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Texas Construction Law Blog

For Subcontractors & Suppliers

Lien Inception

Posted in Liens

When owners file bankruptcy or projects otherwise go south, lien priority often comes to the forefront.  The idea is relatively simple.  Priority is how courts determine which creditors get paid first.  This often pits lenders against M&M lien claimants.  For lenders, their liens typically arise when they record their deeds of trust.  However, for M&M lien claimants, the Texas Property Code has very specific rules that must be followed.

The Code provides that a “mechanic’s lien does not affect any lien, encumbrance, or mortgage on the land or improvement at the time of the inception of the mechanic’s lien ….” Inception is the key word.  The code goes on to state “the time of inception of a mechanic’s lien is the commencement of construction of improvements or delivery of materials.”

Going back to the 1895 Oriental Hotel v. Griffiths opinion, the Texas Supreme Court and numerous other courts have held that it is the date of the initial commencement of anyone’s construction under the original construction contract, rather than the date that the lien claimant commences its work or first delivers materials.    In other words, the time of inception of all M&M liens arising for the purpose of fulfilling the original construction contract will relate back to the date that the first subcontractor began its work or the first materialman delivered its materials under such original construction contract.  This rule enables the general contractor’s lien and all of the general contractor’s subcontractors’ and suppliers’ liens to relate back to this commencement date for purposes of inception.

This, however, is not the end of the analysis.  The Property Code requires that, for purposes of commencement, the initial construction work performed or materials delivered must be “visible” at the project site.  For construction to be visible, the Texas Supreme Court has held that this means the construction must: (1) be conducted on the land itself; (2) be visible on the land; and (3) be an activity that is an improvement under the Code or excavation work.  For materials delivered, the Texas Supreme Court has held that the goods must: (1) be delivered to the land; (2) be visible on the land; and (3) be consumed by, or incorporated into, the construction of the project.  The visibility test is often litigated.  Texas courts have held that preparatory activities, such as setting stakes and batterboards, do not satisfy this test.  On the other hand, excavation work has been found to satisfy this test.  This is a highly fact intensive issue.

The Property Code also provides for two important exceptions:

First, the inception date of liens for architects, engineers, surveyors, landscapers, and persons providing demolition services, is the date that the lien affidavit is recorded by such person.

Second, an owner and original contractor may jointly sign and record an “affidavit of commencement” within 30 days of actual commencement of construction or delivery of materials.

The affidavit must contain:

(1)  the name and address of the owner;

(2)  the name and address of each original contractor, known at the time to the owner, that is furnishing labor, service, or materials for the construction of the improvements;

(3)  a description, legally sufficient for identification, of the property being improved;

(4)  the date the work actually commenced;  and

(5)  a general description of the improvement.

This affidavit is not dispositive of the issue, but it is “prima facie evidence of the date of the commencement of the improvement described in the affidavit.”  Thus, it creates a rebuttable presumption.

The importance of priority, especially during these difficult and strange times, cannot be overstated.  The stakes in a priority dispute can be high.  For the M&M lien claimant, these rules could mean the difference between recovering everything and recovering nothing.

COVID-19 – Legal Impact

Posted in Uncategorized

COVID-19 is now interrupting and, in some instances, cancelling contracts across the country.  While the situation is highly fluid, these business disruptions appear likely to continue and perhaps even worsen in the immediate future.  This will significantly affect and perhaps threaten businesses people have worked had to establish.  And it will of course impact employees and their jobs.  Business leaders will have to make tough decisions in the coming weeks and months.  Many of these decisions will touch on important legal issues.  Below are a few legal hot topics addressed by my colleagues at Gray Reed in the past few days:

Force Majeure 

A few of my colleagues recently published articles on these in the construction context here and the energy context here.  (Thanks to Preston Kamin, J.P. Vogel, Vernon Howerton and Ryan Frankel).  The upshot of both articles is that the language in your contract is what controls; provide timely notice; and it is critical that you review these clauses with counsel to understand your rights.   Remember what is created by contract can be changed by contract.  Encourage your customers and vendors to work with you to modify the contract to deal with these unprecedented circumstances.  This is surely a better result than litigating  novel issues such as whether or not COVID-19 is covered by the clause.

