands, such that Owners would not have to pay
twice for their projects. This concept is referred
to in the case law as “fund trapping”. Owners
are given lien notices which tell them to “trap
funds” still in their hands, and withhold the
money from the contractor until the lien claims
are resolved or paid off.
Under the old version of the law, some Texas
contractors and owners employed the creative
and abusive strategy of avoiding the trapping of
funds by quick or immediate payment by the
owner to the contractor. If no funds were left
available to “trap” when lien notices arrived,
then the owner had no liability. If the owners
disbursed their funds to the contractor before
receipt of a lien notice, the owners had no
liability to the lien claimants.
To plug this hole, the Texas Legislature in 1909,
enacted the first concept of a required statutory
retainage by Owners. The early Statute
required owners to withhold a minimum amount
from the contractor until completion of the
project. This minimum withholding, or owner
statutory retainage, was 10% of the contract
price as adjusted for change orders and
modifications. In 1961, passage of the
Hardeman Act1 refined the owner statutory
retainage concept, broadened its scope to include
all claimants, and provided rights to perfect liens
against this owner statutory retainage fund.
Owners were declared personally liable for
failure to comply with the retainage provisions –
withholding 10% for the minimum time, 30 days
after “final completion” of their project.
Owner statutory retainage is intended to assure
suppliers and subcontractors that there will be a
little something still left in the cupboard, when
1 The Act of 1961, known as the Hardeman Act,
revised Article 5452 et seq. and ushered in sweeping
changes in the manner of perfecting a claimant's
statutory mechanic's lien within the statutory scheme. 17 Ch. 382, § 1, 57th Leg., 1961 Tex. Gen. Laws 863
(1961).
2011 Texas Land Title Institute – Page 6 of 19 Construction Retainage and Lien Waivers
they do not get paid and have to file claims on
projects. Claimants share the owner statutory
retainage on a pro rata basis.
The owner’s statutory retainage requirement is
discussed in Page v. Structural Wood
Components, 102 S.W.3d 720 (Tex. 2003):
“The Texas Property Code requires
owners to retain either "10 percent of
the contract price of the work to the
owner" or "10 percent of the value of
the work . . . using the contract price or,
if there is no contract price, using the
reasonable value of the completed
work" for "30 days after the work is
completed." TEX. PROP. CODE
§53.101. These retained funds "secure
the payment of artisans and mechanics
who perform labor or service," including
subcontractors such as Structural Wood.
Id. §53.102. A subcontractor or other
claimant who wants to make a claim on
that retainage must properly give notice
and file [**5] "an affidavit claiming a
lien not later than the 30th
day after
the work is completed." Id. §53.103.
The period during which a claimant can
and must file a lien affidavit under
section 53.103 is therefore the same
period that an owner can and must hold
retainage under section 53.101 - thirty
days after the completion of work. It is
consequently in the best interest of all
construction participants to know when
the thirty-day period terminates - the
owner so that it can release the
remaining funds, the original contractor
so that it can budget for its final
payment, and the claimant so that it can
file the lien affidavit before that date.”
Page v. Structural Wood Components, supra, at
722
Owners may elect not to withhold retainage.
However they are liable for the amount they
should have retained, and the 30 day period to
file claims (within 30 days of final completion,
termination or abandonment under Texas
Property Code, Subchapter E) no longer applies.
This means that if the owner does not withhold
retainage, claimants have until the Subchapter C
deadlines to file lien affidavits. The Subchapter
C deadlines run from the claimants last month of
work/delivery for the job. “Residential” projects
have a different Subchapter C deadline than non-
residential projects. “Residential” jobs are
defined by the mechanic’s lien statute in
§53.001(8) as involving a single family, duplex,
triplex, quadraplex, or unit in a multi-unit
structure occupied or intended to be occupied by
at least one of the owners. The shorthand way to
remember the definition is to simply think,
“owner-occupied”. The Subchapter C lien filing
deadlines therefore are:
Residential claims: 15th of 3rd
month after
claimant’s last month of work/delivery to the
project., Texas Property Code §53.052 (b), and
§53.053 ( c); and
Non-Residential claims: 15th of 4th month
after claimant’s last month of work/delivery to
the project., Texas Property Code §53.052 (a),
and §53.053 ( c).
See Hadnot v. Wenco Distributors, 961 S.W.2d
232 (Tex.App.-Hous. (1 Dist.), 1997), rehearing
overruled (Jul 23, 1997).
“When the owner does not retain the
10% fund, the 30-day period for
claiming liens is inapplicable. General
Air Conditioning Co. v. Third Ward
Church of Christ, 426 S.W.2d 541, 544
(Tex.1968). The owner becomes
personally liable to the claimant if the
owner does not retain the 10% fund.
James Mechanical Contractors v. Tate,
647 S.W.2d 347, 350 (Tex.App.--
Corpus Christi 1982, no writ);
Donahue v. Rattikin Title Co., 534
S.W.2d 156, 159 (Tex.Civ.App.--Fort
Worth 1976, no writ); W & W Floor
Covering Co. v. Project Acceptance
Co., 412 S.W.2d 379, 382
(Tex.Civ.App.--Austin 1967, no writ).”
Hadnot, supra @ 235
http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=102+S.W.3d+720%2520at%2520722http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=102+S.W.3d+720%2520at%2520722http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1968133987&ReferencePosition=544http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1968133987&ReferencePosition=544http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1968133987&ReferencePosition=544http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1968133987&ReferencePosition=544http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1968133987&ReferencePosition=544http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1968133987&ReferencePosition=544http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1983114893&ReferencePosition=350http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1983114893&ReferencePosition=350http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1983114893&ReferencePosition=350http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1976117041&ReferencePosition=159http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1976117041&ReferencePosition=159http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1976117041&ReferencePosition=159http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1976117041&ReferencePosition=159http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1967131812&ReferencePosition=382http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1967131812&ReferencePosition=382http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1967131812&ReferencePosition=382http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1967131812&ReferencePosition=382http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=713&FindType=Y&ReferencePositionType=S&SerialNum=1967131812&ReferencePosition=382
2011 Texas Land Title Institute – Page 7 of 19 Construction Retainage and Lien Waivers
1.2 Owner Liability on Mechanic’s Lien
Claims.
Therefore the owner’s liability to
subcontractor/supplier lien claimants is the sum
of two figures described in §53.084. First, an
owner is liable for the 10% owner’s statutory
retainage. Second, an owner is further obligated
for “trapping” remaining contract funds once
he/she receives a mechanic’s lien notice letter
(§53.056 (b) and (d)) containing language
requiring the owner to withhold payment from
the contractor for the claim amount. The owner
who ignores a “trap” lien notice letter and fails
to withhold payment from the contractor and
releases funds in spite of receipt of notice in
compliance with the “fund trapping” section of
the statute is personally liable and his/her
property subject to a lien for such amounts paid.
This is in addition to the owners’ liability for the
10% retainage.
