Top 10 Practical Tips on Resolving Construction Claims - March 2012 - RKL.pdf

8/11/2019 Top 10 Practical Tips on Resolving Construction Claims - March 2012 - RKL.pdf

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T OP 10 P RACTICAL T IPS ON R ESOLVINGC ONSTRUCTION C LAIMS

BY

RANDALL K. LINDLEY

CHELSEA L. HILLIARD

BELL NUNNALLY & MARTIN LLP

3232 McKinney Avenue, Suite 1400

Dallas, Texas 75204

(214) 740-1400

A SEMINAR SPONSORED BY:

NACM SOUTHWEST

March 23, 2012


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Copyright 2012 by Randall K. LindleyBell Nunnally & Martin LLP

3232 McKinney AvenueSuite 1400Dallas, Texas 75204(214) 740-1400

Printed in the United States of America

This publication is for educational purposes only and cannot be relied upon as legal advice. Ithas been prepared with the "understanding that the publisher is not engaged in renderinglegal, accounting, or other professional services. Although prepared by professionals, thispublication should not be utilized as a substitute for professional services in specificsituations. If legal advice or other expert assistance is required, the service of a professionalshould be sought." From a Declaration of Principles jointly adopted by a Committee of the

American Bar Association and a Committee of Publishers.


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TABLE OF CONTENTS

A. Top 10 Practical Tips on Resolving Construction Claims ..4

1. Perfected Claims Be the Squeaky Wheel ...5

2. The Lien Claim: Threaten to Foreclose .... ....................6

3. The Perfected Payment Bond Claim: Threatento File Suit against the Surety ..... 7

4. Disputed Claims Notice Letter Problems ... 9

5. Disputed Claims: Lien Affidavit Problems ... 10

6. Disputed Claims: Proof of Delivery ofPerformance of Labor .... 13

7. The Fight for Retainage . ......15

8. Unperfected Claims: Send a Trust Fund Demand Letter ... .16

9. Unperfected Claim: Use Business Good Will / and Request for Joint Check . .20

10. Only Assert Legitimate Claims: Be Awareof the Fraudulent Lien Statute ... 20


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TOP 10 PRACTICAL TIPS ON RESOLVINGCONSTRUCTION CLAIMS

By: Randall K. Lindleyand Chelsea L. Hilliard

The name of the game for credit managers is not merely to properly assert a

construction claim, it is to obtain payment of the construction claim. Each party in the

construction chain of title has their own goals and expectations with respect to the project.

The owner wants the project completed in accordance with the plans and specifications and

in a timely manner. The general contractor, subcontractor(s), and supplier(s) want to be

paid for their labor and materials provided in the construction process. As the construction

process proceeds, these contractors and suppliers assert claims for payment as authorized

by the Texas Constitution, the Texas Property Code and the Texas Government Code.

Compliance with the statutory notice, lien and claim policy procedures is a hotly contested

topic among parties in the construction chain. The claim of general contractors,

subcontractors and suppliers generally fall into the following three (3) hierarchical

categories:

Perfected claims;

Disputed claims; and

Unperfected claims.

At the top of the list, a claimant with a perfected claim has crossed the ts and

do tted the is on sending out notice letters and asserting the lien and/or payment bond

claim. The perfected claim is, for obvious reasons, the easiest type of claim to obtain

payment. Below the perfected claim is a disputed claim, or one that has been asserted,

but for some reason, the owner or general contractor or owner contends that the claim fails


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to comply with the statutory requirements. Below the disputed claim is an unperfected

claim , or a claim for payment on a construction project, without the appropriate statutory

notices and/or claims were not asserted.

1. PERFECTED CLAIMS -- BE THE SQUEAKY WHEEL

Basically, there are several types of squeaky wheels. The first squeaky wheel

squeaks. It is an annoying noise that must eventually be addressed. The second type of

squeaky wheel is more akin to an unbearable air horn. While this squeaky wheel analogy

is used in jest, practically speaking, this terminology has no better place than in the

resolution of construction claims.