Business Interruption

My colleagues, Darin Brooks and Brian Waters also wrote about business interruption insurance coverage.  This issue is critical.  Now is the time to know your policy and know the probability (or improbability) of coverage so you can plan and make business decisions.

Employment

My colleagues in the Gray Reed Employment Practice Group recently contributed an article to amendments expected to be made to the Family Medical Leave Act.  The bottom line:

1. Family and Medical Leave Act (FMLA) coverage and benefits are expanded;
2. 80 hours of paid sick leave for employees affected by COVID-19; and
3. Tax credits for employers to help offset the increased costs of the leave provisions.

If you have any questions about the above, please do not hesitate to contact me.  My contact information can be found here.

 

 

Obscure But Important Surety and Guarantee Rules

Posted in Collection, Uncategorized

Texas surety law contains obscure procedural rules that can have outsized consequences. Chapter 43 of the Civil Practice and Remedies Code is an important example.

Applicability

This chapter applies to everything that is a “surety” as defined by the statute. The statute’s definition includes “an endorser, a guarantor, and a drawer of a draft that has been accepted; and …every other form of suretyship…” This means sureties on payment and performance bonds and even personal guarantees.

Notice and Discharge

A surety on a contract may send a written notice requiring the obligee to bring a suit on the contract. If the obligee fails to do so within the “first term of court” or fails to do so within the “second term of court if good cause is shown for delay” then the surety is discharged of liability. “Term of court’ is antiquated. However, that has since been construed to mean a “reasonable time.”

The Priority of the Execution

If a judgment is entered against a principal and a surety, then Chapter 43 requires the sheriff to first levy the principal’s property until the judgment is satisfied. If the principal does not have enough property in the county to satisfy the judgment, then the surety’s property may be levied.

Subrogation

The surety may also subrogate to the judgment creditor’s rights to extent the surety makes or is complelled to make payment(s) to satisfy the judgment.

Waiver

These rights may be waived by agreement. For this reason, these rights are often, directly or indirectly, waived.

What’s Ahead for the Construction Industry in the 86th Texas Legislative Session

Posted in Construction Legislation

For 140 days, starting on Jan. 8, 2019, the 150 members of the Texas House of Representatives and 31 members of the Texas Senate, under the leadership of Governor Greg Abbott, will gather for the 86th Texas Legislative Session. As is often said, when the Texas Legislature is in session – your life, liberty and property are at stake – as new laws, rules, regulations, taxes and fees will be proposed and will receive substantive debate and deliberation before Texas legislators ultimately vote on your behalf.

Most legislators agree that the main issues driving the agenda for the session are public education (including school finance, school safety, workforce development and teacher pay) and property tax relief. Additionally, there is no question that the legislature will spend considerable time on what is sure to be a complicated and challenging state budget cycle. With school finance, healthcare, infrastructure funding and Hurricane Harvey recovery looming large on the horizon, this legislative session will present unique fiscal challenges – and also great opportunities – to ensure Texas remains strong and prosperous.

In terms of “construction” legislation, general contractors, subcontractors, suppliers, owners, developers, lenders and lawyers all have reason to pay particularly close attention as several important issues have seemed to gain the attention of Texas Legislators. To name a few: Continue Reading

Series LLCs in the Construction Industry: Increasingly Popular Fortresses to Protect Contractor’s Assets

Posted in Business Management

Originally published in Build Houston magazine. 

Co-author: Catherine Chlebowski

The business of construction is a day to day adventure fraught with peril and liabilities dangerous enough to put many construction firms out of business. Given that reality, it is imperative that contractors properly structure the legal entities that provide the fortresses to protect their assets. While most are familiar with the limited liability company (LLC) and limited partnership (LP) set ups, many have no familiarity with series limited liability companies (Series LLC). Continue Reading

Anti-Poaching and Wage-Fixing Agreements: Drawing the Line Between Competitive and Criminal

Posted in Business Management, Labor/Workforce

Originally published in Build Houston magazine.