Review of Aiken v. State of Texas, 36 S.W.3d
131 (Tex. App.—Austin, 2000, no writ.),
provides an instructive illustration of how owner
liability works out when the lien statutes are
applied. Aiken involved criminal prosecution of
a Contractor in connection with a residential
construction project. The Contractor was
accused of taking a bank loan advance for the
construction and misapplying the funds by not
using them to pay project bills due on the job.
This is ordinarily a violation of Chapter 162,
Texas Property Code (the Texas Construction
Trust Funds Act). However, in this case, the
prosecution chose to pursue a conviction
pursuant to Texas Penal Code Section 32.45,
misapplication of fiduciary property. One of the
elements of this offense is to prove that the
Defendant dealt with property “in a manner that
involves substantial risk of loss to the owners”.
In this case because the owners had withheld,
through their interim lender, ten (10%) percent
retainage, the Court determined that the owners
suffered no substantial risk of loss. Their
liability for mechanic’s liens was limited to the
ten percent (10%) retainage because no funds
had been trapped by lien claimants, as described
above. The case provides a good example of
how owner liability is calculated.
To summarize, Owners have to withhold ten
percent (10%) retainage from the general or
original builder/contractor for thirty days
following final completion of the project, or its
termination or abandonment. If Owners fail to
retain the 10%, they are liable for it anyway, and
claimants in that case are not required to perfect
claims within the 30 day retainage withholding
period. The owners in such case will not be able
to “cut off” lien claims.
1.3 Contract Retainage – the Lien Notice
Problem
The owner’s statutory retainage described above
is not the same as, separate and distinct from
retainage agreed to by contract. General
Contractors normally insist on withholding
retainage from subcontractors by the terms of
their subcontracts. The percentage of retainage
withheld in the subcontracts is normally ten
percent, which is the same percentage as the
owner statutory retainage withheld from the
contractor per Texas Property Code §53.101.
Contract retainage is not required by statute. It’s
a creature of the subcontract agreement.
Contractors withhold retainage from their Subs
for many reasons, but the construction “urban
legend” that subcontract retainage is “required
by law” is false. Only owners are required by
statute to withhold retainage on private works
that are not bonded.
A special problem exists for all “derivative”
claimants (subcontractors) who have claims for
unpaid contractual retainage withheld pursuant
to their subcontracts. The problem is with the
lien notice deadlines required under Texas
Property Code. The required notices are
required at different times based on whether the
project is residential or non-residential. (See
definition in section 1.1, above). Residential
project notices are set in Subchapter K,
§53.252, which requires Owner and Contractor
notice of lien claims by the 15th of the second
month following each month the labor or
material comprising the claim is furnished to the
2011 Texas Land Title Institute – Page 8 of 19 Construction Retainage and Lien Waivers
job site. Non-residential notices, set by §53.056
(b), as follows: Contractor notice of lien claims
by the 15th of the second month following each
month the labor or material comprising the claim
is furnished to the job site, and owner is required
by the 15th of the third month following each
month labor or material is furnished.
The problem is that the notices to owners and
contractors are required based on each month of
unpaid work, not the last month of work. If the
claimant works on a job for more than a couple
of months, and contractual retainage is withheld
by the subcontract terms, then each month only
90% of the amount earned is being billed and
paid. The retainage portion accrues each month,
but is not billed. In spite of not billing retainage,
the lien notice deadlines run on unabated. They
are not based on billing dates or when
applications for payment are submitted. They
are tied to delivery or furnishing of work or
material to the jobsite, and are unrelated to the
dates of invoicing, or subcontract retainage or
payment provisions. Claimants sometimes are
paid in accordance with their subcontract terms
for their 90% progress billing amounts all along
during the job, only to find that the retainage bill
is not paid timely. Under the prior statutory
provisions, if Claimants waited until their
completion date to begin to worry about sending
their owner notice for a lien claim for retainage,
it is most likely too late.
Under the old statute, to solve this issue, the
Legislature added an advance retainage notice
provision. Rather than send notices every month
during the job for the retainage portion,
Claimants have had the option under this
provision, Texas Property Code §53.057, to
send a one time, up front notice warning the
owner and contractor that the claimant has
signed a subcontract providing for contractual
retainage. Remember now, this is not owner
statutory retainage. This is retainage by
subcontract contractual agreement. Texas
Property Code §53.057 says claimants have the
option to perfect retainage by a one time, up
front certified mail notice, at the time the
claimant commences work2. The §53.057
notice is sent in lieu of sending the repeated
monthly notices covering each month’s
retainage portion. If this upfront §53.057 notice
is sent, then further notice about retainage is not
required, and the claimant perfects his/her claim
by filing a lien affidavit within thirty days of
final completion, termination or abandonment.
§53.052.
Subcontractor and other “derivative” claimants
(downstream of the original contractor) have
been oftentimes reluctant to send this early
§53.057 retainage notice. The old-law notice
content also required divulging the amount of
the retainage, and percentage of retainage,
revealing the claimant’s pricing.
This was the impetus for new contractual
retainage notice procedures.
1.4 Owner’s Statutory Retainage –
Problem with Filing Deadline for Lien
Affidavit.
The previous section identified the problem with
the notice deadlines for a claimant’s contractual
retainage. This section visits the problems with
filing deadlines for lien affidavits for claimants
seeking a share of the owner’s 10% statutory
retainage fund.
The problems are set up in Page v. Structural
Wood Components, Inc., 102 S.W.3d 720, 46
Tex. Sup. Ct. J. 561 (Tex. 2003) and Page v.
Marton Roofing, Inc., 102 S.W.3d 733, 46 Tex.
Sup. Ct. J. 571 (Tex. 2003). In the Page cases
the Supreme Court held that the thirty day
period owners must withhold 10% statutory
retainage occurred upon final completion,
abandonment, or termination of the first
contractor, and not upon final completion of the
owner’s project by the replacement contractor.
To share in the owner’s statutory retainage fund,
claimants had to know the date of final
completion, termination or abandonment of the
2 Due by the 15
th of the 2
nd month following
Claimant’s first month of delivery/work on
the job §53.057 (b)
2011 Texas Land Title Institute – Page 9 of 19 Construction Retainage and Lien Waivers
project by their original contractor in order to
track their lien affidavit filing deadline. Paying
attention only to project final completion is too
late if the first contractor is terminated, or
abandons the job.
The Legislature, after the two Page cases
provided some help by adding section §53.103,
and added §53.107 requiring owner notices to
claimants of the date of a termination or date of
abandonment, but only for non residential
projects. For original contracts executed after
September 1, 2005, involving non residential
projects only, a notice of termination or
abandonment is required of owners §53.107.
The non-residential job notice must be sent not
later than the 10th day after the date an original
contract is terminated or the original contractor
abandons the project. The owner is required to
send this notice only to claimants who have first
(a) sent owner lien notices, or (b) have sent a
request to the owner for notice of termination or
abandonment. Tex. Property Code §§53.103,
53.107. Claimants not requesting the notice, or
who have not sent lien notices, do not get the
date of termination or abandonment.
