Suit for Accounting in Texas and Appointment of Auditor

Often, when a suit for accounting is filed, the appointment of an auditor under Tex. R. Civ. P. 172 can make the case much easier to handle. The auditor’s report is admissible into evidence under Tex. R. Civ. P. 706. The auditor’s fees should be paid by the parties and are generally taxed as a cost against the losing party. Tex. R. Civ. P. 172, 131, 141. However, the Court has discretion to apportion the cost otherwise if the Court has good cause, stated on the record. Tex. R. Civ. P. 141; Villiers v. Republic Financial Services, Inc., 602 S.W.2d 566, 571 (Tex. Civ. App.—Texarkana 1980, writ ref’d n.r.e.) (Court had discretion to tax one-half of the auditor’s fee to each party when the Court stated appropriate reasons for doing so in the Court’s order).

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

What Landowners Need to Know About Subcontractors: Funds-Trapping, Statutory Retainage, and Other Derivative Claims

Texas law protects not only original or general contractors; who automatically obtain a lien upon the owner’s property just by providing materials or performing labor (Tex. Const. art. XVI, § 37); but also subcontractors who the owner may never meet and who may have no contracts or business dealings whatsoever with the owner. Property owners can be shocked to find that these people that they have never met can claim a lien upon the property and cloud the title, thus preventing a sale or hypothecation of the property. The original contractor holds an automatically-arising lien by the Texas Constitution, however, the Texas Constitution provides no protection to derivative claimants like subcontractors. Consequently, subcontractors’ rights come solely through compliance with the statutory mechanic’s lien laws. Generally, this means that if a subcontractor fails, in any way, to send out proper notices or file everything correctly, then the subcontractor loses its lien claim. Thus, the claims of subcontractors against the property owners can fail easily, often due to technicalities.

Derivative Claims. The subcontractors’ rights are called “derivative claims” because the rights of the subcontractors are derived from the rights of the general contractor. The general contractor is in privity of contract with the property owner (meaning that the owner and contractor have entered into a contract between the two of them) while the subcontractor is not in privity of contract with the property owner, but is in privity of contract with the general contractor. Under basic contract law, the subcontractor generally has no claim against the property owner for breach of contract when the subcontractor has not been paid because the subcontractor is only in privity with the general contractor, and so, may sue only the general contractor, and not the property owner. An exception to the general rule that only parties in privity with each other can sue for breach of contract exists when a third-party to the contract is an “intended beneficiary,” but intended-third-party-beneficiary law is complex, not specific to the State of Texas, and goes beyond the scope of this article, and the subject of mechanic’s lien and construction law, since it is a matter of general contract law principals.

A subcontractor’s lien is valid only if the correct written notice is given. If the general contractor has actual notice of a subcontractor’s claim, but does not receive timely written notice, then the subcontractor’s lien is invalid. Moore v. Brenham Ready Mix, Inc., 463 S.W.3d 109, 116 (Tex. App.—Houston [1st Dist.] 2015). Even though the mechanic’s lien statutes are “liberally construed” and “substantial compliance” with the statutes can sometimes be sufficient to perfect a lien, derivative claimants tend to have little leeway. Id. at 115, 118 (quoting First Nat’l Bank in Graham v. Sledge, 653 S.W.2d 283 (Tex. 1983). For the most part, the subcontractor who misses notices or sends them late loses its lien. Morrell Masonry Supply, Inc. v. Lupe’s Shenandoah Reserve, LLC, 363 S.W.3d 901, 904–07 (Tex. App.—Beaumont 2012, no pet.).

Statutory Retainage. Even unsophisticated Texan homeowners who pay a handyman to do some work on the house need to know about statutory retainage or else face potential derivative liability from unpaid subcontractors of the handyman. Statutory retainage is the amount of holdback funds that are required on every project. Property owners must retain ten (10) percent of the contract price of the work or ten (10) percent of the value of the work (if there is no contract price) for thirty (30) days after the work is completed. Tex. Prop. Code § 53.101. This is called the “required statutory retainage.” Special rules governing contractual retainage claims are found in Section 53.057 of the Texas Property Code. “In order to perfect a statutory retainage lien . . . a subcontractor must file its lien affidavit within thirty days of the time that the original contract is completed, terminated, or abandoned.” Tex. Prop. Code § 53.101; Page v. Marton Roofing, Inc., 102 S.W.3d 733, 734 (Tex. 2003).

