Good News for a Client has Everyday Lessons!

Recently we received good news for one of our clients:  we had been waiting on the opinion for an appeal of the original trial where our client was awarded damages.  The really good news is that our client won their appeal and the other side lost their appeal.

I really wanted to share this information with you because the details of the appeal relate to items that often arise in everyday construction business practices.  This case was originally about a construction dispute between a contractor and an owner relating to oral change orders.  Sound familiar?  The dispute was not settled and it eventually ended up in court.  We prevailed on behalf of the contractor and against the Defendant, personally, as well his business.

When the owner originally signed the contract, he signed it personally and not on behalf of his company.  He filed the appeal claiming that he was personally “immune” and that it should only be the business that was liable.  One line of the court’s opinion basically settles this issue, and should serve as fair warning on how to sign documents for your business: “A person who fails to disclose that he is signing a contract as an agent may be held liable on the contract”.  So, the moral here is to always sign as an agent of the business.  One way to do this is to make sure your title in your company is listed on the document (President, CEO, Vice President…) and that you list the full name of your company including its designation of LLC or Inc.

We also counter-appealed, claiming that the original trial court wrongfully denied the contractor pre-judgment interest.  We argued that under the Prompt Payment Act of the Texas Property Code, we were entitled to eighteen percent pre-judgment interest.  The 5th Court of Appeals reviewed the facts of this case and found that the court erred in failing to award interest pursuant to the Prompt Payment Act, and that the Owner was not relieved of his obligation to pay pre-judgment interest on the amount awarded by the trial court.

If you would like to read the full opinion of the Court of Appeals of the Fifth District of Texas at Dallas you can find it here:

Getting Man the Job Notices? How to Protect Yourself.

Most sub-contracts have a provision called something like “man the Job” provisions.   This is a provision that protects the contractor if a sub-contractor is having unusual delays or even not showing up on the job.  It normally protects the contractor by giving proof of their cause for a termination of a subcontract and possible contractual damages related to such termination and eventual hiring of a substitute sub-contractor to complete the job.

In most cases these are probably used correctly due to a sub-contractor having maybe taken on too much work and not being able to make timely progress.  However, there are times when unscrupulous contractors can use these “man the job notices” to wrongfully try to remove a sub-contractor.  Why would they do that?  Well, sometimes it is to avoid making payments due to a sub-contractor.  Sometimes, they have found someone else to do the back end of the job cheaper.  Other times, we have seen them send these sub-contractors appalling bills alleging that not only does the Contractor not owe the Sub any money, but the Sub owes them money (and a lot of it) for finishing the job.  The reasons for the latter type of letter could be multiple.  However, it is shocking how many sub-contractors we have seen in this position that do not fight these “man the job” notices and when they get the bill that they owe the contractor money, many just lie over.  So, it seems to me that if this happens frequently and the contractors are able to get more money this way, it could be yet another construction scam that we start seeing more and more frequently.

So what should you do if you receive a man the job notice?  Of course, the first thing you should have been doing the whole time, is been keeping good records (including time records showing who was on the job and how long they were on the job) to protect yourself.  It would be a good idea if the other party does not get pictures of your guys sleeping on the job (not my client, but it did happen in a case of mine believe it or not).  But if you haven’t been the best record keeper, hopefully when you got your first notice or inkling that things were starting to go bad, you started being more diligent and protecting yourself.

Second, do not ignore the notice.  You need to respond and include in detail your defense to their claim. If you have documents to support your defense, include those documents.  Take the time NOW to resolve the dispute before it gets more and more out of hand.   If there seems to be a legitimate dispute, try and work out a resolution and put your agreement in writing signed and agreed upon by all parties.

Lastly, if you get more “man the job” notices which are in dispute or are unable to come to an agreement on how to resolve a dispute, don’t just let the eventual happen.  Hire an attorney then to represent your interest and to attempt to resolve the dispute.  A lot of times, when the contractor knows you will hire an attorney that can do a lot in and of itself to help you resolve the dispute.  Also, the attorney can help you protect yourself the best way you can before the termination actually happens.  Being proactive is always the key.