If the non-residential claimant fails to file a lien
affidavit within the thirty days of the deadlines
in §53.103 (completion, termination or
abandonment), but the owner has also failed to
give the required notice of termination or
abandonment (§ 53.107) to the claimant entitled
to such notice, then that particular claimant will
nevertheless have a lien for his share of retained
funds if he has otherwise complied with the
statutory prerequisites for lien perfection. If the
owner fails to send the notice of termination or
abandonment to a claimant then that particular
claimant is not required to file the lien affidavit
under §53.103, within thirty days of termination
or abandonment, in order to have a lien under
§§53.101 – 106. The claimant can merely
comply with the Subchapter C filing deadline.
(See section 1.1).
1.5 New Retainage Legislation Revising
§53.057 and related Provisions
The Legislature this session drafted wholesale
changes to the above described provisions
dealing with contract retainage claims, and the
affidavit deadlines for sharing owner statutory
retainage. These changes were intended to
alleviate difficulty in the notice of contractual
retainage claims, and in addition, attempt to
clarify the deadline(s) for claimants to file their
affidavits claiming liens, in order to share in the
owner’s statutory retainage fund.
1.5.1 New Optional Notice of Contractual
Retainage Deadlines
The deadline for the up front, optional notice of
contract retainage (§53.057) was relaxed
considerably in the new statute, from the 15th of
the second month following the subcontractor
commencing its work, until the earlier of:
→ 30th day after claimant’s agreement (i.e. the
subcontract work) is completed, terminated or
abandoned ; OR
→30th day after date the original
owner/contractor agreement is terminated or
abandoned.
The notice is sent to the owner. It is also sent to
the original contractor if the claimant is not
already in privity with the contractor. The
contents of this retainage have also been relaxed
so that under the new statute, the notice need
only contain limited info:
→the “existence of a requirement for retainage”
→name and address of claimant
→name/address of the subcontractor if the
claimant’s agreement is with a subcontractor
rather than the original contractor
This does not require disclosure of the “sum to
be retained”, due date for the retainage, or nature
of the agreement, as under the existing law.
So notice of contractual retainage withheld in a
subcontract is moved to the end of the Sub’s job.
This is of considerable benefit to the
subcontractor claimant. Subs can now wait to
send retainage notice to the end of their work,
when they are considerably more likely to know
whether they have a problem, or potential
2011 Texas Land Title Institute – Page 10 of 19 Construction Retainage and Lien Waivers
problem with collecting their contractual
retainage.
1.5.2 Lien Affidavit Filing Deadline
Changes.
This is the complicated part of the new bill,
especially for owners. The section provides that
the Claimant has a lien on the owner’s statutory
10% retainage fund, if the notices are sent as
described above, or according to the old monthly
notice requirements of §53.056 (non-residential)
and §53.252 (residential), and the lien affidavit
is filed:
→ in accordance with “Subchapter E”; OR
→ by the earliest of 4 different new deadlines!!
Subchapter E is the old law scheme for filing
lien affidavits in time to share owner statutory
retainage – they are due by 30th day following
final completion, termination or abandonment of
the original contract. Tex. Prop. Code
§§53.103(2), as described above in this paper
§1.4.
The four alternate new deadlines provided are
the earliest of:
1. The “normal” lien filing date
provided by Tex. Prop. Code §53.052:
Residential claims: 15th of 3rd
month after
claimant’s last month of work/delivery to the
project., Texas Property Code §53.052 (b), and
§53.053 ( c); and
Non-Residential claims: 15th of 4th month
after claimant’s last month of work/delivery to
the project., Texas Property Code §53.052 (a),
and §53.053 ( c); OR
2. 40th day after the date stated in
the Affidavit of Completion for the original
contract, if the Owner sent the Claimant notice
of the Affidavit. This Affidavit of Completion is
provided for in §53.106, which allows, but does
not require, the owner to file such an Affidavit
stating the date of final completion for the
project. The Affidavit is “prima facie” evidence
of the actual final completion date for the project
if it is sent to claimants as required; OR
3. For non-residential projects
only, 40th day after the date of termination or
abandonment of the original contract if notice of
termination or abandonment was sent by the
owner to claimants as required by §53.107.
Notice of termination or abandonment is not
applicable to residential projects. Tex. Prop.
Code §53.107 (e); OR
4. 30th day after the day the owner
sends written notice to the claimant demanding
that the Claimant file its mechanic’s lien
affidavit. The demand must contain a legal
description of the project property, owner’s
name and address, and it must say that the lien
affidavit must be filed within 30 days of when
the notice was sent.
Interestingly, this fourth section (new
§53.057 (g)) says that the notice “is effective
only for the amount of contractual retainage
earned by the claimant as of the day this owner
notice was sent.” The 4th deadline and §53.057
(g) indicate that claimants who fail to file within
30 days of the demand may only have their
earned contract amount of retainage impacted.
1.5.3 Application.
Assume that the Claimant sends its lien notices
on time, and complies with the new contractual
retainage notice (within 30 days for claimant’s
completion). The Owner withheld the statutory
10% retainage, but no funds were “trapped”
because the Owner had paid out the adjusted
contract price to the Contractor prior to receipt
by the Owner of the Claimant’s notice letters. If
the Owner sends the “demand” to file the lien
under this 4th deadline, then in order to share a
piece of owner statutory retainage with other
perfecting claimants, the claimant must file his
lien affidavit by the earliest of the 4 new
deadlines, per §53.057, or alternatively still can
file its affidavit within thirty days of project
completion / termination / abandonment under
subchapter E, §53.103.
2011 Texas Land Title Institute – Page 11 of 19 Construction Retainage and Lien Waivers
Analysis of the various kinds of
claimants, and the required withholding period
for owner statutory retainage is now a matter of
applying the alternative deadlines prescribed by
the new law amendments, depending on what
owners do in the way of sending the three
alternate notices: affidavit of final completion,
or demand to file lien affidavit. If owners want
to smoke out potential lien claims, in order to
shorten the time they must withhold statutory
retainage, then they can consider the alternate
new deadlines:
→Owners can file an affidavit of
completion per §53.106 and send copies to all
potential claimants. This will trigger the
§53.057 (f) (1) (b) (ii) deadline for lien affidavits
which is the 40th day from the date of
completion stated in the affidavit. This will
effect claimants who are sent a copy of the
completion affidavit.
→The owners can send the new 30 day demand
for lien filing to all the potential claimants. This
triggers the §53.057 (f) (1) (b) (iv) deadline,
which is only effective as to the claimant’s
contract retainage portion of its claim.
Problem is, if the owner has not heard from a
supplier or subcontractor at all (no notices of
retainage, or other monthly lien notices have
been received), this may be because the claimant
has no contractual retainage being withheld
from it. For these folks, the owner must account
for the first alternative deadline, §53.057 (f) (1)
(b) (i), which is the old §53.052 date = 15th of
the 3rd
month (for residential) or 15th of the 4
th
month (non residential construction) following
the last month of the claimant’s delivery or work
on the job.
