September 04, 2018
Author: MICHAEL W. MORAN
Organization: JACKSON WALKER L.L.P.
The filing of a mechanic's lien amounts to making a claim against the real property, thus the filing and enforcement of liens raise various real estate considerations.1 This paper examines a few of these considerations including the priority of liens, removables, discharging of liens, and environmental liability.
A. Preference of Mechanic's Liens Generally
All subcontractors, laborers, and materialmen who have a perfected mechanic's lien have a preference over other creditors of the original contractor. TEX. PROP. CODE ANN. § 53.121 (Vernon 2007). Except for the preference given to individual artisans and mechanics as to statutory retainage, perfected mechanic's liens arising out of the same general contract are on equal footing with each other without reference to the date of filing the affidavit claiming the lien. TEX. PROP. CODE ANN. § 53.122(a). If the proceeds of a foreclosure sale of property are insufficient to discharge all mechanic's liens against the property, the proceeds shall be paid pro rata on the perfected mechanic's liens on which suit is brought. TEX. PROP. CODE ANN. § 53.122(b).
The Property Code provides that a mechanic's lien attaches to the house, building, improvements, or railroad property in preference to any prior lien, encumbrance, or mortgage on the land on which it is located, and the person enforcing the lien may have the house, building, improvement, or any piece of the railroad property sold separately. TEX. PROP. CODE ANN. § 53.123(a). If there is a pre-existing lien, encumbrance, or mortgage on the land or improvement, that lien, encumbrance or mortgage takes precedence over the later-filed mechanic’s lien. While the holder of the pre-existing lien, encumbrance, or mortgage need not be made a party to a suit to foreclose the mechanic's lien, its rights must be addressed first. TEX. PROP. CODE ANN. § 53.123(b); Lyon-Gray Lumber Co. v. Nocona Cotton Oil Co., 194 S.W. 633 (Tex. Civ. App.–Fort Worth 1917, writ ref'd) (mechanic's liens are subordinate to liens that lawfully existed prior to the inception time of the mechanic's lien).
B. Inception of the Lien
In order to establish the priority of mechanic's liens over other liens, it is necessary to determine the inception date of the mechanic's lien. The time of inception of a mechanic's lien is the commencement of construction of improvements or delivery of materials to the land on which the improvements are to be located and on which the materials are to be used. TEX. PROP. CODE ANN. § 53.124(a); see First Continental Real Estate Investment Trust v. Continental Steel Co., 569 S.W.2d 42, 45 (Tex. Civ. App.-Fort Worth 1978, no writ); Mortgage & Trust, Inc. v. Bonner & Co., 572 S.W.2d 344 (Tex. Civ. App.-Corpus Christi 1978, writ ref'd n.r.e). The construction or materials must be visible from an inspection of the land on which the improvements are being made. TEX. PROP. CODE ANN. § 53.124(b). The time of inception does not take into consideration the date that the property owner decides to start improvements on his property. Univ. Sav. & Loan Ass'n v. Security Lumber Co., 423 S.W.2d 287, 295 (Tex.1967). The Texas Supreme Court has specifically “rejected the idea that such liens had their inception when the owner determined to improve his property.” Id.
1. Commencement of Construction
In the landmark case of Diversified Mortgage Investors v. Blaylock, 576 S.W.2d 794 (Tex. 1978), the Texas Supreme Court concluded that \"commencement of construction\" occurs only when the activity:
(a) is conducted on the land itself;
(b) is visible upon the land; and
(c) constitutes either
(a) an activity which is defined as an improvement under the Texas statute or
(b) the excavation for or the laying of the foundation of a building or structure. Id. at 802. Clearing and grading land constitutes commencement of construction. Reliable Life Ins. Co. v. Brown & Root, Inc., 607 S.W.2d 621, 629 (Tex. Civ. App.-Waco 1980, writ ref'd n.r.e.). Work that is merely preparatory does not constitute commencement. Blaylock, 576 S.W.2d at 802.
2. Delivery of Materials
The Blaylock court also defined \"delivery of material\" as the delivery of material:
(a) to the project site;
(b) that is visible upon inspection of the land; and
(c) is to be consumed during construction or incorporated into the permanent structure. Id. at 803.
