Texas Fast Track Procedure for Civil Lawsuits

In the last Legislature (82nd), House Bill 274 was passed, which made many changes to the Texas Government Code, Texas Rules of Evidence, and Texas Rules of Civil Procedure in order to try and control the speed and costs of legal actions. They took a two prong approach in order to do this: 1) create Rule 91a and amend Rule 47 of the Texas Rules of Civil Procedure, and 2) create Rule 169 of the Texas Rules of Civil Procedure and amend Rule 190 of the Texas Rules of Civil Procedure. The first changes made affect the ability to dismiss the case and damages. I will talk about these changes in another article. I would like to focus on the portion of the rule changes that promote an expedited action of the cases.

This part I personally believe have been needed for a while, in the sense that it has become too easy for some sides to make it their main defense strategy to delay, stall, and perform excessive discovery merely in an attempt to increase the attorney’s fees to amounts that eventually become un-payable by the claimants. Hopefully, the intent of the law will actually play out in real life, because we all know not everything works out as well as intended.

Again, the rules below only apply to cases where damages are less than $100K (including all penalties, costs, expenses, pre-judgment interest and attorney’s fees) and do not involve the Family, Property, and Tax codes or Chapter 74 of the Civil Practice & Remedies Code.

The first part of the changes involves instituting rules for expedited actions (Rule 169 of the Texas Rules of Civil Procedure). All this really means is that they are trying to put hard and fast deadlines in the case so one side can’t abuse the system with delay tactics, which will expedite the case and keep fees down. Here is a general breakdown (of course, there are exceptions and differences, so I have posted a link to full changes at the end of the article):

  • Discovery is governed by Rule 190.2 (covered below)
  • The court must set the case for trial within 90 days of the discovery period ending, and the court may continue the case twice, but the continuances may not exceed a total of 60 days.
  • As far as the trial goes, each side is allowed no more than eight hours to complete everything. However, the court may allow up to twelve hours per side.
  • The court may refer the case to an alternative dispute resolution procedure once, but may not exceed a half-day. Further, the ADR procedure is not to exceed the total cost of twice the amount of applicable civil filing, and must be completed no later than 60 days before initial trial setting.
  • A party may only challenge the admissibility of expert testimony as an objection to summary judgment evidence under Rule 166 or during the trial on merits.
The next part that was added was intended to stop discovery abuse or, at a minimum, keep discovery to reasonable levels (Rule 190 of the Texas Rules of Civil Procedure). These apply to any case that falls under the expedited actions discussed above and to divorce actions involving less than $50,000. Here are the limitations instituted:
  • All discovery must be completed within 180 days of the first request of discovery by either party.
  • Each party may have no more than six hours total to examine and cross-examine all witnesses in oral depositions. This may be expanded up to ten hours if both parties agree.
  • No more than 15 interrogatories.
  • No more than 15 requests for production.
  • No more than 15 request for admissions.
This is only an over view of the changes if you would like more info or the detailed updates to the rules here is a full copy to the changes of the rules:http://www.supreme.courts.state.tx.us/MiscDocket/13/13902200.pdf

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.

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: https://www.dentoncounty.com/dept/county_clerk/recordsearch.asp

Dallas County Deed Record Search: http://roamdallaspropertyrecords.com/ailis/search.do

Tarrant County Deed Record Search: https://ccrecordse.tarrantcountytx.gov/RealEstate/SearchEntry.aspx

Collin County Deed Record Search: http://countyclerkrecords.co.collin.tx.us/webinquiry/

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!

Alternative to a Mechanic’s Lien – UCC Filing Part 2

I first need to apologize for missing a few months of my reminders. The last few months have been a perfect storm of trials for me and I always put a high priority on making sure I’m as prepared as possible. So, some of the peripheral items do get put on the back burner sometimes.

Last time, I discussed the distinctions between “fixtures” and “non-fixtures” in construction projects and also explained why this distinction is important to a contractor. I also discussed how to perfect a security interest in a non-fixture. In this article, I want to continue this series and discuss ways to perfect your security interests in fixtures and how these UCC filings help you gain priority over other potential claimants (such as banks or other lien holders).