Owners are helped somewhat here by the lien
notice letters required by §53.056 (non
residential) and §53.252 (residential) deadlines
for owner lien notice from potential claimants:
→ 15th of the 3
rd month after each month
of delivery or work (§53.056)
→15th of the 2
nd month after each month
of delivery or work (§53.252)
1.5.4 Owner Failure to Withhold
Retainage – §53.052 Deadlines apply
If the Owner fails to withhold statutory
retainage, for the required period of time, then
the Claimants are entitled to perfect their claims
by notice and affidavit either by the deadlines
for progress billings (15th of 3
rd month
(residential) and 15th of the 4
th month (non-
residential) following last month on the job) or
new §53.057, either way. So the Hadnot ruling
was codified. No 30 or 40 day deadlines are
applicable if the Owners fail to properly
withhold the statutory retainage.
1.5.5 “Final Completion”
TDIndustries, Inc. v. NCNB Texas National
Bank, 837 S.W.2d 270 (Tex. App. - Eastland
1992, no writ) contains a discussion of the actual
final completion date. TDIndustries held that
actual completion did not occur until the last
pocket door was installed in the last apartment
on the apartment project construction. An
architect’s certificate that the project had been
completed was not the actual completion date.
Likewise, substantial completion, or beneficial
occupancy, is not a good definition. Actual
completion under TDIndustries does not occur
until all items required by the contract, plus
contemplated change orders and extras, have
actually been installed once. On the other hand,
a contractor going back out to the site to repair
items already installed, or perform other
warranty work, does not thereby extend the
actual completion date. A claimant may refute
an affidavit of completion by evidence of later
completion, in actuality, such as the installation
of the pocket door in the TDIndustries case.
The recent case of a Texas Wood Mill Cabinets,
Inc. v. Butter, 117 S.W.3d 98 (Tex. App.-Tyler
Aug 06, 2003) - addresses “final completion”.
The issue in Texas Wood involved whether final
completion of the cabinetry worked had
occurred. The Cabinetry installation folks
returned to the property because there were a
couple of drawers that were hitting on the cook
top and the drawers had to be modified to fit
2011 Texas Land Title Institute – Page 12 of 19 Construction Retainage and Lien Waivers
beneath it. The Court looked at the contract
scope or work language in order to determine
final completion. Because the contract required
that the cabinets be constructed, installed and
"functional", the court held that this drawer
adjustment work was the final completion even
though it otherwise was "punch list" work only.
1.5.6 Request for Information to Owner –
Date of original contract execution – Effective
Date.
The legislative amendment to “requests for
information” (§ 53.159) adds a new section
requiring Owners, upon written Claimant
request, to furnish a statement including the
legal description, whether the job was bonded by
the contractor, identification of prior recorded
liens on the property, and the new info: the date
the original contract was signed. This is to be
provided by owners within ten days. The
contract signing date is key to determining
application of the new amendments, which apply
only to original contracts (between the owner
and contractor) signed after the effective date
September 1, 2011.
The interesting part of this is that Owner failure
to supply the original contract execution date,
renders the statutory retainage 30 and 40 day
deadlines inapplicable, allowing claimants to file
affidavits by the old §53.052, deadline, 15th of
the 3rd
month following their last month of
work/delivery (residential) and 15th of the 4
th
month (non-residential).
1.5.7 Grounds for Removal of Lien, §53.160
– Retainage Deadlines Expired
The list of grounds for removing mechanic’s
liens was amended to provide that if the
deadlines for filing lien affidavits, to share in the
owner’s retainage have all expired, and the
Owner has already paid the Contractor, without
first receiving the trap funds or other lien notice,
then the lien can be removed. §53.160(b)(4).
2. “Shall” vs “May” Award Attorneys
Fees
Mechanics lien claims perfected in accordance
with the Texas Property Code require judicial
foreclosure. Mechanics liens are "discharged of
record " if suit is not timely filed. Tex. Prop.
Code §53.157. Suits for foreclosure of statutory
mechanics liens on residential projects must be
filed within one year of the last day a valid lien
claim could be filed pursuant to 53.052, or if
earlier, within one year from completion,
termination or abandonment of the original
contract under which the mechanics lien is
asserted. On non-residential projects, the
limitations period is two years from the same
dates.
Consequently claimants should be aware that
unless they timely file suit their claims are
discharged. Naturally the first question is, "How
am I going to recover the expense of suing just
to get my money?” The new legislation
provides that in any action to foreclose a lien (or
enforce a bond claim) on a job covered by Ch.
53, or to declare a lien invalid, “in whole or
part”, the Court “shall” award attorneys fees
which are "equitable and just"
So the punch line is that claimants and
defendants (owner/contractor's) both need to
evaluate their claims and positions carefully, and
sufficiently in advance of the relatively short
fused statute of limitations applicable. Too
many times claimants hold out hope that
someone is going to voluntarily pay them off
without incurring litigation costs, and wind up
procrastinating themselves up against their one-
year or two-year limitation period. To avoid
“discharge” they must file the foreclosure action
simply to preserve some time to investigate
whether or not they have a valid claim. Under
the new statute a hasty, incorrect choice to sue
will result in fees paid by the claimant to the
owner or contractor defending against the lien
claim. Owners on the other hand now know they
get a mandatory award of attorney’s fees if they
remove an invalid claim.
In an important “carve out”, the Court still is
allowed to use discretion before awarding fees
against the residential project owner. See new
Texas Property Code §53.156.
2011 Texas Land Title Institute – Page 13 of 19 Construction Retainage and Lien Waivers
So if the lien is partially good and partially bad,
does the owner get all the fees, or what do you
do? Gill Savings Association v. International
Supply Co., Inc., 759 S.W.2d 697 (Tex. App.--
Dallas 1988, writ denied) addressed the question
about whether a lien overstating the amount due
as of the time of trial was invalid. In this case,
the claimant had not applied a $15,000 payment
received about one month prior to the affidavit
filing date. Also a credit due of $3,000 had not
been applied. The affidavit amount of
$75,986.03 was reduced at trial, after credits and
corrections to $57,365.32.
The Court held that the affidavit was in
substantial compliance with the statute:
“We hold that under the facts of this
case, International's lien affidavit was in
substantial compliance with the property
code statute when it filed its lien for an
amount greater than the actual amount
reconciled by the time of trial two years
later. See First National Bank in
Graham v. Sledge, 653 S.W.2d 283, 285
(Tex.1983) (a subcontractor's lien rights
are totally dependent on compliance
with the statutes authorizing the lien;
however, substantial compliance is
sufficient to perfect a lien); see also and
compare Mathews Construction
Company, Inc. v. Jasper Housing
Construction, 528 S.W.2d 323, 329
(Tex.Civ.App.--Beaumont 1975, writ
ref'd n.r.e.) (holding that a "general
statement" of the total price in lump sum
is in substantial compliance with
mechanic's and materialman's lien
statutes).”
Remember, also that “substantial compliance”
with the mechanics lien statutes has always been
the test for validity.
3. Release of Mechanic’s Liens. New
Statutory Forms. No enforceable release in
advance of collection.
