Opinion ID: 31528
Heading Depth: 2
Heading Rank: 1

Heading: Enforcing Rights under the Texas Property Code

Text: Exchanger roots its claim to a portion of the funds owed to Waterpoint (in which Comerica claims a security interest) to the trust fund provisions of the Code found in Chapter 162. See TEX. PROP. CODE §§ 162.001-033 (Vernon 1995 & Supp. 2003). However, it relies on a provision in the chapter on mechanic’s and materialman’s liens, Chapter 53, to support this claim. See id. § 53.151. A basic understanding of the underlying framework and purpose behind both chapters is thus helpful. (1) Chapter 53 of the Texas Property Code The mechanic’s lien appeared in Texas in 1839 when the Congress of the Republic enacted “[a]n Act for the Relief of Master Builders and Mechanics of Texas.” Eldon L. Youngblood, Mechanics’ and Materialmen’s Liens in Texas, 26 SW. L. J. 665, 665 (1972). The purpose of the mechanic’s lien is to secure payment for those who furnish labor or materials in connection with the construction of improvements to real property to the extent of the increased value of those improvements to the owner’s property. Jeffrey A. Leonard & Darren G. Woody, Texas Mechanic’s and Materialman’s Liens and the Scope of the Preferential Lien on Removables, 15 TEX. TECH L. REV. 5 673, 674 (1984). In 1869, the right to a mechanic’s lien, even for derivative claimants (e.g., subcontractors, mechanics or materialmen who have not contracted directly with the owner of the property to be improved), also became a constitutional right in Texas. W. MICHAEL BAGGETT & BRIAN THOMPSON MORRIS, TEXAS PRACTICE GUIDE, Ch. 10:118 (2003). Article 16, Section 37, of the Texas Constitution now provides that “mechanics, artisans and materialmen of every class, shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor . . . .” TEX. CONST. art. XVI, § 37. However, as interpreted by the Texas Supreme Court, while the constitutional right to a mechanic’s or materialman’s lien is broad, the Texas Constitution creates a “self-executing” lien in favor of only original or general contractors (those who contract directly with the property owner or its agent), not derivative claimants. See, e.g., First Nat’l Bank v. Lyon-Gray Lumber Co., 217 S.W. 133, 135-36 (Tex. 1919). Persons not contracting directly with the owner do not have a “self-executing” lien. See Cabintree, Inc. v. Schneider, 728 S.W.2d 395, 396 (Tex. App.–Houston [1st Dist.] 1986, writ ref’d). Instead, they must comply with the statutory lien perfection requirements to be able to enforce their rights to payment or, if necessary, foreclosure against the owner and his property. See Thermo Tech, Inc. v. Goodyear Tire & Rubber Co., 643 F.2d 1173, 1178 (5th Cir. Unit A 1981); First Nat’l Bank v. Sledge, 653 S.W.2d 283, 285 (Tex. 1983) (“Because a 6 subcontractor is a derivative claimant and, unlike a contractor, has no constitutional, common law, or contractual lien on the property of the owner, a subcontractor’s lien rights are totally dependent on compliance with statutes authorizing the lien.”); Hayek v. W. Steel Co., 478 S.W.2d 786, 790 (Tex. 1972). Chapter 53 of the Texas Property Code, entitled “Mechanic’s, Contractor’s, or Materialman’s Lien” and formerly known as the Hardeman Act, controls the procedures for perfecting liens and the relative priority of these liens once perfected. The Chapter is divided into ten subchapters ranging from general lien provisions and provisions relating to persons entitled to liens (subchapters A and B) to procedures for perfecting liens (subchapter C), schemes for funds being retained or withheld by owners for the benefit of claimants (subchapters D and E), procedures for determining priorities and preferences (subchapter F), procedures related to the release of liens and foreclosure of mechanics’ liens (subchapter G), and procedures related to bonds and liens in the public works context (subchapters H, I and J). In general, the chapter deals with relationships between a general contractor, the owner of the real property and derivative claimants. See, e.g., Scarborough v. Victoria Bank & Trust Co., 250 S.W.2d 918, 922-23 (Tex. App.