Liening Homesteaded Properties in Texas

In previous blogs, I have discussed the differences between commercial and residential liens and about how homesteaded residential properties differ from non-homesteaded residential properties in the in-ability to foreclose on a valid lien.   What I have never really covered is how liens placed on homesteaded properties in Texas have different requirements than liens placed on non-homesteaded properties.  Since Texas is a state that really believes in a person’s rights to preserve their homestead, there are some additional requirements that often trap unwary contractors.

While this might not apply to contractors who only build “new” construction, it definitely applies to any contractor who performs work on what we commonly refer to as “residential” construction.  Typically this would be the situation where someone is already living in a home or considers it their “homestead” or primary residence.  There are several trades that often perform work on properties which are homesteaded:  roofers, A/C, pool builders and even some landscape companies (for larger projects such as retaining walls, fences).

To provide you an example that recently came to light in my own life.  I had some retaining wall work performed for my house and the company only required one party (my husband or I) to sign the contract.  Now of course, if there were any problems they could have always sued my husband for breach of contract but because they didn’t follow the requirements set out under the Texas Property Code to secure a lien for a homestead property they never had the ability to secure a valid lien on our property.

Section 53.254 of Texas Property Code sets forth the requirements for liens on homestead properties.  Below are some snippits detailing the “extra” steps:

“(a) To fix a lien on a homestead, the person who is to furnish material or perform labor and the owner must execute a written contract setting forth the terms of the agreement.”

“(b)  The contract must be executed before the material is furnished or the labor is performed.”

“(c)  If the owner is married, the contract must be signed by both spouses.”

“(e)  The contract must be filed with the county clerk of the county in which the homestead is located.  The county clerk shall record the contract in records kept for that purpose.”

Part C is the section I alluded to earlier with our contract for a retaining wall, since I didn’t sign the contract.  This puts the onus on you to specifically find out if they are married and insist that their spouse sign the contract also.  Parts A & B aren’t probably an issue for most cases since you always want a signed contract before you start working, but it does mean a “verbal” contract (also due to part C&E) would not be allowed. Part E is interesting because there is no time frame required in the Code.  Most of the time, if this provision has become an issue, we have filed the contract at that time or with the lien.  It is also an option to file the contract as an attachment to the lien.

I always try to remind people that Mechanic’s Liens aren’t a sure fire way to get the money that is owed to them but they are probably one of the strongest tools that the state allows for contractors & laborers to collect it.  So with the added complexity a homestead adds to the ability to secure the lien rights and the inability to foreclose on the lien, I believe contractors need to have their eyes wide open when having large contracts on homesteaded properties.

Protecting Yourself with a Simple Google Search

Unfortunately, in all industries there are a few bad apples out there that spoil the bunch and construction is no different (keep the bad lawyer jokes to a minimum here please).   When the market had a down turn in 2009, I unfortunately was front row to witness the destruction it had on some businesses.  Some of them were just hard working people caught up in a bad economy, but there were others who were doing unscrupulous things which were exposed when the economy turned.   I had dealings with one specific person who owed multiple, well actually a better description would be countless, people money because he had been robbing Peter to pay Paul for a long time.

In this instance, we had finally ceased our collection efforts because it was just costing my client too much money and it didn’t look like we would ever see a dime of any money that had ever been given to this person.  I had even received calls from the FBI office questioning me about my knowledge of this person.  Later, I heard he was charged criminally for his actions and was actually in prison. This was back in 2009/2010.

So it surprised me when, in 2012, his name popped back up and it again involved yet another client losing money.  Had a simple Google search been performed on this person prior to entering into a contract and giving him money, my client(s) would have easily seen this was someone they would not want to trust.

To show you what I am referring to, look at the Google search that was recently done on this individual:

 Google Search to Protect Yourself

While I agree it is probably rarely this obvious, if you’re going to do business with someone new that you have never had any dealings with I would recommend doing at least a rudimentary search to see if you see any glaring issues.   Please refer to one of my previous blog searches,, to determine how more extensive research can be performed.

