Construction Retainage and Lien Waivers · 2011 Texas Land Title Institute – Page 1 of 19 Construction Retainage and Lien Waivers Construction Retainage and Lien Waivers Thomas

2011 Texas Land Title Institute – Page 1 of 19 Construction Retainage and Lien Waivers

Construction Retainage and Lien Waivers

Thomas J. Walthall, Jr.

The Gardner Law Firm,

A Professional Corporation

745 E. Mulberry, Suite 500

San Antonio, Texas 78212-3149

(210)733-8191

Facsimile: (210)733-5538

Email: [email protected]

www.tglf.com

Texas Land Title Institute

December 1, 2011

mailto:[email protected]://www.tglf.com/


BIOGRAPHY

of

Thomas J. Walthall, Jr.

Thomas J. “Tom” Walthall, Jr. has widely regarded expertise in construction law and lien

and bond claims. He has practiced in the San Antonio area since 1980, and became a

member of The Gardner Law Firm in 1991 upon a merger with his former law firm. Mr.

Walthall’s practice consists primarily of representation of contractors, subcontractors,

and owners in construction law area, concentrating in mechanic’s liens, bond claims,

defect litigation, engineer and architect defense, delay claims, and related litigation in the

Courts and in arbitration.

Mr. Walthall is experienced in arbitration and court trials in the construction law area,

including subcontract breach and delay claims, bond claims, lien claims, Prompt Pay Act

claims, Texas Construction Trust Fund cases for subcontractors and suppliers,

delay/impact litigation, Miller Act litigation, bankruptcy discharge litigation regarding

the Texas Construction Trust Fund Act and construction defect litigation. He regularly

counsels clients in the negotiation and preparation of subcontracts, construction contracts,

purchase and supply orders and related construction documents.

Mr. Walthall has served for over ten years on the State Bar’s Real Estate Forms

Committee, which prepares and publishes the Texas Real Estate Forms Manual, and has

been responsible for Ch. 28, Texas mechanic’s liens, of the Forms Manual. Mr. Walthall

gives several seminars each year to local construction trade organizations (including the

American Subcontractor’s Association, the National Association of Credit Managers, and

the United States Tennis Court & Track Builders Association) regarding construction

contracting and contracts, mechanics liens, and bond claims. He also has made frequent

presentations on mechanic’s lien, construction bond claims and related topics at the State

Bar of Texas continuing legal education seminars, including the Advanced Real Estate

and the Advanced Real Estate Drafting Courses, and at the University of Texas Law

School’s Mortgage Lending Institute.

Mr. Walthall is licensed to practice law in Texas before all the state courts, and the

United States District Courts for the Eastern, Southern and Western Districts of Texas,

and before the 5th U.S. Circuit Court of Appeals. He is a member of the Texas Bar

Association (Construction Law Section, Real Estate, Probate and Trust Law Section), and

is chapter attorney for the American Subcontractors Association, San Antonio, Texas.


TABLE OF CONTENTS

Overview- Mechanic’s Lien Liability for Retainage; Lien Waivers;

2011 Legislation . . . . . . . . . . . . . . . . . . . . . . . . ………………… . . . . . . . . . . . . . . . . . 5

1. Retainage Legislation HB 1390... .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.1 Statutory Retainage (“Owner Statutory Retainage”). . . . . . . . …. . . . . . . . . 5

1.2 Owner Liability on Mechanic’s Lien Claims.. . . . . . …. . . . . . . . . . . . . . . . . 7

1.3 Contract Retainage – the Lien Notice Problem……………….. . . . . ... . . . 7

1.4 Owner’s Statutory Retainage –Problem with Filing Deadline for

Lien Affidavit……….………………………….. . . . . . . . . . . . . . . … . . . 8

1.5 New Retainage Legislation Revising §53.057 and related Provisions. . . .. 9

1.5.1 New Optional Notice of Contractual Retainage Deadlines……. .. 9

1.5.2 Lien Affidavit Filing Deadline Changes………………………... 10

1.5.3 Application……………………………………...………….....….10

1.5.4 Owner Failure to Withhold Retainage

– §53.052 Deadlines apply. . . . . . . . ……………………... . . . . . .11

1.5.5 “Final Completion”………………………...…………………….11

1.5.6 Request for Information to Owner – Date of original contract

execution – Effective Date.. . . . . . . . . . . . . . ... . . . . …….. . . . . . . . 12

1.5.7 Grounds for Removal of Lien, §53.160 – Retainage Deadlines

Expired……………………………………………. . . . . . . . . . . . . 12

2. “Shall” vs “May” Award Attorneys Fees……... . . ………………. . . . . . . . . . . . . 12

3. Release of Mechanic’s Liens. New Statutory Forms. No enforceable release in

advance of collection.. . . . …………………………………………... . . . . . . . . . .13

4. Ch. 12 Texas Civil Practice and Remedies Code. The Fraudulent Lien Act . . . 14

5. Construction Trust Funds Liability – Residential Construction. . . . . .……….. . . 16

5.1 Basics and Bank Exemption.. . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . ... . 16


5.2 Accounting – Residential Homesteads…………… . . . . . . . . . . . . . . ... . . 17

5.3 Trust Fund Act Litigation – Cause of Action and Limitations Clarified...17


OVERVIEW- MECHANIC’S LIEN LIABILITY

FOR RETAINAGE; LIEN WAIVERS; 2011

LEGISLATION

This presentation covers the 2011 Legislation

impacting construction claims in Texas. Three

basic areas will be discussed: significant

Legislation effecting mechanic’s lien claims and

retainage, the new Legislation on mechanic’s

lien and bond claim waivers, and the Texas

Property Code Ch. 162 (the Texas Construction

Trust Funds Act). Several important bills

effecting the construction industry passed this

2011 Legislative Session. This paper will focus

on mechanic’s lien related legislation, including

the new retainage bill (HB 1390) and the lien

waiver bill (HB 1456). The passage of

construction industry related matters is

incredible and amazing due to all the other

hubbub this past session, including the budget

cutting, voter id, sanctuary cities etc. etc. We

will also re-visit the application of Texas

Property Code Chapter 162, the Construction

Trust Funds Act and its provisions.

1. Retainage Legislation HB 1390.

The 2011 Leg. passed wholesale changes to the

mechanic’s lien law dealing with retainage. The

intent was to simplify and clarify retainage claim

procedure. The result, as we’ll see, is a complex

compromise bill accommodating several

competing interest groups in the construction

business. The new legislation introduces some

clarity but also added some interesting questions

about how all this new stuff is going to work as

a practical matter. The world of owner liability

for mechanic’s liens and retainage has changed

dramatically due to HB 1390 (Deshotel).

Before launching into the details of HB 1390,

we will first get a historical perspective to “set

the scene”.

1.1 Statutory Retainage (“Owner

Statutory Retainage”).

When originally drafted the early versions of the

Texas Mechanic’s Lien statute provided limited

liability for owners. Lien claimants were to be

paid on their perfected lien claims out of the

remaining undisbursed funds in the Owners’

hands, such that Owners would not have to pay

twice for their projects. This concept is referred

to in the case law as “fund trapping”. Owners

are given lien notices which tell them to “trap

funds” still in their hands, and withhold the

money from the contractor until the lien claims

are resolved or paid off.

Under the old version of the law, some Texas

contractors and owners employed the creative

and abusive strategy of avoiding the trapping of

funds by quick or immediate payment by the

owner to the contractor. If no funds were left

available to “trap” when lien notices arrived,

then the owner had no liability. If the owners

disbursed their funds to the contractor before

receipt of a lien notice, the owners had no

liability to the lien claimants.

