Thursday, October 18, 2012

Texas Mechanic's and Materialman's Liens and Bond Claims: Constitutional Liens and Sham Contracts

Constitutional Liens

In Texas, contractors may have a constitutional lien claim.  The Texas Constitution states as follows:

“Article 16 Section 37:  LIENS OF MECHANICS, ARTISANS, AND MATERIAL MEN. Mechanics, artisans and material men, of every class, shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor; and the Legislature shall provide by law for the speedy and efficient enforcement of said liens.”

Constitutional liens benefit only original contractors, or those who have their contract directly with the owner of the property.  A constitutional lien arises automatically or is “self-executing”.  It is not necessary to send notices or file an affidavit of lien as with statutory liens.  However, the best practice is to go ahead and file an affidavit of lien even though it is not required to perfect the constitutional lien.  The affidavit of lien filed in the real property records provides notice of the lien to third parties.  For example, if a third party wishes to purchase the property upon which the contractor has a constitutional lien, the lien will transfer only if the third party had notice of the lien.  Filing an affidavit in the real property records provides this notice.

Sham Contracts

There are many more notice requirements for Subcontractors and Sub-Subcontractors than there are for General Contractors.  An Owner who understands this may attempt to use an alter ego as the General Contractor making it more difficult for workers and materials suppliers to make valid lien claims. 

A sham contract may exist when the Owner and General Contractor are essentially one and the same.  They may be operating under different names, but either the Owner or General Contractor can effectively control the other, for example, through ownership of voting stock, interlocking directorships, or otherwise.  For example, Company X is the Owner and Company Y is the General Contractor.  However, the President and members of each company are the same. 

If there is truly a “sham contract,” Subcontractors are considered to be in direct contractual relationship with the Owner and can claim a lien as a General Contractor.  This is beneficial to Subcontractors because, as previously noted, it is easier for General Contractors to claim a valid lien. 

Furthermore, when there is a sham contract, Subcontractors may be able to claim a constitutional lien as well.

By Sarah F. Berry, Attorney
If you are interested in attending a lien and bond claim workshop please contact Sarah Berry for more information. or (512) 472-2300.  Our next workshop is scheduled for November 2, 2012. 

No comments: