Payment Bond Claims – Part 2

Last month I started a series about the Payment Bond Process in Texas.  You can find the last article here:  Payment Bond Claims – Part 1.   We went over the time frames of notices and what has to be included.  This time I would like to go over what kind of items you can include in a Bond Claim.

One item that can be included is labor.  Chapter 2253.001 (5) of the Statute says: “Public work labor” means labor used directly to carry out a public work.  That’s pretty self-explanatory, but of course people have tried to get paid on aspects that pertain to labor but may not be direct labor.

The following situations have been tested in the courts and have been deemed covered by the bond:   1) Labor paid out on a commission basis qualifies; and 2) where labor is furnished by a temp agency then the temp agency qualifies to make a claim on the bond.

The following examples are a few scenarios that have been deemed not covered by the bond;  1) Plans that were provided but were never used on the construction project; 2) Insurance premiums that are normally held, such as workers compensation and liability coverage; 3)and, of course, funds.

Another item that can be included is materials. Chapter 2253.001 (6) of the Statute says:

“Public work material” means:

(A)  material used, or ordered and delivered for use, directly to carry out a public work;

(B)  specially fabricated material;

(C)  reasonable rental and actual running repair costs for construction equipment used, or reasonably required and delivered for use, directly to carry out work at the project site;  or

(D)  power, water, fuel, and lubricants used, or ordered and delivered for use, directly to carry out a public work.

Like the items I discussed above in labor, the courts have distinguished between materials that may or may not qualify and the following has been held up through the courts.  Materials that the courts have found to qualify include items that might be rented or leased for a job but are off-site, such as a rock crusher located at a quarry that could not be moved to the actual jobsite.  One can also claim a leased piece of equipment that will be used exclusively for a specific job and then returned when the job is complete.    However, the courts have stated that materials that might be purchased and used in the normal course of business for a construction business are not allowed to be claimed.

Next time I will try and cover some other situations that have been litigated through the courts.

Payment Bond Claims – Part 1

Over the next few posts I would like to go over payment bond claims for state and local public works projects.  You may have heard these described as Little Miller Act claims, or what was known as the McGregor Act.  In Texas the process is controlled under Chapter 2253 of the Texas Government Code.  Although it may appear that the primary purpose behind Chapter 2253 is to make sure contractors get paid for public works projects, it is also intended to protect the bond companies from being overwhelmed with claims.

The deadlines are set forth in the code in such a way that it puts the burden on the contractor to know them and follow them, or they will lose out on their claim.  On the flip side, if you are willing to do what is required by the law you have a good chance of getting the money that is owed to you.

First, we must review the timing of notifications.  The Texas courts have held up these deadlines and requirements, so they are very important to follow.

Second tier contractors that have a written agreement, must give written notice (sent by certified or registered mail) to the prime contractor and the surety.  The notice must be mailed on or before the 15th day of the third month after each month in which any of the claimed labor was performed or any of the claimed material was delivered.  The notice must be accompanied by a sworn statement of account that states in substance: (1) the amount claimed is just and correct; and (2) all just and lawful offsets, payments, and credits known to the affiant have been allowed.  The statement of account shall include the amount of any retainage applicable to the account that has not become due yet.

If there is no written agreement then these items must also be included in the notice: (1) the name of the party for whom the public work labor was performed or to whom the public work material was delivered; (2) the approximate date of performance or delivery; (3) a description of the public work labor or material for reasonable identification; and (4) the amount due.  The payment bond beneficiary must generally itemize the claim and include with it copies of documents, invoices, or orders that reasonably identify: (1) the public work labor performed or public work material delivered for which the claim is made; (2) the job; and (3) the destination of delivery.

Lower tier contractors have to follow the above rules for the third month notice but have one additional notice they need to provide.  This notice must be mailed to the prime contractor on or before the 15th day of the second month after each month in which the labor was performed or the material was delivered.

Retainage claims can be included in the above notices or by sending a separate retainage claim to the Prime contractor and surety on or before the 90th day after the final completion of the project.  The claim requires a notice to contain a statement of: (1) the amount of the contract; (2)  any amount paid;  and (3)  the outstanding balance.

A little leeway is given in the code for notice if the end of a notice period ends on a weekend, i.e. the 15th is on a Saturday, the notice is due on the next following non-holiday weekday.