To plug this hole, the Texas Legislature in 1909,

enacted the first concept of a required statutory

retainage by Owners. The early Statute

required owners to withhold a minimum amount

from the contractor until completion of the

project. This minimum withholding, or owner

statutory retainage, was 10% of the contract

price as adjusted for change orders and

modifications. In 1961, passage of the

Hardeman Act1 refined the owner statutory

retainage concept, broadened its scope to include

all claimants, and provided rights to perfect liens

against this owner statutory retainage fund.

Owners were declared personally liable for

failure to comply with the retainage provisions –

withholding 10% for the minimum time, 30 days

after “final completion” of their project.

Owner statutory retainage is intended to assure

suppliers and subcontractors that there will be a

little something still left in the cupboard, when

1 The Act of 1961, known as the Hardeman Act,

revised Article 5452 et seq. and ushered in sweeping

changes in the manner of perfecting a claimant's

statutory mechanic's lien within the statutory scheme. 17 Ch. 382, § 1, 57th Leg., 1961 Tex. Gen. Laws 863

(1961).


they do not get paid and have to file claims on

projects. Claimants share the owner statutory

retainage on a pro rata basis.

The owner’s statutory retainage requirement is

discussed in Page v. Structural Wood

Components, 102 S.W.3d 720 (Tex. 2003):

“The Texas Property Code requires

owners to retain either "10 percent of

the contract price of the work to the

owner" or "10 percent of the value of

the work . . . using the contract price or,

if there is no contract price, using the

reasonable value of the completed

work" for "30 days after the work is

completed." TEX. PROP. CODE

§53.101. These retained funds "secure

the payment of artisans and mechanics

who perform labor or service," including

subcontractors such as Structural Wood.

Id. §53.102. A subcontractor or other

claimant who wants to make a claim on

that retainage must properly give notice

and file [**5] "an affidavit claiming a

lien not later than the 30th

day after

the work is completed." Id. §53.103.

The period during which a claimant can

and must file a lien affidavit under

section 53.103 is therefore the same

period that an owner can and must hold

retainage under section 53.101 - thirty

days after the completion of work. It is

consequently in the best interest of all

construction participants to know when

the thirty-day period terminates - the

owner so that it can release the

remaining funds, the original contractor

so that it can budget for its final

payment, and the claimant so that it can

file the lien affidavit before that date.”

Page v. Structural Wood Components, supra, at

722

Owners may elect not to withhold retainage.

However they are liable for the amount they

should have retained, and the 30 day period to

file claims (within 30 days of final completion,

termination or abandonment under Texas

Property Code, Subchapter E) no longer applies.

This means that if the owner does not withhold

retainage, claimants have until the Subchapter C

deadlines to file lien affidavits. The Subchapter

C deadlines run from the claimants last month of

work/delivery for the job. “Residential” projects

have a different Subchapter C deadline than non-

residential projects. “Residential” jobs are

defined by the mechanic’s lien statute in

§53.001(8) as involving a single family, duplex,

triplex, quadraplex, or unit in a multi-unit

structure occupied or intended to be occupied by

at least one of the owners. The shorthand way to

remember the definition is to simply think,

“owner-occupied”. The Subchapter C lien filing

deadlines therefore are:

Residential claims: 15th of 3rd

month after

claimant’s last month of work/delivery to the

project., Texas Property Code §53.052 (b), and

§53.053 ( c); and

Non-Residential claims: 15th of 4th month

after claimant’s last month of work/delivery to

the project., Texas Property Code §53.052 (a),

and §53.053 ( c).

See Hadnot v. Wenco Distributors, 961 S.W.2d

232 (Tex.App.-Hous. (1 Dist.), 1997), rehearing

overruled (Jul 23, 1997).

“When the owner does not retain the

10% fund, the 30-day period for

claiming liens is inapplicable. General

Air Conditioning Co. v. Third Ward

Church of Christ, 426 S.W.2d 541, 544

(Tex.1968). The owner becomes

personally liable to the claimant if the

owner does not retain the 10% fund.

James Mechanical Contractors v. Tate,

647 S.W.2d 347, 350 (Tex.App.--

Corpus Christi 1982, no writ);

Donahue v. Rattikin Title Co., 534

S.W.2d 156, 159 (Tex.Civ.App.--Fort

Worth 1976, no writ); W & W Floor

Covering Co. v. Project Acceptance

Co., 412 S.W.2d 379, 382

(Tex.Civ.App.--Austin 1967, no writ).”

Hadnot, supra @ 235

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1.2 Owner Liability on Mechanic’s Lien

Claims.

Therefore the owner’s liability to

subcontractor/supplier lien claimants is the sum

of two figures described in §53.084. First, an

owner is liable for the 10% owner’s statutory

retainage. Second, an owner is further obligated

for “trapping” remaining contract funds once

he/she receives a mechanic’s lien notice letter

(§53.056 (b) and (d)) containing language

requiring the owner to withhold payment from

the contractor for the claim amount. The owner

who ignores a “trap” lien notice letter and fails

to withhold payment from the contractor and

releases funds in spite of receipt of notice in

compliance with the “fund trapping” section of

the statute is personally liable and his/her

property subject to a lien for such amounts paid.

This is in addition to the owners’ liability for the

10% retainage.

Review of Aiken v. State of Texas, 36 S.W.3d

131 (Tex. App.—Austin, 2000, no writ.),

provides an instructive illustration of how owner

liability works out when the lien statutes are

applied. Aiken involved criminal prosecution of

a Contractor in connection with a residential

construction project. The Contractor was

accused of taking a bank loan advance for the

construction and misapplying the funds by not

using them to pay project bills due on the job.

This is ordinarily a violation of Chapter 162,

Texas Property Code (the Texas Construction

Trust Funds Act). However, in this case, the

prosecution chose to pursue a conviction

pursuant to Texas Penal Code Section 32.45,

misapplication of fiduciary property. One of the

elements of this offense is to prove that the

Defendant dealt with property “in a manner that

involves substantial risk of loss to the owners”.

In this case because the owners had withheld,

through their interim lender, ten (10%) percent

retainage, the Court determined that the owners

suffered no substantial risk of loss. Their

liability for mechanic’s liens was limited to the

ten percent (10%) retainage because no funds

had been trapped by lien claimants, as described

above. The case provides a good example of

how owner liability is calculated.

To summarize, Owners have to withhold ten

percent (10%) retainage from the general or

original builder/contractor for thirty days

following final completion of the project, or its

termination or abandonment. If Owners fail to

retain the 10%, they are liable for it anyway, and

claimants in that case are not required to perfect

claims within the 30 day retainage withholding

period. The owners in such case will not be able

to “cut off” lien claims.

1.3 Contract Retainage – the Lien Notice

Problem

The owner’s statutory retainage described above

is not the same as, separate and distinct from

retainage agreed to by contract. General

Contractors normally insist on withholding

retainage from subcontractors by the terms of

their subcontracts. The percentage of retainage

withheld in the subcontracts is normally ten

percent, which is the same percentage as the

owner statutory retainage withheld from the

contractor per Texas Property Code §53.101.

Contract retainage is not required by statute. It’s

a creature of the subcontract agreement.

Contractors withhold retainage from their Subs

for many reasons, but the construction “urban

legend” that subcontract retainage is “required

by law” is false. Only owners are required by

statute to withhold retainage on private works

that are not bonded.