In practice, the squeaky wheel conversation with the project manager for the general

contractor is as follows:

Hi, my name is Payme Now. I am the credit manager for JonesSupply. Jones Supply was a subcontractor to Rooster Mechanicalrelated to the construction project at the Brinker ApartmentComplex. As you know, Rooster Mechanical failed to pay us and wehad to send the statutory notice of our claim to you and the owner. I

just wanted to follow up with you concerning the payment for our

unpaid invoices.

Does the general contractor continue to hold monies that aredue to Rooster Electrical?

Has the owner paid you, as general contractor, all moniesdue for the work performed by Rooster Electrical?

We would like to release our claim, will you pay us directly?

As illustrated above, the first buttons to push with respect to the general contractor

focus on what funds they continue to hold from which you can obtain payment and using

additional labor and/or material requirements for the job as leverage to insist on payment.

(In other words, does the general contractor require additional work from the creditor can

you refuse this work until payment is made?) If the creditor believes that the general


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contractor is not providing enough focus or attention to this claim, the creditor can engage

counsel to politely request a response and/or information.

If the project is a public job and involves a surety, the surety will typically send two

letters as follows:

An acknowledgment letter; and

A request for document s letters (in the form of a proof of claim)

Although it is duplicative of the notices previously sent, sending the surety all

documents that support the productive claim (invoices, notice letters, purchase orders, proof

of delivery) is an important step. The next step is to request a time commitment from the

surety on its decision making and check issuance process. The specific questions to ask the

surety are as follows:

What additional documents do you need before you can issue a check for thismatter?

Please let me know when we can expect payment.

PRACTICAL TIP: ON PRIVATE PROJECTS, CALL THE OWNER AND GENERAL

CONTRACTOR AND ASK FOR PAYMENT FROM TRAPPEDFUNDS AND ON PUBLIC PROJECTS, CALL THE SURETY ANDREQUEST PAYMENT.

2. THE LIEN CLAIM: THREATEN TO FORECLOSE

A mechanic and materialmans lien claim may only be foreclosed judicially. To

prevail, the lien claimant must file a lawsuit and obtain a judgment that forecloses the lien

and orders the sale of the property subject to the lien. T EX . P ROP . CODE A NN . 53.154

(Vernon 2007). The lawsuit to foreclose the lien must be brought within two years after the

last day the claimant may file the lien affidavit or within one year after completion of the

project, whichever is later. T EX . P ROP . CODE A NN . 53.158(a) (Vernon 2007). For a

residential construction project, the lawsuit must be brought to foreclose the lien within one


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year after the last day the claimant may file the lien affidavit or one year after completion

of the project, whichever is later. T EX . P ROP . CODE A NN . 53.158(b) (Vernon 2007).

The Texas Property Code was amended last year to provide that a Court shall award

costs and attorneys fees in any proceeding to:

(1) foreclose a lien,

(2) enforce a claim against an indemnity or surety bond, or

(3) declare any such lien or claim invalid or unenforceable in whole or in part. TEX .

P ROP . CODE A NN . 53.156 (Vernon 2012). The intent behind this amendment was to

r equire Courts to award attorneys fees when there is a clear winner, rather than requiring

each party to be responsible for its own fees and costs. Palomita, Inc. v. Medley , 747 S.W.2d

575, 577 (Tex. App. Corpus Christi 1988, no writ) (court stated the primary intent of the

legislature in adopting 53.156 and 53.157 was to allow subcontractors to recover attorneys

fees.) . This new mandatory attorneys fees language, however, does not require a

residential property owner to pay costs and attorneys fees for mechanics liens arising out

of a residential construction contract. T EX . P ROP . CODE A NN . 53.156.

In addition, a copy of the demand letter to the surety threatening to foreclose the

lien is provided as a hand-out to this presentation.

PRACTICAL TIP: SEND THE LETTER THREATENING TO FORECLOSE THE LIEN

3. THE PERFECTED PAYMENT BOND CLAIM: THREATEN TO FILESUIT AGAINST THE SURETY

A payment bond beneficiary who has provided public work labor or materials under

a public work contract covered by a Chapter 2253 payment bond may sue the principal or

surety, jointly or severally, on the bond. T EX . GOVT . CODE A NN . 2253.073(a) (Vernon

2008). To prevail, the payment bond beneficiary must prove:

(1) that it is a payment bond beneficiary under Chapter 2253;


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(2) that it fulfilled the requirements of Chapter 2253 by performingits contract, either by carrying out the public work laborrequired or delivering the materials ordered;

(3) that the work performed or the materials furnished was incident

to, or used on, the construction project covered by the bond;

(4) that the claim was properly filed and notice given; and

(5) that the claim was not paid before the 61 st day after the date thenotice of claim is mailed.

