Once your lien is perfected, it’s time to enforce it. With the exception of public works and bonded projects, you must file a lawsuit seeking a judicial foreclosure of the lien. This means asking the court to enter an order allowing the real estate to be sold at public auction with the proceeds to be paid to all lienholders pro rata. To enforce your claims in a case involving a bonded project, a lawsuit must be filed against the bonding company.
If you, as claimant, are anything other than a natural person, you must retain a licensed attorney to represent you in court, unless you are in a Justice Court whose jurisdiction is limited to $10,000. However, note that a Justice of the Peace has no power to issue an Order of Sale of the property!
- 1. Limitations
All claims must be enforced (or at least the enforcement process initiated) within certain time limits. The time within which a lawsuit must be filed is:
A. Un-bonded Commercial Projects
Within two years of the last day a claimant may file a lien affidavit or within one year after completion, termination or abandonment of the project, whichever is later. However, it should be noted that if the lien claim is based upon a Constitutional lien, the time may be extended to four years instead of two. There is no clear authority on this issue at this time.
B. Bonded Commercial Projects
Within one year of perfection of the claim, if the bond was recorded at the time the lien was filed. Within two years of perfection of the claim, if the bond was not recorded at the time the lien was filed.
C. Commercial Leasehold Projects
Within two years of the last day a claimant may file a lien affidavit or within one year after completion, termination or abandonment of the project, whichever is later. If the suit is only to collect the debt (no foreclosure), the time is four years from the date the debt was due.
D. Residential Projects
Within one year of the last day a claimant may file a lien affidavit or within one year after completion, termination or abandonment of the project, whichever is later. If the suit is only to collect the debt (no foreclosure), the time is four years from the date the debt was due.
E. State Public Work Projects
Within one year of the date that notice of a claim was first mailed.
F. Federal Public Work Projects
Within one year from the last date on which you furnished labor or materials to the project, and no sooner than 90 days after the last of your work or material was furnished.
- 2. Attorney's Fees
In many instances a claimant can recover reasonably incurred attorney's fees. This includes not only the enforcement phase, but all attorney's fees incurred all along the process. This is certainly an incentive to retain an attorney.
A. Un-bonded Commercial Projects – The Texas Property Code states that the court shall award all costs and reasonable attorney's fees as are just and equitable.
B. Bonded Commercial Projects – No attorney's fees are allowed.
C. Commercial Leasehold Projects – The Texas Property Code states that the court shall award all costs and reasonable attorney's fees as are just and equitable. If the suit is only to collect the debt (no foreclosure), attorney's fees are still allowed.
D. Residential Projects – The Texas Property Code states that the court is not required to award costs and attorney's fees, but probably can if it so desires.
E. State Public Work Projects – The court may award all costs and reasonable attorney's fees as are equitable.
F. Federal Public Work Projects – Although not entirely consistent in all circuits, it appears that at least in the Fifth Circuit (which includes Texas), if you, as claimant, have a contractual provision with the party with whom you contracted that provides for attorney's fees upon breach, you will be able to recover attorney's fees against the surety.
- 3. The Trust Fund Statute
Subchapter 162A of the Texas Property Code can provide a claimant with a means of recovery even where the claimant has failed to properly perfect a lien claim. The following are the significant aspects of the trust fund statute:
A. Personal Liability: Where a contractor or subcontractor is paid, but fails to pay his subcontractors or suppliers, the contractor or subcontractor, and its agents, officers, directors or the persons who directed or controlled the use of the monies received diverted to another project or use, may be held personally liable for the debt.
B. Criminal Penalties: The diversion or misapplication of "trust funds" by a contractor, subcontractor, owner or any other officer, etc. is punishable by fine and/or imprisonment.
C. Lien Unnecessary: The benefits of the trust fund statute may be claimed regardless of whether or not a lien has been perfected.
D. Defense: It is a defense under the Trust Fund Statute that the trust funds were used to pay the trustee's "actual expenses directly related to the construction or repair of the improvement."
- 4. Texas Prompt Payment Act
The Texas Property Code Chapter 28, "The Texas Prompt Payment Act," provides generally that if a contractor is not "promptly paid" (as defined in the Act) his claim will earn interest at the rate of one and one-half percent per month (18% per annum). If you have a direct contractual relationship with the Owner, the Owner must pay the amount of your claim by the thirty-fifth day after the date the Owner receives a demand or request payment. Delivery of an invoice stating the date payment is due is sufficient.
When an Original Contractor receives payment from the Owner, the Original Contractor must pay each of its subcontractors that portion of the Owner's payment attributable to each subcontractors' work performed under their respective contracts with the Original Contractor within seven days of receiving payment from the Owner.
Likewise, when a subcontractor receives payment from an Original Contractor, the subcontractor must pay each of its subcontractors and suppliers that portion of the payment from the Original Contractor attributable to each subcontractor and supplier for work performed under each respective contract within seven days of receiving the payment from the Original Contractor.
Any unpaid amount begins to accrue interest the day after the date that payment becomes due. Interest stops accruing on the earlier of: (i) the date payment is made; (ii) the date of mailing if payment is received within three days of being mailed; or (iii) the date a judgment is entered by a court for a violation of the Act.
In addition to the interest, a court may award court costs and reasonable attorney's fees.
If the project is ongoing, and the Owner fails to pay the Original Contractor any undisputed amount, the Original Contractor or any subcontractors may suspend performance under the contract beginning on the tenth day after the Original Contractor or subcontractor gives the Owner written notice of the nonpayment and the intent to suspend performance. An Original Contractor or subcontractor who suspends performance is not required to further perform until paid the amount due, plus any costs incurred for demobilization and remobilization. Further, the Original Contractor and/or subcontractor will not be responsible for damages resulting from work suspension unless he is first notified in writing before the suspension that payment has been made or that a "good faith dispute" exists for withholding the payment.
The Owner is excused from making payment to its contractors on projects where the Owner has obtained a loan for the construction if: (i) the owner has timely and properly requested disbursement of proceeds from the loan; and (ii) the lender is legally obligated to disburse such proceeds to the owner, but has failed to do so within thirty-five days after the date the Owner received the contractor's payment request. Under such circumstances, the owner is not obligated to make payment to the contractor until the fifth day after the date that the owner receives the loan proceeds.
As noted, "Prompt Pay Act" violations are only enforceable against the party with whom you contracted, so unless you contracted with the Owner, the Owner will not be personally liable.
There are no provisions allowing "Prompt Pay Act" claims to constitute a lien against the real estate or against any payment bond.
The rules governing mechanic’s liens and bond claims are not only complex and confusing, but unforgiving, There are numerous deadlines varying in time depending upon the nature of the project. Some notices are required to have particular words, phrases, and formatting. If properly traversed, the mechanic’s lien laws can provide you a powerful remedy to collect what you are owed. However, it is a perilous journey for those not experienced managing the dauntless task. The safest course always would be to enlist the help of an experienced real estate/construction attorney well-versed in Texas construction law. I would welcome the opportunity to assist you and give you piece of mind. Regardless, I hope you will find this information helpful. If you have any questions about the foregoing or other aspects of Texas real estate law, please don’t hesitate to contact me.
– T. Rick Frazier