Defending Against A Fraudulent Lien

In order to have a fraudulent lien, you must meet four elements:

  1. Knowledge that the document/record is fraudulent;
  2. Intent that the fraudulent document be given the same legal effect as a valid document;
  3. Intent to cause financial injury, physical injury or mental anguish; and
  4. Intent to defraud. This was added to §12.002 in 2009, but this has yet to be exercised by the courts as it relates to mechanic’s liens.

Case Law
There are three cases in Texas that address fraudulent mechanic’s liens. The first one is Centurion Planning Corp. v. Seabrook Venture II, 176 S.W.3d 498 (Tex.App.- Houston [1 Dist.], 2004).Centurion’s President, Knickerbocker, filed a mechanic’s lien against Seabrook, even though there was no written contract, only an oral agreement. The Court of Appeals (Houston) found the lien to be fraudulent because Centurion did not have a licensed engineer and because an architect, engineer, or surveyor had a right to file lien only if there was a written contract. The Court relied on the first element mentioned above, that Seabrook had knowledge that the document was fraudulent. In Section 53.021 of the Texas Property Code, persons entitled to a lien only include those who execute a written contract with the owner. Here, there was no written contract, and because ignorance of the law is no excuse, the lien was deemed fraudulent.

The second case, Taylor Electrical Services, Inc. v. Armstrong Electrical Supply Co., 167 S.W.3d 522 (Tex.App.-Fort Worth, 2005), involved work done for the same owner on two different churches. Taylor alleged that Armstrong failed to deliver materials in a timely manner, causing Taylor to be behind schedule on the projects. As a consequence, Taylor withheld $6,110.00 from Armstrong as liquidated damages. Armstrong did not cash one of Taylor’s checks for partial payment on the account but instead filed a mechanic’s lien on both properties for the full outstanding balance. Nevertheless, Armstrong cashed said check after filing the liens. The court found that there was enough evidence to believe that Armstrong had the check in its possession and did not credit Taylor’s account prior to filing the lien; therefore, the lien was fraudulently filed.

The Taylor case addresses elements one and three of a fraudulent lien: knowledge that the document is fraudulent, and intent to cause financial injury. Because Armstrong possessed the check several weeks prior to filing the liens and did not credit Taylor’s account, it is reasonable to assume that Armstrong knew that the amount stated on the liens did not reflect the correct balance. As for the element of intent, Taylor had, on several occasions, stressed to Armstrong the importance of timely delivery and informed them of the potential financial losses Taylor faced if they were not on schedule; nevertheless, Armstrong sent a letter to Taylor before filing the liens that stated “[w]e do not wish you any harm in your business,” which, in the court’s opinion, was sufficient to meet the intent element because it acknowledged that by filing the lien, the business would be harmed.

In the third case, Walker & Associates Surveying, Inc. v. Roberts, 306 S.W.3d 839 (Tex.App.-Texarkana, 2010), the owner, Roberts, hired Walker & Associates Surveying, Inc. (“WAS”) and Dennis Walker (“Walker”) d/b/a Walker and Associates Construction (“WAC”) to extend a horse training racetrack. WAC had a written contract with Roberts, whereas WAS only performed a field survey for which there was no separate written contract. A dispute arose relating to the amount of clay that needed to be installed, and Walker eventually abandoned the project. WAS filed a mechanic’s lien, citing that it “performed labor and furnished material to improve [Roberts’] real property” and was owed money.

Roberts filed a motion for summary judgment on the basis that the lien was fraudulent, attaching Walker’s deposition testimony wherein he admitted that his affidavit was incorrect because the claimant was wrong, the amount due was wrong, and they had no authority to charge the additional finance charges and late fees that were included in the amount. Walker responded that he had intended to claim the debts of WAC, not WAS. The trial court granted the motion for summary judgment, but the court of appeals reversed the decision. The appellate court addressed all three elements of fraudulent lien filing in this case. As to the first element, the court found that summary judgment was not proper: “[w]e see a distinction in an affidavit that is factually inaccurate in some respect and one that is attempting to perpetrate a fraud. While this lien may be invalid and unenforceable as filed, we believe there is a fact issue on whether it is fraudulent.” The appellate court also disagreed with the trial court on the second element, intent of legal effect, as intent should not be “inferred” from “common knowledge”. On the final element, Walker had testified that it was routine business practice for his office to file a lien immediately upon completion of a project. Therefore, the court decided that Walker may not have intended to cause financial harm to Roberts.