See H. Richards Oil Co. v. W. S. Luckie, Inc., 391 S.W.2d 135, 137 (Tex. Civ. App. Austin,

1965, writ refd n.r.e.); Tex-Craft Builders, Inc. v. Allied Constructors of Houston, Inc. , 465

S.W.2d 786, 793 (Tex. Civ. App. Tyler Mar 25, 1971, writ refd n.r.e.); see also Employers

Liability Assur. Corp. v. Young County Lumber Co. , 64 S.W.2d 339, 344 (Tex. 1933) (holding

that failure to file claim barred recovery on bond).

If the payment bond beneficiary prevails, it may recover the unpaid balance of its

claim at the time the claim was mailed or the suit was brought, and the trial court may

award reasonable attorney fees. T EX . GOVT . CODE A NN . 2253.073(b) (Vernon 2008).

However, the trial court has the discretion to reduce or deny the payment bond

beneficiarys fee recovery. TEX . GOVT . CODE A NN . 2253.074 (Vernon 2008); C. Green

Scaping, L.P. v. Westfield Ins. Co ., 248 S.W.3d 779, 789 (Tex. App. Fort Worth 2008, no

pet.).

In the event a party asserts a Chapter 2253 bond claim which remains unpaid, a

lawsuit must be commenced before the expiration of one year after the date the notice of a

claim is filed. T EX . GOV T CODE A NN . 2253.078 (Vernon 2000).

An example of a form letter threatening to sue the surety on the payment bond is

provided as a hand-out to this presentation.

PRACTICAL TIP: SEND THE LETTER THREATENING TO SUE THE SURETY


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4. DISPUTED CLAIMS NOTICE LETTER PROBLEMS

There are three general types of problems that occur with notice letters: the notice

letter is:

Untimely;

Sent to the wrong party; and/or

Fails to include the statutory language.

Timeliness is key. As evidenced by the holding in Morrison Supply Co. v. MW

Hamilton & Co., even a notice that is only ten days late, is ten days too late. 411 S.W.2d

790 (Tex. App. Amarillo 1967, no writ). Because the statute specifies that the notice must

be in writing and must be delivered within the prescribed time period, Texas courts have

held that even actual notice of the claim is insufficient without proof of a timely delivered

written notice. Tex. Constr. Assocs., Inc. v. Balli , 558 S.W.2d 513 (Tex. App. Corpus

Christi 1977, no writ ) (timely written notice is a necessary condition p recedent to

perfecting a claim).

Know who the key parties involved are. It is important to make sure that you have

properly identified the true owner of the property and that is who you have forwarded the

notice to. Under Texas law, the party seeking to enforce its lien claim has the burden to

prove that it properly perfected its lien claim by sending the notice to the actual owner of

the property. Robert Burns Concrete Contractors, Inc. v. Norman , 561 S.W.2d 614 (Tex.

App. Tyler 1978, writ refd n.r.e. ) (delivery of notice must be to the proper owner and

claimant failed to show that title had ever passed to new owner to which claimant had sent

notice).

Including the statutory language is also essential to properly asserting your lien

claim. The notice letter must include all of the language required by the statute to be valid.


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For example, in First Natl Bank in Graham v. Sledge , the Texas Supreme Court held that

a notice letter that did not contain the statutory warning language was not v alid and thus

could not be used to perfect a lien claim. 653 S.W.2d 283, 287 (Tex. 1983). There, the Court

went on to explain that in order for a notice to be valid, it must contain a warning that

alerts the owner to the fact that if they fail to pay the claim or otherwise settle, that they

may be held personally liable and their property be subjected to a lien. Id.