One of the most contentious topics in all of
construction subcontracting over the last several
years involves releases of liens. Contractors and
owners sometimes require unconditional lien
releases before paying a draw or final payment.
Subcontractors and suppliers often require
collected funds before signing unconditional
releases. Some builder/contractors require
advance waivers of liens as a part of their
standard subcontract agreements.
The 2011 Legislature took on the release of lien
issue and has regulated, verbatim, the language
of lien waivers, by adding Texas Property Code,
Subchapter L, §§53.281--.286. This new section
provides that releases are unenforceable unless
they comply with the statute. The heart of the
section is §§53.282 and .283 providing that
releases are unenforceable unless they (1)
comply with the forms in the statute, and (2) the
claimant must have actually received payment in
good and sufficient funds for an unconditional
release of lien to be enforceable. No one can
require a release unless the Claimant has
collected funds for payment for its work.
The four new statutory form releases are for
conditional and unconditional partial payment,
and for conditional and unconditional final
payment. The conditional releases are
ineffective until the check tendered is “properly
endorsed” and “paid by the bank on which it is
drawn”. The payment request or statement must
be attached to the release, and the statute says
these releases cover the work in the attached pay
request, except for retainage, pending changes,
or “other items furnished”.
The claimant must represent in the release that it
has paid, or will pay its bills to the extent
covered by the attached pay request.
Unconditional releases contain a notice at the
top of the form warning that unconditional
releases are prohibited if the Claimant has not
collected payment.
The new release forms take effect for “a
contract” executed on or after January 1, 2012.
The act contains a “substantial compliance”
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2011 Texas Land Title Institute – Page 14 of 19 Construction Retainage and Lien Waivers
provision effective through August 31, 2012.
This provision gives contractors, subcontractors
and owners until August 31, 2012 to find and
start using the statutory forms verbatim. Until
then release forms provided in “attempted
compliance” are effective. However any attempt
to jigger with (expand or restrict the rights as
stated in the statute) the requirement that the
releases are only effective upon payment
collected, are banned. The statute terms are
read into the release forms, and altering
language is “disregarded”. Any contractual
provision purporting to waive the new statutory
requirements are void. Copies of the prescribed
forms are attached as Exhibit A to this paper.
Once a lien affidavit is filed or bond claim
submitted the prescribed forms are not
applicable.
The tract home, or spec home builders received
a special exemption from the provisions of the
statute. If the project involves construction of
“single-family houses, townhouses, duplexes, or
land development for such construction”, the
new statute specifically sanctions advance
contractual waiver of mechanic’s lien rights,
provided the waiver is contained in the written
agreement or subcontract and such agreement is
made before the work under that agreement
commences. However suppliers of material who
do not furnish any labor are not subject to this
special home builder advance waiver.
If a lien is filed anyway by a subcontractor with
a subcontract with one of these advance waivers
in it, the filing is declared not to be a violation of
the fraudulent lien statute, Ch. 12, Civil Practice
and Remedies Code, as long as the lien is
released within 14 days in response to an owner
demand containing an explanation of the reason
for non-payment on the job, and a copy of the
contract wavier. See new §§53.282 (b)
4. Ch. 12 Texas Civil Practice and
Remedies Code. The Fraudulent Lien Act.
The Texas Civil Practice and Remedies Code
Fraudulent Lien provisions were passed to deal
with fictitious or fraudulent documents creating
false liens against real property. The Act
provides that if the document is fraudulent, then
civil penalties, actual damages, attorney’s fees
and exemplary damages are recoverable. After
passage, the Act was employed against
mechanic’s lien claims. The cases of Centurion
Planning Corp., Inc. v. Seabrook Venture II, 2004 WL 2823125 (Tex.App.--Hous. (1 Dist.)
Dec 09, 2004) , and Taylor Elec. Services, Inc.
v. Armstrong Elec. Supply Co., 167 S.W.3d 522
(Tex.App.-Fort Worth, 2005) have arguably
expanded these civil penalty provisions of the
statute cited beyond the original intent.
Centurion holds that the civil penalties section
of the statute can be enforced even if the
document, and the conduct of the lien claimant
in question, does not rise to the level of finding
that the lien violates the fraud test in 51.091 (c)
Texas Gov’t. Code. Section 51.901(c) of the
Government Code provides that,
"[f]or purposes of this section, a
document or instrument "is presumed to
be fraudulent" if:
[T]he document or instrument purports
to create a lien or assert a claim against
real or personal property or an interest in
real or personal property and:
(A) is not a document or instrument
provided for by the constitution or laws
of this state or of the United States;
(B) is not created by implied or express
consent or agreement of the obligor,
debtor, or the owner of the real or
personal property or an interest in the
real or personal property, if required
under the laws of this state, or by
implied or express consent or agreement
of an agent, fiduciary, or other
representative of that person; or
(C) is not an equitable, constructive, or
other lien imposed by a court with the
jurisdiction created or established under
the construction or laws of this state or
of the United States.
Tex. Gov't Code Ann. § 51.901(c)(2)
(Vernon 1998).
The Centurion Court held:
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2011 Texas Land Title Institute – Page 15 of 19 Construction Retainage and Lien Waivers
“However, section 51.091(c) does not
define the term "fraudulent"; it
establishes a "presumption" that a
document or instrument is fraudulent
under certain circumstances. Moreover,
section 12.006, entitled "Plaintiff's
Costs," simply provides the
circumstances under which a plaintiff
"shall" recover the "costs of bringing the
action" in addition to the plaintiff's
damages awarded under section 12.002.
If the Legislature had wanted to define
the term "fraudulent" as used for all
purposes in Chapter 12, it could have
done so. Instead, the Legislature
referenced the term fraudulent "as
described" in Government Code section
51.901(c) in regard only to the recovery
of plaintiff's costs in section 12.006. We
cannot read section 12.006's reference to
the term fraudulent "as described by
Section 51.901(c), Government Code"
as providing a definition of the term for
all of Chapter 12.”
The error of the lienor’s ways in Centurion was
that the claim was made for engineering fees.
The claimant did not have a written contract
with the owner for engineering services,
required as a prerequisite to filing a valid
engineer’s lien, Tex. Prop. Code §53.021.
Centurion found the requisite intent for filing a
fraudulent lien because the claimant admitted
that he knew he had no written contract. The
fact that he didn’t know a written contract was
required for an engineer’s lien was not important
to the Court. Knowledge of the statutory
requisites was imputed.
Ch. 12 was further expanded in Taylor Electric.
In Taylor the claimant filed a lien for an amount
which did not account for a payment made prior
to filing. Also the claimant had substantially
delayed delivery of materials on the job, which
was found to be fraudulent conduct by the jury.
The Court concluded that this evidence of fraud
was sufficient to make a finding that rendered
the mechanic’s lien fraudulent as well, violating
Ch. 12, and supporting award of the $10,000
civil penalty. The Plaintiff in this case was the
original contractor on the job, not the owner.
The Court said the contractor had standing to
bring a case under the fraudulent lien statute
because of the contractor’s indemnity obligation
to protect the owner from liens.