A special problem exists for all “derivative”

claimants (subcontractors) who have claims for

unpaid contractual retainage withheld pursuant

to their subcontracts. The problem is with the

lien notice deadlines required under Texas

Property Code. The required notices are

required at different times based on whether the

project is residential or non-residential. (See

definition in section 1.1, above). Residential

project notices are set in Subchapter K,

§53.252, which requires Owner and Contractor

notice of lien claims by the 15th of the second

month following each month the labor or

material comprising the claim is furnished to the


job site. Non-residential notices, set by §53.056

(b), as follows: Contractor notice of lien claims

by the 15th of the second month following each

month the labor or material comprising the claim

is furnished to the job site, and owner is required

by the 15th of the third month following each

month labor or material is furnished.

The problem is that the notices to owners and

contractors are required based on each month of

unpaid work, not the last month of work. If the

claimant works on a job for more than a couple

of months, and contractual retainage is withheld

by the subcontract terms, then each month only

90% of the amount earned is being billed and

paid. The retainage portion accrues each month,

but is not billed. In spite of not billing retainage,

the lien notice deadlines run on unabated. They

are not based on billing dates or when

applications for payment are submitted. They

are tied to delivery or furnishing of work or

material to the jobsite, and are unrelated to the

dates of invoicing, or subcontract retainage or

payment provisions. Claimants sometimes are

paid in accordance with their subcontract terms

for their 90% progress billing amounts all along

during the job, only to find that the retainage bill

is not paid timely. Under the prior statutory

provisions, if Claimants waited until their

completion date to begin to worry about sending

their owner notice for a lien claim for retainage,

it is most likely too late.

Under the old statute, to solve this issue, the

Legislature added an advance retainage notice

provision. Rather than send notices every month

during the job for the retainage portion,

Claimants have had the option under this

provision, Texas Property Code §53.057, to

send a one time, up front notice warning the

owner and contractor that the claimant has

signed a subcontract providing for contractual

retainage. Remember now, this is not owner

statutory retainage. This is retainage by

subcontract contractual agreement. Texas

Property Code §53.057 says claimants have the

option to perfect retainage by a one time, up

front certified mail notice, at the time the

claimant commences work2. The §53.057

notice is sent in lieu of sending the repeated

monthly notices covering each month’s

retainage portion. If this upfront §53.057 notice

is sent, then further notice about retainage is not

required, and the claimant perfects his/her claim

by filing a lien affidavit within thirty days of

final completion, termination or abandonment.

§53.052.

Subcontractor and other “derivative” claimants

(downstream of the original contractor) have

been oftentimes reluctant to send this early

§53.057 retainage notice. The old-law notice

content also required divulging the amount of

the retainage, and percentage of retainage,

revealing the claimant’s pricing.

This was the impetus for new contractual

retainage notice procedures.

1.4 Owner’s Statutory Retainage –

Problem with Filing Deadline for Lien

Affidavit.

The previous section identified the problem with

the notice deadlines for a claimant’s contractual

retainage. This section visits the problems with

filing deadlines for lien affidavits for claimants

seeking a share of the owner’s 10% statutory

retainage fund.

The problems are set up in Page v. Structural

Wood Components, Inc., 102 S.W.3d 720, 46

Tex. Sup. Ct. J. 561 (Tex. 2003) and Page v.

Marton Roofing, Inc., 102 S.W.3d 733, 46 Tex.

Sup. Ct. J. 571 (Tex. 2003). In the Page cases

the Supreme Court held that the thirty day

period owners must withhold 10% statutory

retainage occurred upon final completion,

abandonment, or termination of the first

contractor, and not upon final completion of the

owner’s project by the replacement contractor.

To share in the owner’s statutory retainage fund,

claimants had to know the date of final

completion, termination or abandonment of the

2 Due by the 15

th of the 2

nd month following

Claimant’s first month of delivery/work on

the job §53.057 (b)


project by their original contractor in order to

track their lien affidavit filing deadline. Paying

attention only to project final completion is too

late if the first contractor is terminated, or

abandons the job.

The Legislature, after the two Page cases

provided some help by adding section §53.103,

and added §53.107 requiring owner notices to

claimants of the date of a termination or date of

abandonment, but only for non residential

projects. For original contracts executed after

September 1, 2005, involving non residential

projects only, a notice of termination or

abandonment is required of owners §53.107.

The non-residential job notice must be sent not

later than the 10th day after the date an original

contract is terminated or the original contractor

abandons the project. The owner is required to

send this notice only to claimants who have first

(a) sent owner lien notices, or (b) have sent a

request to the owner for notice of termination or

abandonment. Tex. Property Code §§53.103,

53.107. Claimants not requesting the notice, or

who have not sent lien notices, do not get the

date of termination or abandonment.

If the non-residential claimant fails to file a lien

affidavit within the thirty days of the deadlines

in §53.103 (completion, termination or

abandonment), but the owner has also failed to

give the required notice of termination or

abandonment (§ 53.107) to the claimant entitled

to such notice, then that particular claimant will

nevertheless have a lien for his share of retained

funds if he has otherwise complied with the

statutory prerequisites for lien perfection. If the

owner fails to send the notice of termination or

abandonment to a claimant then that particular

claimant is not required to file the lien affidavit

under §53.103, within thirty days of termination

or abandonment, in order to have a lien under

§§53.101 – 106. The claimant can merely

comply with the Subchapter C filing deadline.

(See section 1.1).

1.5 New Retainage Legislation Revising

§53.057 and related Provisions

The Legislature this session drafted wholesale

changes to the above described provisions

dealing with contract retainage claims, and the

affidavit deadlines for sharing owner statutory

retainage. These changes were intended to

alleviate difficulty in the notice of contractual

retainage claims, and in addition, attempt to

clarify the deadline(s) for claimants to file their

affidavits claiming liens, in order to share in the

owner’s statutory retainage fund.

1.5.1 New Optional Notice of Contractual

Retainage Deadlines

The deadline for the up front, optional notice of

contract retainage (§53.057) was relaxed

considerably in the new statute, from the 15th of

the second month following the subcontractor

commencing its work, until the earlier of:

→ 30th day after claimant’s agreement (i.e. the

subcontract work) is completed, terminated or

abandoned ; OR

→30th day after date the original

owner/contractor agreement is terminated or

abandoned.

The notice is sent to the owner. It is also sent to

the original contractor if the claimant is not

already in privity with the contractor. The

contents of this retainage have also been relaxed

so that under the new statute, the notice need

only contain limited info:

→the “existence of a requirement for retainage”

→name and address of claimant

→name/address of the subcontractor if the

claimant’s agreement is with a subcontractor

rather than the original contractor

This does not require disclosure of the “sum to

be retained”, due date for the retainage, or nature

of the agreement, as under the existing law.

So notice of contractual retainage withheld in a

subcontract is moved to the end of the Sub’s job.

This is of considerable benefit to the

subcontractor claimant. Subs can now wait to

send retainage notice to the end of their work,

when they are considerably more likely to know

whether they have a problem, or potential


problem with collecting their contractual

retainage.

1.5.2 Lien Affidavit Filing Deadline

Changes.

This is the complicated part of the new bill,

especially for owners. The section provides that

the Claimant has a lien on the owner’s statutory

10% retainage fund, if the notices are sent as

described above, or according to the old monthly

notice requirements of §53.056 (non-residential)

and §53.252 (residential), and the lien affidavit

is filed:

→ in accordance with “Subchapter E”; OR

→ by the earliest of 4 different new deadlines!!

Subchapter E is the old law scheme for filing

lien affidavits in time to share owner statutory

retainage – they are due by 30th day following

final completion, termination or abandonment of

the original contract. Tex. Prop. Code

§§53.103(2), as described above in this paper

§1.4.