Because it may be difficult to determine solely from delivery of materials whether such materials will be consumed during construction or incorporated into the permanent structure a case-by-case analysis of the facts is necessary to determine when the Blaylock criteria have been met. In re Jamail, 471 F. Supp. 441 (S.D. Tex. 1979), aff'd, 609 F.2d 1387 (5th Cir. 1980). In summary, the inception date could be one of several dates including the date construction commences, the date that materials are delivered, or the date the lien is filed.
3. Affidavit of Commencement
To more definitely set the date construction is commenced, the Property Code provides that an owner and an original contractor may jointly file an affidavit of commencement. TEX. PROP. CODE ANN. § 53.124(c). An affidavit filed in compliance with § 53.124(c) is prima facie evidence of the date of the commencement of the improvement described in the affidavit. TEX. PROP. CODE ANN. § 53.124(d). The time of inception of a mechanic's lien arising from work described in an affidavit of commencement is the date of commencement of the work stated in the affidavit. Id. The affidavit of commencement must be filed with the county clerk of the county in which the property is located not later than the 30th day after the date of actual commencement of the construction of the improvements or delivery of materials to the land. TEX. PROP. CODE ANN. § 53.124(c) The affidavit must contain:
(a) the name and address of the owner;
(b) the name and address of each original contractor, known at the time to the owner, that is furnishing labor, service, or materials for the construction of the improvements;
(c) a description, legally sufficient for identification, of the property being improved;
(d) the date the work actually commenced; and
(e) a general description of the improvement. Id.
C. Effect of Inception Date on Priority
After the date of inception has been determined, the next step is to determine the inception date's effect on the priority of the mechanic's lien. If there are no prior liens, then the mechanic's lien has priority as to the land and the improvements. TEX. PROP. CODE ANN. § 53.121, 53.123, & 53.124. If a deed of trust has been created before any mechanic's lien's inception date, then the deed of trust will have priority. Id.
A perfected statutory lien has priority over all liens which attach to the land or improvement after the inception of the lien. When perfected, the mechanic's lien relates back to the time of inception for purposes of determining its relative priority. First Federal Savings & Loan Asso. v. Stewart Title Co., 732 S.W.2d 98, 111 (Tex. App.?Beaumont 1987, writ denied); Reliable Life Ins. Co., 607 S.W.2d at 629; University Savings & Loan Association v. Security Lumber Co., 423 S.W.2d 287, 293 (Tex. 1967). If a deed of trust is filed after the inception of a mechanic's lien as determined by the Blaylock test, any mechanic's lien that arises subsequent to the deed of trust will relate back to the date of inception, giving it priority over the deed of trust. Stewart Title Company, 732 S.W.2d at 111.2 If there are notice and filing requirements involved, then the lien relates back as soon as the proper steps are taken to fix the lien. Id.; see also Trammell v. Mount, 4 S.W. 377, 379 (Tex. 1887).
The relation-back doctrine also provides that the lien attaches to whatever legal or equitable interest the contracting party had when the work was begun.3 If the contracting party does not own an interest in the land when work is begun, the contractual agreement between the parties does not establish a basis for a mechanic's lien and so the relation-back doctrine does not apply. Inman v. Orndorff, 596 S.W.2d 236 (Tex. Civ. App.?Houston [1st Dist.] 1980, no writ). In Inman, the person who requested the work be done did not own the property when work commenced. He later acquired title but title passed burdened by a bank's security interest and a deed of trust. The court held that the mechanic's lien was subordinate to the bank's liens. Id. at 238.
D. Effect of Multiple General Contracts
In an old line of cases, it was argued that one original contractor's lien may commence out of the performance of work done under another different general contract. The courts applied the doctrine of relation back to situations involving several original contractors. Oriental Hotel Co. v. Griffiths, 33 S.W. 652, 663 (Tex. 1895). In Oriental Hotel, the Texas Supreme Court stated that among various original contractors, the first fixed inception date constituted the inception date for all subsequent liens. Id. Therefore, a mechanic's lien created subsequent to a deed of trust had a common priority with the mechanic's lien created before the deed of trust.
In the more modern line of cases, the courts reject the common lien theory and hold that the inception date for mechanic's lien is the date work commenced on the contract with the owner under which each entity is working.