Protections for Homeowners. Subchapter K of Chapter 53 of the Texas Property Code protects unsophisticated homeowners from some of the pitfalls of statutory retainage and funds-trapping law. These rules, in Sections 53.251 to 53.260 of the Texas Property Code, apply to properties “used or intended to be used as a dwelling by one of the owners.” See Tex. Prop. Code § 53.001(8)–(10). Generally, Subchapter K notice deadlines for subcontractors on residential projects are one month shorter than the non-residential deadlines. Also, the homeowner must be provided with a list of subcontractors and suppliers. See Tex. Prop. Code § 53.256. Keep in mind that even though a contractor is supposed to provide a homeowner with the disclosure from Tex. Prop. Code § 53.255 that the failure to do so does not invalidate the contractor’s lien, it only gives rise to damages against the contractor if the failure to provide the lien causes damages. Tex. Prop. Code § 53.255(c); See 1997 Texas House Bill 740, Committee Report, April 10th, 1997 (“In connection with the disclosure and disbursement statements, there are no specific remedies provided against the contractor or the lender who fails to provide these statements because the Committee believes that there are sufficient statutory causes of action available to consumers who are injured as a result of the failure to comply with a statutory disclosure requirement.”). The contractor is also required to provide funds disbursal statements, with subcontractors listed, under Tex. Prop. Code § 53.258, but again, the failure to comply does not invalidate a lien. Tex. Prop. Code § 53.258(e).

Final Bills—Paid Affidavit. Homeowners should also be aware that original contractors are required by Section 53.259 of the Texas Property Code to submit a “Final Bills—Paid Affidavit.” In this affidavit, the original contractor should either state that he has “paid each person in full for all labor and materials used” or give the names and amounts owed of anyone who remains unpaid. Additionally, the statute makes it a crime to submit a false final bills-paid affidavit and imposes personal liability on the person signing the affidavit for any incorrect information in the affidavit. Since most homeowners do not know about this law, they probably would not even think to ask for this affidavit.

Homesteads. Homesteads are different from residences. “Homesteads” are defined by Section 41.002 of the Texas Property Code, while “residences” are defined in Sections 53.001(8)–(10). Contractors working on “homesteads” need to follow the specific rules in Section 53.254 of the Texas Property Code. Contractors working on a homestead must obtain a written contract signed by both spouses to have a chance at obtaining a valid mechanic’s lien. This applies to both original and derivative claimants. Additionally, unless the property owner misrepresents the property owner’s marital status on the contract itself, even if the property owner makes misrepresentations elsewhere, a mechanic’s lien probably cannot attach without both spouses’ signatures. The Cadle Co. v. Ortiz, 227 S.W.3d 831, 838-39 (Tex. App.—Corpus Christi 2007). Accordingly, contractors should make sure to list the owner’s name in the contract as “John Doe, a single man,” or something similar, to avoid undisclosed marriages. Id. “It is well-settled that neither a constitutional lien nor a statutory mechanic’s lien may be enforced against a homestead unless a written contract for the work and material to be supplied is signed by all owners prior to the work commencing and is recorded.” Cadle v. Oritz, 227 S.W.3d at 836.; also see Tex. Const. art. XVI § 50(a)(5)(A); Tex. Prop. Code § 53.254(c). Under Tex. Prop. Code § 53.254(e), a construction contract on a homestead must be filed with the county clerk. Ultimately, because of how many rules apply to homesteads, unless the contractor is quite savvy and papered the transaction correctly, the typical homestead owner can probably escape the contractor’s claim for a mechanic’s lien.