The four alternate new deadlines provided are

the earliest of:

1. The “normal” lien filing date

provided by Tex. Prop. Code §53.052:

Residential claims: 15th of 3rd

month after

claimant’s last month of work/delivery to the

project., Texas Property Code §53.052 (b), and

§53.053 ( c); and

Non-Residential claims: 15th of 4th month

after claimant’s last month of work/delivery to

the project., Texas Property Code §53.052 (a),

and §53.053 ( c); OR

2. 40th day after the date stated in

the Affidavit of Completion for the original

contract, if the Owner sent the Claimant notice

of the Affidavit. This Affidavit of Completion is

provided for in §53.106, which allows, but does

not require, the owner to file such an Affidavit

stating the date of final completion for the

project. The Affidavit is “prima facie” evidence

of the actual final completion date for the project

if it is sent to claimants as required; OR

3. For non-residential projects

only, 40th day after the date of termination or

abandonment of the original contract if notice of

termination or abandonment was sent by the

owner to claimants as required by §53.107.

Notice of termination or abandonment is not

applicable to residential projects. Tex. Prop.

Code §53.107 (e); OR

4. 30th day after the day the owner

sends written notice to the claimant demanding

that the Claimant file its mechanic’s lien

affidavit. The demand must contain a legal

description of the project property, owner’s

name and address, and it must say that the lien

affidavit must be filed within 30 days of when

the notice was sent.

Interestingly, this fourth section (new

§53.057 (g)) says that the notice “is effective

only for the amount of contractual retainage

earned by the claimant as of the day this owner

notice was sent.” The 4th deadline and §53.057

(g) indicate that claimants who fail to file within

30 days of the demand may only have their

earned contract amount of retainage impacted.

1.5.3 Application.

Assume that the Claimant sends its lien notices

on time, and complies with the new contractual

retainage notice (within 30 days for claimant’s

completion). The Owner withheld the statutory

10% retainage, but no funds were “trapped”

because the Owner had paid out the adjusted

contract price to the Contractor prior to receipt

by the Owner of the Claimant’s notice letters. If

the Owner sends the “demand” to file the lien

under this 4th deadline, then in order to share a

piece of owner statutory retainage with other

perfecting claimants, the claimant must file his

lien affidavit by the earliest of the 4 new

deadlines, per §53.057, or alternatively still can

file its affidavit within thirty days of project

completion / termination / abandonment under

subchapter E, §53.103.


Analysis of the various kinds of

claimants, and the required withholding period

for owner statutory retainage is now a matter of

applying the alternative deadlines prescribed by

the new law amendments, depending on what

owners do in the way of sending the three

alternate notices: affidavit of final completion,

or demand to file lien affidavit. If owners want

to smoke out potential lien claims, in order to

shorten the time they must withhold statutory

retainage, then they can consider the alternate

new deadlines:

→Owners can file an affidavit of

completion per §53.106 and send copies to all

potential claimants. This will trigger the

§53.057 (f) (1) (b) (ii) deadline for lien affidavits

which is the 40th day from the date of

completion stated in the affidavit. This will

effect claimants who are sent a copy of the

completion affidavit.

→The owners can send the new 30 day demand

for lien filing to all the potential claimants. This

triggers the §53.057 (f) (1) (b) (iv) deadline,

which is only effective as to the claimant’s

contract retainage portion of its claim.

Problem is, if the owner has not heard from a

supplier or subcontractor at all (no notices of

retainage, or other monthly lien notices have

been received), this may be because the claimant

has no contractual retainage being withheld

from it. For these folks, the owner must account

for the first alternative deadline, §53.057 (f) (1)

(b) (i), which is the old §53.052 date = 15th of

the 3rd

month (for residential) or 15th of the 4

th

month (non residential construction) following

the last month of the claimant’s delivery or work

on the job.

Owners are helped somewhat here by the lien

notice letters required by §53.056 (non

residential) and §53.252 (residential) deadlines

for owner lien notice from potential claimants:

→ 15th of the 3

rd month after each month

of delivery or work (§53.056)

→15th of the 2

nd month after each month

of delivery or work (§53.252)

1.5.4 Owner Failure to Withhold

Retainage – §53.052 Deadlines apply

If the Owner fails to withhold statutory

retainage, for the required period of time, then

the Claimants are entitled to perfect their claims

by notice and affidavit either by the deadlines

for progress billings (15th of 3

rd month

(residential) and 15th of the 4

th month (non-

residential) following last month on the job) or

new §53.057, either way. So the Hadnot ruling

was codified. No 30 or 40 day deadlines are

applicable if the Owners fail to properly

withhold the statutory retainage.

1.5.5 “Final Completion”

TDIndustries, Inc. v. NCNB Texas National

Bank, 837 S.W.2d 270 (Tex. App. - Eastland

1992, no writ) contains a discussion of the actual

final completion date. TDIndustries held that

actual completion did not occur until the last

pocket door was installed in the last apartment

on the apartment project construction. An

architect’s certificate that the project had been

completed was not the actual completion date.

Likewise, substantial completion, or beneficial

occupancy, is not a good definition. Actual

completion under TDIndustries does not occur

until all items required by the contract, plus

contemplated change orders and extras, have

actually been installed once. On the other hand,

a contractor going back out to the site to repair

items already installed, or perform other

warranty work, does not thereby extend the

actual completion date. A claimant may refute

an affidavit of completion by evidence of later

completion, in actuality, such as the installation

of the pocket door in the TDIndustries case.

The recent case of a Texas Wood Mill Cabinets,

Inc. v. Butter, 117 S.W.3d 98 (Tex. App.-Tyler

Aug 06, 2003) - addresses “final completion”.

The issue in Texas Wood involved whether final

completion of the cabinetry worked had

occurred. The Cabinetry installation folks

returned to the property because there were a

couple of drawers that were hitting on the cook

top and the drawers had to be modified to fit


beneath it. The Court looked at the contract

scope or work language in order to determine

final completion. Because the contract required

that the cabinets be constructed, installed and

"functional", the court held that this drawer

adjustment work was the final completion even

though it otherwise was "punch list" work only.

1.5.6 Request for Information to Owner –

Date of original contract execution – Effective

Date.

The legislative amendment to “requests for

information” (§ 53.159) adds a new section

requiring Owners, upon written Claimant

request, to furnish a statement including the

legal description, whether the job was bonded by

the contractor, identification of prior recorded

liens on the property, and the new info: the date

the original contract was signed. This is to be

provided by owners within ten days. The

contract signing date is key to determining

application of the new amendments, which apply

only to original contracts (between the owner

and contractor) signed after the effective date

September 1, 2011.

The interesting part of this is that Owner failure

to supply the original contract execution date,

renders the statutory retainage 30 and 40 day

deadlines inapplicable, allowing claimants to file

affidavits by the old §53.052, deadline, 15th of

the 3rd

month following their last month of

work/delivery (residential) and 15th of the 4

th

month (non-residential).

1.5.7 Grounds for Removal of Lien, §53.160

– Retainage Deadlines Expired

The list of grounds for removing mechanic’s

liens was amended to provide that if the

deadlines for filing lien affidavits, to share in the

owner’s retainage have all expired, and the

Owner has already paid the Contractor, without

first receiving the trap funds or other lien notice,

then the lien can be removed. §53.160(b)(4).

2. “Shall” vs “May” Award Attorneys

Fees

Mechanics lien claims perfected in accordance

with the Texas Property Code require judicial

foreclosure. Mechanics liens are "discharged of

record " if suit is not timely filed. Tex. Prop.

