A suit on an unpaid account against your customer will likely entitle you to the principal balance plus interest and attorney fees. But a suit on an unpaid account is only as good as your customer’s ability to satisfy the judgment. A claim on an account against an entity provides very little leverage. The principals may decide to walk away from the entity and set up another one. Alternatively, they may file for bankruptcy. If so, you will have an unsecured claim. Unsecured creditors almost never receive the principal amount of their claim in bankruptcy. This makes an unpaid account claim the least powerful of all claims available to a subcontractor or a supplier.
In addition to the unpaid account claim, there are quasi-contract theories, such as quantum meruit, but such claims may be difficult to prove. In addition, the case law regarding these claims is unsettled, especially when they involvle claims arising out of the chain of contract on a construction project.
If you supply construction materials and/or equipment then you likely have encountered a joint check agreement. For those that have not yet encountered this arrangement, a joint check agreement is a credit facility frequently used to help subcontractors with unestablished credit obtain supplies and services on credit from a supply house. For example, if you are a supplier, you may require a subcontractor and the subcontractor’s general contractor to sign a joint check agreement whereby the general contractor agrees to write checks jointly to you and the subcontractor. In theory, a joint check agreement benefits all three parties: the general contractor minimizes the risk of nonpayment to lower tiered parties, and thus lien claims; the subcontractor may purchase supplies and materials on credit; and the supplier is somewhat further protected against the subcontractor absconding with the payment from the general contractor.
A joint check agreement is better than nothing but it is no substitute for lien and bond rights. A supplier should preserve its lien and bond rights regardless of whether the supplier has a joint check agreement with the general contractor. Nevertheless, joint check agreements can be useful. They can allow a supplier to provide materials on credit to a subcontractor who normally would not be approved to purchase materials on credit. But bear in mind, there is no standard form. A joint check agreement is not defined or limited by statute. Consequently, parties have the freedom to put self serving terms and conditions in the joint check agreement. For example, a general contractor may use it as a means to impose onerous terms on a supplier (e.g. lien release and/or waiver language, indemnities, pay if paid clauses). Suppliers should always draft the joint check agreement to minimize the inclusion of any extraneous and unfavorable terms.
You should contact your attorney to help draft a joint check agreement form so you have it at your disposal when the need arises. If you must sign a general contractor’s form, read it carefully and watch out for unfavorable provisions.
In general, a personal guaranty makes an individual or individuals liable for an entity’s debts or obligations. A personal guaranty which guarantees a general contractor’s obligations to pay a subcontractor is rarely given, but it is common for the principal(s) of a subcontractor with unestablished credit to personally guarantee the debts and obligations of the subcontractor to a supplier in exchange for purchasing or renting materials on credit.
Personal guaranties are understandably unpopular with customers. The most opportune time to get a personal guaranty is when a customer first applies for credit. It is common to include a personal guaranty in or attach it to the credit application.
A personal guaranty is nice to have, but it is not a substitute for a lien or bond claim (liens and bonds offer much more security). A personal guaranty is merely an additional avenue to collect an obligation. In other words, it provides an additional target for payment of a debt. However, a personal guaranty is no better than the individual signing it. If the guarantor does not have the financial assets to support the guaranteed obligation, the personal guaranty is virtually worthless.
You should make the personal guaranty continuing, absolute and unconditional. You should contact your attorney to help draft a form of personal guaranty so that you have it at your disposal when the need arises.
If you provide services or supplies in the oil field, you should have at least a basic understanding of Texas mineral liens because filing a mineral lien may help your bottom line someday.
Who can file a mineral lien?
A mineral contractor or subcontractor may file a lien to secure payment for labor or services related to the mineral activities. These terms are defined broadly.
“Mineral activities” means digging, drilling, torpedoing, operating, completing, maintaining, or repairing an oil, gas, or water well, an oil or gas pipeline, or a mine or quarry.
“Mineral contractor” means a person who performs labor or furnishes or hauls material, machinery, or supplies used in mineral activities under a contract with a mineral property owner.
“Mineral subcontractor” means one who furnishes or hauls material, machinery, or supplies used in mineral activities under contract with a mineral contractor or with a subcontractor; performs labor used in mineral activities under contract with a mineral contractor; or performs labor used in mineral activities as an artisan or day laborer employed by a subcontractor.
What does the lien cover?
- the material, machinery, and supplies furnished or hauled by the lien claimant;
- the land, leasehold interest, oil or gas well, water well, oil or gas pipeline and its right-of-way, and lease for oil and gas purposes for which the labor was performed or material, machinery, or supplies were furnished or hauled, and the buildings and appurtenances on this property;
- other material, machinery, and supplies used for mineral activities and owned by the owner of the property listed in 2; and
- other wells and pipelines used in operations related to oil, gas, and minerals and located on the property listed in 2.
How to perfect a mineral lien:
Notice – mineral contractors do not need to send notice, however mineral subcontractors must serve written notice on the property owner that the lien is claimed no later than the 10th day before the day the affidavit is filed.