To recap, a “Fixture” means goods that have become so related to a particular real property that an interest in them arises under the real property law of the state in which the real property is situated. In other words, fixtures are, generally, those products which are physically attached to the building. There are numerous examples of this on a construction project – carpet, tile, countertops, and bathtubs.

A party with a security interest in goods which are considered a fixture must perfect this interest by making a “fixture filing.” Such is accomplished by filing a financing statement in the county where a mortgage on the real property would be recorded. In addition to the usual requirements for a financing statement (as were discussed last time – UCC Filing – Part 1), a fixture filing financing statement must contain the legal description of the real property to which the fixture is attached.

Determining priority in relation to these types of filings can be extremely tricky. However, the general rule is that in a contest between a holder of a security interest in a fixture (i.e. you, for example) and a holder of an interest in the real property to which the fixture is attached (i.e. the mortgagor, for example), the first party to file a fixture filing or record its real property interest prevails (which would almost always be the mortgagor).

However, a contractor can prevail over a mortgagor or someone with a prior interest, in the following situations:

1.   The security interest is perfected in any manner authorized by the code PRIOR to affixing the good to the property. In this case, that security interest will prevail over a real property interest if (1) the collateral is a readily removable office or factory machine; (2) the collateral is readily removable equipment that is not primarily used or leased for use in the operation of real property; or (3) the collateral is a readily removable replacement of a domestic appliance that is a consumer good.

2.   A security interest in fixtures, whether or not perfected, has priority over the conflicting interest of an encumbrancer or owner if (1) the encumbrancer or owner has, in an authenticated record, consented to the security interest or disclaimed interest in the goods as fixtures or (2) the debtor has a right to remove the goods against the encumbrancer or owner. This is something that would have to be included within a security agreement contained within your contracts.

3.   And, if you are not dealing with a construction mortgage but instead are dealing with a conventional mortgage or home equity line of credit (such as in remodel situations), a secured party who makes a fixture filing within 20 days after the fixture was attached to the property (i.e. you) will prevail over a real property interest in the same fixture that was recorded prior to affixation (i.e. the mortgagor).

In layman’s terms, what does this mean to you? Those services which are not the initial construction of a residential or commercial project have a high probability of falling within Exception 3, listed above. If you don’t fit into Exception 3, you can easily fit under Exception 2 and protect your interest in the fixtures you supply if you ensure that your contracts have a security agreement within the terms which is signed and consented to by all owners of the property. If you don’t fall within Exception 3 and do not have your contractual language in order, pursuant to Exception 2, the only thing you can do is see if the goods that you are providing to the Project are goods designated in Nos. 1-3 within Exception 1.

Generally, if you provide goods which can be considered a fixture to a construction project, the real point is that you can usually protect your interest but you have to have a plan, which is set prior to the delivery of the goods, as to how you are going to ensure that the goods you provide fall within one of these exceptions and, thus, have priority over other encumberances to the property.

While this might sound very complicated to a non-lawyer, this is a perfect example of why business owners should meet with their attorney, periodically, to discuss their business, what they are doing, what the business goals are, and how they can legally protect all of their interests. A lawyer can usually help make sure that your corporate formalities, contracts, employment policies, financial interests, etc. are all in order where they protect you. The real trick is seeking the advice before the problems arise!!!

Alternative to a Mechanic’s Lien – UCC Filing

There is a great deal of confusion as to the term “fixtures” in the construction industry and even greater confusion as to what rights a contractor, subcontractor, or supplier has to the fixtures or non-fixtures that are incorporated into a construction project.  Over the next few months, I am going to attempt to explain the difference between a fixture and a non-fixture and provide alternatives to the Texas’ mechanic’s lien process for securing the goods and services provided on a property.