Code §53.157. Suits for foreclosure of statutory

mechanics liens on residential projects must be

filed within one year of the last day a valid lien

claim could be filed pursuant to 53.052, or if

earlier, within one year from completion,

termination or abandonment of the original

contract under which the mechanics lien is

asserted. On non-residential projects, the

limitations period is two years from the same

dates.

Consequently claimants should be aware that

unless they timely file suit their claims are

discharged. Naturally the first question is, "How

am I going to recover the expense of suing just

to get my money?” The new legislation

provides that in any action to foreclose a lien (or

enforce a bond claim) on a job covered by Ch.

53, or to declare a lien invalid, “in whole or

part”, the Court “shall” award attorneys fees

which are "equitable and just"

So the punch line is that claimants and

defendants (owner/contractor's) both need to

evaluate their claims and positions carefully, and

sufficiently in advance of the relatively short

fused statute of limitations applicable. Too

many times claimants hold out hope that

someone is going to voluntarily pay them off

without incurring litigation costs, and wind up

procrastinating themselves up against their one-

year or two-year limitation period. To avoid

“discharge” they must file the foreclosure action

simply to preserve some time to investigate

whether or not they have a valid claim. Under

the new statute a hasty, incorrect choice to sue

will result in fees paid by the claimant to the

owner or contractor defending against the lien

claim. Owners on the other hand now know they

get a mandatory award of attorney’s fees if they

remove an invalid claim.

In an important “carve out”, the Court still is

allowed to use discretion before awarding fees

against the residential project owner. See new

Texas Property Code §53.156.


So if the lien is partially good and partially bad,

does the owner get all the fees, or what do you

do? Gill Savings Association v. International

Supply Co., Inc., 759 S.W.2d 697 (Tex. App.--

Dallas 1988, writ denied) addressed the question

about whether a lien overstating the amount due

as of the time of trial was invalid. In this case,

the claimant had not applied a $15,000 payment

received about one month prior to the affidavit

filing date. Also a credit due of $3,000 had not

been applied. The affidavit amount of

$75,986.03 was reduced at trial, after credits and

corrections to $57,365.32.

The Court held that the affidavit was in

substantial compliance with the statute:

“We hold that under the facts of this

case, International's lien affidavit was in

substantial compliance with the property

code statute when it filed its lien for an

amount greater than the actual amount

reconciled by the time of trial two years

later. See First National Bank in

Graham v. Sledge, 653 S.W.2d 283, 285

(Tex.1983) (a subcontractor's lien rights

are totally dependent on compliance

with the statutes authorizing the lien;

however, substantial compliance is

sufficient to perfect a lien); see also and

compare Mathews Construction

Company, Inc. v. Jasper Housing

Construction, 528 S.W.2d 323, 329

(Tex.Civ.App.--Beaumont 1975, writ

ref'd n.r.e.) (holding that a "general

statement" of the total price in lump sum

is in substantial compliance with

mechanic's and materialman's lien

statutes).”

Remember, also that “substantial compliance”

with the mechanics lien statutes has always been

the test for validity.

3. Release of Mechanic’s Liens. New

Statutory Forms. No enforceable release in

advance of collection.

One of the most contentious topics in all of

construction subcontracting over the last several

years involves releases of liens. Contractors and

owners sometimes require unconditional lien

releases before paying a draw or final payment.

Subcontractors and suppliers often require

collected funds before signing unconditional

releases. Some builder/contractors require

advance waivers of liens as a part of their

standard subcontract agreements.

The 2011 Legislature took on the release of lien

issue and has regulated, verbatim, the language

of lien waivers, by adding Texas Property Code,

Subchapter L, §§53.281--.286. This new section

provides that releases are unenforceable unless

they comply with the statute. The heart of the

section is §§53.282 and .283 providing that

releases are unenforceable unless they (1)

comply with the forms in the statute, and (2) the

claimant must have actually received payment in

good and sufficient funds for an unconditional

release of lien to be enforceable. No one can

require a release unless the Claimant has

collected funds for payment for its work.

The four new statutory form releases are for

conditional and unconditional partial payment,

and for conditional and unconditional final

payment. The conditional releases are

ineffective until the check tendered is “properly

endorsed” and “paid by the bank on which it is

drawn”. The payment request or statement must

be attached to the release, and the statute says

these releases cover the work in the attached pay

request, except for retainage, pending changes,

or “other items furnished”.

The claimant must represent in the release that it

has paid, or will pay its bills to the extent

covered by the attached pay request.

Unconditional releases contain a notice at the

top of the form warning that unconditional

releases are prohibited if the Claimant has not

collected payment.

The new release forms take effect for “a

contract” executed on or after January 1, 2012.

The act contains a “substantial compliance”

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provision effective through August 31, 2012.

This provision gives contractors, subcontractors

and owners until August 31, 2012 to find and

start using the statutory forms verbatim. Until

then release forms provided in “attempted

compliance” are effective. However any attempt

to jigger with (expand or restrict the rights as

stated in the statute) the requirement that the

releases are only effective upon payment

collected, are banned. The statute terms are

read into the release forms, and altering

language is “disregarded”. Any contractual

provision purporting to waive the new statutory

requirements are void. Copies of the prescribed

forms are attached as Exhibit A to this paper.

Once a lien affidavit is filed or bond claim

submitted the prescribed forms are not

applicable.

The tract home, or spec home builders received

a special exemption from the provisions of the

statute. If the project involves construction of

“single-family houses, townhouses, duplexes, or

land development for such construction”, the

new statute specifically sanctions advance

contractual waiver of mechanic’s lien rights,

provided the waiver is contained in the written

agreement or subcontract and such agreement is

made before the work under that agreement

commences. However suppliers of material who

do not furnish any labor are not subject to this

special home builder advance waiver.

If a lien is filed anyway by a subcontractor with

a subcontract with one of these advance waivers

in it, the filing is declared not to be a violation of

the fraudulent lien statute, Ch. 12, Civil Practice

and Remedies Code, as long as the lien is

released within 14 days in response to an owner

demand containing an explanation of the reason

for non-payment on the job, and a copy of the

contract wavier. See new §§53.282 (b)

4. Ch. 12 Texas Civil Practice and

Remedies Code. The Fraudulent Lien Act.

The Texas Civil Practice and Remedies Code

Fraudulent Lien provisions were passed to deal

with fictitious or fraudulent documents creating

false liens against real property. The Act

provides that if the document is fraudulent, then

civil penalties, actual damages, attorney’s fees

and exemplary damages are recoverable. After

passage, the Act was employed against

mechanic’s lien claims. The cases of Centurion

Planning Corp., Inc. v. Seabrook Venture II, 2004 WL 2823125 (Tex.App.--Hous. (1 Dist.)

Dec 09, 2004) , and Taylor Elec. Services, Inc.

v. Armstrong Elec. Supply Co., 167 S.W.3d 522

(Tex.App.-Fort Worth, 2005) have arguably

expanded these civil penalty provisions of the

statute cited beyond the original intent.

Centurion holds that the civil penalties section

of the statute can be enforced even if the

document, and the conduct of the lien claimant

in question, does not rise to the level of finding

that the lien violates the fraud test in 51.091 (c)

Texas Gov’t. Code. Section 51.901(c) of the

Government Code provides that,

"[f]or purposes of this section, a

document or instrument "is presumed to

be fraudulent" if:

[T]he document or instrument purports

to create a lien or assert a claim against

real or personal property or an interest in

real or personal property and:

(A) is not a document or instrument

provided for by the constitution or laws

of this state or of the United States;

(B) is not created by implied or express

consent or agreement of the obligor,

debtor, or the owner of the real or

personal property or an interest in the

real or personal property, if required

under the laws of this state, or by

implied or express consent or agreement

of an agent, fiduciary, or other

representative of that person; or

(C) is not an equitable, constructive, or

other lien imposed by a court with the

jurisdiction created or established under

the construction or laws of this state or

of the United States.