See Ferris v. Security Savings & Loan Association, 545 S.W.2d 208, 212 (Tex. Civ. App.?Eastland 1976, no writ); First Continental Real Estate, 569 S.W.2d at 46-47. The Fifth Circuit Court of Appeals, in In re Waller Creek, Ltd., 867 F.2d 228 (5th Cir. 1989) upheld a one-hundred-year-old principle announced by the court in Lyon v. Logan, 5 S.W. 72 (Tex. 1887), by stating that an owner may limit the scope of mechanic's liens by negotiating separate contracts for improvements. In Waller Creek, an original contractor involved in the construction of a hotel on top of a parking garage sought to assert the priority of its mechanic's lien on the parking garage and hotel. The lenders and owners of the garage and hotel contended that since the garage and hotel were constructed under separate contracts and construction commenced at different times, the contractor should be precluded from claiming that the inception of both liens relate back to the commencement of the first project. The court held that the contractor's demolition, excavation, and pier drilling work, performed under the garage contract and billed to that contract alone, did not give rise to a debt for which [he] has a lien on the hotel property. Waller Creek, 867 F.2d at 236.
E. Effect of Alienation of Land on the Relation-Back Doctrine
The Texas Supreme Court applied the relation-back doctrine to the later sale of property in Valdez v. Diamond Shamrock Refining and Marketing Co., 842 S.W.2d 273 (Tex. 1992). In Valdez, a general contractor entered into a contract with the owner for the construction of improvements on a 7.1 acre portion of a 7.9 acre tract of land. Id. at 274. At the time that Valdez signed the contract, the other 0.8 acres was still part of the entire 7.9 acres and was legally described as one tract. Id. The owner later sold the 0.8 acres to Diamond Shamrock. Id. Although the contractor delivered no materials to the 0.8 acre tract and did not construct any improvements on that portion, the court held that the mechanic's lien related back to the date of commencement of construction and so attached to the portion that was subsequently sold. Id. at 276-277. The court stated that to reach any other conclusion would \"contravene public policy, insofar as it might allow a property owner to sell off portions of a lot and thereby reduce a contractor's or subcontractor's lien rights with impunity.\" Id. at 277. The court further held that there is no duty imposed on contractors or subcontractors to check deed records for post-construction sales; rather, a contractor is entitled to rely on a representation of ownership made by the parties with whom the contractor deals. Id. at 276.
A. Priority of Mechanic's Liens
Generally, a mechanic's lien for improvements is subordinate to a vendor's lien when the mechanic's lien's inception date is subsequent to perfection of the vendor's lien. TEX. PROP. CODE ANN. § 53.123. The exception to this general rule is when the materials have been incorporated into the structure but can be removed without causing material injury to the land and pre-existing improvements or the materials or improvements themselves. First National Bank v. Whirlpool Corp., 517 S.W.2d 262, 269 (Tex. 1974); Exchange Savings & Loan Association v. Monocrete Pty., Ltd., 629 S.W.2d 34, 36 (Tex. 1982). These improvements are called \"removables.\" In other words, even if a deed of trust was filed prior to the mechanic’s lien, the mechanic’s lien has priority if the subject of the lien is a removable. This preference lien also attaches to materials that the supplier has delivered but which have not yet been incorporated into the improvement. In re Jamail, 609 F.2d at 1389.
1. Does a Mechanic's Lien Attach to the Item?
The first question is whether the item is sufficiently incorporated into the structure for a mechanic's lien to attach to that item. A mechanic's lien will not attach to fixtures or personal property that are not incorporated into the structure. McConnell v. Frost, 45 S.W.2d 777 (Tex. Civ. App.?Waco 1931, writ ref'd). In holding that refrigerators and ranges were not fixtures, the Whirlpool court stated that if from the circumstances \"it appears to be the intention of the party making the annexation that it shall be permanent, or that it shall so remain annexed until it has become worn out...,\" then a fixture may be considered a permanent improvement for priority purposes. Id. In Houk Air Conditioning, Inc. v. Mortgage & Trust, Inc., 517 S.W.2d 593 (Tex. Civ. App.?Waco 1974, no writ) the court found that it was the intention of the party making the annexation that the air conditioning and heating systems be permanent, and therefore, these improvements were designated as fixtures for priority purposes.
If an item is considered to be a removable, then it is unreasonable for a deed of trust to have priority over that item. In Whirlpool, 517 S.W.2d at 262, the court held that a mortgagee's deed of trust did not have priority over a mechanic's lien on removable improvements, even though the deed of trust was perfected before the inception of the mechanic's lien. The court reasoned that to allow priority over removables when there is a pre-existing lien at the time of the improvement does not adversely affect the holder of the existing lien since the secured party has the same security for its interest as it had before the improvement. Id. at 268-269. On the other hand, when labor or materials are furnished and used to complete a nonremovable, the mechanic's lien will not have priority because it would adversely affect the existing lienholder. Id.