“Fixtures” means goods that have become so related to particular real property that an interest in them arises under the real property law of the state in which the real property is situated.  In other words, Fixtures are generally physically attached to the building.  There are numerous examples of this on a construction project – carpet, tile, countertops, bathtubs, … This should not be confused with the term “removable.”   See http://www.kmdalegal.com/construction-law/foreclosure-of-your-mechanics-lien/

Likewise, “Non-Fixtures” would be those goods which are made a part of a construction project but not permanently affixed as to become an actual part of the property.  For example, furnishings, equipment such as sound systems, tv’s, refrigerators and light fixtures, etc.

You might wonder how this relates to you and how this helps you get paid. I am sure at this point you have either personally been burned or know someone who has been burned by filing a mechanic’s lien on the property only to have your lien “foreclosed out” by the bank leaving your remedies extremely limited.   However, in Texas, there are various filings that you can file with the Secretary of State to secure your interest in the fixture or non-fixture you provide to a property.  This is important to you because, in some situations, you can have priority over a bank that has provided the construction loan for the property thus securing your rights even through a foreclosure.

Now I want to go over how Security Interests in Non-Fixtures works. The Uniform Commercial Code Section (UCC) is the central filing office for certain financing statements and other documents provided for under the Uniform Commercial Code since 1966.  Some of the main documents which are filed are financing statements and certain types of liens.  Securing non-fixtures should be done through the filing of a financing statement with the secretary of state.   The financing statement should state: the name and mailing address of the debtor; the name and mailing address of the secured party; an indication of the collateral covered.   The authenticated security agreement itself may be filed as the financing statement if the parties so desire.  “Authenticated” is defined as signed. The financing statement should be filed as soon as possible but certainly not later than 20 days after the first delivery of goods to the person with whom your contract is with.

I know what you are thinking.  More paperwork?  YES.  With our whole country struggling financially, unfortunately, the primary way to protect yourself is through a paper trail.   The good news is that a financing statement or security agreement are simple forms that you probably can have drawn up one time through an attorney.  This does not have to be complicated but you do have to go through the process of having something customized to your type of business that you can repeatedly use for your various customers and clients.

Next month, I am going to discuss Security Interests in Fixtures and explain how these UCC filings can help you gain priority over other potential claimants

Are You Going to Get Paid? Ask a Construction Lawyer

We aren’t the biggest construction law firm in the DFW area, but it is funny how in our practice we get to see some industry trends developing first hand and probably even before most analysts do.  I’ve always told clients to keep up with their receivables in order to preserve their lien rights.  I’ve even gone as far as saying hey…if you don’t want to worry about deadlines just give me a monthly spreadsheet with your receivables and I can tell you which ones you have to worry about.  Usually I’m coming at it from the point of view of lien deadlines, but more and more I have another point of view.

Being an Attorney for many clients in the construction industry I get a broader industry perspective than the lone sole contractor, sub-contractor or supplier.  For instance, I usually know if residential construction projects are having more payment problems than commercial projects or vice versa.  I know what bond companies are easy to work with and which are not.

So the other day I was talking to a client about one matter when he just mentioned that he ‘may’ have another one for me.  I inquired more about it and when he was done, I told him that his ‘may’ was actually a ‘sure thing’.  His potential matter related to a specific General Contractor building an anchor store in Houston.  He was ‘promised’ that he would get paid and to just give it a month (which would have put him past his lien deadline).  What he didn’t know is the previous week I had filed a lawsuit to foreclose on a property in Dallas that the same General Contractor had built for the same retail chain.   So the odds that he would give up his lien rights and not get paid were actually pretty high.

So, yes, people can try and do liens themselves or use a online service to preserve their rights, but they give up something important (beyond probably not doing it right).  When you go to a law firm, experienced in the area of construction litigation and commercial collections, you have the added benefit of a wealth of knowledge regarding the financial viability of particular projects and General Contractors, Builders, Subcontractors and Suppliers in and around the DFW area and even in some cases, throughout the State of Texas.   Many times, we know who is paying, who is not, what jobs are having funding problems, which parties are known to be “slow pays,” “no pays,” or even continuously in litigation.  To most clients, this information is almost invaluable and is a benefit you can get from your law firm without having to spend any additional money.