Tex. Gov't Code Ann. § 51.901(c)(2)

(Vernon 1998).

The Centurion Court held:

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“However, section 51.091(c) does not

define the term "fraudulent"; it

establishes a "presumption" that a

document or instrument is fraudulent

under certain circumstances. Moreover,

section 12.006, entitled "Plaintiff's

Costs," simply provides the

circumstances under which a plaintiff

"shall" recover the "costs of bringing the

action" in addition to the plaintiff's

damages awarded under section 12.002.

If the Legislature had wanted to define

the term "fraudulent" as used for all

purposes in Chapter 12, it could have

done so. Instead, the Legislature

referenced the term fraudulent "as

described" in Government Code section

51.901(c) in regard only to the recovery

of plaintiff's costs in section 12.006. We

cannot read section 12.006's reference to

the term fraudulent "as described by

Section 51.901(c), Government Code"

as providing a definition of the term for

all of Chapter 12.”

The error of the lienor’s ways in Centurion was

that the claim was made for engineering fees.

The claimant did not have a written contract

with the owner for engineering services,

required as a prerequisite to filing a valid

engineer’s lien, Tex. Prop. Code §53.021.

Centurion found the requisite intent for filing a

fraudulent lien because the claimant admitted

that he knew he had no written contract. The

fact that he didn’t know a written contract was

required for an engineer’s lien was not important

to the Court. Knowledge of the statutory

requisites was imputed.

Ch. 12 was further expanded in Taylor Electric.

In Taylor the claimant filed a lien for an amount

which did not account for a payment made prior

to filing. Also the claimant had substantially

delayed delivery of materials on the job, which

was found to be fraudulent conduct by the jury.

The Court concluded that this evidence of fraud

was sufficient to make a finding that rendered

the mechanic’s lien fraudulent as well, violating

Ch. 12, and supporting award of the $10,000

civil penalty. The Plaintiff in this case was the

original contractor on the job, not the owner.

The Court said the contractor had standing to

bring a case under the fraudulent lien statute

because of the contractor’s indemnity obligation

to protect the owner from liens.

Walker & Assocs. Surveying v. Roberts, 306

S.W.3d 839 (Tex. App. Texarkana 2010),

clarifies the proof required for a violation of Ch.

12, as follows:

Thus, to establish a fraudulent lien in

this case, Roberts was required to show

that Walker or WAS (1) made,

presented, or used a document with

knowledge that it was a fraudulent lien;

(2) intended the document be given

legal effect; and (3) intended to cause

Roberts financial injury. See TEX. CIV.

PRAC. & REM. CODE ANN. §

12.002(a). n8

Walker & Assocs. Surveying v. Roberts,

306 S.W.3d 839, 848 (Tex. App.

Texarkana 2010)

…….Next, Roberts cites Taylor

Electrical Services for the proposition

that Walker's letter informing Roberts of

the lien stating, "Upon receipt of

payment in full this lien will be

removed" was evidence of intent to

cause financial harm. 167 S.W.3d 522.

There are two key differences

distinguishing this case from Taylor.

First, Taylor involved a jury finding. Id.

at 525. Second, the evidence of intent in

Taylor was a letter threatening to file a

lien and stating, "We do not wish you

any harm in your business," evidencing

knowledge that the filing of a lien could

potentially cause financial harm. Id. at

531. We decline to find that the letter

sent by [**20] Walker in this case

established intent as required by the

fraudulent lien statute. At most, it

creates a genuine issue of material fact

for a jury's resolution.

Consequently the Taylor and Walker cases teach

http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000170&DocName=TXCPS12.006&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000170&DocName=TXCPS12.002&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000301&DocName=TXGTS51.901&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000301&DocName=TXGTS51.901&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000170&DocName=TXCPS12.006&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000170&DocName=TXCPS12.006&FindType=Lhttp://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=1000301&DocName=TXGTS51.901&FindType=Lhttp://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=306+S.W.3d+839%2520at%2520848http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=306+S.W.3d+839%2520at%2520848http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=306+S.W.3d+839%2520at%2520848http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=306+S.W.3d+839%2520at%2520848http://www.lexis.com/research/xlink?app=00075&view=full&searchtype=get&search=306+S.W.3d+839%2520at%2520848https://www.lexis.com/research/buttonTFLink?_m=8e5b19ba4f4886aeca513d157500d6af&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b306%20S.W.3d%20839%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=101&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20S.W.3d%20522%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAl&_md5=74fd85562eabb578b9882237edda039chttps://www.lexis.com/research/buttonTFLink?_m=8e5b19ba4f4886aeca513d157500d6af&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b306%20S.W.3d%20839%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=102&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20S.W.3d%20522%2c%20525%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAl&_md5=7dccc0566c13d1e528d5812bc5c05406https://www.lexis.com/research/buttonTFLink?_m=8e5b19ba4f4886aeca513d157500d6af&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b306%20S.W.3d%20839%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=102&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20S.W.3d%20522%2c%20525%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAl&_md5=7dccc0566c13d1e528d5812bc5c05406https://www.lexis.com/research/buttonTFLink?_m=8e5b19ba4f4886aeca513d157500d6af&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b306%20S.W.3d%20839%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=103&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20S.W.3d%20522%2c%20531%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAl&_md5=7e12bf7a92be06bdf81bce74ff0beb73https://www.lexis.com/research/buttonTFLink?_m=8e5b19ba4f4886aeca513d157500d6af&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b306%20S.W.3d%20839%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=103&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20S.W.3d%20522%2c%20531%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAl&_md5=7e12bf7a92be06bdf81bce74ff0beb73


that to trigger Ch. 12, there must be evidence the

Claimant intended financial harm.

Further complicating this area the Legislature

amended Ch. 12 in 2009 to specifically exempt

mechanic’s lien Claimants by adding §12.002

(c):

A person claiming a lien under Chapter

53, Property Code, is not liable under

this section for the making, presentation,

or use of a document or other record in

connection with the assertion of the

claim unless the person acts with intent

to defraud.

Given the fraudulent intent requirements as

identified in Taylor and Walker the mechanic’s

lien exemption does not absolve Claimants of

exposure for Ch. 12 violations.

In fact, under the new release of lien bill, Texas

Property Code §53.282 (discussed above, §3), in

cases where an advance release of lien is

included in a residential contract, (see above §3,

page 16) it is an express violation of §12.002 if

the lien claimant fails to release a lien within 14

days of the day the owner sent the request for

release and other items required.

5. Construction Trust Funds Liability –

Residential Construction

5.1 Basics and Bank Exemption.

Texas Property Code §162.001 provides an

additional, and separate remedy over and above

the involuntary mechanic’s lien rights. Under

this statute, construction payments or loan

receipts to pay for construction (including such

funds in the hands of an owner, general

contractor, a sub, or any officer or director or

agent of the same) are "trust funds". Recipients

(i.e., the owner, contractor, subcontractor) are

“trustees” for the construction funds which come

into their possession on the job. Owners are

trustees if they receive loan draws and such loan

is secured by a lien on the project property.3

3 Texas Property Code §162.001(b).

Anybody who furnishes labor or material to

improve real property in Texas, is a beneficiary

of this "trust fund." The purpose of this "fund"

is to pay for the work or materials.