–San Antonio 1952, writ ref’d). It sets out procedures for connecting a derivative claimant to the owner in order to give the owner notice of the derivative claimant’s claim to money still in the owner’s hands. See id.; see also Youngblood, supra, at 676 7 (“In Texas, unlike many states, only an original contractor enjoys a direct lien on the property; the subcontractor must rely on his statutory rights to collect funds due from the owner to his contractor. Consequently, once the owner has paid the full price to his original contractor, if he has complied with the statutes for doing so, no subcontractor can subject his property to a lien.”). While several of the provisions in Chapter 53 concern procedures for foreclosing a mechanic’s lien on real property or improvements, it is clear from the framework of Chapter 53 that a mechanic’s lien and the necessary steps a subcontractor must perform to perfect this lien have to do with real property and foreclosure secondarily and the trapping and retainage of funds for the benefit of derivative claimants primarily. See First Nat’l Bank, 217 S.W. at 134; Gordon-Jones Const. Co. v. Welder, 201 S.W. 681, 684 (Tex. App. – San Antonio 1918, writ ref’d) (stating that, while subcontractors “have no privity with the owner, whose obligation is solely to the contractor,” they are “given a method for [first] impounding funds payable by the owner to the contractor” and then, if necessary, taking the owner’s property). As provided by Chapter 53, if notice is given to the owner by the derivative claimant and the derivative claimant’s lien is perfected, the owner is liable to the derivative claimant and the owner’s property is subject to a statutory lien to the extent the owner should have withheld funds from the original contractor under 8 the trapping provisions of the Texas Property Code (§ 53.081) and the general retainage provisions of the Texas Property Code (§§ 53.101-53.105). See Page v. Structural Wood Components Inc., 102 S.W.3d 720, 721 (Tex. 2003) (stating that “Chapter 53 of the Property Code permits a construction subcontractor to claim a lien on funds retained by the owner” only if the subcontractor complies with the notice and filing provisions in Chapter 53); Sledge, 653 S.W.2d at 286 (discussing the “two methods by which a subcontractor can perfect a lien in the owner’s property” as (1) trapping and (2) retainage); TDInds. v. NCNB Tex. Nat’l Bank, 837 S.W.2d 270, 272 (Tex. App.–Eastland 1992, no writ); see also 18 WILLIAM V. DORSANEO III, TEXAS LITIGATION GUIDE § 271.02 (2002). Thus, in contrast to an original contractor, a subcontractor does not have an ability to enforce any right to funds owed a contractor by an owner if the subcontractor does not comply with the notice and filing provisions for perfection of his lien under the Code. See Pac. Indem. Co. v. Bowles & Edens Supply Co., 290 S.W.2d 353, 357 (Tex. App. – Dallas 1956, writ ref’d n.r.e.) (stating that mechanics’ liens “are incipient or inchoate until completed or perfected by compliance with the statute, and are lost utterly if those acts required for their completion be not done in the manner and within the time required by statute”) (quoting Ball v. Davis, 18 S.W.2d 1063, 1064 (1929)); see also DORSANEO, supra, at § 271.02 (“Perfecting a lien is a vital step in gaining almost all of the protection available under the laws governing mechanic’s and materialmen’s liens. This 9 is true even though the ultimate relief sought may not involve a lien on the property.”). In 1983, the Texas Legislature replaced the Hardeman Act with the Code. In so doing, it made clear that a subcontractor’s ability to enforce his lien rights under Chapter 53 requires compliance with the lien perfection provisions in Chapter 53. For example, before this 1983 codification, article 5464 of the Texas Revised Civil Statutes (part of the Hardeman Act) provided that “all subcontractors, laborers and materialmen . . . have preference over other creditors of the principal contractor or builder.” TEX. REV. CIV. STAT. ANN. art. 5464 (Vernon 1958)(repealed 1983) (current version at TEX. PROP. CODE § 53.121 (Vernon 1995 & Supp. 2003)). In Lebo v. Dochen, 310 S.W.2d 715 (Tex. App.