Developing Law
The fourth and newest element to the statute, intent to defraud, is meant to exonerate those who are accused of filing a fraudulent lien due to typographical or clerical error. However, it is important to note that while an initial filing might not be accompanied by intent to defraud, there is a continual possibility that a lien claimant can develop this guilt and violate the statute. Therefore, if someone points out potential issues with your lien, it would be good practice to investigate such claims and make adjustments accordingly before proceeding any further. Just the same, it would be a good idea to inform a lien claimant of any errors in a lien filing and request that the lien be removed before asserting a fraudulent lien claim.

Other Factors
In addition to the mere filing of a fraudulent lien, the statute also penalizes the making, using, or presenting of a fraudulent lien. In addition to this scope of activities, the scope of potential guilty parties is also broad. The statute extends liability beyond the company on whose behalf the lien is filed to also include individuals who sign the lien and presumably any individual who assists in making, using, or presenting the fraudulent lien (provided the requisite intent is found).

  • Individual liability – there is individual liability for anyone who violates the fraudulent lien statute, even if they violate it on behalf of a business entity. Clearly the individual who signs the fraudulent lien affidavit has personal liability; however, it is safe to assume that those who participated with the requisite intent other than the signatory could be implicated.
  • Vicarious liability – If an individual acting on behalf of a company files a fraudulent lien, the company may also be implicated.
  • Standing – owners or debtors have the right to bring a fraudulent lien claim, though because they have the duty to defend the owner’s property from a lien, general contractors, too, may bring a claim. Tex. Prop. Code §53.153.
  • Burden – the burden of proof for a fraudulent lien falls on the party claiming a fraudulent lien.

According to Section 12.002(b) of the Texas Civil Practices & Remedies Code Annotated, when a person presents a fraudulent lien, the injured parties are entitled to the following:

  • The greater of:
    • $10,000.00; or
    • The actual damages caused by the violation;
  • Court costs;
  • Reasonable attorney’s fees; and
  • Exemplary damages in an amount determined by the court.
  • Exemplary damages can be defined as any damages awarded as a penalty or punishment rather than for compensation.

Judicial Review of Liens
Texas Government Code sections 51.901 through 51.903 provide an expedited process for reviewing a potentially invalid lien or claim. Essentially, a person challenging a lien or claim may file a motion for judicial review, which may be performed ex parte and without notice to the other side. The procedure does not give a ruling on the claims of the parties, but instead only reviews the ministerial act. However, the court can sanction a party for an inappropriate filing of the motion.

If a party’s lien is found to be invalid per the above process, there are criminal sanctions if the offending party does not promptly remove the lien. See Texas Penal Code 32.49. The offense is a Class A misdemeanor, which in Texas is a fine of up to $4,000.00, and incarceration for a period up to one year, or both.

Law Changes: Mandate Attorney’s Fees in Foreclosure Actions and Higher Interest in Contract Claims Against Local Government

Over the last several months I have written about several of the law changes that were produced by the 82nd Texas Congressional Session.  First was the change in the contract indemnification laws, I then wrote about the changes involving lien waivers and retainage notices.  Well these last two involve two relatively small changes to the Texas Property Code.  However, these “small” changes could possibly have large implications with regards to obtaining your attorney’s fees and interest in some construction litigation.  These are TX SB 539 and TX HB 345.

With regards to SB 539, there was a one word substitution from may to shall that now requires a court to award costs and attorney fees in any proceeding to foreclose a lien or to enforce a claim against a bond on a municipal project.  As far as I’m concerned the less wiggle room you give to a judge on what the Court “may” award, the better.  Additionally, I have already found that this new law has been helpful in settling mechanic’s lien and bond claims because I tell them “look, if we foreclose on our suit we are automatically going to get our attorney’s fees.”  That has much more weight than “a Judge might award us attorney’s fees.”

Again with HB 345, the law was changed to clarify how the interest should be calculated on breach of contract lawsuits against local governments.  It now uses the same interest calculation used under the prompt pay statute, which is eighteen percent per annum.

