Monthly Archives: November 2015

THAT’S NOT YOUR MONEY YET! The Texas Construction Trust Fund Act

In an earlier post I explained the difficulties subcontractors face when trying to protect themselves against non-payment. Difficulties in complying with The Texas Property Code make perfection difficult for subs. However, The Texas Construction Trust Fund Act does give some protection.

According to the act, a contractor, subcontractor, or owner or an officer, director, or agent of a contractor, subcontractor, or owner, who receives trust funds or who has control or direction of trust funds, is a trustee of the trust funds and an artisan, laborer, mechanic, contractor, subcontractor, or materialman who labors or who 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 § 162.002.

This means that essentially, almost anyone in connection with the project that receives trust funds is a trustee of the trust funds and anyone who provides labor or materials in connection with a project is a beneficiary. This begs the question, what are trust funds?

The statute answers the question below:

(a)  Construction payments are trust funds under this chapter if the payments are made to a contractor or subcontractor or to an officer, director, or agent of a contractor or subcontractor, under a construction contract for the improvement of specific real property in this state.

(b)  Loan receipts are trust funds under this chapter if the funds are borrowed by a contractor, subcontractor, or owner or by an officer, director, or agent of a contractor, subcontractor, or owner for the purpose of improving specific real property in this state, and the loan is secured in whole or in part by a lien on the property.

(c)  A fee payable to a contractor is not considered trust funds if:

(1)  the contractor and property owner have entered into a written construction contract for the improvement of specific real property in this state before the commencement of construction of the improvement and the contract provides for the payment by the owner of the costs of construction and a reasonable fee specified in the contract payable to the contractor; and

(2)  the fee is earned as provided by the contract and paid to the contractor or disbursed from a construction account described by Section 162.006, if applicable.

(d)  Trust funds paid to a creditor under this chapter are not property or an interest in property of a debtor who is a trustee described by Section 162.002.

Tex. Prop. Code § 162.001.

What this means is that most draw payments made to contractors are trust funds. These funds are to be used to pay subcontractors and cover building materials. In fact, a trustee who, intentionally or knowingly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries of the trust funds, is said to have misapplied trust funds. Depending on how much money was diverted or retained, this could result in a felony or a misdemeanor conviction. Tex. Prop. Code § 162.031 & § 162.032.

Nothing here is intended to be legal advice and should not be interpreted as such. Please consult a lawyer for any and all of your legal questions. If you believe someone has misapplied trust funds or if you’re accused of misapplying trust funds, give us a call at 832-930-0529 or email us at info@stephensbell.com. You can also visit our website www.StephensBell.com

 

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M&M Liens: Pesky Perfection Problems

Any subcontractor who has been in business for quite some time has probably attempted to perfect an M&M lien. However the M&M perfection process is simply not subcontractor friendly and often times, subs miss perfection due to non-compliance with the statutes.

There are many of examples of difficult situations where a subcontractor will have to comply with statutory requirements in order to protect its interest but compliance with those requirements are sometimes nearly impossible. For example, let’s say a subcontractor begins a project in January that is expected to take eight months to complete and payment in full is due upon completion. Now let’s say that upon completion in September, the subcontractor is not paid. If the subcontractor is contracted directly with the primary contractor, the subcontractor has likely missed its opportunity to secure payment through perfection. How can this be?

Well, according to the Texas Property Code, the subcontractor must send a letter by certified mail, return receipt requested, to the owner and the primary contractor informing them of the unpaid claim not later than the 15th day of third calendar month following each month in which labor was performed or material delivered. Tex. Prop. Code § 53.056(b). This means that in order to protect it’s interest, the subcontractor would have had to predict that it would not be paid and sent notice to the primary contractor and the owner no later than April 15 to protect its interest for the labor done in January. The same would have to be done for the remaining months.

So why not simply send notice on every project? That’s a good question. The short answer is that a subcontractor will likely run a foul with the primary contractor and make the owner nervous. No construction professional or owner wants unnecessary payment concerns during their project and any sub that raises these concerns without a reason to raise them could find themselves in hot water. Think about it, would you want the holder of your car note to send you repossession notices every month even though you pay on time?