It is a felony to retain, use, or divert trust funds

in excess of $500.00, unless the trustee has paid

all current or past due obligations respecting the

trust funds. The case law provides a private

civil action for violation of the Trust Fund

Statute.4 There are some affirmative defenses to

suit or prosecution under this law. The holder of

funds is allowed to use them to pay actual

expenses directly related to the construction

project. He is also allowed to retain them upon

the basis of a "reasonable belief" that the party

claiming is not entitled to be paid the money, or

because the funds are retained because a lien

claim has been filed.

Again, keep in mind that the beneficiary under

this theory is not required to establish any kind

of valid mechanic’s lien. This is a wholly

separate and additional right of the claimant.

More special interest legislation occurred with

passage of the Trust Funds Act, because Banks

are totally exempt from its application. In re

Waterpoint International, 330 F.3rd

339 (5th Cir.

(Tex. 2003). In this case, the bankruptcy court

decision was affirmed by the 5th Circuit

regarding a fight between the Subcontractor and

Comerica Bank as to the debtor-contractor’s

accounts receivables. Waterpoint, Debtor,

contracted with Exxon to improve a certain

parcel of land. The Subcontractor to Waterpoint

was not paid for its work, but also never

perfected a mechanic’s lien. Contractor filed

bankruptcy. Comerica Bank asserted it had a

perfected security interest in the Contractor’s

receivables, including the money owed by

Exxon. The Subcontractor claimed a priority to

these receivables under the Texas Construction

Trust Fund Statute as outlined above. Citing

4 Lively v. Carpet Services, Inc., 904 S.W.2d 868

(Tex.App. -- Houston [1st Dist.] 1995, writ denied)

and Tacon Mechanical Contractors, Inc. v. Grant

Sheet Metal, Inc., 889 S.W.2d 666 (Tex.App. –

Houston [14th Dist.] 1994, writ denied).


Texas Property Code 162.004 (exempting Banks

from the Trust Fund Statute) and the Texas

Supreme Court in Republicbank Dallas, N.A. v.

Interkal, Inc., 691 S.W.2d 605, 607-08 (Tex.

1985), the Court held that banks are not subject

to the Construction Trust Fund Statue. The

court then considered the subcontractor’s next

argument, that the legislature, after the Interkal

decision, had passed Texas Property Code

Section 53.151, providing that a creditor cannot

enforce a security interest to the prejudice of a

subcontractor. The court held that Interkal is

still the law in spite of 53.151. The Court held

further that if the subcontractor had perfected its

mechanic’s lien against the project, then with a

perfected mechanic’s lien it would have been

able to keep the bank from intercepting the

construction payment from the owner to the

contractor. Without a perfected mechanic’s lien

however, the Court held that the subcontractor

was without a remedy. Under such

circumstances the bank could take the

construction funds with impunity by exemption

from the trust fund statute.

“The courts interpreting article 5466, the

predecessor to §53.151, demonstrate the

presumption (at least under article 5466)

that a derivative claimant must comply

with the lien perfection procedures in

order to assert rights to funds held by

the owner. See, e.g., Youngstown Sheet

& Tube Co. v. Lucey Prod. Co., 403

F.2d 135, 142 (5th Cir.1968) (discussing

(under the Hardeman Act) the need for

proof of a materialman's compliance

with the procedures for lien perfection

before liens can affix to an account

receivable of a debtor); Crutcher,

Rolfs, Cummings, Inc. v. Big Three

Welding Equip. Co., 224 S.W.2d 884

(Tex.Civ.App.-Galveston 1949), rev'd

on other grounds, 149 Tex. 204, 229

S.W.2d 600 (1950) (discussing article

5466 as referring to only funds

subjected to mechanics' and

materialmen's liens); see also

Baumann v. Cibolo Lumber Co., 226

S.W.2d 210, 212 (Tex.Civ.App.-San

Antonio 1950, no writ) (same). These

cases further persuade us to reject

Exchanger's argument that §53.151 was

meant to overrule Interkal as

inconsistent with the framework and

function of Chapters 53 and 162.” Supra

@ 348.

5.2 Accounting – Residential

Homesteads.

If the project is for construction of

improvements to a residential homestead

exceeding $5,000, the builder is required to

deposit the construction payments into a

"construction account". The bank statement

must identify the account as the "construction

account".

The builder must maintain an account record

showing the source and amount of trust funds

come including date of deposit, the date and

amount of each disbursement from the account

and the payee, and current balance. A separate

"account record" for each project must be

maintained which specifies direct costs and

indirect costs. All invoicing and other supporting

documents regarding construction costs for

which trust funds were disbursed, must be

retained. The deposit and payment documents

must reference the construction account number

or other link to the construction account. The

accounting information must be preserved for at

least one year from completion.

5.3 Trust Fund Act Litigation – Cause of

Action and Limitations Clarified.

The use of the Texas construction trust fund act

in civil litigation has dramatically expanded in

the last several years. Different appellate

decisions however have applied different causes

of action to enforcement of the act. See Lively v.

Carpet Services, Inc., 904 S.W.2d 868

(Tex.App. -- Houston [1st Dist.] 1995, writ

denied) and Tacon Mechanical Contractors,

Inc. v. Grant Sheet Metal, Inc., 889 S.W.2d 666

(Tex.App. -- Houston [14th Dist.] 1994, writ

denied).


However in Polk Mech. Co., LLC v. Jones,

2009 Tex. App. LEXIS 4939, 9-11 (Tex. App.

San Antonio, 2009, pet. Review denied, 2009)

the cause of action, and applicable limitations

statute were addressed. The San Antonio Court

4th Court of Appeals clarified that the Trust Fund

act creates a fiduciary relationship between the

trustee and beneficiary, and the cause of action

therefore is a claim for breach of fiduciary duty.

The four year statute of limitations applies, and

is subject to the "discovery rule". Therefore the

cause of action must be “inherently

undiscoverable” but “objectively verifiable”.

Limitations does not commence until the

plaintiff knew, or should have known, of the

facts giving rise to the claim.

“Polk Mechanical's claim against

Jones arises under the Texas

Construction Trust Fund Act. Under

section 162.003 of the Act, a

subcontractor who labors or who

furnishes labor or material for the

construction or repair of an

improvement on real property is a

beneficiary of any trust funds paid by or

received in connection with the

improvement. TEX. PROP. CODE

ANN. § 162.003 (Vernon 2007). A

contractor, or an officer of a contractor

who receives trust funds or who has

control or direction over trust funds, is a

trustee of the trust funds. Id. § 162.002.

The Act, therefore, creates a

beneficiary/trustee relationship between

a subcontractor and a contractor who

receives payment from a project owner.

See id. In other words, the Act

"imposes fiduciary responsibilities on

contractors to ensure that Texas

subcontractors . . . are paid for work

completed." Kelly v. Gen. Interior

Constr., Inc., 262 S.W.3d 79, 84-85

(Tex. App.--Houston [14th Dist.] 2008,

pet. granted on other grounds); In re

Faulkner, 213 B.R. 660, 666 n. 10

(Bankr. W.D. Tex. 1997) (noting that a

trust relationship arises under Texas law

at the time payments are made to the

contractor for construction).

A variation to the inherently

undiscoverable element arises when

applying the discovery rule to a

fiduciary relationship. Computer

Assocs. Int'l, Inc. v. Altai, Inc., 918

S.W.2d 453, 456 (Tex. 1996); see also

S. V. v. R. V., 933 S.W.2d 1, 8 (Tex.

1996). In the fiduciary context, "a

person to whom a fiduciary duty is owed

is either unable to inquire into the

fiduciary's actions or unaware of the

need to do so." S V., 933 S.W.2d at 8.