Walker & Assocs. Surveying v. Roberts, 306
S.W.3d 839 (Tex. App. Texarkana 2010),
clarifies the proof required for a violation of Ch.
12, as follows:
Thus, to establish a fraudulent lien in
this case, Roberts was required to show
that Walker or WAS (1) made,
presented, or used a document with
knowledge that it was a fraudulent lien;
(2) intended the document be given
legal effect; and (3) intended to cause
Roberts financial injury. See TEX. CIV.
PRAC. & REM. CODE ANN. §
12.002(a). n8
Walker & Assocs. Surveying v. Roberts,
306 S.W.3d 839, 848 (Tex. App.
Texarkana 2010)
…….Next, Roberts cites Taylor
Electrical Services for the proposition
that Walker's letter informing Roberts of
the lien stating, "Upon receipt of
payment in full this lien will be
removed" was evidence of intent to
cause financial harm. 167 S.W.3d 522.
There are two key differences
distinguishing this case from Taylor.
First, Taylor involved a jury finding. Id.
at 525. Second, the evidence of intent in
Taylor was a letter threatening to file a
lien and stating, "We do not wish you
any harm in your business," evidencing
knowledge that the filing of a lien could
potentially cause financial harm. Id. at
531. We decline to find that the letter
sent by [**20] Walker in this case
established intent as required by the
fraudulent lien statute. At most, it
creates a genuine issue of material fact
for a jury's resolution.
Consequently the Taylor and Walker cases teach
http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000170&DocName=TXCPS12.006&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000170&DocName=TXCPS12.002&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000301&DocName=TXGTS51.901&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000301&DocName=TXGTS51.901&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000170&DocName=TXCPS12.006&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000170&DocName=TXCPS12.006&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000301&DocName=TXGTS51.901&FindType=Lhttp://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=306+S.W.3d+839%2520at%2520848http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=306+S.W.3d+839%2520at%2520848http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=306+S.W.3d+839%2520at%2520848http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=306+S.W.3d+839%2520at%2520848http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=306+S.W.3d+839%2520at%2520848https://www.lexis.com/research/buttonTFLink?_m=8e5b19ba4f4886aeca513d157500d6af&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b306%20S.W.3d%20839%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=101&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20S.W.3d%20522%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAl&_md5=74fd85562eabb578b9882237edda039chttps://www.lexis.com/research/buttonTFLink?_m=8e5b19ba4f4886aeca513d157500d6af&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b306%20S.W.3d%20839%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=102&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20S.W.3d%20522%2c%20525%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAl&_md5=7dccc0566c13d1e528d5812bc5c05406https://www.lexis.com/research/buttonTFLink?_m=8e5b19ba4f4886aeca513d157500d6af&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b306%20S.W.3d%20839%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=102&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20S.W.3d%20522%2c%20525%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAl&_md5=7dccc0566c13d1e528d5812bc5c05406https://www.lexis.com/research/buttonTFLink?_m=8e5b19ba4f4886aeca513d157500d6af&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b306%20S.W.3d%20839%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=103&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20S.W.3d%20522%2c%20531%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAl&_md5=7e12bf7a92be06bdf81bce74ff0beb73https://www.lexis.com/research/buttonTFLink?_m=8e5b19ba4f4886aeca513d157500d6af&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b306%20S.W.3d%20839%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=103&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20S.W.3d%20522%2c%20531%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAl&_md5=7e12bf7a92be06bdf81bce74ff0beb73
2011 Texas Land Title Institute – Page 16 of 19 Construction Retainage and Lien Waivers
that to trigger Ch. 12, there must be evidence the
Claimant intended financial harm.
Further complicating this area the Legislature
amended Ch. 12 in 2009 to specifically exempt
mechanic’s lien Claimants by adding §12.002
(c):
A person claiming a lien under Chapter
53, Property Code, is not liable under
this section for the making, presentation,
or use of a document or other record in
connection with the assertion of the
claim unless the person acts with intent
to defraud.
Given the fraudulent intent requirements as
identified in Taylor and Walker the mechanic’s
lien exemption does not absolve Claimants of
exposure for Ch. 12 violations.
In fact, under the new release of lien bill, Texas
Property Code §53.282 (discussed above, §3), in
cases where an advance release of lien is
included in a residential contract, (see above §3,
page 16) it is an express violation of §12.002 if
the lien claimant fails to release a lien within 14
days of the day the owner sent the request for
release and other items required.
5. Construction Trust Funds Liability –
Residential Construction
5.1 Basics and Bank Exemption.
Texas Property Code §162.001 provides an
additional, and separate remedy over and above
the involuntary mechanic’s lien rights. Under
this statute, construction payments or loan
receipts to pay for construction (including such
funds in the hands of an owner, general
contractor, a sub, or any officer or director or
agent of the same) are "trust funds". Recipients
(i.e., the owner, contractor, subcontractor) are
“trustees” for the construction funds which come
into their possession on the job. Owners are
trustees if they receive loan draws and such loan
is secured by a lien on the project property.3
3 Texas Property Code §162.001(b).
Anybody who furnishes labor or material to
improve real property in Texas, is a beneficiary
of this "trust fund." The purpose of this "fund"
is to pay for the work or materials.
It is a felony to retain, use, or divert trust funds
in excess of $500.00, unless the trustee has paid
all current or past due obligations respecting the
trust funds. The case law provides a private
civil action for violation of the Trust Fund
Statute.4 There are some affirmative defenses to
suit or prosecution under this law. The holder of
funds is allowed to use them to pay actual
expenses directly related to the construction
project. He is also allowed to retain them upon
the basis of a "reasonable belief" that the party
claiming is not entitled to be paid the money, or
because the funds are retained because a lien
claim has been filed.
Again, keep in mind that the beneficiary under
this theory is not required to establish any kind
of valid mechanic’s lien. This is a wholly
separate and additional right of the claimant.
More special interest legislation occurred with
passage of the Trust Funds Act, because Banks
are totally exempt from its application. In re
Waterpoint International, 330 F.3rd
339 (5th Cir.
(Tex. 2003). In this case, the bankruptcy court
decision was affirmed by the 5th Circuit
regarding a fight between the Subcontractor and
Comerica Bank as to the debtor-contractor’s
accounts receivables. Waterpoint, Debtor,
contracted with Exxon to improve a certain
parcel of land. The Subcontractor to Waterpoint
was not paid for its work, but also never
perfected a mechanic’s lien. Contractor filed
bankruptcy. Comerica Bank asserted it had a
perfected security interest in the Contractor’s
receivables, including the money owed by
Exxon. The Subcontractor claimed a priority to
these receivables under the Texas Construction
Trust Fund Statute as outlined above. Citing
4 Lively v. Carpet Services, Inc., 904 S.W.2d 868
(Tex.App. -- Houston [1st Dist.] 1995, writ denied)
and Tacon Mechanical Contractors, Inc. v. Grant
Sheet Metal, Inc., 889 S.W.2d 666 (Tex.App. –
Houston [14th Dist.] 1994, writ denied).