If you have ever talked to a non-construction law attorney who tries to figure out the mechanic’s lien/bond claim statutes in the Texas Property Code, they will usually tell you they are confusing and vague.  Well I believe these two new additions, in addition to the other ones we have already covered this year, are a step forward in clarifying and adding weight to the Statutes.  It is important to note that both of these laws are already in effect and have been in effect since September 1, 2011.

How to Bond Around a Mechanic’s Lien

I received an email the other day asking if there was a standard form for bonding around a mechanic’s lien, so I thought it would be a good topic to write out how you actually go about bonding around a lien.  I think the first step is looking at all the options that are available to you.  This really isn’t in the scope of this article since every situation is different, but if you decide that this is the best way to proceed then the next step would be to find an insurance provider for the bond.

We really recommend going with a provider that does this in their normal course of business.  Yes, you may be able to get one of your current insurance agents to get you a bond, but in my experience, the understanding of the process and the time it takes for them to complete the process isn’t worth the trouble.  We know of a couple of local companies that we usually refer clients to, and I imagine most other construction attorneys have someone that they know is experienced with the bond process.

The next step would be to draft the Bond Affidavit.  The State of Texas does not have a bond form, but only has guidelines as to the amount of the bond and what has to be included in the bond.  Specifically, the Texas Property Code Sec. 53.172, Bond Requirements, states:

The bond must

(1)  describe the property on which the liens are claimed;

(2)  refer to each lien claimed in a manner sufficient to identify it;

(3)  be in an amount that is double the amount of the liens referred to in the bond, unless the total amount claimed in the liens exceeds $40,000, in which case the bond must be in an amount that is the greater of 1-1/2 times the amount of the liens or the sum of $40,000 and the amount of the liens;

(4)  be payable to the parties claiming the liens;

(5)  be executed by:

(A)  the party filing the bond as principal;  and

(B)  a corporate surety authorized and admitted to do business under the law in this state and licensed by this state to execute the bond as surety, subject to Section 1, Chapter 87, Acts of the 56th Legislature, Regular Session, 1959 (Article 7.19-1, Vernon’s Texas Insurance Code);  and

(6)  be conditioned substantially that the principal and sureties will pay to the named obligees or to their assignees the amount that the named obligees would have been entitled to recover if their claims had been proved to be valid and enforceable liens on the property.

After the bond is drafted and sworn to, it is filed in the county where the property in question is located.

While this process is not necessarily difficult, having a construction attorney and bond company that has repeatedly done this process can save you time and headaches, especially if your contracts require you to indemnify a person or entity by bonding around a lien and time becomes of the essence.  

Mechanic’s Lien Research to Protect Yourself

Have you ever gotten into a job and started hearing some bad rumors; such as, you might not get paid for your work? Or the GC on this job doesn’t pay retainage? Well a couple years ago I wrote this article:  Are you going to get paid ask a construction Lawyer to show that Attorneys can be used pro-actively instead of re-actively (which is the more expensive way). I’d like do a quick overview of something you can do yourself to pro-actively protect your business from trouble. Specifically, you can do your own research to determine if the person you are working for is having liens being filed against them currently.

As you might know, almost all larger counties have an online database you can search for deed records. However, you might not know that those same databases keep track of the lien affidavit filings as well. Here are links to the research databases around the DFW area:

Denton County Deed Record Search:

Dallas County Deed Record Search:

Tarrant County Deed Record Search:

Collin County Deed Record Search:

Each one works a bit differently but usually you can search for the name of the company in some form or fashion (sometimes it takes a little trial and error). Here is a search of somebody you may want to think twice before doing work for:

You will note that we put in the persons first and last name (you could have also put in a corporate name under the last name), and checked, land records. You will get results that look something like this:

As far as looking for Mechanic’s Liens that is the first highlighted area M/L AFDT, depending on the county it may say something different. It gets more interesting with the next two highlighted boxes. Abst Jdgmt means that they have lost in court and have a judgment against them and the abstract is in place to help the prevailing party secure their judgment on any real property owned by that person in that county, and I think we all know what it means when “USA” has a Fed Tax LN on someone.