On a whole, a notice letter must technically comply and conform to the statutes

technical requirements. Failure to meet these requirements may result in the claim being

held invalid, and thus, unenforceable. Yeager Electric & Plumbing Co., Inc. v. Ingleside

Cove Lumber and Builders, Inc. , 526 S.W.2d 738 (Tex. Civ. App. Corpus Christi 1975, no

writ) (proof of notice to owner must be pled to succeed in suit to foreclose a lien and show

that the requisite statutory notice was in fact given). Likewise, in Herrington v. Luce , the

court articulated that the giving of the notice letter to the owner is a condition precedent to

the validity of a lien claim by a subcontractor. 491 S.W.2d 478 (Tex. Civ. App. Tyler 1973,

no writ).

PRACTICAL TIP: CHECK AND DOUBLE CHECK YOUR DATES, NAMES AND ADDRESSES ON THE FRONT END TO AVOID NOTICE DEFECTS.

5. DISPUTED CLAIMS: LIEN AFFIDAVIT PROBLEMS

In order to properly assert a statutory lien there are several steps that must be

completed by the claimant. Thus, there are also several problems that can result along the

way, which can result in the lien being legally invalid. Some of the problems with the lien

affidavits include:

Failing to file the affidavit in a timely manner

Failing to identify the amount claimed


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o Accounts must show facts required by statute to establish liens, andaffidavit and account. In the case of Pacific Indem. Co. v. Bowles &Edens Supply Co. , the court held that the affidavit must contain adescription of the amounts due that is sufficient to show that labor hasbeen performed, that certain sum is due therefor, and when it wasdue. 290 S.W.2d 353 (Tex. App. Dallas 1956, writ ref. n.r.e.).

o In Gi ll Sav. Assn v. Intl Supply Co., Inc. , the court held that therequirement to accurately describe the amounts due and owing in theaffidavit did not go so far as to require the lien claimant to prove thevalue of the materials supplied. The court explained that this was notan essential element of a suppliers claim and would not render proofof amount of claim inadequate. 759 S.W.2d 697 (Tex. App. Dallas1988, writ denied).

Failing to identify the owner

Failing to describe the labor and/or materials

o General contractor responsibilities was sufficient description of laborto satisfy substantial compliance test. In re Orah Wall FinancialCorp. , 84 B.R. 442 (Bkrtcy. W.D. Tex. 1986).

o Mathews Const. Co., Inc. v. Jasper Housing Const. Co. 528 S.W.2d 323(Tex. App. Beaumont 1975, writ ref. n.r.e.).

o Must include the months in which the work was performed to perfectlien. Milner v. Balcke-Durr, Inc. , 2006 WL 2190516 (App. 3 Dist.2006, unreported).

Failing to adequately describe the real property

o Metes and bounds survey not necessary to be legally sufficient.Rather, land description is legally sufficient when it contains nucleusof information that would enable party familiar with locality toidentify the premises with reasonable certainty. Blanco, Inc. v.

Porras , 897 F.2d 788 (5 th Cir. 1990).

o Need not be any more particular than what is required for theconveyance of land both are designed to require a description from

which the land may be certainly found and identified. Rheem Acceptance Corp. v. Rowe , 332 S.W.2d 353 (Tex. App. Amarillo 1959,writ ref. n.r.e.).

o Even if it identifies the wrong county, so long as it furnishes anucleus of description it will be sufficient, where it provided properaddress of property and identified owner as being located at the sameaddress. AMS Const. Co., Inc. v. Warm Springs Rehab. Found., Inc. ,94 S.W.3d 152, 163 (Tex. App. Corpus Christi 2002, no pet.).


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Failing to include a Jurat

o To be an affidavit it must contain a jurat . An acknowledgement isnot sufficient. Crockett v. Sampson , 439 S.W.2d 355, 359-60 (Tex.

App. Austin 1969, no writ).

Failing to send a copy of the lien affidavit

o Section 53.055 of the Texas Property Code

o In re Rose, 22 F.Supp. 988, 992 (W.D. Tex. 1938) held that eventhough the lien affidavit substantively complied with the statutoryrequirements, the failure of filing the lien affidavit on time was fatalto any recovery thereon as it constituted no notice.

o Copy of the filed affidavit must be sent via registered or certifiedmail to the owner or reputed owner at the owners last knownbusiness or residence address not later than the fifth (5) dayafter the date the affidavit is filed with the county clerk.

o If not an original contractor must also send a copy of theaffidavit to the original contractor at the original contractorslast known business or residence address same time frame.