2011 Texas Land Title Institute – Page 17 of 19 Construction Retainage and Lien Waivers
Texas Property Code 162.004 (exempting Banks
from the Trust Fund Statute) and the Texas
Supreme Court in Republicbank Dallas, N.A. v.
Interkal, Inc., 691 S.W.2d 605, 607-08 (Tex.
1985), the Court held that banks are not subject
to the Construction Trust Fund Statue. The
court then considered the subcontractor’s next
argument, that the legislature, after the Interkal
decision, had passed Texas Property Code
Section 53.151, providing that a creditor cannot
enforce a security interest to the prejudice of a
subcontractor. The court held that Interkal is
still the law in spite of 53.151. The Court held
further that if the subcontractor had perfected its
mechanic’s lien against the project, then with a
perfected mechanic’s lien it would have been
able to keep the bank from intercepting the
construction payment from the owner to the
contractor. Without a perfected mechanic’s lien
however, the Court held that the subcontractor
was without a remedy. Under such
circumstances the bank could take the
construction funds with impunity by exemption
from the trust fund statute.
“The courts interpreting article 5466, the
predecessor to §53.151, demonstrate the
presumption (at least under article 5466)
that a derivative claimant must comply
with the lien perfection procedures in
order to assert rights to funds held by
the owner. See, e.g., Youngstown Sheet
& Tube Co. v. Lucey Prod. Co., 403
F.2d 135, 142 (5th Cir.1968) (discussing
(under the Hardeman Act) the need for
proof of a materialman's compliance
with the procedures for lien perfection
before liens can affix to an account
receivable of a debtor); Crutcher,
Rolfs, Cummings, Inc. v. Big Three
Welding Equip. Co., 224 S.W.2d 884
(Tex.Civ.App.-Galveston 1949), rev'd
on other grounds, 149 Tex. 204, 229
S.W.2d 600 (1950) (discussing article
5466 as referring to only funds
subjected to mechanics' and
materialmen's liens); see also
Baumann v. Cibolo Lumber Co., 226
S.W.2d 210, 212 (Tex.Civ.App.-San
Antonio 1950, no writ) (same). These
cases further persuade us to reject
Exchanger's argument that §53.151 was
meant to overrule Interkal as
inconsistent with the framework and
function of Chapters 53 and 162.” Supra
@ 348.
5.2 Accounting – Residential
Homesteads.
If the project is for construction of
improvements to a residential homestead
exceeding $5,000, the builder is required to
deposit the construction payments into a
"construction account". The bank statement
must identify the account as the "construction
account".
The builder must maintain an account record
showing the source and amount of trust funds
come including date of deposit, the date and
amount of each disbursement from the account
and the payee, and current balance. A separate
"account record" for each project must be
maintained which specifies direct costs and
indirect costs. All invoicing and other supporting
documents regarding construction costs for
which trust funds were disbursed, must be
retained. The deposit and payment documents
must reference the construction account number
or other link to the construction account. The
accounting information must be preserved for at
least one year from completion.
5.3 Trust Fund Act Litigation – Cause of
Action and Limitations Clarified.
The use of the Texas construction trust fund act
in civil litigation has dramatically expanded in
the last several years. Different appellate
decisions however have applied different causes
of action to enforcement of the act. See Lively v.
Carpet Services, Inc., 904 S.W.2d 868
(Tex.App. -- Houston [1st Dist.] 1995, writ
denied) and Tacon Mechanical Contractors,
Inc. v. Grant Sheet Metal, Inc., 889 S.W.2d 666
(Tex.App. -- Houston [14th Dist.] 1994, writ
denied).
2011 Texas Land Title Institute – Page 18 of 19 Construction Retainage and Lien Waivers
However in Polk Mech. Co., LLC v. Jones,
2009 Tex. App. LEXIS 4939, 9-11 (Tex. App.
San Antonio, 2009, pet. Review denied, 2009)
the cause of action, and applicable limitations
statute were addressed. The San Antonio Court
4th Court of Appeals clarified that the Trust Fund
act creates a fiduciary relationship between the
trustee and beneficiary, and the cause of action
therefore is a claim for breach of fiduciary duty.
The four year statute of limitations applies, and
is subject to the "discovery rule". Therefore the
cause of action must be “inherently
undiscoverable” but “objectively verifiable”.
Limitations does not commence until the
plaintiff knew, or should have known, of the
facts giving rise to the claim.
“Polk Mechanical's claim against
Jones arises under the Texas
Construction Trust Fund Act. Under
section 162.003 of the Act, a
subcontractor who labors or who
furnishes labor or material for the
construction or repair of an
improvement on real property is a
beneficiary of any trust funds paid by or
received in connection with the
improvement. TEX. PROP. CODE
ANN. § 162.003 (Vernon 2007). A
contractor, or an officer of a contractor
who receives trust funds or who has
control or direction over trust funds, is a
trustee of the trust funds. Id. § 162.002.
The Act, therefore, creates a
beneficiary/trustee relationship between
a subcontractor and a contractor who
receives payment from a project owner.
See id. In other words, the Act
"imposes fiduciary responsibilities on
contractors to ensure that Texas
subcontractors . . . are paid for work
completed." Kelly v. Gen. Interior
Constr., Inc., 262 S.W.3d 79, 84-85
(Tex. App.--Houston [14th Dist.] 2008,
pet. granted on other grounds); In re
Faulkner, 213 B.R. 660, 666 n. 10
(Bankr. W.D. Tex. 1997) (noting that a
trust relationship arises under Texas law
at the time payments are made to the
contractor for construction).
A variation to the inherently
undiscoverable element arises when
applying the discovery rule to a
fiduciary relationship. Computer
Assocs. Int'l, Inc. v. Altai, Inc., 918
S.W.2d 453, 456 (Tex. 1996); see also
S. V. v. R. V., 933 S.W.2d 1, 8 (Tex.
1996). In the fiduciary context, "a
person to whom a fiduciary duty is owed
is either unable to inquire into the
fiduciary's actions or unaware of the
need to do so." S V., 933 S.W.2d at 8.
When a trustee breaches its duty to a
beneficiary, the nature of the injury is
considered inherently undiscoverable
because of the fiduciary nature of the
relationship. See id. However, the
person owed a fiduciary relationship still
must exercise reasonable diligence
"when the fact of misconduct becomes
[so] apparent it can no longer be
ignored." n1 Id.; see also Computer
Assocs. Int'l, 918 S.W.2d at 456;
[*11] Slay v. Burnett Trust, 143 Tex.
621, 187 S.W.2d 377, 394 (Tex. 1945);
G. Prop. Mgmt., Ltd. v. Multivest Fin.
Servs. of Tex., Inc., 219 S.W.3d 37, 48-
49 (Tex. App.--San Antonio 2006, no
pet.).
Because Jones owed fiduciary
responsibilities to Polk Mechanical, the
inherently undiscoverable requirement
for applying the discovery rule is
satisfied. See S V., 933 S.W.2d at 8.