Next time I’ll go over what can and can’t be included in a payment bond claim.

Texas Relinquishes Sovereign Immunity

When it pertains to federal, state, and local governments, one of the main doctrines of law is that they have sovereign immunity; i.e. the “sovereign or entity” cannot commit a legal wrong and is immune from civil suit or criminal prosecution.  In the last legislature, Texas passed a law which changed that with respect to contracts.  With HB 586, you are now allowed to bring a suit against a state agency with whom you had a contract and whom you allege is in violation of said contract.  Of course, as with any law, there are a myriad of rules and guidelines.

First, this only applies to a claim for breach of written contract for engineering, architectural, or construction services, and for materials related to those services by a party to the contract, and the contract must be with a state agency, not with a county, municipality, etc.  Additionally, the damages, not including attorney’s fees, penalties, costs, expenses, and prejudgment interest, must exceed $250,000.  This law does not apply to any contract that is subject to Section 201.112 of the Transportation Code; e.g., any TxDot contract.  Finally, the new law went into effect on September 1, 2013, so it will only apply to contracts entered into after that date.

If you were to succeed with your claim, it allows for the award to include the following items:

  • The balance due and owed by the state agency under the contract as it may have been amended, including any amount owed as compensation for the increased cost due to owner delay;
  • The amount owed pursuant to written change orders;
  • Reasonable attorney’s fees only if the written contract expressly provides recovery of fees;
  • Interest at a rate up to 10%.

And it cannot include:

  • Consequential damages;
  • Exemplary damages;
  • Damages for unabsorbed home office overhead.

After receiving a Judgment, you would then proceed with the collections process, which also has limitations.  Payment of a Judgment is not allowed to come from the State’s general revenue unless expressly given for that purpose.  Additionally, you are not allowed to seize, attach, garnish, or take any other normal creditor remedy typically used to satisfy a judgment.

Even despite these limitations and restrictions, this is a significant change in the law and helps keep the State accountable for contracts it enters into and is definitely a step towards making the State of Texas accountable under the same rules as everyone else.

Specially Fabricated Material Liens

One of the requirements for filing a lien is to have either physically installed material or physically made improvements to real property. Typically, when a job is cancelled, the resulting harm to the contractor, subcontractor, or fabricator is limited to lost profits from the missed opportunity to provide work. This is because no work has been performed on the real property yet, no wages have been paid to employees, and no supplies have been installed on the property.

Sometimes, however, the resulting harm can be much greater. For example, consider the situation where you order materials which must be specially fabricated for a project, the supplier produces the materials, and the project is subsequently cancelled? In such a situation, you can file a lien to recover the costs of the specially fabricated materials.

Under Texas law, a “specially fabricated material” is defined as a material fabricated for use as a component of the construction or repair so as to be reasonably unsuitable for use elsewhere.

As an example, let’s consider granite countertops. Once a slab of granite is cut to the required dimensions for a specific project, perhaps with a cut out for a sink, those pieces are usually unsuitable for use on another job.

In Texas, this scenario is addressed by Tex Prop. Code Section 53.021 (2) (b), which states that a “person who specially fabricates material has a lien even if the material is not delivered.” Further, the lien secures payment for “the specially fabricated material, even if the material has not been delivered or incorporated into the construction or repair, less its fair salvage value.” Tex. Prop. CodeSection 53.023 (2).

So, the caveat is that you are supposed to lower your damages by the fair salvage value of the product.

Now, of course, Texas can’t make it easy and have the same rule for all types of projects. There are more hoops if this is for a residential construction project. In such instances, an extra notice must be provided, and if you fail to provide the notice, you will only be able to file a lien for any items actually provided to the project. I’ll paraphrase it, but you can see the full details here: Tex. Prop. Code Section53.253.

• Notice must be given to the owner, or reputed owner, not later than the 15th day of the second month after the month in which you receive and accept the order for the material.
• The notice must contain a statement that the order has been received and accepted, and the price of the order must be included.
• The notice must be sent by registered or certified mail.

Filing a specially fabricated material lien is complicated. Are you following all of the proper procedures to protect your lien rights?

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.

Defending Against A Fraudulent Lien

Elements
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.

Remedies
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.