Failing to file the lien affidavit on time

o Better to be early rather than late. Contractor could perfect itsmechanics lien even though he sent a copy of the lien affidavitto property owner before the affidavit was actually filed with thecounty clerk, where owner received copy no more than five daysafter lien was filed, copy was an exact copy of what was filed,and filing of affidavit occurred within a few days of notice beingsent to owner. Arias v. Brookstone, L.P., 265 S.W.3d 459 (Tex.

App. Houston [1st Dist.] 2007, pet. denied).

o Truss World, Inc. v. ERJS, Inc., 284 S.W.3d 393, 395-98 (Tex. App. Beaumont 2009, no pet.) (statute does not prohibit givingnotice before the lien affidavit is filed).

Although Texas courts repeatedly state that substantial compliance with the Texas

Property Code is sufficient in order to perfect a lien claim, the author recommends that

strict compliance is always the best rule. First Natl Bank v. Sledge , 653 S.W.2d 283, 285

(Tex. 1983). Basically, this means that technical mistakes in a lien affidavit may not be


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fatal to the validity of the lien as long as the claimant has substantially complied with the

statutory requirements. One example is the recent case of Mustang Tractor & Equipment

Co. v. Hartford Accident & Idenmnity Co. , where the Court held that a suppliers lien was

valid even though it failed to provide a statement of the dates and method of mailing of the

notice of the owner required by Tex. Prop. Code 53.054. 263 S.W.3d 437 (Tex. App.

Austin, 2008, pet. denied). The Austin Court of Appeals held that the lien substantially

complied with the lien statutes despite the complete omission of this required information.

If a mistake is made, argue substantial compliance. In an ideal world, however,

you never want to rely on substantial compliance to establish the validity of your lien claim.

PRACTICAL TIP: AS A LAST RESORT, ASK COUNSEL IF YOU HAVE A BASIS TO ARGUE SUBSTANTIAL COMPLIANCE

6. DISPUTED CLAIMS: PROOF OF DELIVERY OR PERFORMANCE OFLABOR

Depending on whether the claim relates to a public project or a private project,

either the surety or the owner will require proof of delivery (of materials) or performance (of

labor) before paying a disputed claim. It is important for a claimant that sold materials tohave a system in place to document shipment to, and delivery at the project site. Some

businesses make their own deliveries. In such a case, requiring a signature by the project

manager at the job site is ideal. Other businesses use vendors (truckers) to make

deliveries. In both instances, a specific signatory process to create documentary evidence

that the materials at issue were in fact delivered to the job site on a specific date is very

important.

A showing of actual delivery to the job site is necessary:

o Unless the owner directs delivery of the materials to a place otherthan the job site sufficient to construe delivery of the materials as itgives the owner complete ownership and control over the materialsonce at that location. Trammel v. Mounts , 4 S.W. 377 (Tex. 1887).


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o Not necessary that the materials be immediately used or incorporatedinto the project, delivery to the job site is sufficient to start thestatutory clock. First Cont l Real Estate Inv . Trust v. Cont l Steel Co. ,569 S.W.2d 42 (Tex. Civ. App. Fort Worth 1978, no writ).

If a claimant provided services at the project site , the evidence of the performance

of such services can be documented through log sheets and other reports reflecting the

dates personnel performed tasks at the project site. Since services are harder to prove

delivery of, per se , it is important to document when the materials and machinery, used by

the artisans and laborers in providing their services, are delivered or dropped off at the

project site.

For example, in Fidelity and Deposit Co. of Maryland v. Indus. Handling Engrs,

Inc. , the court held that delivery of a platform lift to the building site constituted delivery

under the statute so as to fix the date from when the time to file a lien claim began, even

though the machinery was not usable at the time it was delivered to the job site. 474

S.W.2d 584 (Tex. Civ. App. Houston [14th Dist.] 1971, no writ).

