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This article is based on a webinar that was hosted by SunRay Construction Solutions and features Emily A. Pendleton, an associate at Porter Hedges LLP in the construction litigation practice group. The focus of this article is on what happens after you record your lien and at the end you have not seen a check so how to get paid.
First, we start with what rights and abilities your perfected lien gives you.
What Does your Perfected Lien Give You?
There are three things that your lien gives you.
a. Leverage
First and foremost, it is going to give you leverage which is critical when you are facing non-payment issues. Originally, you probably felt fairly restricted in terms of negotiating directly with your customer whether that is the general contractor or another subcontractor on these Texas construction projects.
But your perfected lien is going to involve the owner because it gives you a direct claim as against the project owner and so they will have a vested interest in ensuring you get paid. So not only are you a direct line of communication with the entity that has failed to pay you.
But now the property owner is going to say that they paid the funds downstream to ensure that this party gets paid and ask what the bottleneck is.
b. Security
Second is that it is going to give you security. Your perfected lien attaches to the title of the real property, and so now you have some security knowing that even if you hear things of potential bankruptcy or insolvency of the owner entity or downstream.
You know that there is some security there because your claim is now backed by the value of the real property asset. So that can give you some peace of mind.
c. Priority
Lastly, it is going to give you some property. Oftentimes when there are nonpayment issues on projects, you are not the only party that has performed work on this construction project that is having a nonpayment issue.
So to the extent you are able to properly perfect your Texas mechanic’s lien, you are going to take priority in certain funds over and above those who remain unpaid and fail to timely perfect their lien claim.
Leverage – Available Claims
Now we will discuss a little further about leverage and available claims that the perfected mechanic’s lien gives you.
Claim against the contracting entity for non-payment
So of course, you have your claim directly against the contracting entity for non-payment. Those are claims such as Breach of Contract, quantum meruit, and those sorts of things.
A perfected mechanic’s lien gives you a claim directly against the owner
But now your perfected mechanic’s lien gives you a direct claim to foreclose on your lien and that claim gets asserted directly against the owner.
Owner’s Liability
Your perfected mechanic’s lien creates liability on behalf of the owner in two separate sets of funds. Those are:
a. Reserved funds
Reserved funds are what you might otherwise know as retainage on a project.
b. Trapped funds
The second type of funds are what is called ‘trapped funds.’
These are the two types of funds that the owner can be held liable for if they fail to pay you for your perfected mechanic’s lien.
Reserved fund
The reserved fund, otherwise known as the retainage; the statute has just defined the term reserved fund.
- A fund the owner is required to retain from the general contractor
It is the fund that the property owner is statutorily required to retain from the general contractor throughout the course of the project.
- 10% of original contract price or if the project is not complete, 10% of value of work performed
It is equal to 10% of the original contract price or if the project is not yet completed, it is 10% of the value of the work performed.
- Owner must withhold funds until 30 days after the contract is completed
The owner is required to withhold these funds from the general contractor until 30 days after the original contract is completed. This is a pot of money set aside specifically to satisfy lien claimants in the event that the general contractor or any subcontractor downstream fails to pay their contractual obligations.
- Trapped fund
The second fund of money that the owner is going to be liable for is ‘trapped funds.’ These are funds that the owner pays to the general contractor after receipt of your preliminary notice and a failure to withhold amounts sufficient to satisfy the amount claimed in the pre-lien notice.
So the owner can have some additional liability to the retainage in these trapped funds by failing to set aside amounts sufficient to cover your claim and failing to withhold those and pay them out to the general contractor.
We will talk a little more about these two separate funds when it comes time to ask these sorts of important questions of the owner and the general contractor as you start to investigate and ask things like “what is the problem with nonpayment on this project?”
Three Steps to Get Paid
There are three steps to getting paid.
a. Investigate
The first one is the most economical. What can you do to start the line of communication to figure how you can get paid? The first is to investigate and establish your line of communication directly with the owner and the original contractor in order to determine what the real issue is here
b. Retain counsel
Your next step to the extent those information negotiations directly between the businesses is seemingly not going to work out. You should go ahead and retain counsel.
c. File suit
If they cannot get it resolved, then they are going to need to file suit.
After Recording Your Lien
Let us talk about what you can do after recording your statutory lien to try and expedite the payment process.
a. Call the project owner and investigate!
First thing is you need to establish that line of communication with the owner, because the owner has a vested interest in insuring that you get paid. They are going to be the ones with liability because of your perfected lien on their property and they are going to want it removed. So it is best to just call up the owner and ask them some questions.
i. Confirm that owner received your notices and lien affidavit
First and foremost, confirm that the owner did in fact receive your lien notices and a copy of your lien affidavit to ensure they are aware that you are out there and have not been paid.
ii. Get intel regarding payment problem
Second is to just get intel regarding the payment problem. Straight up ask them if they are aware of why you have not received payment from the general contractor or first-tier subcontractor on this project. What is the general contractor telling you about why you have not been paid? Is there any sort of allegation that your work was done deficiently or are there any defects in the work?
Generally, get as much information as you can from the owner about what the payment problem is on this project.
iii. Are you withholding funds from the general contractor to satisfy your company’s lien claim?
These next two points are important to get at specifically the owner’s potential liability. First, ask if the owner is withholding funds from the general contractor to satisfy your lien claim. That is going to get at how they have trapped the funds necessary to satisfy your claim and not pay those funds out to the general contractor yet.
iv. Did you withhold retainage from the general contractor throughout the course of the project?
The next point is, did you withhold retainage from the general contractor throughout the course of the project? That is when you determine whether they have satisfied their obligation to withhold the reserved fund to satisfy your lien claim.
This and the above question will give you information to determine the owner’s potential liability for your lien claim. Ask them and be as cooperative as possible.
v. What information/documentation is needed from you for your company to get paid?
What information or documentation do they need from you in order to get your company paid? Do they need any sort of additional invoicing or other types of information? Definitely work with the owner to satisfy whatever they need in order to ensure that you get paid.
vi. Will your company be paid via a joint check?
Ask them whether or not they would be willing to pay your company via a joint check. This is seen more and more often in the prime contract agreement where the owner and the general contractor’s agreement specifies the ability to make payments via joint check when a lien claim arises.
So that might be an option where the owner can ensure that the money they fund on this project to the general contractor is certainly going to reach you by issuing a joint check.
vii. You would like to avoid filing formal claims if you can get payment issue resolved in next 10 days
You can always conclude these types of conversations with nothing aggressive, but you want to avoid having to file any formal claims if you can get this payment issue resolved in the next 10 days. Put a deadline on it. At the end of the day, your invoice is probably several months unpaid so having a short deadline may help to expedite the payment process.
b. Call the general contractor and investigate
Another form of investigation is to go ahead and contact the general contractor directly. You might already have a lot of information from the general contractor about the payment issue to the extent that your contract is directly with the general contractor.
i. This is important if you are a second-tier subcontractor
Establishing a direct line of communication with the general contractor is particularly important if you are someone further down the chain, such as a second-tier subcontractor or third-tier subcontractor.
ii. Get intel regarding the payment problem
You want to approach the conversation with the general contractor very similar in terms of getting as much information about the payment problem as you can. You want to note any sort of allegations of defective work or if there is just a hold-up on the owner’s behalf.
For example, if there is a large invoice outstanding for several milestones and once those get funded by the owner, the funds will come down to you. It is just that the owners told you they are supposed to issue payment in no more than 30 days.
So at least then you have a general sense of when you can anticipate payment by.
iii. If you can negotiate, consider whether small reduction in your demand will save time and money
One final thing to think about as you have these conversations with both the owner and the general contractor is whether or not you have the ability to negotiate. Do not start out the conversation with being willing to take a deduction on your invoice, but to the extent it comes to the point that you consider retainage or retaining counsel.
You might consider whether taking a small reduction on your demand will save you both time and money.
Perform cost-benefit analysis of hiring an attorney to file a lawsuit
Perform a cost-benefit analysis of hiring an attorney to file a lawsuit and look at whether or not going ahead if the payment could be issued sooner. What small reduction would you be able to make on the front end just to get paid that much faster and be done with the problem?
If this sort of informal negotiation and discussion do not appear to lead anywhere to get you paid on your perfected lien, you want to consider retaining counsel.
Retain Counsel
Generally, the first thing you should do is to try and do your own investigation.
a. A call from an attorney may do the trick
A call from an attorney may do the trick. Find out whether or not they are already represented by counsel which is beneficial information.
b. Finding out you have hired counsel to prepare lawsuit may add pressure to get you paid
Finding out that you have retained counsel to prepare a lawsuit may add to the pressure that is necessary to get you paid prior to needing to formally file a lawsuit.
Suit to Foreclose
To the extent that these conversations with council do not lead anywhere, the ultimate step to getting you paid is to go ahead and file a lawsuit to foreclose on your perfected mechanic’s lien.
a. When you must file suit to foreclose
It is important to know the Texas mechanic’s lien timeline in which you need to make sure that you retain counsel and file suits to foreclose. The deadline to file suit to foreclose on your perfected mechanic’s lien is one year after the last date that a claimant may file a lien affidavit.
Generally speaking, that is going to be the 15th day of the fourth month after you complete your work. So more or less you have one year from that last date you could have filed your lien affidavit to file your lawsuit to foreclose on your lien.
b. One year window
One common misconception is to think that you do not want to go through that.
i. You cannot wait for the owner to sell the property to get paid
Eventually, the owner is going to want to sell their property and they are going to get paid. Just so that they can release the lien from their property, clear the title, and make the sale of the property. But that is not the case.
ii. Your 1-year limitation period to file suit may expire before owner want to sell property
You cannot simply wait for the owner to sell the property in order to get paid. You have a one-year limitation, and that limitation period may expire well before the owner ever wants to sell it. So to the extent that the owner finds himself in a position where he paid out all the funds to the general contractor, they do not think they have any additional liability to you.
They are just going to sit and wait and see whether or not you file a lawsuit to foreclose on your construction lien. You are going to need to do that within one year and not wait for the opportunity of the owner selling their property in order to recover on your lien.
The Lawsuit
Last but not least, is the lawsuit.
a. Getting all parties to be represented by counsel can be beneficial to get paid
Oftentimes, when there is a straightforward obviously perfected lien, the work has been done, there is no claim of deficient work, getting the parties together to be represented by counsel can be beneficial in getting you paid especially when there is the opportunity for each and every party involved to have adequate representation advising them of the risks and liabilities that they face.
The longer the nonpayment issue drags on, things like attorney’s fees accrue, things like interest accrue, and the longer the lien claim remains unpaid. So having those parties represented by counsel can expedite the process and get you paid. That is not to say that you should call off and file a lawsuit.
b. Approximately 95% of lawsuits settle before going to trial
Filing a lawsuit does not mean it is going to be a year or two years before you get paid. That is generally not the case. Approximately 95% of lawsuits settle before going to trial and so oftentimes, you will see that when you file very straightforward lien foreclosure lawsuits there are no claims of deficient work, defective work, and things of that nature.
They settle a lot sooner than having to go to trial. There are a lot of ways to expedite difficult parties such as things like motions for summary judgement and those sorts of tools that we have to expedite the payment process once the lawsuit is filed.
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