2. Is the Item \"Removable\"?
a. Material Injury to the Structure or to the Improvement
The Property Code does not authorize the removal of any improvement which would cause material injury to the existing structure because it would adversely affect prior liens by reducing the value of the property which serves as the security for these prior liens. TEX. PROP. CODE ANN. § 53.123. Whether an improvement can be removed without material injury to the existing structure or the item itself is a fact question to be determined on a case-by-case analysis of the facts and circumstances of each case. Wallace Gin Co. v. Burton-Lingo Co., 104 S.W.2d 891, 892 (Tex. Civ. App.?Austin 1937, no writ).
The term \"material injury\" is not susceptible to a precise definition. Texas authorities illustrate that each case must be determined upon its particular facts. The general rule is that where the building or improvement is severable, a mechanic's lien will take priority over other recorded liens. However, if the nature of the improvement is such that it is merged in and becomes a part of the building or structure improved, the mechanic's lien will not take priority. Parkdale State Bank v. McCord, 428 S.W.2d 121 (Tex. Civ. App.–Corpus Christi 1968, writ ref'd n.r.e.).
In deciding whether an item is removable, the court first considers whether the materials can be removed without material injury to (1) the land, (2) the pre-existing improvements, or (3) the materials themselves. Monocrete, 629 S.W.2d at 36.
Although the determination of \"material injury\" is made upon the specific facts of a case, the general trend of the courts has been to expand the scope of items that are removable. For example, in First Continental Real Estate, 569 S.W.2d at 42, the court allowed the removal of certain improvements even though nonremovable improvements had to be dismantled to accomplish the task. The court specifically held that windows and doors could be removed by taking out the brick and trim around them. The court found that both the brick and the trim could be replaced without material damage. Id. at 47.
In a break from the trend toward greater removability, in In re Orah Wall Financial Corp., 84 B.R. 442 (Bankr. W.D. Tex. 1986) the bankruptcy court modified and attempted to narrow the definition of legal removability. The court held:
Mechanics cannot be permitted to dismantle structures piecemeal. The economic consequences are too great. Even if roofing tiles are \"removable\" as a factual matter, to allow legal removal would do little to protect the mechanic and would do great economic injury to the structure. Id. at 445-46. The Orah Wall court applied a balancing test of \"incorporation\" v. \"nonincorporation\" to determine removability. The court gave five questions to be used to define \"incorporation\" and its effect on removability:
(a) Is the item merely attached to the structure in such a manner that it is obvious that removal and/or replacement is always possible?
(b) Is the item one which is removed and/or replaced as part of the ordinary maintenance?
(c) Is the item one which is removed and/or replaced as part of the ordinary operation of the building?
(d) Is removal, while not usual, or even usually contemplated, so simple and so nondestructive of item, structure or freehold, that to deny removability (or separateness) would violate the purpose of the mechanic's lien statutes? See First Nat'l Bank in Dallas v. Whirlpool, Inc., 517 S.W.2d at 269.
(e) Is the item, though easily removable, such a part of the finished structure that no party would ever contemplate removal and/or replacement during the ordinary operation and maintenance of the building? Id. at 446. If something is incorporated, but separable under the five tests, then it is removable. Id. The court distinguished factual removability, when an item may be removed without material injury to the item itself or the structure, from legal removability, in applying the five tests.
In applying these tests, the court found that pumps, compressors, fans, plumbing fixtures, doors, light fixtures, cabinets, electrical control panels and building hardware was removable; whereas duct work, piping, sheetrock, electrical conduit, wiring, junction boxes, insulation, glass brick wall and the suspended ceiling were not.
b. Post-Removal Injury
An additional consideration for the court is the possibility of post-removal damage. Monocrete, 629 S.W.2d at 37. In Monocrete, the court held that the removal of a cement tile roof would cause material damage to the existing structure because the structure would be exposed to the elements. The court noted that the following factors should be considered in analyzing the issue of post-removal damages:
(a) the manner and extent of attachment to the land or existing improvements;
(b) the extent to which removal would necessitate repairs, modification and/or protection of the land;
(c) the state of completion of improvements under construction at the time removal is sought;
(d) and, the function of the improvements sought to be removed. Id.
