I Filed my Mechanic’s Lien, Now What? Turning that Lien into Dollars - Texas

In this blog, presented by SunRay Construction Solutions and Rebecca A. Hicks, Managing Partner, Hicks Law Group, construction professionals in Texas can learn in detail about the steps they should take after they file their mechanics lien to ensure that it results in them receiving the money. These instructions are specific to private construction projects.

The Lien Claim Cheat Sheet

Before we jump into what needs to be done, let’s take a quick look at the preliminary steps that you should have already taken:

1. If you are a general contractor, then you should have filed your mechanics lien by the 15^th day of the fourth month for each month that you did the work.

2. If you are a first-tier or second-tier subcontractor, then you should have sent out your notice letter by the 15^th day of the third month for each month that you did the work.

3. You should have also filed your mechanics lien by the 15th day of the fourth month after the last month that you did work on the job.  

4. You have ensured that you have followed all the rules in the Texas Property Code and filed your mechanics lien with the real property records, and after filing it, you have also sent a letter providing notice of the filed mechanics lien within five days of filing the lien.

5. You have sent the notice of the filed lien to the owner, general contractor, and anyone up in the chain, and you have sent it via certified mail which is the preferred method as per the statute.

Now, after performing all these steps, you still have not heard anything back, and your mechanics lien is ideally just sitting out there. What do you do? Well, read on to find out what steps you need to take to turn that mechanics lien into actual money.  

Steps After Perfecting a Mechanics Lien

So, you have perfected your lien and filed it properly, and you have sent out all the necessary notices and letters to the required people but you still have not received any response from them. There are two steps that you can take.

Step 1 - The first step is ideal if you do not want to engage a lawyer in the process because it will incur additional time and money for you. What you can do is try and initiate a conversation with the owner, the general contractor or with whomever you are working. You can do it via phone, email, text messages, etc.

Step 2 - You can let them know that there is a mechanics lien out there and if you don’t get paid promptly, you will have to engage a lawyer and file a lawsuit, or you can check with them how to quicky resolve that mechanics lien.  

Step 3 - Sometimes, just by having a conversation with them after the mechanics lien is filed, you can get paid successfully. In some cases, where you have large contractors and large owners, they often receive multiple mechanics lien notice letter and they may not pay attention to each of those letters. So, having a conversation and bringing your notice to their attention can sometimes get the payment issue resolved quickly.  

If the first step does not work for you, then the second step is to send a sort of legal letter called the foreclosure demand letter.  

What is a Foreclosure Demand Letter?

A foreclosure demand letter is another step that you can take before you need to hire a lawyer and file a lawsuit to get you paid.  Now you need to bear in mind that the foreclosure demand letter is not something that is required by the law and it is also not a mandatory step that you need to take.

A foreclosure demand letter is just a letter that lets the owner, general contractor and anyone else who is above you in the construction chain know that you have a filed a mechanics lien and if the payment is not made on time, then you will go ahead and file a lawsuit.

As you know, a mechanics lien is an actual lien that attaches to the real property and once you file your mechanics lien, it is essentially a claim against that real property. So, if you have perfected your lien then you entitled to foreclose on that lien. Once the court enters a judgment, you can sell the property to get yourselves paid. The foreclosure demand letter is just going to point out all of this. Once the owner sees the demand letter, it can trigger them into taking action and paying you promptly because they obviously don’t want their real property to be sold.

Logistics for Foreclosure Demand Letter

When dealing with foreclosure demand letters, you need to remember that it is not a statutorily required document, but it is better to follow a formal process when using it so that it gets more attention. So, who should get this letter and how should you send it?

Who should get the letter?

You need to send the foreclosure demand letter to all the people whom you sent the lien notice letters. So, basically you will send it to the owner, general contractor, and anyone who is above you in the construction chain.

How should you send it?

Again, there is no statutory requirement, but it is ideal to send the letter via certified mail, return receipt requested. You can also send it via regular mail or if you have the email addresses of the owner, general contractors, subcontractors, etc., you can send email it to them as well.  