Lien Affidavit – you must record a lien affidavit with the county clerk of the county in which the property is located no later than 6 months after the day the indebtedness accrues. The day indebtedness accrues is based on the last day you furnished labor, service, or materials.
How to enforce a mineral lien:
Mineral liens are to be enforced in the same manner and in the same time as mechanic’s and materialmen’s liens under Chapter 53 of the Texas Property Code.
Prompt Pay Acts deter late payment by general contractors (and owners) by giving subcontractors and suppliers rights in the event the general contractor does not timely pay. These rights generally include interest, attorney fees, and the right to suspend performance.
Texas Private Prompt Pay Act
The Texas Private Prompt Pay Act requires the owner to pay the general contractor within 35 days of the submission date of an invoice. The general contractor, in turn, must pay the subcontractors for the portion of the owner’s payment that is attributable to the subcontractor’s work within 7 days of when the general contractor received payment from the owner. The same deadline is imposed on first tier subcontractors with respect to paying their second tier subcontractors. If the parties have a good faith dispute over the work, the party withholding payment can withhold no more than 100 percent (nonresidential) or 110 percent (residential) of the difference between the amounts each party believes is due. Interest accrues at the rate of 1.5 percent per month or 18 percent annually on overdue payments. The terms of the act cannot be waived or altered by contract. Any provisions that attempt to do so are void.
Texas Public Prompt Pay Act
The public act has very similar terms to the private act. The owner must pay 31 days after receiving the invoice and the general contractor must pay the subcontractor no later than 10 days after the general contractor receives payment. Interest accrues at the sum of 1 percent plus the prime rate as published in the Wall Street Journal per month. Similar to the private act, payments for work subject to a bona fide dispute can be withheld. As is in the private act, the terms of the public act cannot be waived or altered by contract and attempts to do so are void.
Federal Prompt Pay Act
The federal act requires each construction contract awarded by a federal agency to include a clause that requires the prime contractor to include in each subcontract for labor or materials: (1) a payment clause which obligates the prime contractor to pay the subcontractor for satisfactory performance under its subcontract within 7 days out of such amounts as are paid to the prime contractor by the agency under such contract; and (2) an interest penalty clause which obligates the prime contractor to pay to the subcontractor an interest penalty using an interest rate established by the United States Treasury.
The Construction Trust Fund Act is often “Plan B” for subcontractors and suppliers who have not perfected their lien or bond claim. The Construction Trust Fund Act provides for civil and criminal penalties to those who misappropriate construction trust funds and fail to pay for labor and materials. When a general contractor or upstream contractor is paid for its work on a specific project but does not pay its downstream suppliers or subcontractors, then the general contractor or upstream subcontractor is in violation of the Construction Trust Fund Act.
However, such claims can be a powerful tool, primarily because the Construction Trust Fund Act provides for personal liability against the agents, officers, or directors of the general contractor or upstream subcontractor who directed or controlled the use of the funds received by the contractor or subcontractor. Further, at least one court has held a trust fund claimant is entitled to recover its attorney fees incurred in prosecuting a trust fund claim.
There are some exemptions and defenses to be aware of. The Construction Trust Fund Act does not apply to lenders, title companies, closing agents, or bonding companies. Also, it is an affirmative defense under the Construction Trust Fund Act if the funds were used to pay the general contractor’s (or upstream subcontractor’s) actual expenses directly related to the construction or repair of the improvement. There are also practical limitations. Trust fund claims require extensive discovery and are much more expensive to litigate than lien and bond claims. Nevertheless, if you miss your lien and bond claim deadlines, a trust fund claim is often your best hope for payment.
In some circumstances one who is normally a subcontractor (e.g., electrician or plumber) may have a direct contract with the owner of the property. If you have a direct contractual relationship with the owner, you will be considered to be an “original contractor” and you may have a constitutional lien. The constitutional lien attaches to the “building” or “article” you improved.
The beauty of a constitutional lien is it is self-executing. That means you do not have to send notice to the owner, but it is recommended. The policy behind constitutional liens is the owner already knows you were not paid because you have a contract with the owner. However, to assert a constitutional lien, you must file a lien affidavit as you would with a statutory mechanic’s lien. It is important to record your lien affidavit promptly to avoid the risk that the building or article is sold to a bona fide purchaser before your lien affidavit is filed.
Another benefit of constitutional liens is time. Some courts have held that a claim to foreclose a constitutional lien has a four year statute of limitations rather than the two year statute of limitations which applies to statutory mechanic’s lien claims.
The Miller Act requires a payment bond on federally owned projects where the prime contract is in excess of $100,000. If you–a subcontractor or supplier–have a contract or account directly with the general contractor, you are covered. If you do not have a direct contract with the general contractor, you are protected only if the party with whom you do have a contract with is a “subcontractor” of the general contractor. The definition of the term subcontractor is the subject of many cases and can be difficult to pin down. The bottom line is if you do not have a direct contract with either the general contractor or a subcontractor, then you are not covered by the bond.