However, in First Natl Bank of Electra v. Fed. Supply Co. , where oil drilling

company was ordering and receiving materials at the job site (related to the drilling of a

single well) on an as needed basis, the court determined that the tolling of the time to file

a lien claim began running from the last date the materials were delivered to the lienor at

the project site. 260 S.W. 881 (Tex. Civ. App. Amarillo 1924, no writ). In explaining the

holding, the court articulated that like a contract for personal services under a contract

where no definite time is agreed upon for completion of the work or end of the laborthat

in such cases limitation commences to run from the time of the completion of the work or

labor. Id. ; citing Matthews v. Wagenhaeuser Brewing Assn , 19 S.W. 150 (Tex. 1892).

Thus, in cases where materials are being delivered to the project on an as needed basis or

where services are being rendered without a contract providing for a definite completion


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date, Texas courts will consider the materials or services as a whole and begin the

limitations period from the last date the materials or services were provided.

PRACTICAL TIP: MAKE SURE YOUR BUSINESS HAS A SYSTEM IN PLACE TOPROVE DELIVERY

7. THE FIGHT FOR RETAINAGE

Once the owner has retained the required 10%, the next issue is how those funds are

to be distributed among the various claimants. It is a common misconception of many

claimants that if they comply with the lien laws, and properly perfect their lien claim, they

will be paid in full. The owners liability, however , is limited to the amount of funds

trapped after receipt of a fund-trapping letter, plus the 10% statutory retainage. In many

cases, the total amount of lien claims far exceeds the amount of funds trapped and/or

retained by the owner. Texas Property Code Section 53.104 outlines how this pool of funds

should be distributed among claimants.

Individual artisans and mechanics are entitled to a preference to the retained funds

to the extent their claims are for wages and fringe benefits earned. T EX . P ROP . CODE A NN .

53.104(a) (Vernon 2007). Note, this preference only applies to claims for wages and fringe

benefits. Section 53.104(b) specifies that the remainder of the claimants share

proportionately in the balance of the retained funds. TEX . P ROP . CODE A NN . 53.104(b)

(Vernon 2007). Therefore, if the total amount of claims exceeds the total amount of

retained funds, each claimant will receive a prorata share, or a percentage, of the total

claim amount.

Section 53.105 clarifies that if the owner fails to retain the required 10% for thirty

(30) days, the claimant is entitled to a lien in the amount of the 10% that the owner should

have retained. T EX . P ROP . CODE A NN . 53.105 (Vernon 2007). The maximum amount of

the lien is the amount required to be retained under statutory retainage method, plus the


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amount of trapped funds. Ambassador Dev. Corp. v. Valdez , 791 S.W.2d 612, 622 (Tex.

App. Ft. Worth 1990, no writ).

The claimant should verify that all other lien claims are valid and properly perfected

by reviewing each lien affidavit as well as the required notices. A claimant can often

increase his or her prorata share of the retained funds by identifying invalid claims, and

making the owner aware of the defects that make the claim invalid.

PRACTICAL TIP: ANALYZE COMPETING LIEN CLAIMS TO POINT OUT DEFECTSTO OWNER

8. UNPERFECTED CLAIMS: SEND A TRUST FUND DEMAND LETTER

A. Texas Construction Trust Fund Statute

Chapter 162 of the Texas Property Code provides that construction payments are

trust funds if they are made to a contractor or subcontractor under a construction

contract for the improvement of real property in Texas. T EX . P ROP . CODE A NN .

162.001(a) (Vernon Supp. 2010). Similarly, loan receipts borrowed by a contractor,

subcontractor or owner for improvements to real property in Texas are trust funds. TEX .

P ROP . CODE A NN . 162.001(b) (Vernon Supp. 2010).

The party in the construction chain (i.e. the contractor, subcontractor or owner), as

well as the individual officers, directors or agents of said party, who receives or has control

of the trust funds, is deemed the trustee of the trust funds for the benefit of unpaid

subcontractors or materialmen. T EX . P ROP . CODE A NN . 162.002 (Vernon 2007) & T EX .

P ROP . CODE A NN . 162.003 (Vernon Supp. 2010). To the extent these parties and

individuals misapply the trust funds, they may be personally liable to the unpaid

subcontractors and materialmen. Nuclear Corp. of Am. v. Hale , 355 F.Supp. 193, affd , 479

F.2d 1045 (5th Cir. 1973). It is important to note that a private cause of action for

misapplication of trust funds exists without showing intent to defraud. Id.; North Texas


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Operating Engrs Health Bene fit Fund v. Dixie Masonry, Inc. , 554 F.Supp. 516 (N.D. Tex.