Funds-Trapping Letters. “The statutory fund-trapping provision allows subcontractors to ‘trap, in the owner’s hands, funds payable to the general contractor if the owner receives notice from the subcontractors that they are not being paid.’ First Nat’l Bank v. Sledge, 653 S.W.2d 283, 286, 26 Tex. Sup. Ct. J. 463 (Tex. 1983). Specifically, the statute provides that an owner who receives such notice ‘may withhold from payments to the original contractor an amount necessary to pay the claim for which he receives notice.’ Tex. Prop. Code § 53.081(a). The statute further provides a remedy if the owner fails to withhold funds from the original contractor: ‘the owner is liable and the owner’s property is subject to a claim for any money paid to the original contractor after the owner was authorized to withhold funds under this subchapter.’ Id. § 53.084(b).” Page v. Marton Roofing, Inc., 102 S.W.3d 733, 734-35 (Tex. 2003). The main difference between residential and nonresidential claims is that residential claims only involve one notice, while nonresidential claims involve two sets of notices. In the nonresidential context, both notices must be sent by the deadlines for the lien to be valid. Morrell Masonry Supply, Inc. v. Lupe’s Shenandoah Reserve, LLC, 363 S.W.3d 901 (Tex. App.—Beaumont 2012, no pet.).

The following Matrix shows the funds-trapping notice rules for statutory and contractual retainage claims (known colloquially as “funds-trapping” notices). Please note that Tex. Prop. Code. § 53.058 and § 53.253 contain other rules for specially-fabricated items.

Funds-Trapping Notice Matrix

Statutory Retainage Claim

Contractual Retainage Claim

Residential

If homestead, then also comply with Tex. Prop. Code §
53.254, including giving the homeowner the statutory notice
in subsection (g).

Written notice to the owner and the original contractor of
the unpaid balance.

Deadline is the fifteenth (15th) day of the
second (2nd) month following each month in which
all or part of the claimant’s labor was performed or
material delivered.

Notice must state that “if the claim remains unpaid, the
owner may be personally liable and the owner’s property may
be subjected to a lien unless: (1) the owner withholds
payments from the contractor for payment of the claim; or
(2) the claim is otherwise paid or settled.” Tex. Prop.
Code § 53.252.

Must be sent registered or certified mail and be addressed
to the last known address for the recipient.

The notice should include “A copy of the statement or
billing in the usual and customary form.” Tex. Prop. Code §
53.252(e).

The subcontractor can either follow the rules for statutory
retainage claims, or follow the rules for contractual
retainage claims. Either are effective. Tex. Prop. Code §
53.057(a).

Notice of a contractual retainage agreement must be given
to the owner “not later than the earlier of (1) the
thirtieth (30th) day after the date the the
claimant’s agreement providing for retainage is completed,
terminated, or abandoned; or (2) the thirtieth (30 th) day after the date the original contract is
terminated or abandoned.” Tex. Prop. Code § 53.057(b).

If the contractual retainage agreement is with the original
contractor, then the notice must go to both the owner and
the original contractor by the deadline.

The notice must generally state the existence of a
requirement for retainage and contain the name and address
of the claimant and the subcontractor, if different.

The notice must be sent to the last known business or
residence address of the owner or contractor.

Tex. Prop. Code § 53.057(e) through (g) contain rules for
filing of lien affidavits in lieu of following the
statutory retainage claim rules.

Non-Residential

Subcontractor must give notice of unpaid balance to the
original contractor “not later than the fifteenth (15 th) day of the second (2nd) month
following each month in which all or part of the claimant’s
labor was performed or material delivered.” Tex. Prop. Code
§ 53.056(b).

Subcontractor must give the same notice to the owner, with a copy to the original contractor, not later than the fifteenth (15 th) day of the third (3rd) month
following each month in which all or part of the claimant’s
labor was performed or material delivered. Id.

The notice to the owner must state “if the claim remains
unpaid, the owner may be personally liable and the owner’s
property may be subjected to a lien unless: (1) the owner
withholds payments from the contractor for payment of the
claim; or (2) the claim is otherwise paid or settled.” Tex.
Prop. Code § 53.056(d).

Must be sent registered or certified mail and be addressed
to the last known business or residential address for the
recipient.

The notice should include “A copy of the statement or
billing in the usual and customary form.” Tex. Prop. Code §
53.252(e).

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

How to Get Mechanic’s Liens Removed

The easiest way is to simply wait out the limitations period. Tex. Prop. Code § 53.158. If a suit is not filed by the contractor to foreclose the lien within one (1) year on a residential project or two (2) years on a commercial project, then the lien is automatically discharged of record. Id.; Tex. Prop. Code § 53.157 (listing ways that a mechanic’s lien becomes “discharged of record”). Title companies know about the “Discharge of Lien” statute and will generally insure around lien affidavits after the limitations period runs out.