When a trustee breaches its duty to a

beneficiary, the nature of the injury is

considered inherently undiscoverable

because of the fiduciary nature of the

relationship. See id. However, the

person owed a fiduciary relationship still

must exercise reasonable diligence

"when the fact of misconduct becomes

[so] apparent it can no longer be

ignored." n1 Id.; see also Computer

Assocs. Int'l, 918 S.W.2d at 456;

[*11] Slay v. Burnett Trust, 143 Tex.

621, 187 S.W.2d 377, 394 (Tex. 1945);

G. Prop. Mgmt., Ltd. v. Multivest Fin.

Servs. of Tex., Inc., 219 S.W.3d 37, 48-

49 (Tex. App.--San Antonio 2006, no

pet.).

Because Jones owed fiduciary

responsibilities to Polk Mechanical, the

inherently undiscoverable requirement

for applying the discovery rule is

satisfied. See S V., 933 S.W.2d at 8.

Moreover, the injury in this case is

objectively verifiable as it can be

objectively established through bank

records and cancelled checks. See

HECI Exploration Co., 982 S.W.2d at

886. Accordingly, we hold the

discovery rule applied to Polk

Mechanical's claim against Jones, and

Jones was required to conclusively

negate its application to be entitled to

summary judgment. See Pustejovsky, 35

S.W.3d at 646 Polk Mech. Co., LLC v.

Jones, 2009 Tex. App. LEXIS 4939, 9-

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11 (Tex. App. San Antonio, 2009,

review denied)

Polk Mech. Co., LLC v. Jones, 2009

Tex. App. LEXIS 4939 (Tex. App. San

Antonio July 1, 2009)

Polk Mechanical discusses, in reversing

summary judgment for the defendants on

limitations, that the discovery rule may not have

been tripped until the defendants’ bank records

were produced showing the expenditures on

other projects, taking the balance below the

deposits on the project in question.

END.

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EXHIBIT “A”

(Page 1 of 4)

Conditional Partial Release - During Construction

§53.284 (b), Tex. Property Code:

If a contractor (or other potential lien claimant) is required to execute a waiver

and release in exchange for or to induce payment of a progress payment and is not

paid in exchange for the waiver and release or if a single payee check or joint payee

check is given in exchange for the waiver and release, the waiver and release must

read:

CONDITIONAL WAIVER AND RELEASE ON PROGRESS PAYMENT

Project ___________________

Job No. ___________________

On receipt by the signer of this document of a check from ________________

(maker of check) in the sum of $__________ payable to _____________________ (payee or

payees of check) and when the check has been properly endorsed and has been

paid by the bank on which it is drawn, this document becomes effective to release any

mechanic's lien right, any right arising from a payment bond that complies with a state

or federal statute, any common law payment bond right, any claim for payment, and

any rights under any similar ordinance, rule, or statute related to claim or payment rights

for persons in the signer's position that the signer has on the property of

________________ (owner) located at ______________________ (location) to the following

extent: ______________________ (job description).

This release covers a progress payment for all labor, services, equipment, or

materials furnished to the property or to __________________ (person with whom signer

contracted) as indicated in the attached statement(s) or progress payment request(s),

except for unpaid retention, pending modifications and changes, or other items

furnished.

Before any recipient of this document relies on this document, the recipient

should verify evidence of payment to the signer.

The signer warrants that the signer has already paid or will use the funds received

from this progress payment to promptly pay in full all of the signer's laborers,

subcontractors, materialmen, and suppliers for all work, materials, equipment, or

services provided for or to the above referenced project in regard to the attached

statement(s) or progress payment request(s).

Date ____________________________

_________________________________ (Company name)

By ______________________________ (Signature)

_________________________________ (Title)

EXHIBIT “A”

(Page 2 of 4)

Unconditional Partial Release - During Construction

§53.284 (c), Tex. Property Code:

If a contractor (or other potential lien claimant) is required to execute an

unconditional waiver and release to prove the receipt of good and sufficient funds for

a progress payment and the claimant or potential claimant asserts in the waiver and

release that the claimant or potential claimant has been paid the progress payment,

the required statutory form of waiver and release is as follows. The form must include

the Notice at the top:

NOTICE:

This document waives rights unconditionally and states that you have been paid

for giving up those rights. It is prohibited for a person to require you to sign this

document if you have not been paid the payment amount set forth below. If you have

not been paid, use a conditional release form.

UNCONDITIONAL WAIVER AND RELEASE ON PROGRESS PAYMENT

Project ___________________

Job No. ___________________

The signer of this document has been paid and has received a progress

payment in the sum of $___________ for all labor, services, equipment, or materials

furnished to the property or to _____________________ (person with whom signer

contracted) on the property of _______________________ (owner) located at

______________________ (location) to the following extent: ______________________ (job

description). The signer therefore waives and releases any mechanic's lien right, any

right arising from a payment bond that complies with a state or federal statute, any

common law payment bond right, any claim for payment, and any rights under any

similar ordinance, rule, or statute related to claim or payment rights for persons in the

signer's position that the signer has on the above referenced project to the following

extent:

This release covers a progress payment for all labor, services, equipment, or

materials furnished to the property or to __________________ (person with whom signer

contracted) as indicated in the attached statement(s) or progress payment request(s),

except for unpaid retention, pending modifications and changes, or other items

furnished.

The signer warrants that the signer has already paid or will use the funds received

from this progress payment to promptly pay in full all of the signer's laborers,


services provided for or to the above referenced project in regard to the attached

statement(s) or progress payment request(s).

Date ____________________________

_________________________________ (Company name)

By ______________________________ (Signature)

_________________________________ (Title)

EXHIBIT “A”

(Page 3 of 4)

Conditional Final Release

§53.284 (d), Tex. Property Code:

If a contractor (or other potential lien claimant) is required to execute a

waiver and release in exchange for or to induce the payment of a final payment

and is not paid in good and sufficient funds in exchange for the waiver and

release or if a single payee check or joint payee check is given in exchange for

the waiver and release, the waiver and release must read:

CONDITIONAL WAIVER AND RELEASE ON FINAL PAYMENT

Project ___________________

Job No. ___________________

On receipt by the signer of this document of a check from

________________ (maker of check) in the sum of $____________ payable to

_____________________ (payee or payees of check) and when the check has

been properly endorsed and has been paid by the bank on which it is drawn,

this document becomes effective to release any mechanic's lien right, any right

arising from a payment bond that complies with a state or federal statute, any

common law payment bond right, any claim for payment, and any rights under

any similar ordinance, rule, or statute related to claim or payment rights for

persons in the signer's position that the signer has on the property of

_____________________ (owner) located at ______________________ (location) to

the following extent: ______________________ (job description).

This release covers the final payment to the signer for all labor, services,

equipment, or materials furnished to the property or to __________________

(person with whom signer contracted).

Before any recipient of this document relies on this document, the

recipient should verify evidence of payment to the signer.

The signer warrants that the signer has already paid or will use the funds

received from this final payment to promptly pay in full all of the signer's laborers,


services provided for or to the above referenced project up to the date of this

waiver and release.

Date ____________________________

_________________________________ (Company name)

By ______________________________ (Signature)

_________________________________ (Title)"

EXHIBIT “A”

(Page 4 of 4)

Unconditional Release – Final Payment

If a contractor (or o

Documents

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