In applying these factors, the court noted that the roofing tiles were necessary to prevent penetration of the elements. Thus, the tiles became an integral part of the construction of the structure. Id.
c. Economic Benefit
In dicta, the Texas Supreme Court in Monocrete stated that the determination of any economic benefit that may accrue to the materialman by removing the material is an unnecessary addition to and not a part of the material injury test. This language was criticized by the Orah Wall court and that court at least suggests that it is appropriate to consider the economic benefit, or lack thereof, to the mechanic or materialman.
3. The Expanding List of Removable Items
The improvements that have been found to be removable include the following:
(a) windows and doors that can be removed by taking out surrounding brick and trim, First Continental Real Estate, 569 S.W.2d at 42 (the improvements were capable of being removed even though the nonremovable fixtures had to be dismantled in order to sever the removables);
(b) air conditioning units and heating units, American Amicable Life Ins. Co., v. Jay's Air Conditioning & Heating, Inc., 535 S.W.2d 23 (Tex. Civ. App.?Waco 1976, writ ref'd n.r.e.); Houk Air Conditioning, 517 S.W.2d at 593;
(c) carpets, appliances, air conditioning and heating components, smoke detectors, burglar alarms, light fixtures, and door locks, Richard H. Sikes, Inc. v. L. & N. Consultants, Inc., 586 S.W.2d 950 (Tex. Civ. App.?Waco 1979, writ ref'd n.r.e.);
(d) garbage disposals and dishwashers, Whirlpool, 517 S.W.2d at 262;
(e) a rock house, R.B. Spencer & Co. v. Brown, 198 S.W. 1179 (Tex. Civ. App.?El Paso 1917, writ ref'd);
(f) pumps, compressors, fans for air conditioning and heating systems, toilets, basins, doors, windows, light fixtures, wall switches, electrical control panels, building hardware, and cabinets, Orah Wall, 84 B.R. at 442;
(g) mirrors, Occidental Nebraska Federal Sav. Bank v. East End Glass Co., 773 S.W.2d 687 (Tex. App.-San Antonio 1989, no writ);
(h) entire structure removable from foundation, Parkdale State Bank v. McCord, 428 S.W.2d 121 (Tex. Civ. App.–Corpus Christi 1968, writ ref’d n.r.e.); and
(i) pumps attached to existing machinery and foundation, Mogul Producing & Refining Co. v. Southern Engine Pump Co., 244 S.W. 212 (Tex. Civ. App.–Beaumont 1922, no writ).
Improvements that have been held not to be removable include the following:
(a) plastering and painting, R.B. Spencer & Co., 198 S.W. at 1179;
(b) lumber used in the construction of a house, Cameron County Lumber Co. v. Al & Lloyd Parker, Inc., 62 S.W.2d 63 (Tex. 1933);
(c) roof repairs, Citizens National Bank v. Strauss, 69 S.W. 86 (Tex. Civ. App. 1902, writ ref'd);
(d) window frames, McCallen v. Mogul Producing & Refining Co., 257 S.W. 918 (Tex. Civ. App.?Galveston 1923, writ dism'd);
(e) bricks utilized in the construction of a fireplace and chimney, Chamberlain v. Dollar Savings Bank, 451 S.W.2d 518 (Tex. Civ. App.?Amarillo 1970, no writ);
(f) certain types of cabinets, Houk Air Conditioning, 517 S.W.2d at 593;
(g) roofing tiles, Monocrete, 629 S.W.2d at 34;
(h) a shell home, Irving Lumber Co. v. Alltex Mortgage Co., 446 S.W.2d 64 (Tex. Civ. App.?Dallas 1969), aff'd, 468 S.W.2d 341 (Tex. 1971); and
(i) duct work for air conditioning and heating systems, copper plumbing, piping, sheet rock, electrical wiring and conduit, electromagnetic insulation, glass brick interior wall, suspended ceiling, Orah Wall, 84 B.R. at 442.
B. Who has a Claim to a Removable?
After classifying an item as a removable, it must be determined who may actually remove it. There are two conflicting lines of cases which establish who may remove a removable. One line holds that only the mechanic's lienholder who supplies the removable materials is given a priority over other liens.
