Texas Lawyer Tip: Commercially Reasonable Sale

As you are probably aware, debtors and guarantors who are pursued for a deficiency often attempt to raise every defense imaginable to attempt to avoid liability, and one of the most frequently used defense is that the diposition of the collateral following a foreclosure of personal or real property was not conducted in a commercially reasonable manner. See UCC Sections 9-625, 9-610(b) and 9-626.

As a creditor planning for avoidance of this defense, it is helpful if the secured party and these obligors, at the time requesting the loan, contract for and agree to the method of the disposition of the collateral and accept the method/manner of the sale detailed to be commercially reasonable. This is particularly helpful if the collateral being financed is unique or very large equipment, or something where it is difficult to find a buyer or a "market" for the goods.

Interesting case on Reaffirmation Agreements in Texas

Hat tip to Stephen Sather, this is an interesting case where the Texas bankruptcy court denied a reaffirmation agreement due to the hardship it placed on the debtor. The judge goes through the process of when a court will deny a reaffirmation agreement (even if debtor and creditor agree), and has some advice for Chapter 7 attorneys in practice on how to deal with debtor clients.

If you're not familiar with reaffirmation agreements in bankruptcy, basically a reaffirmation agreement under Section 524(c) is a new contract between a debtor in bankruptcy and a creditor (typically a secured creditor) wherein the debtor "reaffirms" the debt owed to the creditor in order to not have to surrender the property to the creditor with that lien interest/security interest. Typically there is an agreement on the fair market value of the property to be paid back with an agreed interest rate, and it is enforceable as a post bankruptcy debt that will not be discharged in the bankruptcy. This is usually done with vehicles used by the debtor, but it also is used to keep household property like washers and dryers, etc.

Copy of the case is here.

Texas Guarantor Not Liable Under Lease Renewal

The Texas Legislature made couple of revisions to the Texas Property Code during the 81st Legislative Session. They added Section 92.021 which addresses liability of guarantors under lease renewals. Under the new code section, for lease agreements executed on or after January 1, 2010, a guarantor is not liable under a lease renewal unless the guarantor expressly agreed to be liable under a lease renewal in the original lease. The original lease must contain specific information as set out in the new code section to bind a guarantor under a lease renewal. Landlords should review and revise their leases as necessary before January 1, 2010.

Texas Public Works Bond Claim Case

A recent case, brings good news for material suppliers and subcontractors. The Texas Supreme Court ruled in favor of an unpaid supplier regarding statutory and common law claims, even though the unpaid material supplier missed their bond claim deadlines. In Dealers Electrical Supply Co. v. Scoggins Construction Co. Inc., 2009 WL 1901638, Slip op No. 08-0272 (Tex. July 3, 2009), an electrical subcontractor on a bonded public-works project walked off the job and left his parts supplier, Dealers, unpaid. The supplier missed the McGregor Act deadline to pursue a claim on the bond, but filed suit against the prime or general contractor for violation of the Texas Construction Trust Fund Act and breach of a separate Joint Check Agreement.

At trial, it was held that the prime contractor's president violated the Trust Fund Act by failing to pay the supplier, and had guaranteed the payment of the supplier’s materials under a Joint Check Agreement, and was therefore liable. The court of appeals reversed incorrectly ruling that that the McGregor Act was the supplier’s exclusive remedy. The Texas Supreme Court disagreed, holding that the McGregor Act is the unpaid laborer and materialman's exclusive remedy against the payment bond but does not otherwise limit their other statutory and common-law claims. Dealers Electrical Supply Co. v. Scoggins Construction Co. Inc., 2009 WL 1901638, Slip op No. 08-0272 (Tex. July 3, 2009).

Part 5: Texas Public Works Construction Projects & Subcontractors: Prime Contracts Over $25,000.00 & Rights to Information from Prime Contractors and Gover

Subcontractors in Texas are entitled to certain information upon written request and public owners (governmental entities) and prime contractors are required to furnish the information.

Subcontractors can request the following information / documentation from prime contractors:

(1) the name and last known address of the governmental entity with whom the prime contractor has its contract;
(2) a copy of the payment and performance bond for the project; and
(3) the name of the surety issuing the payment bond and the toll-free telephone number maintained by the Texas Department for obtaining information concerning licensed insurance companies.

See Tex. Gov’t Code § 2253.024

If the prime contractor did not initially disclose the name of the surety, the best practice is to request this information as soon as possible as this information is necessary to send the “Third Month Notice” discussed in Part 3 of this blog series. If you do not obtain this information early enough but wait until payments are missed, you may not have the necessary information in time to mail the required “Third Month Notice” to the surety.