1982).

While claimants should always assert lien and bond claim rights because they are

easily the most effective remedy available, circumstances often arise where notice deadlines

are missed and these rights are lost. A claimants ability to assert a claim under the trust

fund statute is entirely independent of its lien claim rights. The Court in McCoy v. Nelson

Utils. Servs., held that a materialman was not required to perfect a lien claim in order to

recover under the trust fund statute. 736 S.W.2d 160 (Tex. App. Tyler 1987, writ ref.

n.r.e.). In McCoy , the materialman (without any contractual relationship with the owner or

the contractor) recovered a judgment against the owner of the property, the general

contractor and the individual owners of the general contractor for the amount of misapplied

trust funds. Id . at 166.

In this day and age of difficult economic times, many owners and contractors find

themselves in a position where they choose to rob Peter to pay Paul. When a claimant is

confronted with this scenario, the Texas Trust Fund Statute is a viable remedy.

The trust fund statute applies regardless of whether a construction contractor is

covered by a statutory or common law payment bond, i.e., regardless of whether the

contractor has furnished a payment bond under the Government Code. T EX . P ROP . CODE

A NN . 162.004(c) (Vernon Supp. 2010). The statute also applies to a residential property

owner under a residential construction contract. T EX . P ROP . CODE A NN . 162.003(b)

(Vernon Supp. 2010).

However, the trust fund statute does not apply to:

(1) a bank, savings and loan, or other lender;

(2) a title company or other closing agent; or


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(3) a corporate surety who issues a payment bond covering the contractfor the construction or repair of the improvement.

TEX . P ROP . CODE A NN . 162.004(a) (Vernon 2007).

Additionally, the latest amendment to the trust fund statute provides that afee payable to a contractor under a Cost Plus contract is not consideredtrust funds if:

(1) the contractor and property owner;

(2) entered into a written construction contract that provides for thepayment by the owner of the costs of construction and a reasonable feespecified in the contract payable to the contractor;

(3) for the improvement of specific real property in Texas;

(4) before construction of the improvement begins; and(5) the fee is earned as provided by the contract and paid to the contractor

or disbursed from a construction account described by Section 162.006,if applicable.

TEX . P ROP . CODE A NN . 162.001(c) (Vernon Supp. 2010). The old version of this statute

was open to the interpretation that all payments made under a Cost Plus contract were

exempt from trust fund status. The amendment clarifies that the exemption only applies to

the Contractors Fee under a Cost Plus Contract. Id .

It is a defense to a trust fund claim if the trustee uses the funds to pay actual

expenses directly related to the construction. T EX . P ROP . CODE A NN . 162.031(b) (Vernon

2007). For example, if an owner fires an original contractor before paying the full contract

price but subsequently hires a new original contractor and pays the new contractor the

remaining funds, the owner is not liable to any subcontractors who remain unpaid by the

terminated contractor since the trust funds were used to complete the project. The Texas

legislature recently clarified that construction trust funds do not lose their trust fund

status when a contractor commingles trust funds with its other funds. T EX . P ROP . CODE

A NN . 162.031(d) (Vernon Supp. 2010).


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A judgment based on a violation of the Texas Trust Fund Statute is likely non-

dischargable in bankruptcy. In re Munton , 352 B.R. 707 (9th Cir. 2006). As a related issue,

the legislature recently amended the Texas Trust Fund Statute to protect subcontractors

from having to repay trust funds du e to a contractors bankruptcy. See TEX . P ROP . CODE

A NN . 162.001(c) (Vernon Supp. 2010). As a general rule, where a debtor pays a creditor

and then declares bankruptcy within 90 days of the payment, the bankruptcy trustee can

seek to have the creditor pay the money back into the bankruptcy estate. 11 U.S.C.A.

547(b) (West Supp. 2010). The transaction is voidable based on the rationale that the

payment was made as an improper preference of one creditor over others with equal rights

to recover the deb tors assets through the bankruptcy.