A typical foreclosure demand letter will include your details, the addresses of the owner, general contractors, and others who are above you in the construction chain and the key information which is what will be if the mechanics lien is not paid promptly. As mentioned above, the demand letter will clearly state that you will foreclose and after the judicial process, the property will be sold, and you will recover your money from the sales proceeds.

If That Does Not Work: File Suit

If you do not get any response even after performing the above steps, i.e., you have tried to initiate informal conversations, you have sent emails, you have sent your foreclosure demand letters, but there is still no response and your mechanics lien is still outstanding, then the next step is to judicially foreclose a mechanics lien.

• From this step, you must engage an attorney because you must file a lawsuit to foreclose.

• When you file the lawsuit, the claims in the lawsuit would include a breach of contract, other causes of action, etc. You will also sue the property owner in the same lawsuit to foreclose on the mechanics lien.

• In general, you will also sue the owner for trapped funds. In Texas, there are some case laws which says that owners are separately liable for funds that they should have held after receiving a mechanics lien fund trapping notice letter.

• You must file the lawsuit in the county where the project is located. So, wherever you have filed your mechanics lien, you will file the lawsuit also in the same county.  

New Deadline to File Suit to Foreclose Shorter  

One of the key deadlines to remember is the time you have to file your lawsuit to foreclose on the mechanics lien. As of January 1^st, 2022, the legislature has shortened the statute of limitations to file the foreclosure action. You now have only one year to file your foreclosure suit. So, make sure that you do not let your mechanics lien t sit out there for more than a year. Because once the first anniversary of the last day a claimant may file the lien passes, your mechanics lien becomes worthless and unenforceable.

You may have a bit of wiggle room if you file your mechanics lien a little early because then your deadline may also be a little longer. But the best practice is to not let that one-year deadline pass because you need to get that lawsuit on file before that first anniversary and hopefully you want to get it on file long before so that you can even get service of process accomplished before that one-year anniversary.

Deadline to Foreclose Lien

Prior to 2022, the deadline to foreclose on a mechanics lien was within 2 years from the last the claimant could have filed a lien; however, as mentioned above, this deadline has now been shortened to one year, so make sure that you take the required action well before the one-year deadline passes.

Understanding the Litigation Process

Let’s say you have reached the step where you need to hire an attorney and file a lawsuit to foreclose on your mechanics lien. This is how the litigation process looks:

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Step 1 - Filing the Lawsuit

The first step is to file the lawsuit, or petition, with the district court in the county where your mechanics lien is recorded.

Step 2 - Service of Process

The county clerk issues citations, which you send to a process server or sheriff/constable to physically serve on the defendants. For LLCs or corporations, service is on the registered agent.

Step 3 - Defendant's Answer

Once served, defendants have until the Monday after 21 days to answer the lawsuit, usually with a general denial. LLCs and corporations must hire an attorney to file their answer.

Step 4 - Default Judgment

If the defendant doesn't answer on time, you can file for a default judgment, supported by affidavits proving your mechanics lien.

Step 5 - Discovery and Motions

If the defendant answers and includes counterclaims, the discovery period begins, where each side discloses evidence. If there's no dispute about the work or products, you might get a summary judgment.

Step 6 - Trial and Judgment

If not resolved by motions, the case goes to trial, either with a jury or a bench trial (judge only). A bench trial is often preferable for mechanics lien cases. After the trial, you get a judgment foreclosing your lien.

Step 7 - Property Sale and Bankruptcy

The judgment allows the sheriff/constable to issue an order of sale, but it's rare for cases to reach this point. Owners usually act when served with a lawsuit, leading to a settlement or bankruptcy filing.

Step 8 - Mechanics Lien in Bankruptcy

If there's a bankruptcy filing, your mechanics lien becomes a claim in the bankruptcy. It's likely to be paid if there's equity in the property. Don't assume your lien is worthless if you get a bankruptcy notice.

Lien Does Not = 100% Paid

There is a common misunderstanding with regards to mechanics lien that if you perfect your mechanics lien and file it timely, you are going to get paid 100% on that mechanics lien. However, this is not true. The mechanics lien statutes are basically created to balance the risk between the owners, general contractors and subcontractors. The owner’s risk is limited.