–Austin 1958, writ ref’d n.r.e.), certain mechanics and materialmen who had contracted with a general contractor to perform a portion of the labor and to provide a portion of the materials in the construction of a filling station sought funds owed to the contractor from owners of the real property on which the filling station was located. Id. at 719. One materialman argued that he should be afforded a preference over other creditors under article 5464 regardless of whether he complied with the provisions for lien perfection. Id. at 720. He maintained that the preference rights afforded materialmen under article 5464 did not require compliance with the statutes on lien perfection because article 5464 did not say as much. Id. The court rejected this argument, stating that “Art. 5464 provides a 10 preference only for subcontractors, laborers and materialmen who have liens . . . The Act deals exclusively with liens. It does not purportedly put mechanics, etc. in a preferred class of creditors except as they may comply with the procedure for establishing a lien.” Id. To clarify that its intentions were in accord with the Lebo court’s ruling, the 68th Legislature codified article 5464 (now § 53.121 under the Code) to state that the preference addressed in article 5464 exists only to those persons who hold a mechanic’s lien. See TEX. PROP. CODE § 53.121 revisor’s note (Vernon 1995 & Supp. 2003) (“The revised law adds the qualification that the preference exists only as to those persons with a mechanic’s lien in order to avoid having the reader assume this section grants a general preference without regard to a lien. The addition is in conformity with the interpretation of this section in Lebo v. Dochen.”). (2) Chapter 162 of the Texas Property Code In contrast to the notice and filing requirements found in Chapter 53 of the Code, Chapter 162 of the Code, entitled “Construction Payments, Loan Receipts, and Misapplication of Trust Funds,” provides that construction payments made to a contractor, subcontractor, or to an officer, director, or agent of a subcontractor or contractor pursuant to a construction contract for the improvement of specific real property are deemed to be trust funds held for the benefit of laborers without regard to the 11 laborer’s compliance with the procedural requirements under Chapter 53. See McCoy v. Nelson Util. Serv., Inc., 736 S.W.2d 160, 164 (Tex. App.–Tyler 1987, writ ref’d n.r.e.). Specifically, § 162.001 states that: An artisan, laborer, mechanic, contractor, subcontractor or materialman who labors or furnishes labor or material for the construction or repair of an improvement on specific real property in this state is a beneficiary of any trust funds paid or received in connection with the improvement. TEX. PROP. CODE § 162.001. This provision was enacted to serve as a special protection for subcontractors and materialmen in situations where contractors or their assignees refused to pay the subcontractor or materialman for labor and materials. See McCoy, 736 S.W.2d at 164. The Code imposes fiduciary responsibilities on contractors to ensure that subcontractors, mechanics and materialmen are paid for work completed. The misapplication of these trust funds is a criminal offense under the Code. See TEX. PROP. CODE §§ 162.031-032 (Vernon 1995 & Supp. 2003). However, § 162.004 clearly states that the provisions of Chapter 162 do not apply to a “bank” or “other lender,” such as Comerica.1 In Republicbank Dallas, N.A. v. Interkal, Inc., 691 1 Section 162.004 states, in relevant part, that: (a) This chapter does not apply to: (1) a bank, savings and loan, or other lender; (2) a title company or other closing agent; or (3) a corporate surety who issues a payment bond covering the contract for the construction or repair of the improvement. 12 S.W.2d 605 (Tex. 1985), a bank which held a security interest in a contractor’s accounts receivable brought an action against a materialman claiming it had a superior right to funds held by the contractor. Id. at 606. The materialman, who had furnished the bleachers and stage equipment for the contractor to construct gymnasium facilities for various schools, argued that he was entitled to the funds because the contractor held them in trust for his benefit. Id. Looking to the plain language of the Code, the Texas Supreme Court disagreed. Id. at 607. Instead, it interpreted § 162.004 as plainly stating that the trust fund provisions of the Code do not apply to banks in any situation. Id. Section 162.004 was codified in 1983 and amended in 1987, after the Interkal case. However, as seen from the plain language of the provision and as interpreted by the Texas Attorney General in an Opinion issued in 1988, § 162.004, as amended in 1987, retains the exemption for banks and other lenders from the trust fund provisions of the Code. See Op. Tex. Att’y Gen. No. JM-945 (1988). Further, several of the trust fund provisions contained in Chapter 162 underwent substantial modifications in 1997. See TEX. PROP. CODE §§ 162.001, .005, .006, .007, .032 cmt. (Vernon Supp. 1997). However no changes were made to § 162.004.