Court Opinion

ID: 31528
Source: CourtListenerOpinion
Date Created: 2010-04-25 10:18:15+00
Date Added: 2024-06-11T11:50:01.907851
License: Public Domain

United States Court of Appeals
                                                                Fifth Circuit
                                                              F I L E D
                       REVISED JUNE 27, 2003
               IN THE UNITED STATES COURT OF APPEALS            May 1, 2003

                                                           Charles R. Fulbruge III
                         FOR THE FIFTH CIRCUIT                     Clerk

                         _____________________

                              No. 02-20755
                         _____________________

     In The Matter Of:      WATERPOINT INTERNATIONAL LLC

                            Debtor

     --------------------------------

     EXCHANGER CONTRACTORS INC

                            Appellant

          v.

     COMERICA BANK-TEXAS; WATERPOINT INTERNATIONAL LLC; ROBBYE
     WALDRON, Chapter 7 Trustee

                            Appellees

_________________________________________________________________

          Appeal from the United States District Court
               for the Southern District of Texas

_________________________________________________________________

Before KING, Chief Judge, and DAVIS, Circuit Judge, and VANCE,
District Judge.*

KING, Chief Judge:

     Exchanger Contractors Inc., a subcontractor, was not paid by

its contractor, Waterpoint International LLC, for labor performed

by the subcontractor.    In response, Exchanger Contractors sought a

     *
        United States District Judge Sarah S. Vance of the
Eastern District of Louisiana, sitting by designation.

                                     1
declaration regarding its rights (pursuant to trust fund provisions

of the Texas Property Code) to a portion of the receivable owing to

the contractor by the property owner. The contractor’s lender, who

holds a security interest in the contractor’s receivable from the

owner, countered.    Because the trust fund provisions under which

Exchanger Contractors claims relief explicitly exempt banks and

other lenders from their reach, we affirm the district court’s

final order upholding the bankruptcy court’s summary judgment in

favor of the lender.

                                     I.

                    FACTUAL AND PROCEDURAL HISTORY

     In   1997,     the    debtor,        Waterpoint    International LLC

(“Waterpoint”), a construction contractor, executed a promissory

note payable to its lender, Comerica Bank-Texas (“Comerica”).

Pursuant to this note and the contemporaneously-signed security

agreement,   Comerica     acquired   a     valid   security   interest   in

Waterpoint’s accounts receivable.           Comerica duly perfected its

security interest in these accounts receivable.

     Sometime before February 2000, Waterpoint contracted with

Exxon Mobil Corporation (“Exxon”) to construct certain improvements

to specific real property owned by Exxon. Waterpoint subcontracted

some of the labor necessary to complete the Exxon project to

Exchanger Contractors Inc. (“Exchanger”).          Invoices document labor

performed by Exchanger for the benefit of Waterpoint totaling

                                     2
$71,878.45.        However, Exchanger made no effort to comply with the

notice and filing provisions for perfecting a mechanic’s lien under

the Texas Property Code (the “Code”).

       On   July    5,    2000,      before    paying    Exchanger     for     the   labor

performed on the Exxon project, Waterpoint filed a voluntary

petition for relief under Chapter 11 of the Bankruptcy Code.                              At

this time, Exxon still had, in its hands, money due Waterpoint for

the improvements to its real property.

       On January 9, 2001, after seeking relief from the automatic

stay    provisions        of    the    Bankruptcy       Code,      Exchanger      filed    a

declaratory action in state court, seeking an adjudication of its

right to a portion of the funds owed Waterpoint by Exxon.                         Claiming

it   was    a    core     proceeding      related      to    the    administration        of

Waterpoint’s       estate,       Comerica      removed      the    action    to   federal

bankruptcy court pursuant to 28 U.S.C. § 1452 and Rule 9027 of the

Federal Rules of Bankruptcy Procedure.                        The bankruptcy court

thereafter       preserved      Exchanger’s         claim   for    $71,878.45      of   the

Waterpoint receivable, but authorized all of Waterpoint’s accounts

receivable to be paid to Comerica so that Exxon could be dismissed

from the        action.        The    bankruptcy     court    then    granted     summary

judgment in favor of Comerica.                 This final order was affirmed by

the district court.            Exchanger timely appeals the district court’s

order.

                                              II.

                                               3
                              STANDARD OF REVIEW

     On    appeal   in   a    bankruptcy   case,   we   review    de   novo   the

bankruptcy court’s decision to grant summary judgment in favor of

Comerica.    See Mercer v. Mercer (In re Mercer), 246 F.3d 391, 402

(5th Cir. 2001) (en banc).

                                     III.

            COMPETING CLAIMS TO THE WATERPOINT RECEIVABLE

     Exchanger’s declaratory judgment complaint requested that the

bankruptcy court “adjudicate its rights to receivables owing by

Exxon . . . to Waterpoint International, LLC upon which Comerica

Bank-Texas claims a security interest and to which [Exchanger]

claims a prior right by reason of Section 162 of the Property

Code.”    Comerica countered that Exchanger has no valid claim to a

portion of the receivable because banks and other lenders are

specifically exempted (under § 162.004 of the Code) from the

Chapter 162 trust fund provisions under which Exchanger claims

relief.     In support of this argument, Comerica proffered to the

bankruptcy court the plain language of § 162.004 of the Code and a

Texas Supreme Court case interpreting § 162.004 clearly to except

banks and other lenders from the trust fund provisions of the Code.

See Republicbank Dallas, N.A. v. Interkal, Inc., 691 S.W.2d 605

(Tex. 1985). In response, Exchanger argued that in 1989, the Texas

Legislature amended § 53.151 of the Code specifically to overrule

Interkal    in   favor   of    increased   protection    for     subcontractors

                                       4
regarding funds held in trust for their benefit.

     To address the competing claims to a portion of the Waterpoint

receivable, we start with an overview of the relevant sections of

the Code as they relate to construction contracts.

     A.     Enforcing Rights under the Texas Property Code

     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.

     B.     Consideration of Exchanger’s Argument

     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.

                                CONCLUSION

      Exchanger’s claim for relief is clearly based on the trust

fund provisions in Chapter 162 of the Code.            However, the trust

fund provisions clearly exempt banks and other lenders from their

reach, and Exchanger’s argument that § 53.151 of Chapter 53 of the

Code somehow repealed this exemption in the trust fund provisions

is without merit. We therefore AFFIRM the judgment of the district

court, which in turn affirmed the judgment of the bankruptcy court.

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