Moreover, the injury in this case is
objectively verifiable as it can be
objectively established through bank
records and cancelled checks. See
HECI Exploration Co., 982 S.W.2d at
886. Accordingly, we hold the
discovery rule applied to Polk
Mechanical's claim against Jones, and
Jones was required to conclusively
negate its application to be entitled to
summary judgment. See Pustejovsky, 35
S.W.3d at 646 Polk Mech. Co., LLC v.
Jones, 2009 Tex. App. LEXIS 4939, 9-
http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=2009+Tex.+App.+LEXIS+4939http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=2009+Tex.+App.+LEXIS+4939http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=2009+Tex.+App.+LEXIS+4939http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=2009+Tex.+App.+LEXIS+4939http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=2009+Tex.+App.+LEXIS+4939
2011 Texas Land Title Institute – Page 19 of 19 Construction Retainage and Lien Waivers
11 (Tex. App. San Antonio, 2009,
review denied)
Polk Mech. Co., LLC v. Jones, 2009
Tex. App. LEXIS 4939 (Tex. App. San
Antonio July 1, 2009)
Polk Mechanical discusses, in reversing
summary judgment for the defendants on
limitations, that the discovery rule may not have
been tripped until the defendants’ bank records
were produced showing the expenditures on
other projects, taking the balance below the
deposits on the project in question.
END.
http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=2009+Tex.+App.+LEXIS+4939http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=2009+Tex.+App.+LEXIS+4939http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=2009+Tex.+App.+LEXIS+4939http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=2009+Tex.+App.+LEXIS+4939http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=2009+Tex.+App.+LEXIS+4939
EXHIBIT “A”
(Page 1 of 4)
Conditional Partial Release - During Construction
§53.284 (b), Tex. Property Code:
If a contractor (or other potential lien claimant) is required to execute a waiver
and release in exchange for or to induce payment of a progress payment and is not
paid in exchange for the waiver and release or if a single payee check or joint payee
check is given in exchange for the waiver and release, the waiver and release must
read:
CONDITIONAL WAIVER AND RELEASE ON PROGRESS PAYMENT
Project ___________________
Job No. ___________________
On receipt by the signer of this document of a check from ________________
(maker of check) in the sum of $__________ payable to _____________________ (payee or
payees of check) and when the check has been properly endorsed and has been
paid by the bank on which it is drawn, this document becomes effective to release any
mechanic's lien right, any right arising from a payment bond that complies with a state
or federal statute, any common law payment bond right, any claim for payment, and
any rights under any similar ordinance, rule, or statute related to claim or payment rights
for persons in the signer's position that the signer has on the property of
________________ (owner) located at ______________________ (location) to the following
extent: ______________________ (job description).
This release covers a progress payment for all labor, services, equipment, or
materials furnished to the property or to __________________ (person with whom signer
contracted) as indicated in the attached statement(s) or progress payment request(s),
except for unpaid retention, pending modifications and changes, or other items
furnished.
Before any recipient of this document relies on this document, the recipient
should verify evidence of payment to the signer.
The signer warrants that the signer has already paid or will use the funds received
from this progress payment to promptly pay in full all of the signer's laborers,
subcontractors, materialmen, and suppliers for all work, materials, equipment, or
services provided for or to the above referenced project in regard to the attached
statement(s) or progress payment request(s).
Date ____________________________
_________________________________ (Company name)
By ______________________________ (Signature)
_________________________________ (Title)
EXHIBIT “A”
(Page 2 of 4)
Unconditional Partial Release - During Construction
§53.284 (c), Tex. Property Code:
If a contractor (or other potential lien claimant) is required to execute an
unconditional waiver and release to prove the receipt of good and sufficient funds for
a progress payment and the claimant or potential claimant asserts in the waiver and
release that the claimant or potential claimant has been paid the progress payment,
the required statutory form of waiver and release is as follows. The form must include
the Notice at the top:
NOTICE:
This document waives rights unconditionally and states that you have been paid
for giving up those rights. It is prohibited for a person to require you to sign this
document if you have not been paid the payment amount set forth below. If you have
not been paid, use a conditional release form.
UNCONDITIONAL WAIVER AND RELEASE ON PROGRESS PAYMENT
Project ___________________
Job No. ___________________
The signer of this document has been paid and has received a progress
payment in the sum of $___________ for all labor, services, equipment, or materials
furnished to the property or to _____________________ (person with whom signer
contracted) on the property of _______________________ (owner) located at
______________________ (location) to the following extent: ______________________ (job
description). The signer therefore waives and releases any mechanic's lien right, any
right arising from a payment bond that complies with a state or federal statute, any
common law payment bond right, any claim for payment, and any rights under any
similar ordinance, rule, or statute related to claim or payment rights for persons in the
signer's position that the signer has on the above referenced project to the following
extent:
This release covers a progress payment for all labor, services, equipment, or
materials furnished to the property or to __________________ (person with whom signer
contracted) as indicated in the attached statement(s) or progress payment request(s),
except for unpaid retention, pending modifications and changes, or other items
furnished.
The signer warrants that the signer has already paid or will use the funds received
from this progress payment to promptly pay in full all of the signer's laborers,
subcontractors, materialmen, and suppliers for all work, materials, equipment, or
services provided for or to the above referenced project in regard to the attached
statement(s) or progress payment request(s).
Date ____________________________
_________________________________ (Company name)
By ______________________________ (Signature)
_________________________________ (Title)
EXHIBIT “A”
(Page 3 of 4)
Conditional Final Release
§53.284 (d), Tex. Property Code:
If a contractor (or other potential lien claimant) is required to execute a
waiver and release in exchange for or to induce the payment of a final payment
and is not paid in good and sufficient funds in exchange for the waiver and
release or if a single payee check or joint payee check is given in exchange for
the waiver and release, the waiver and release must read:
CONDITIONAL WAIVER AND RELEASE ON FINAL PAYMENT
Project ___________________
Job No. ___________________
On receipt by the signer of this document of a check from
________________ (maker of check) in the sum of $____________ payable to
_____________________ (payee or payees of check) and when the check has
been properly endorsed and has been paid by the bank on which it is drawn,
this document becomes effective to release any mechanic's lien right, any right
arising from a payment bond that complies with a state or federal statute, any
common law payment bond right, any claim for payment, and any rights under
any similar ordinance, rule, or statute related to claim or payment rights for
persons in the signer's position that the signer has on the property of
_____________________ (owner) located at ______________________ (location) to
the following extent: ______________________ (job description).
This release covers the final payment to the signer for all labor, services,
equipment, or materials furnished to the property or to __________________
(person with whom signer contracted).
Before any recipient of this document relies on this document, the
recipient should verify evidence of payment to the signer.
The signer warrants that the signer has already paid or will use the funds
received from this final payment to promptly pay in full all of the signer's laborers,
subcontractors, materialmen, and suppliers for all work, materials, equipment, or
services provided for or to the above referenced project up to the date of this
waiver and release.
Date ____________________________
_________________________________ (Company name)
By ______________________________ (Signature)
_________________________________ (Title)"
EXHIBIT “A”
(Page 4 of 4)
Unconditional Release – Final Payment
If a contractor (or o