Additionally, the mechanic's lien is defeated if the materials provided cannot be identified and segregated from materials furnished by others. See Kaspar v. Cockrell-Riggins Lighting Co., 511 S.W.2d 109 (Tex. Civ. App.–Eastland 1974, no writ); In re Jamail, 609 F.2d 1387, 1389 (5th Cir. 1980). The second line of cases hold that any contractor or subcontractor that has supplied materials or labor may have a preferential lien on all removables on the project, irrespective of who provided them. See L & N Consultants, Inc. v. Sikes, 648 S.W.2d 368, 370-72 (Tex. App.?Dallas 1983, writ ref'd n.r.e.); Wallace Gin Co. v. Burton- Lingo Co., 104 S.W.2d 891, 892 (Tex. Civ. App.?Austin 1937, no writ).
1. Limited Priority - Identification and Segregation Required
Several cases hold that identification and segregation are preconditions to removal. In McCallen v. Mogul Producing & Refining Co., 257 S.W. at 918, 923, the court did not give priority to a claimant for materials furnished because the evidence failed to establish that the materials supplied could be identified, so as to segregate them from similar materials provided by others.
The court in Kaspar followed McCallen and held that a claimant is required to identify the materials he supplied from materials supplied by others in order to be granted a preferential lien. Kaspar, 511 S.W.2d at 110-11. In the Kasper case, the claimant provided materials that had been incorporated into an apartment complex. Id. The claimant could not prove which apartments contained items it supplied because none of the materials had any type of identifying number or stamp. Id. at 111. Although the items were classified as removables, the court did not render judgment for the claimant since the materials could not be identified or segregated. Id.
The Fifth Circuit also follows this line of cases. In re Jamail, 609 F.2d at 1378. In In re Jamail, the court analyzed Texas law and concluded that in order to obtain a preferential lien, a mechanic's lien claimant must be able to identify the removable improvement materials bought from him. Id. at 1390. McCallen, Kaspar, and In re Jamail all support the theory that a claimant must identify the materials it supplied, so as to segregate them from similar materials supplied by others, in order gain preferential status for removal.
In Dorsett Brothers Concrete Supply, Inc. v. Safeco Title Insurance Co., 880 S.W.2d 417 (Tex. App.?Houston [14th Dist.] 1993, writ denied) the court followed this line of cases. The court found a mechanic's lien can only attach to removables to which the mechanic or materialman supplied at least some labor or materials. Id. at 423.
2. Unlimited Scope on Priority
The second line of cases describing who can remove removables state that mechanic's liens actually attach to all improvements on a project, including those supplied by others. In Wallace Gin Co. v. Burton-Lingo Co., 104 S.W.2d 891, 892 (Tex. Civ. App.?Austin 1937, no writ) the court held that the claimant was entitled to remove and sell an entire house, since the building was a removable and could be removed without materially injuring the house itself, the property, or the remaining improvements. In this case, Burton-Lingo Company (hereinafter \"Burton\") furnished some, but not all, of the materials used to construct a cotton house. Id. at 891. Burton brought suit on the balance due on the materials. Id. The court rejected the identification requirement and enforced Burton's lien based on the policies underlying the establishment of the mechanic's lien. Id. at 892. The court argued that because materialmen often do not supply all the materials on a given project, to refuse to recognize a lien on such materials would defeat the rights of the materialmen in many cases. Id. At 892.4 See also Parkdale State Bank v. McCord, 428 S.W.2d at 121, 126, 127. The court in Richard H. Sikes, Inc. v. L & N Consultants, Inc., 586 S.W.2d 950 (Tex. Civ. App.?Waco 1979, writ ref'd n.r.e.) (\"Sikes 1\") followed the reasoning of Wallace Gin and held that \"a perfected mechanic's and materialman's lien extends to all of the improvements without regard to who placed them there.\" Id. at 956. The claimant, an original contractor, furnished and installed the materials for several nonremovable improvements. His subcontractors supplied and installed the remaining materials for improvements, which were removable. The court refused to limit the scope of the original contractor's lien to the items he furnished and held that his lien extended to all of the removable improvements.5
In L & N Consultants, Inc. v. Sikes, 648 S.W.2d 368 (Tex. App.?Dallas 1983, writ ref'd n.r.e.) (\"Sikes 2\") the court further explained the proposition set out in Sikes 1. The Sikes 2 court held that an original contractor should be granted a preferential lien on the removables furnished under his contract. Id. At 371. The court stated that articles 5452 and 5459, section 1 (now sections 53.021-.023 and 53.123, respectively):
do not limit the amount of a contractor's lien to that portion of the contract price that may be allocated to removables; rather, they give him a preference lien on the removables furnished under his contract, and for which he is responsible, for the entire amount due him for the materials and labor furnished by him under that contract, even though some of the items furnished are not removable. Id. at 371. The court distinguished Kaspar by stating that there was no need to identify the specific materials supplied by the original contractor since he furnished all of the labor and materials under his contract with the owner. Id. While Wallace Gin is clearly contrary to the more modern line of cases discussed above, Sikes 1 and 2 are distinguishable because the claimant is the general contractor. Sikes 1 and 2 recognize that a general contractor's work is different from a subcontractor's role and gives the general contractor a claim on the material furnished under his contract.