This is just a quick example on how anyone can use public information to help protect their business. Obviously, if this is you and you are entering into business with someone who’s reputation you don’t know or may be a little dubious, it really pays to do your homework on the front end. If you would rather not do this yourself, then this is an example of what KMDA can do for you for all surrounding counties. We usually provide a report to our client that goes through the various businesses owned by that individual and tells you what type of Judgments and liens they might have against them.

Good Luck and Happy Researching!

Law Changes: Lien Waivers and Retainage Notices

In addition to the new indemnification laws that we discussed during the last blog post, there are other laws and bills that were passed that greatly affect the construction industry.  One of them is HB 1456 the other is HB 1390 you can find the full text of the new laws here: TX HB 1456 and TX HB 1390.

HB 1456 Goes into effect January 1st and pertains to Lien waivers.  You may recall it was just a few months ago I went over some of the pit falls of lien waivers in the blog post Lien Releases: Look Before You Leap.  Well HB 1456 changes how lien waivers are handled.  It provides standard forms for conditional and unconditional lien waivers.  It also fixes something that has plagued the building industry, trying to force sub-contractors to sign an unconditional waiver before payment has been made in full for the invoice or work in question.

Here is the text from the law that fixes that issue:

“A person may not require a claimant or potential claimant
to execute an unconditional waiver and release for a progress
payment or final payment amount unless the claimant or potential
claimant received payment in that amount in good and sufficient

One other item the new law provides are conditional and unconditional waiver forms that must be substantially complied withto be valid.

The law that arose from  HB 1390 pertains to how retainage notices were to be handled since September 1, 2011.  Back in 2009 (view it here: retainage claims) I wrote about when Retainage notices are due.  HB 1390 now allows the notices to be given at the end of the project instead of requiring the contractors and/or subcontractors to give Retainage Notices at the beginning of the project.  This is important because I very rarely saw the retainage notices being timely sent, if at all.

I am VERY excited about the changes in these laws.  These go so far in protecting the Texas Contractors and takes care of many of these issues that have come up in my legal practice almost daily in the past few years.  Again, the lawmakers have gone a long way to strengthen some of the loopholes that have been used time and time again by the unsavory.

Beware of the Changes in the Contractual Indemnification Laws in Texas

On January 1, 2012, a new law will go into effect that is known as the Anti-indemnification Bill (HB 2093).  This will affect most construction contracts that are currently being used.

Currently, most contracts that the General Contractor requires sub-contractors to sign have an indemnification clause that limits the GC’s own liability and holds it squarely in the hands of the sub-contractor.  The great news is that those parts of any contract signed after January 1, 2012 will be void (with a few exceptions of course).

Here is a more thorough breakdown of how this law will change the way contracts need to be written:

  • A GC can no longer require a subcontractor to indemnify the GC of their own sole or partial negligence.  Indemnity clauses violating this prohibition will be void and unenforceable.
  • Unless you enter into a “Joint Defense Agreement” after a claim has been asserted, a GC’s contract can no longer require a subcontractor to defend the GC from claims based on the GC’s own negligence.
  • Additional Insured endorsements to a subcontractor’s liability insurance policy that purport to provide coverage for the GC’s sole or partial negligence, so long as the claim arises from the Subcontractor’s work, are also no longer enforceable.  It is very likely that ISO specific Additional Insured endorsement forms will be prepared to cover this in Texas (but see below).
  • NOTE:  These restrictions on indemnification (both with regard to claims and defense of claims) and on Additional Insured endorsements do NOT apply to on-the-job employee personal injury claims.  Accordingly, a GC can still make a Subcontractor defend and indemnify the GC for the Subcontractor’s own sole or partial negligence for a personal injury claim by an employee of the GC (or even other subcontractors of the GC).   This means that the current broad form intermediate or additional insured endorsements will still be enforceable in situations where personal injuries occur on the job in Texas.

The good news is that, so far, it looks like the lawmakers got it right this time.  They finally put some laws in place to give equal bargaining power to general contractors and subcontractors.  If you are a General Contractor and you are depending on these provisions to protect yourself, as of January 1st, you need to think again.  And as for Subcontractors, you no longer have to sign contracts with these provisions in them.