Real Estate - Construction - Lien Law Blog

Priority of Lien Claim in Texas

Anyone who has been involved in a lien foreclosure knows that proceeds from the sale of a property are distributed based on certain priorities. In most states, the highest priority is given to the first recorded deed of trust, followed by subsequent deeds recorded before any lien claims. After that, taxes and real estate fees are paid. Finally, lien claimants are paid on a pro-rata basis according to when their work commenced, whether they are just laborers or the recording date of the lien, depending on the particular state statute.

In 2005, Texas added a twist to this format when an appellate court ruled on a foreclosure in a case referred to as Huber Contracting, Ltd., 347 B.R. 205 (Bankr. W.D. Tex. 2005). Here, the court concluded that a lien claim will not take priority over a perfected security interest, such as an Article 9 security interest in account receivables.

We expect that banks in Texas will take advantage of this ruling and begin to perfect more security interests with respect to their borrowers assets.

For our clients that are selling to or working on construction projects in Texas, it is important to recognize that your level of protection just took a minor hit. It you would like to discuss this implication, please feel free to call Ted Levy

Materials may be liened even when they are not shipped to the job site

I’m often asked if construction materials must be shipped directly to the project for the supplier to have a valid construction lien. The answer is No.

However, there are a number of caveats to consider. With the exception of a Miller Act Claim (which relates to government projects), the key to having an enforceable lien is not delivery to the job site. Rather, it is being able to demonstrate that your product was incorporated into the structure. Of course, this assumes that a supplier has met all of the notification requirements and filed the lien on time.

Generally speaking, incorporation of materials is easier to prove if the supplier furnished visible fixtures, such as sinks, flooring, cabinets, etc., rather than generic rough-in wire, pipe, fasteners or adhesives. Even so, proving incorporation is the key, even when materials are shipped directly to the job site.

Thank to Charles Hosman of Mesher Supply for bringing up this question and giving us the opportunty to post a answer.

What to say when declining credit to customers

In the wholesale building trades, credit is the lifeline for contractors. However, there are many times when the distributor should decline to offer credit. Many suppliers will take the position that if they can obtain a personal guaranty and lien rights on contractor sales that credit can be extended to virtually anyone. Not so! You may have collateral, but is the cost of doing business too high to justify that sale? That is, when you add up the cost of preliminary notices and liens, late payments, credit manager time and intervention, and write-offs, are you really making any money?

If the answer is “No”, then it is time to decline credit availability. Reaching this decision should be objective and consistent between customers. Your company should have a current and well written credit policy that sets out minimum standards for offering and declining credit. Assuming you have that mechanism in place, here is a simple and concise verbal statement that can be offered to a customer:

We have reviewed your credit history with our company, and obtained a current credit report. We also may have contacted credit references listed on your application and other vendors in the industry. After evaluating the information, we regret to inform you that credit availability cannot be extended at this time.

Thanks to Jenny Starks of Wanke Cascade for asking the question, and to Mike McDowell of Alaskan Copper & Brass for providing some input.

Imortant Changes to Washington Contractor Registration Requirement

Effective July 22, 2007, the Washington legislature now requires that anyone building a residence who doesn’t live in it for more than 1 year to be registered as a contractor. This law has implications for both the builder and any sub-trades working for him, which are addressed below.

First, in order for a subcontractor or supplier to have lien rights, they must be working for the owner or the “agent” of the owner, which is defined as a registered contractor. So let’s suppose that you are working for a developer who fails to register, builds and sells a spec home in about 7 months and doesn’t pay for labor or materials, causing you to file a lien claim. The new owner could challenge the lien claim by asserting the the lien claimant wasn’t working for an agent of the owner and, therefore, cannot perfect its lien claim.

As you can see, the implications are far reaching. Our recommendation to clients is that you get to know your customers better and check to make sure that anyone who is building a spec home has a valid registration number when you begin to sell or work for them.

Thanks to Donna Wynn of Western Pacific Building Materials for posing the question to our firm.

California subcontractors required to send the 20-Day Preliminary Notice

The California State Licensing Board now requires that all subcontractors serve a 20-Day Preliminary Notice on private works projects if:

1. The subcontractor has employed laborers that have not been paid in full or
2. There are balances owed to a laborer’s trust fund or
3. If the subcontractor is performing more than $400 worth of work.

As you can see, the wording of this requirement will encompass virtually any private works project other than one that is a simple 1 or two hour repair.

In addition, if you serve the 20-Day Preliminary Notice at a time when you owe money to an employee or trust fund, you must also include the names and addresses of those employees or trusts. Failure to do so can result in disciplinary action by the CSLB.

We are also posting a similar alert for public projects, which is governed by CAC 3098. Feel free to call Ted Levy at 206-626-5444 with any questions as this is an important change.