Construction / 2 min read
One of the most powerful legal mechanisms a downstream party has to assure its right to payment on a construction project is the materialman’s and mechanic’s lien. When a downstream party performs work on a project and does not get paid, the legal recourse, other than filing a suit, is for the downstream party to perfect and attach its lien to the project’s property. This gives the downstream party a direct legal right all the way up to the property owner, even when the downstream party has no direct contractual privity with the property owner.
There are instances when the property owner pays a general contractor’s pay application, and then later receives a pre-lien notice from the general contractor’s subcontractor. A similar scenario can occur when a general contractor pays a subcontractor, then the subcontractor’s supplier sends a pre-lien notice. While there are many, more favorable explanations for this, one possibility is the original party was paid, and misappropriated the funds received, thereby never making it to the downstream party for which the funds were intended. This scenario can be extremely disruptive to the progress of a construction project, and the property owner or other upstream party is faced with the unpleasant decision of whether to “double-pay’” to avoid liens from the unpaid downstream vendors.
To address this problem, the Texas Legislature enacted Texas Property Code Chapter 162, the Texas Construction Trust Fund Statute. Chapter 162 provides downstream parties specific rights and remedies when an upstream party fails to pay for work performed when the upstream party had received funds that were intended for the downstream party. One pitfall of Chapter 162 could include a property owner who paid a general contractor for work performed by a subcontractor, who then cannot assert a Chapter 162 claim against the general contractor if the paid funds are misappropriated. Even when the property owner is harmed by the subsequent lien filing of the unpaid subcontractor. In recent years, some courts have interpreted Chapter 162 to state that upstream parties do not have standing under Chapter 162 to assert claims against a downstream party for misapplication of funds.
To remedy this gap, House Bill 1864 was introduced in the last legislative session. House Bill 1864 proposed to permit an assignment of beneficiaries’ (subcontractors or suppliers) rights under Chapter 162 to another trustee (i.e., the general contractor) or property owner of the associated construction project. Under this amendment, a property owner or other upstream party will have a valid avenue to assert trust fund claims against the party misappropriating funds, through an assignment of the beneficiaries’ rights. Despite this common-sense solution, House Bill 1864 was passed by the Texas House but died in a Senate Committee this past legislative session.
Given the disruption misapplication of funds can cause on a construction project, it is likely that the bill will be reintroduced and passed in the next legislative session. Property Owners and other upstream parties who pay funds intended for a downstream party, only to find out that the downstream party was not paid have little recourse otherwise, when facing the decision to double pay or have a lien attached to the project’s property.