Our firm understands the frustration of subs in these situations and are familiar with strategies and statutory remedies that allow subs to feel secure about collecting payment. We’d love to sit down and discuss them with any subcontractor having problems.

Give us a call at 832-930-0529 today!

 

New Hoops to Jump Through In Condominium Defect Claims

Houston Condominium

Houston Condominium

With all the condominiums and high rises going up around Houston, it’s a bit surprising that there is very little discussion on the newest amendments to the Texas Property Code that effect condominium defect claims. If a condominium association is in Texas and has at least eight units it must comply with Chapter 82 of the Texas Property Code before it can file any defect claims.

Chapter 82.119 reads as follows:

In addition to any preconditions to filing suit or initiating an arbitration proceeding included in the declaration, an association, before filing suit or initiating an arbitration proceeding to resolve a claim pertaining to the construction or design of a unit or the common elements, must:

(1)  obtain an inspection and a written independent third-party report from a licensed professional engineer that:

(A)  identifies the specific units or common elements subject to the claim;

(B)  describes the present physical condition of the units or common elements subject to the claim; and

(C)  describes any modifications, maintenance, or repairs to the units or common elements performed by the unit owners or the association; and

(2)  obtain approval from unit owners holding more than 50 percent of the total votes allocated under the declaration, voting in person or by proxy as provided by Section 82.110, at a regular, annual, or special meeting called in accordance with the declaration or bylaws, as applicable.

(c)  The association must provide written notice of the inspection to be conducted by the engineer to each party subject to a claim not later than the 10th day before the date the inspection occurs. The notice must:

(1)  identify the party engaged to prepare the report required by Subsection (b)(1);

(2)  identify the specific units or common elements to be inspected; and

(3)  include the date and time the inspection will occur.

(d)  Each party subject to a claim may attend the inspection conducted by the engineer, either personally or through an agent.

(e)  Before providing the notice of the meeting under Subsection (f), an association must:

(1)  on completion of the independent third-party report, provide the report to each unit owner and each party subject to a claim; and

(2)  allow each party subject to a claim at least 90 days after the date of completion of the report to inspect and correct any condition identified in the report.

(f)  Not later than the 30th day before the date the meeting described by Subsection (b)(2) is held, the association must provide each unit owner with written notice of the date, time, and location of the meeting. The notice must also include:

(1)  a description of the nature of the claim, the relief sought, the anticipated duration of prosecuting the claim, and the likelihood of success;

(2)  a copy of the report required by Subsection (b)(1);

(3)  a copy of the contract or proposed contract between the association and the attorney selected by the board to assert or provide assistance with the claim;

(4)  a description of the attorney’s fees, consultant fees, expert witness fees, and court costs, whether incurred by the association directly or for which the association may be liable as a result of prosecuting the claim;

(5)  a summary of the steps previously taken by the association to resolve the claim;

(6)  a statement that initiating a lawsuit or arbitration proceeding to resolve a claim may affect the market value, marketability, or refinancing of a unit while the claim is prosecuted; and

(7)  a description of the manner in which the association proposes to fund the cost of prosecuting the claim.

(g)  The notice required by Subsection (f) must be prepared and signed by a person who is not:

(1)  the attorney who represents or will represent the association in the claim;

(2)  a member of the law firm of the attorney who represents or will represent the association in the claim; or

(3)  employed by or otherwise affiliated with the law firm of the attorney who represents or will represent the association in the claim.

(h)  The period of limitations for filing a suit or initiating an arbitration proceeding for a claim described by Subsection (b) is tolled until the first anniversary of the date the procedures are initiated by the association under that subsection if the procedures are initiated during the final year of the applicable period of limitation.

Tex. Prop. Code § 82.119.

What does this mean for litigation in this area? Well, only time can give a definitive answer but one can certainly predict that there will likely be far less defect litigation in the area. The expert requirements alone will likely result in fewer claims as the cost to prosecute one of these claims has certainly increased.