In addition to a written request, subcontractors must submit an affidavit when requesting information from a governmental entity. The affidavit must state that the person / subcontractor:

(1) has supplied public work or labor for which payment has not been made;
(2) has contracted for specially fabricated materials for which payment has not been made; or
(3) is being sued on a payment bond.

Subcontractors can request the following information / documentation from governmental entities:

(1) a certified copy of the bond;
(2) the public work contract for which the bond was given; and
(3) the toll-free telephone number maintained by the Texas Department for obtaining information concerning licensed insurance companies.
See Tex. Gov’t Code § 2253.026

Information requested must be provided within 10 days after the receipt of the written request for the information. A prime contractor or governmental entity from whom information is requested may require payment of the actual cost for providing the requested information.
Texas law governing public projects can be found in Texas Government Code Chapter 2253 (formerly known as the McGregor Act) and Texas Property Code Chapter 53.

Please visit our blog again in a few days for Part 6: Public Works Construction Projects & Subcontractors: Prime Contracts Over $25,000.00 & Rights to Information from Subcontractors & Payment Bond Claimants.

Part 4: Texas Public Works Construction Projects & Subcontractors: Prime Contracts Over $25,000.00 & Retainage

Like in private construction projects, in Texas public works projects, general contractors hold back part of the contract price until the subcontractor fulfills the contract as “retainage.” The amount withheld is a percentage of the total contract price, often around 10%. The retained money is supposed to be paid to the subcontractor after the public works contract (the contract between the governmental entity and the general contractor) is completed. If the general contractor does not pay the retained money, the subcontractor can file a lawsuit to collect on the payment bond; however, the subcontractor must first meet the notice requirements.

The subcontractor must give notice to the general contractor and surety on or before 90 days after final completion of the public works contract. The notice must include the amount of the contract, any amount paid, and the outstanding balance. Tex. Gov’t Code § 2253.046. The notices must be mailed by the proper method and to the proper addresses.

Once again, sending the notices timely, to the correct people, and with the correct content is crucial to perfect a claim retainage.

Texas law governing public projects can be found in Texas Government Code Chapter 2253 (formerly known as the McGregor Act) and Texas Property Code Chapter 53.

Please visit our blog again in a few days for Part 5: Public Works Construction Projects & Subcontractors: Prime Contracts Over $25,000.00 & Rights to Information.

Part 3: Texas Public Works Construction Projects & Subcontractors: Prime Contracts Over $25,000.00.

In reality, most public works projects in Texas are over $25,000.00 in value. When projects exceed $25,000.00 in value, the general contractor must post a payment bond in the amount of the prime contract for the protection of subcontractors and sub-subcontractors. Tex. Gov’t Code § 2253.021. If subcontractors are not paid by the general contractor, they can file a lawsuit to collect on the payment bond; however, before they can file suit, subcontractors must ensure that they have complied with strict notice requirements. If the notice requirements, including deadlines and content, are not properly met, the subcontractor will not be able to successfully sue to collect on the payment bond.

Under Texas law, Subcontractors (those having a contract directly with the general contractor) must give written notice to the prime contractor and surety not later than the fifteenth day of the third month following each month in which the labor or material was provided for which the claimant has not been paid (often called the “Third Month Notice”). Tex. Gov’t Code § 2253.041(b). If this deadline is not properly met, the subcontractor will have lost its ability to prevail in a lawsuit. Furthermore, the notice must identify specific details such as: the labor or materials provided; who they were provided to; and when they were provided; in addition to other required information. Additionally, a sworn statement must be included verifying the amount due. Tex. Gov’t Code § 2253.041(c). The notices must be mailed by the proper method and to the proper addresses. Tex. Gov’t Code § 2253.044.

Sending the required notices on time is crucial for subcontractors but is often overlooked until it is too late or sent incorrectly due to a misunderstanding of the applicable laws. Subcontractors often wait too long believing that they will work something out with the general contractor. When they eventually do seek help from an attorney, the deadline has already passed. Subcontractors should pay careful attention to their past due invoices and ensure they seek an attorney’s advice far enough in advance so that all deadlines can be met and the subcontractor’s rights protected.

Texas law governing public projects can be found in Texas Government Code Chapter 2253 (formerly known as the McGregor Act) and Texas Property Code Chapter 53.

Please visit our blog again in a few days for Part 4: Public Works Construction Projects & Subcontractors: Prime Contracts Over $25,000.00 & Retainage.