DEFENDING AGAINST AN INVALID LIEN

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

There are a few cases in Texas that address fraudulent mechanic’s liens.  The first one we will discuss 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.

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.

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).

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:

Exemplary damages can be defined as any damages awarded as a penalty or punishment rather than for compensation.

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.

Please consider contacting Kelly M. Davis & Associates, LLC or another qualified attorney of your choice before you enter into a construction contract in Texas.

For More Amazing Content, visit us at https://www.facebook.com/dallasconstructionlaw