Contractor Protection Beyond SOL

If you’re a construction professional in Texas you’ve probably heard the term SOL or “Statute of Limitation”. For those that have not, Statutes of limitation are laws creating time limits for plaintiffs to bring suit against defendants for various reasons. The statutes generally differ depending on cause of action forming the basis for the suit. For example, generally injury claims must be brought within two years of the discovery of the injury while breach of contract claims are allowed within four years of the breach.

However, what is less commonly mentioned in the construction space is the statute of repose. Tex. Civ. Prac. & Rem. Code Ann. §§ 16.008 and 16.009 bar actions against persons who either design or make improvements to real property, unless brought within 10 years. The sections apply to suits for injury, damage, or loss to real property and to suits for personal injury.

Why is any of this important? Well, with a statute of repose, the time period begins running when the improvement is substantially completed rather than when a cause of action accrues. See Tumminello v. U.S. Home Corp., 801 S.W.2d 186, 187-88 (Tex. App.–Houston [1st Dist.] 1990, writ denied). Therefore, a statute of repose can cut off a right of action before an injured party discovers or reasonably should have discovered the defect or injury. Johnson v. City of Fort Worth, 774 S.W.2d 653, 654 n.1 (Tex. 1989) (per curiam). What this means is that even though a potential party’s statute of limitation has not expired because they have not discovered their injury, if the work causing the injury has been completed for 10 or more years, the claim is likely to be barred.

This is why it is important to accurately document the work being completed on every project. Documentation of each individual subcontractor’s substantial completion of their work can offer protection against a later suit. It is good practice for every contractor to keep these records and store them as they could great evidence to prevent future problems.

Nothing here is to be considered legal advice. If you are in the midst of a construction dispute you may want to consider giving us a call at 832-930-0529 or visiting http://www.StephensBell.com

P3 Projects and Difficulties With Remedies

Most construction projects are either public or private in nature. When the government owns the property forming the basis of the project, the project is considered public and when a private individual or company owns the property, it’s considered a private project. The classification is generally most important in two contexts, remedies in the event of non-payment and the application of prompt payment statutes.

With regard to the remedies, in a private construction project if a contractor is not paid, it will file a statutory lien against the property to protect its interest. However, on a public project, a contractor cannot file a lien because generally, the government has laws in place stating that no private individual or entity can file a lien against public property. Consequently, on public projects the solution is a bond. The bond gives the contractor assurance of payment.

Many states, including Texas, have prompt payment statutes that require the general contractors to pay subs within a certain timeframe of receiving their invoice. In Texas, these periods vary depending on who is paying and whether the project is private or public. However, this classification is not always straightforward.

Although most projects are either private or public, there are some projects that mix public and private construction, funding, development, etc. and those projects are called Public Private Partnerships (P3) projects. P3 projects can be complicated because often times, the law doesn’t specifically outline how to handle or classify the p3 project. This makes it difficult to know which nonpayment remedies apply to these projects.

The best solution for avoiding these problems may be to address them during formation. P3s are creatures of contract which means that in many cases the contract can control the remedies available. Also, general contractors and subcontractors will want to try to classify the project early on so that they know their remedies.

For more information on P3 projects and breach or nonpayment remedies contact Stephens & Bell at 832 930 0529 or visit www.StephensBell.com

STEPHENS & BELL GET THE DEAL DONE

 

Attorney Kenneth Stephens Esq. of Stephens & Bell starts the year by helping to facilitate a corporate acquisition valued at just under $80,000.00. Stephens & Bell was retained when the deal looked to be going south with less than 10 days before closing. After working through some of the more problematic deal points and dedicating a couple of weekends to get the necessary documents ready for execution, the deal closed to the satisfaction of the firm and its client.

This is the second deal of this type that the firm has rescued from failure within the last six months. The previous transaction, involved a similar situated company in the insurance industry and was valued at over $200,000.00. Kenneth was also lead counsel on this transaction.

For more information about Stephens & Bell visit www.StephensBell.com

 

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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

 

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.

Construction Payments, Why Misapplication Could Mean Big Problems

Whether you’re a prime contractor, subcontractor, owner, officer, director, or agent of a contractor, subcontractor, or owner who receives construction payments or who has control or direction of construction payments, you are a trustee under Tex. Prop. Code § 162.002. This means that you have a responsibility to correctly apply trust funds.

Misapplication of Trust Funds

Under the statute, a trustee who, intentionally or knowingly or with intent to defraud, directly or indirectly 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, has misapplied the trust funds. Tex. Prop. Code § 162.031. Plainly stated, this means that if you fail to pay any 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 you have misapplied trust funds and opened yourself up to consequences of this action; but what are the consequences?

Consequences of Misapplication

There are criminal and civil consequences to misapplying trust funds. Under Tex. Prop. Code § 162.032:

(a)  A trustee who misapplies trust funds amounting to $500 or more commits a Class A misdemeanor.

(b)  A trustee who misapplies trust funds amounting to $500 or more with intent to defraud, commits a felony of the third degree.

(c)  A trustee who fails to establish or maintain a construction account in violation of Section 162.006 or fails to establish or maintain an account record for the construction account in violation of Tex. Prop. Code § 162.007 commits a Class A misdemeanor.

Obviously, there are multiple claims that can be brought against a Trustee who misapplies funds. Breach of contract, fraud, and breach of fiduciary duty are just a few claims that are likely to be in a plaintiff’s petition.

What Should You Do

Understand your role and responsibility as a Trustee. Be diligent with your accounting and pay all beneficiaries before withholding or retaining any trust funds as your own. Consult with your attorney if there is any confusion regarding payment and your rights to funds from the trust.

Nothing here is intended to be legal advice and should not be interpreted as such. If you or someone you know is has a potential construction dispute or would like advice regarding construction, give us a call at 832-930-0529. You can also visit our website http://www.StephensBell.com