• Now, the owner’s liability on a mechanics lien is going to be limited to 10% of the reserved funds which is known as statutory retainage. This is 10% of the contract price between the owner and the general contractor.

• The owner is required to keep that 10% until the end of the job until all claims have been resolved. Apart from these 10% reserved funds, they may also have any money that they trap after receiving a mechanics lien notice.  

• So, you have the 10% and this may increase based on the funds that were trapped by the owner or should have been trapped by the owner. “Trapped” typically means that the owner does not pay that money to the general contractor until the claim is resolved.

• The way these projects work is you have to work out what is the owner’s total liability compared to how many liens have been properly perfected on the project. Also, remember that all mechanics liens are treated the same, irrespective of which was filed first, as long as they are perfected and properly filed.

• For example, the owner has a million-dollar contract with the general contractor. This means that 10% retainage is $100,000. Let’s say you sent your fund trapping notice letter and $50,000 is trapped funds. This means the owner did not pay the general contractor an additional $50,000 after the fund trapping notice letter was sent because that's all the money they had left to pay the general contractor other than the reserve funds that they were holding.

• This means that the owner’s total liability on that project is $150,000.

Dividing the Pie

Now, taking the above example, if the owner’s liability is $150,000, then the lien claimants are going to share proportionately or pro-rata in those funds. So, if there are lien claims that are worth more than $150,000, then everybody is going to take a cut.

In such situations, it is best to look at the other claims and make sure that they have been perfected properly because the more claims you can get rid of, the bigger share you can get. So, if you know the basic laws and rules, you can tell the owner if any of the claims have not been perfected and rule them out of this $15,000 liability. So, if you can make such successful arguments, then you can increase the price of the amount that you may receive.  

To summarize, always remember that perfecting and filing your mechanics lien does not ensure successful payment. You must follow through with additional and timely steps to convert the lien into money.  For further guidance or assistance consulting experts at SunRay, who specialize in Texas lien laws, is always a smart choice. We offer personalized advice to protect your rights and ensure a successful project outcome. Call us today on 800-403-7660 to get the payment you deserve!

Key Takeaways

1. Filing a Mechanics Lien is Not Enough: Even a perfectly filed lien doesn't guarantee payment. You need to take additional steps to ensure you receive the money you're owed.

2. Initial Steps After Filing:

• Informal Communication: Reach out to the owner, general contractor, or whoever you're working with directly. A simple conversation can sometimes resolve the issue.

• Foreclosure Demand Letter (Optional): While not legally required, sending a formal letter threatening foreclosure can motivate the owner to pay.

3. Foreclosure Demand Letter:

• Who to Send It To: The property owner, general contractor, and anyone else you sent a lien notice to.

• How to Send It: Certified mail is the best way, but regular mail or email can also work.

• Content: Clearly state the consequences of non-payment, including foreclosure and property sale.

4. One-Year Deadline to File Suit: If the above steps fail, you MUST file a lawsuit to foreclose on the lien within one year of the last date you could have filed the lien. Don't miss this deadline!

5. Litigation Process (If Necessary):

• Hire an attorney.

• File a lawsuit in the county where the project is located.

• Expect the process to take time, but many cases are settled before trial.

6. Not All Liens Are Paid 100%:

• The owner's liability is limited to 10% of the contract price (retainage) plus any trapped funds.

• Lien claimants share proportionally in the available funds.

7. Protect Yourself:

• Keep meticulous records of all project-related communication and documentation.

• Be aware of potential bankruptcy filings by the owner or general contractor.

Common Questions Contractors Ask

What makes a mechanics lien invalid in Texas?

A mechanics lien can become invalid in Texas for several reasons, including:

• Failing to send the required preliminary notice or filing the lien within the strict deadlines specified by Texas law.    

• Errors in the lien claim, such as incorrect property description, owner name, or amounts owed.

• Not serving the lien notice to the required parties in the correct manner.

• Signing a contract that waives your right to file a lien.

• Intentionally inflating the amount claimed or providing false information.

How long does a mechanics lien last in Texas?

A mechanics lien in Texas generally lasts for one year from the last date the claimant could have filed the lien. This means you have one year to take legal action (i.e., file a lawsuit) to enforce the lien.

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