Perfection is very similar to the Texas public payment requirements. You perfect your claim by sending a notice with a sworn statement of account. A subcontractor with a direct contract with a general contractor is not required to send notice, but should do so anyway. A subcontractor with no direct contractual relationship with the general contractor must notify the general contractor (and should include the surety and first tier subcontractor) within ninety days “from the date on which such person did or performed the last of the labor or furnished or supplied the last of the materials for which such claim is made.” To be prudent, you should not wait the full ninety days in order to ensure the general contractor receives the notice before the ninetieth day.
You must file suit within one year of the last date you furnished labor or materials on the project, but no sooner than ninety days after you last furnished labor or materials. This gives the surety and the general contractor a window to investigate and perhaps settle your claim.
The federal governmental agency issuing the contract is required to provide a copy of the payment bond upon the presentation of an affidavit stating you have not been paid for labor or materials furnished for the project.
A general contractor on a privately owned project may provide the owner with a payment bond. Although these payment bonds are not required under Texas law, many owners require general contractors to post payment bonds so the owner can avoid lien claims against the owner and the owner’s property. You may perfect a claim against a private payment bond by giving the appropriate lien notices and by filing a lien affidavit just as you would to perfect a lien claim.
The notices should also be sent to the surety. Before doing so, you should demand a copy of the bond so you can confirm it is the correct bond and you have the correct surety and bond information. Private payment bonds are also required to be recorded in the county in which the project is located. Nevertheless, you should always acquire a copy of the payment bond before you begin your work on the project or begin shipping materials to the project.
If the privately owned project is covered by a payment bond from the general contractor then you cannot sue the owner or foreclose your lien on the property. This protection is why owners frequently seek a private bond. Instead, you must sue the surety for a claim on the bond. In other words, the bond is your security for payment rather than a lien against the real property. A private bond is nearly always as good as (and sometimes may even be better) than a lien because it obligates a surety to pay your claim. The time limits for filing a claim on a private payment bond are different from those for filing suit to foreclose your lien. You must wait to file suit until at least 60 days have passed from the date your claim is perfected. The purpose of this waiting period is to give the surety time to investigate. In addition, you must file suit within twelve months after your claim is perfected if the bond is filed of record at the time the lien affidavit is filed. If the bond was not filed of record when you filed your lien affidavit, you must file suit within two years from the date your claim is perfected.
If a bond is furnished by someone other than a general contractor, a first tier subcontractor for example, then this is typically referred to as a common law bond and is not governed by the Texas Property Code. Because these bonds and their terms are not subject to the usual statutory requirements, the precise wording of these bonds is very important. You should not assume the terms and provisions will be the same as private payment bond issued by the general contractor.
You cannot lien public real property. Instead, you have a claim against a payment bond obtained for the project you furnished labor or materials to. For the construction, alteration, or repair of a public building or public work (i.e., land owned by a “Governmental entity”) in which the prime contract is in excess of $25,000, Texas law requires the general contractor to provide a payment bond. Governmental entities include: the State of Texas or any county, municipality, or any departments, boards or agencies thereof, any school district or any other governmental authority organized under the laws of Texas. The purpose of the payment bond is to provide a substitute for a lien and protect subcontractors and suppliers who furnish labor and/or materials to public projects.
Who and When to Notice
You perfect a Texas public payment bond claim by sending a notice via certified mail, return receipt requested, containing a sworn statement of account to the general contractor, the surety, and, if you are a second tier subcontractor, the first tier subcontractor you have a contract with. You should also send notice to the contracting authority for the government. If you are a first tier subcontractor then you must send notice no later than 15th day of the third month following each month you furnish labor and/or materials. Second tier subcontractors or suppliers must give additional notice of the unpaid balance to the prime contractor not later than the 15th day of the second month following each month in which labor was performed or materials were delivered. Unlike liens, there is no lien affidavit to record.
The Contents of the Notice
All notices must include a sworn statement of account that states “the amount claimed is just and correct” and “all just and lawful offsets, payments, and credits known to the affiant have been allowed.” If your claim arose under a written agreement then you may (and in many instances should) attach a copy of the contract to the notice along with a statement of the completion or the value of partial completion of the agreement. If you have a written unit price agreement, then you must also attach the following to your notice: a list of units and unit prices set by the contract and a statement of the completed and partially completed units. If you do not have a written contract then your notice must also include: (1) the name of the party for whom the work was done or to whom the materials were delivered; (2) the date of the performance or delivery; (3) a description of the work or materials; and (4) the amount due. In these circumstances, you should also attach your invoices to your notice as an exhibit because these invoices will help satisfy these requirements.
What do you do if you do not know who the surety is?
Demand it in writing. The general contractor is required to provide you with the following information within 10 days of your written demand: (1) the name and last known address of the governmental entity; (2) a copy of the payment and performance bonds for the public work; and (3) the name of the surety issuing the payment bond. The better practice, however, is to collect this information and a copy of the bond before you begin work or supply any materials.
When to File Suit
The surety and general contractor are allowed a 60 day window after the date of perfection to investigate and settle the claim. Therefore, you cannot file suit before that sixty day window has expired. However, bear in mind that the statute of limitations is short: you must file suit within 12 months of the date notice for a claim is mailed.