IV. DISCHARGE OF LIENS
Section 53.157 lists the ways a mechanic's lien filed pursuant to the Property Code may be discharged of record.
A. Bonds to Indemnify against Liens
The purpose of filing a mechanic's lien is to encumber the property and allow the contractor to get paid from the proceeds of the sale of the affected property. But, the existence of a disputed lien will adversely affect an owner's ability to sell the property until the dispute is resolved. In an attempt to avoid allowing contractors to hold owners \"hostage\", the Texas Legislature incorporated a procedure into the Property Code that allows an owner to substitute a surety bond for the lien filed against his property. This procedure, found in Subchapter H of Chapter 53 of the Property Code, can also be used by a general contractor to remove a subcontractor's lien from the property while still retaining the right to dispute the claim. This procedure is called \"bonding around\" a lien.
1. The Bond
The first step in bonding around a lien is to prepare the bond itself. Section 53.172 lists the requirements for the bond. It must:
(a) describe the property on which the lien is claimed;
(b) refer to each lien claimed in a manner sufficient to identify it;
(c) be in an amount specified in § 53.172(3), meaning that if the lien is for $40,000 or less, the bond must be for double the lien amount, and if the lien is for more than $40,000, the bond must be for one and a half times the lien amount;
(d) be payable to the parties claiming the lien;
(e) be executed by the party filing the bond as the principal and by a corporate surety; and
(f) be conditioned that the principal and sureties will pay to the named obligees the amount they would have been entitled to if their claims had been proved to be valid and enforceable liens on the property.
It is not good practice to deviate from the statutory requirements of the bond. In Sheldon Pollack Corp. v. Pioneer Concrete of Texas, Inc., 765 S.W.2d 843 (Tex. App.?Dallas 1989, writ denied) the bond to indemnify contained an additional provision which limited the general contractor's liability. \"It is our opinion that this bond provision, because it exceeds the statutory limitations of liability, is unenforceable.\" Id. at 846.
After the bond is prepared and issued by a corporate surety, it is filed in the deed records of the county where the property is located. The Texas Property Code then provides for the county clerk to issue notice of the bond to all named obligees. In practice, I have often prepared the notice myself and just had the clerk sign it; different counties handle this different ways.
After the notice has been issued by the clerk, it must be served on all the obligees by any means authorized for service of an original petition, possibly through the sheriff or certified mail. After service, the notice with the completed return, is filed in the deed records.
After this procedure is successfully completed, \"a purchaser, insurer of title, or lender may rely on and is absolutely protected by the record of the bond, notice, and return to the same extent as if the lien claimant had filed a release of lien in the real property records.\" TEX. PROP. CODE ANN. § 53.174(b).
2. Action on the bond
The proper filing of a bond to indemnify eliminates a mechanic's lien claimant's right to file suit to foreclose its lien. The bond is substituted for the lien and is the claimant's only recourse.6
Section 53.175 provides that a party making a claim on the bond may not sue on the bond later than one year after the date on which the notice is served or after the date on which the underlying claim becomes unenforceable. As a result, a bond to indemnify can shorten the time available for a lien claimant to file suit, so it is important to be sure to consider the limitation periods in both § 53.158 and in § 53.175.
In general, a claimant must prove that its mechanic's lien was perfected before it will prevail on its claim against a bond. One exception, however, appears to be the inclusion of the \"statutory warning\" in its notice letter. In St. Paul Fire & Marine Insurance Co. v. Vulcraft, 748 S.W.2d 290 (Tex. App.–Tyler 1988, no writ), the court held that because the general contractor was the principal on the bond and the owner was not a party to the case, the failure to include the statutory warning in the notice letter to the owner did not prejudice the owner and so the notice was not deficient. Id. at 296.