The amended statute makes clear that construction trust funds paid to a creditor

under the trust fund statute are not property or an interest in property of a debtor who is a

trustee under the statute. Id . The practical effect of this amendment is that a

subcontractor who holds a mechanics and materialmans lien, receives payment, and then

releases its lien is protected from having to repay the trust funds to a subsequently

bankrupt contractors bankruptcy estate as a voidable preference. See id .

The bankruptcy courts have yet to interpret this amendment to the statute, but a

similar outcome was already supported by prior federal case law. Echoing a bankruptcy

court opinion from the Western District of Texas, the Fifth Circuit previously held that a

trustee in bankruptcy cannot avoid, as a preference, a transfer of construction trust funds

from a contractor to a subcontractor within 90 days of the contractors bankruptcy filing. In

re N.A. Flash Found., Inc. , 298 Fed. Appx. 355, 359-61, 2008 WL 4763328, at *4-5 (5th Cir.

2008) (Not for Publication); see Cunningham v. T & R Demolition, Inc. , 301 B.R. 195, 199-

200 (Bankr. N.D. Tex. 2003) (recognizing that payments made under the Texas trust fund


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statute are not voidable preferences); In re HLW Enters. of Tex., Inc. , 157 B.R. 592, 596-98

(Bankr. W.D. Tex. 1993) (holding that transferred funds were trust funds under Chapter

162 and therefore not the property of the debtor).

PRACTICAL TIP: SEND A TRUST FUND DEMAND LETTER

9. UNPERFECTED CLAIM: USE BUSINESS GOOD WILL / ANDREQUEST FOR JOINT CHECK

One alternative to sending the trust fund demand letter is to simply call the general

contractor and request payment. When the general contractor states there is no

contractual privities (i.e. no obligation), then explain that the trust funds being held by the

general contractor are earmarked for the materials or services provided by the supplier or

subcontractor are intended to flow to the supplier or subcontractor. At this point, the

supplier can suggest that a joint check be issued made jointly payable to the contractor

and/or the subcontractor.

10. ONLY ASSERT LEGITIMATE CLAIMS: BE AWARE OF THEFRAUDULENT LIEN STATUTE

Section 12.002 of the Texas Civil Practice & Remedies Code, often referred to as the

fraudulent lien statute, provides as follows:

(a) A person may not make, present, or use a document or other record with:

(1) knowledge that the document or other record is a fraudulentcourt record or a fraudulent lien or claim against real orpersonal property or an interest in real or personal property;

(2) intent that the document or other record be given the same legaleffect as a court record or document of a court created by orestablished under the constitution or laws of this state . . .evidencing a valid lien or claim against real or personalproperty or an interest in real or personal property. T EX . C IV . P RAC . & REM . CODE A NN . 12.002 (Vernon 2002 and Supp.2010) (emphasis added).


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The potential damages for violation of this statute are the greater of $10,000, or the

actual damages caused by the violation, plus court costs, attorneys fees and even

exemplary damages in an amount determined by the court. Id .

However, a person claiming a lien under Chapter 53 of the Property Code is not

liable under the fraudulent lien statute for the making, presentation or use of a document

or other record in connection with the assertion of the claim, unless the claimant acts with

intent to defraud. Id . Thus, a Chapter 53 lien claimant will not be liable for filing a

fraudulent lien if the claimant merely made an inadvertent or good faith mistake or error in

the filing of a mechanics lien. From a practical perspective, this exception allows a

Chapter 53 claimant to correct such mistakes or errors in its lien filings without fear of

exposure to potential liability under the fraudulent lien statute.

For example, in Taylor Elec. Servs., Inc. v. Armstrong Elec. Supply Co. , the court

determined that an individual had violated the fraudulent lien statute where he filed a lien

against the project for an amount in excess of what he was owed. 167 S.W.3d 522, 531-32

(Tex. App. Fort Worth 2005, no pet. ). Specifically, the court found that the lienors cl aim

for $12,452.04 failed to reflect a $7,732.99 payment he had received prior to filing that

claim, and thus, was fraudulently asserted. Id.

HIRE A FIRE-BREATHING ATTORNEY

When all else fails and you have not had success with the alternative methods of

obtaining payment discussed above, engaging counsel to send demand letters and/or file a

lawsuit may be an effective approach.

Documents

Top 10 Practical Tips on Resolving Construction Claims - March 2012 - RKL.pdf