In October 2016, the Antitrust Division of the U.S. Department of Justice (DOJ) issued guidance identifying poaching agreements and wage-fixing agreements as primary antitrust enforcement targets.  In April 2018, DOJ brought the Department’s first enforcement case over illegal anti-competitive employment related agreements.

In a market where skilled labor is in increasingly high demand, and the price of labor continues to rise, scrutiny of employment-related agreements is also on the rise.  Industries facing skilled labor shortages are natural targets of DOJ scrutiny, the construction industry is no exception. Continue Reading

Fighting the Four Horsemen of the Workforce Apocalypse

Posted in Labor/Workforce

Co-author: Michael Kelsheimer
Published in TEXO InFocus Magazine

Since at least 2008, Flood, Fire, Famine and Pestilence have ravaged the construction workforce across America. In the downturn, many workers left the industry never to return. Others left the U.S. and have not returned.  Couple that with construction growth, a resistance to training workers who may leave for another dollar an hour, and seeming lack of interest in construction jobs by the current generation now entering the workforce, and you’ve got the makings of a big challenge.

Protect yourself on the contracting side before heading into the storm . . .

Continue Reading

Establishing Personal Liability Without a Guaranty

Posted in Collection, Construction Contracts

Co-author: Trevor Lawhorn
Published in Build Houston Magazine

When non-payment occurs, suppliers and service providers often first seek relief by suing for breach of contract. Unfortunately, many companies are undercapitalized or otherwise “judgment proof.”  A personal guaranty might mitigate this risk by providing an additional target, but guarantees are often difficult to obtain.  Even if one is signed, the guarantors may lack assets, perhaps deliberately so.  Judgement proof debtors and guarantors are especially frustrating when the case involves misappropriations of construction project funds or wrongful transfers of assets.  Texas law provides at least two statutory tort claims in these circumstances: the Texas Uniform Fraudulent Transfer Act (TUFTA) and the Texas Construction Trust Funds Act (the Trust Fund Statute). Continue Reading

Is Your Construction Business Prepared and Protected for ICE Undocumented Worker Audits?

Posted in Labor/Workforce

Co-author: Michael Kelsheimer
Published on ForConstructionPros.com

Understand and navigate the government’s amplified focus on undocumented workers to protect your business from escalating fines, jail time, delay damages and back-charges

Whatever your political views, undocumented workers and the businesses that knowingly or unknowingly employ them have been under the microscope since President Trump took office in January 2017.

According to U.S. Immigration and Customs Enforcement (ICE), between Oct. 1, 2017, and May 4, 2018, there were:

  • 2,282 employer audits opened, nearly a 60% jump from the 1,360 audits opened between October 2016 and September 2017,
  • 594 employers arrested on criminal immigration charges, up from 139 during the previous fiscal year, and
  • 610 civil immigration charges, compared to 172 in the preceding 12 months

Continue Reading

Section 232 Investigations: What Steel-Consuming Businesses Need to Know

Posted in Steel

In just the first four months of 2018, among a surge in trade complaints filed by domestic steel manufacturers against foreign rivals (a frequency not seen in over 15 years), and after a lengthy investigation by the Secretary of Commerce concluding “that the present quantities and circumstance of steel imports are ‘weakening our internal economy’ and threaten to impair the national security” of the United States, President Trump has issued two presidential proclamations—adjusting the imports of certain steel products by imposing a 25 percent ad valorem tariff (the “Tariffs”) on those steel products from all countries—granted a permanent extension to the Tariffs for South Korea, Argentina, Australia, and Brazil and has extended a final temporary 30 day exemption from the Tariffs to Canada, Mexico and the member countries of the European Union, the United States’ biggest trading partner. Continue Reading