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

Heading: Consideration of Exchanger’s Argument

Text: With this framework in mind, we address Exchanger’s argument. TEX. PROP. CODE § 162.004. 13 It contends that “[f]our years after the injustice of the Interkal decision (light speed for a legislature), the Texas legislature enacted § 53.151 of the Texas Property Code . . . effectively [to] reverse[] Interkal by providing that a creditor may not execute on trust fund money owed to a contractor or subcontractor.” For several reasons, we cannot agree. First, Exchanger’s effort to frame legislative conduct regarding § 53.151 as responsive to Interkal is not persuasive. Section 53.151 was not “enacted” in 1987; indeed, its roots stem from Acts of 1889. TEX. REV. CIV. STAT. ANN. Art. 5466 cmt. (Vernon 1958). As stated, in 1983, the Texas Legislature replaced the Hardeman Act with the Code. Section 53.151 under this new Code, entitled “Relinquishment Following Contract Compliance; Garnishment of Money Due Original Contractor,” stated, in full, that: (a) When the debt is paid under the contract for construction, the party for whose interest the contract was recorded shall enter a relinquishment showing full compliance with the contract to the extent of all money due the party from the original contractor on account of labor done or material furnished. (b) A creditor may not garnish the money due the original contractor from the owner to the prejudice of the subcontractors, mechanics, laborers, or materialmen. TEX. PROP. CODE § 53.151 (Vernon 1983) (emphasis added). This codification of former article 5466 of the Hardeman Act did not substantively change the rights afforded materialmen and subcontractors under the Hardeman Act. See Tex. S.B. 748, 78th 14 Leg., R.S. (1983) (“An ACT relating to adoption of nonsubstantive revision of the statutes relating to property.”) (emphasis added). The former article 5466, entitled “Relinquishment entered,” had provided that: When the debt is paid under the contract for such building or improvements, the party for whose interest the contract was recorded shall enter a relinquishment showing a full compliance of said contract to the extent of all money due them from the original contractor or builder on account of labor done or material furnished; and the money due said original contractor or builder from the person owning or having improvements made shall not be garnished by other creditors to the prejudice of such sub-contractors, mechanics, laborers or material men. TEX. CIV. STAT. ANN. art. 5466 (Vernon 1958) (repealed 1983) (current version at TEX. PROP. CODE § 53.151 (Vernon 1995 & Supp. 2003)) (emphasis added). Section 53.151 was itself amended in 1989. Under its new title, “Enforcement of Remedies Against Money Due Original Contractor or Subcontractor,” the provision now states that: (a) A creditor of an original contractor may not collect, enforce a security interest against, garnish, or levy execution on the money due the original contractor or the contractor’s surety from the owner, and a creditor of a subcontractor may not collect, enforce a security interest against, garnish, or levy execution on the money due the subcontractor, to the prejudice of the subcontractors, mechanics, laborers, materialmen, or their sureties. (b) A surety issuing a payment bond or performance bond in connection with the improvements has a priority claim over other creditors of its principal to contract funds to the extent of any loss it suffers 15 or incurs. That priority does not excuse the surety from paying any obligations that it may have under its payment bonds. TEX. PROP. CODE § 53.151 (Vernon 1995 & Supp. 2003). Comparing the 1983 and the current versions of § 53.151, it is clear that while the 1989 amendments did add the phrase “and a creditor of a subcontractor may not collect, enforce a security interest against, garnish, or levy execution on the money due the subcontractor” (emphasis added) to the 1983 version of § 53.151, this additional phrase does not support Exchanger’s argument. Even if we assume that § 53.151 speaks to funds held in trust for the benefit of a subcontractor or a materialman (as argued by Exchanger), the part of § 53.151 that would have been helpful to the materialman in Interkal and would be helpful to Exchanger here was a part of § 53.151 in 1983 and when Interkal was decided in 1985. Indeed, it was a part of article 5466 of the Hardeman Act. The phrase stating that “[a] creditor of an original contractor may not . . . garnish . . . the money due the original contractor . . . from the owner . . . to the prejudice of the subcontractors,” is simply not new. Exchanger’s argument that § 53.151 was amended to overrule Interkal is thus difficult for us to accept. Additionally, the framework of the Code belies Exchanger’s contentions regarding the relationship between § 53.151 and Chapter 162. To accept Exchanger’s argument that § 53.151 was meant to address funds held in trust for the benefit of subcontractors, we 16 must creatively (and, we think, incorrectly) bridge Chapter 53 and Chapter 162. Although both Chapter 53 and Chapter 162 (and their respective antecedents) are designed to protect mechanics and materialmen, the focus of each chapter is different. Chapter 53 controls procedures for perfecting mechanics’ and materialmen’s liens, steps required to trap money (for the benefit of derivative claimants) in the hands of the owner, procedures to alert an owner that it should retain funds for the benefit of a derivative claimant, and procedures for foreclosing a lien. In contrast, Chapter 162 addresses the fiduciary duties of persons holding funds in trust for the benefit of derivative claimants. The chapters address different situations. The upshot of Exchanger’s argument is that § 53.151 precludes a creditor of a contractor from ever collecting the proceeds of an account receivable in which the creditor has a security interest when the owner has not first ensured that all derivative claimants – regardless of their compliance with the provisions on lien perfection – have been paid by the contractor. However, if it were this easy for a subcontractor to trap a general contractor’s receivable, there would be no need for the elaborate trapping and retention schemes found in Chapter 53. These provisions are designed to protect those subcontractors and materialmen who provide adequate notice to the owner of their presence and their rights to funds owed the contractor. Indeed, the Code even contemplates a procedure to protect subcontractors and materialmen 17 from “sham contract” situations – e.g., where owners use an alter ego original contractor in order to avoid being in privity with the persons who actually perform the labor or provide the material for the project. See TEX. PROP. CODE § 53.026 (Vernon 1995 & Supp. 2003). The effect of the “sham contract” provision is to place subcontractors in direct privity with the owner (as an original contractor would have been) for the purposes of the mechanic’s lien statutes. See Da-Col Paint Mfg. v. Am. Indem. Co., 517 S.W.2d 270, 273 (Tex. 1974). Under Exchanger’s argument, these provisions would be rendered a nullity, for there is no need for “sham contract” provisions if no action can ever be taken with regard to money owed a contractor by a creditor to the prejudice of a subcontractor, regardless of the subcontractor’s compliance with the notice and filing provisions of Chapter 53. 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, 229 S.W.2d 600 (Tex. 1950) (discussing article 18 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. When faced with a situation where it could not go after funds in the hands of Exxon directly (because it was not in contractual privity with Exxon and failed to comply with the notice and filing provisions of Chapter 53), Exchanger crafted an argument to “trap” the Waterpoint receivable still in the hands of Exxon (as envisioned in Chapter 53) without complying with the notice and filing procedures for perfecting a lien under Chapter 53. While perhaps rich in creativity, we find the argument lacking in merit.