3. Recovery of attorneys fees
If the claimant would be entitled to recover its attorneys fees in its suit to foreclose its lien, those fees would also be recoverable in its suit on the bond. TEX. PROP. CODE ANN. §53.172(6).
B. Bonds to Pay Liens or Claims
If a statutory payment bond, prepared and filed in accordance with § 53.201 et. seq., is of record, a claimant may not file suit against the owner or the owner's property and any lien that is filed is considered to be discharged of record. TEX. PROP. CODE ANN. § § 53.201(b) & 53.157(5). The existence of a valid payment bond covering the work a subcontractor performed on a construction project precluded a subcontractor's claims for unpaid work against the property owners, because the bond was recorded in the public records before the subcontractor filed its lien on the property, and thus, the subcontractor had constructive notice of its existence. Fondren Const. Co., Inc. v. Briarcliff Housing Development Associates, Inc., 2006 W.L. 964497, 5 (Tex. App.—Houston [1st Dist.] 2006, no pet.); TEX. PROP. CODE ANN. § 53.201(b).
C. Recording Lien Release or Final Judgment
Another way to discharge a lien is to record either a valid lien release or a certified copy of a final judgment discharging the lien. TEX. PROP. CODE ANN. § 53.157(1) & (3). A new procedure has been created allowing for an expedited determination of the validity of a lien. Under § 53.160 of the Texas Property Code, a party objecting to a lien can file a summary motion to remove an invalid or unenforceable mechanic’s lien. TEX. PROP. CODE ANN. § 53.160 A hearing can be set on this issue 21 days after the claimant files an answer to the request for the hearing. This avoids a long process if the lien appears invalid on its face.
D. Passing of the Statute of Limitations
The applicable statutes of limitations determine a claimant’s deadline to sue on the lien. If the applicable statutes of limitations contained in TEXAS PROPERTY CODE § 53.158, § 53.175 or § 53.208 passes without suit being filed, the lien is considered to be discharged of record. TEX. PROP. CODE ANN. § 53.157(2). Generally, that period will pass in one to two years depending upon the type of project and the date of the project’s completion.
E. Indemnifying the Title Company
Another way to allow for the sale of assets in the presence of a mechanic's lien is to agree to indemnify the title company from any loss it may suffer as a result of the lien. This is a non-statutory option so it must be negotiated directly with the title company; but with adequate security, title companies are occasionally willing to consider this option.
1 Elizann Carroll made significant contributions to the content of this paper. Ms. Carroll’s
work in this regard is greatly appreciated.
2 In an opinion styled In re Huber Contracting, Ltd., the Bankruptcy Court for the Western District of Texas held that the section of the Texas Property Code giving holders of perfected mechanics’ liens “preference over other creditors” of the principal contractor does not accord subcontractors and suppliers a priority over the contractor’s secured creditors. 347 B.R. 205, 221 (Bankr. W.D. Tex. 2006). This opinion appears to be contrary to the plain language of Section 53.121 of the Texas Property Code, as well as one hundred years of substantive case law. Additionally, the Fifth Circuit in In re Waterpoint Intern. LLC, does not agree with the proposition in Huber Contracting. 330 F.3d 339, 342-45 (5th Cir. 2003). Nonetheless, this case must be given thorough and fair consideration due to the extensiveness of the analysis provided by the Bankruptcy Court for the Western District.
3 The doctrine of after-acquired title may operate to expand the interest to which the lien has become attached if the owner later acquires a greater interest in the property to which the lien attaches. Blaylock, 576 S.W.2d at 806.
4 Recently, the Dorsett court recognized the holding of Wallace Gin and stated that it \"read
Wallace Gin to hold that a contractor need not supply all of the materials for an improvement to be able to execute a lien on that improvement.\" Dorsett, 880 S.W.2d at 423.
5 The court in the Dorsett opinion limited the scope of the Sikes 1 holding and stated that it interpreted Sikes 1 to hold that a preferential lien only extends to the \"improvements supplied by the lien holder, regardless of who actually placed the improvements on the property . . . . [T]he fact that a contractor used subcontractors to supply labor and materials to improvements did not prevent its mechanic's lien from reaching those improvements.\" Dorsett, 880 S.W.2d at 423.
6 In a prior version of the Property Code, the language suggested that if a mechanic's lien claimant filed suit to foreclose its lien within 30 days of receiving notice of the filing of a bond to indemnify, it could maintain its action against the property. In the 1989 revisions, that language was eliminated.