Somewhat confusingly, a “lien” is defined as a “claim in property for the payment of a debt and includes a security interest.” Tex. Civ. Prac. & Rem. Code § 12.001, but mechanic’s lien affidavits on homesteads must conspicuously state that “THIS IS NOT A LIEN. THIS IS ONLY AN AFFIDAVIT CLAIMING A LIEN.” Tex. Prop. Code § 53.254. Since a “claim in property” is a lien and since the affidavit claiming a lien still clouds title to the property and prevents the homeowner from conveying the property with title insurance to a buyer, the distinction between a lien and an affidavit claiming a lien seems like a distinction without a difference. Title companies generally do not care that an affidavit claiming a lien is not actually a lien—they still will not insure the transaction without a release of the lien or claim of lien.

Title Companies:

Check with your title company regarding whether the company will “insure around” a lien. Generally, there must be some defect in the lien to do this. The title company will look at each lien claim on a case-by-case basis to evaluate whether to offer any options for insuring around the lien. You will probably need to execute an indemnity agreement with the title company and you may need to make a substantial deposit with the title company to satisfy any potential claims. Doing this can be a great alternative to a remedial bond under Tex. Prop. Code § 53.171. If the property owner insures around the lien, and then the statute of limitations runs out on the lien without the contractor filing suit, then generally, the property owner will be in the clear.

Remedial Bonds Under Section 53.171 of the Texas Property Code:

Under Section 53.171(c) of the Texas Property Code, a mechanic’s lien can be discharged with a bond even after the dispute has arisen and the lien has been filed. The bond must be substantially higher than the lien amounts. See Tex. Prop. Code § 53.172(3). The filing of the bond starts a one-year limitations period against any lien claimants. Tex. Prop. Code 53.175; Stoltz v. Honeycutt, 42 S.W.3d 305 (Tex. App.—Houston [14th Dist.] 2001, no writ). The statutory requirements for filing and notice regarding the bond should be followed to ensure that no problems arise.

Summary Motion for Lien Removal:

Section 53.160 of the Texas Property Code allows a property owner to file a “Summary Motion to Remove Invalid or Unenforceable Lien.” Tex. Prop. Code § 53.160. It is called a “summary” motion for lien removal because it allows for the lien to be removed as fast as twenty-one (21) days after the lien claimant answers or appears in the suit. Tex. Prop. Code § 53.160(c). This is obviously much faster than waiting for the Court to schedule a trial date. Getting a trial date; under the most common Discovery Control Plan—Level Two (2) (See Tex. R. Civ. P. 190.3); is going to take at least nine months, probably much longer, since the parties are entitled, in a Level Two case, to a nine-month discovery period starting with the “earlier of the date of the first oral deposition or the due date of the first response to written discovery.” Tex. R. Civ. P. 190.3(b)(1)(B)(ii). Even this “expedited” lien removal process tends to leave aggrieved property owners bitter. No one wants to file a new lawsuit, watch the process server spend a month chasing the defendants down, and then wait another month for the answer to get filed, and then wait another twenty-one days after that, to get an “expedited” hearing, especially in District Court since County Courts at Law in Texas generally do not have jurisdiction over “question[s] of title.” Escobar v. Garcia, No. 13-12-00596-CV, 2014 Tex. App. LEXIS 5157, at *9 (App.—Corpus Christi May 15, 2014, pet. denied); Tex. Gov’t Code Ann. § 26.043(8).

At the summary lien removal hearing, the lien claimant has the burden of proving that the notice of claim and affidavit of lien were furnished to the owner and original contractor (if applicable) as required. Tex. Prop. Code § 53.160(d). The movant has the burden of establishing that the lien should be removed for “any other ground authorized by this section.” Id. Despite the title of the code section, the lien cannot be removed simply because it is invalid or unenforceable. Instead, the “grounds for objecting to the validity or enforceability of the claim or lien for purposes of the motion are limited to” the seven (7) grounds listed in Texas Property Code § 53.160(b). The seven grounds are:

“(1) notice of claim was not furnished to the owner or original contractor as required by Section 53.056, 53.057, 53.058, 53.252, or 53.253;
(2) an affidavit claiming a lien failed to comply with Section 53.054 or was not filed as required by Section 53.052;
(3) notice of the filed affidavit was not furnished to the owner or original contractor as required by Section 53.055;
(4) the deadlines for perfecting a lien claim for retainage under this chapter have expired and the owner complied with the requirements of Section 53.101 and paid the retainage and all other funds owed to the original contractor before:
(A) the claimant perfected the lien claim; and
(B) the owner received a notice of the claim as required by this chapter;
(5) all funds subject to the notice of a claim to the owner and a notice regarding the retainage have been deposited in the registry of the court and the owner has no additional liability to the claimant;
(6) when the lien affidavit was filed on homestead property:
(A) no contract was executed or filed as required by Section 53.254;
(B) the affidavit claiming a lien failed to contain the notice as required by Section 53.254; or
(C) the notice of the claim failed to include the statement required by Section 53.254; and
(7) the claimant executed a valid and enforceable waiver or release of the claim or lien claimed in the affidavit.”

If the property owner’s reasons for wanting the lien removed do not neatly fit into any of these categories, then the property owner should try simply depositing “all funds subject to the notice of a claim” into the court’s registry, and getting the lien removed under Tex. Prop. Code § 53.160(5). Doing this can be cheaper than a remedial bond since the remedial bond must be substantially higher than the lien amount. See Tex. Prop. Code § 53.172(3).

One potential hiccup with the summary lien removal motion is Tex. Prop. Code § 53.161, which provides that the Court must allow the lien claimant to stay the removal of the lien by posting a bond that is a “reasonable estimate of the costs and attorney’s fees the movant is likely to incur” and that does “not exceed the amount of the lien claim.” The bond must be posted within thirty (30) days of the order. If the bond is not posted by the deadline, then the property owner can file a certified copy of the order along with a certificate from the clerk of court stating that no bond was filed within thirty (30) days after the date the order was entered by the Court and no order staying the order to remove the lien was entered by the Court. Tex. Prop. Code § 53.161(f). Upon filing the foregoing, creditors or subsequent purchasers for valuable consideration can take an interest in the property free of the lien claim. Tex. Prop. Code § 53.161(g). At this point, the property owner should have no problem selling or encumbering the property with title insurance from any title company.

If the lien claim is removed under the summary lien removal statute, but the lien claimant ultimately wins at trial, establishing the validity of the claim and getting an order for foreclosure of the lien, then the claimant can file the final judgment with the county clerk and get the lien revived. Tex. Prop. Code § 53.162.

Action on Fraudulent Lien on Property:

Property owners, real estate developers, and anyone else dealing with mechanic’s liens need to know right off the bat that the “Action on Fraudulent Lien on Property” under Tex. Gov’t Code § 51.903 is NOT a panacea for every mechanic’s lien dispute. In fact, it rarely applies. The Court dealing with this section CANNOT “make a finding as to any underlying claim of the parties involved.” Tex. Gov’t Code § 51.903(a). If a “substantive evidentiary claim” must be decided by the Court, then this procedure is unavailable. Tu Nguyen v. Bank of Am., N.A., No. 01-15-00587-CV, 2016 Tex. App. LEXIS 12595, at *7 (App.—Houston [1st Dist.] Nov. 29, 2016). For the procedure to be available, the fraudulent nature of the claim must, pretty much, be determinable by review of the document alone. Id. (citing David Powers Homes, Inc. v. M.L. Rendleman Co., 355 S.W.3d 327, 339 (Tex. App.—Houston [1st Dist.] 2011).

Section 51.903 of the Texas Government Code provides that a property owner with “reason to believe” that a previously filed “document purporting to create a lien or claim” against “real or personal property” is “fraudulent” may submit a “Motion for Judicial Review of Documentation or Instrument Purporting to Create a Lien or Claim” to the District Clerk. The motion, supporting affidavit, certificate of acknowledgement, and order on the motion should all follow the statutory formats listed in Tex. Gov’t Code § 51.903. The motion “may be ruled on by a district judge having jurisdiction over real property matters in the county where the subject document was filed.” Tex. Gov’t Code § 51.903(c). The Court’s review can be “ex parte without delay or notice of any kind.” Id. Moreover, the appellate court should “expedite review” of the trial court’s finding. Id. In filing the motion, keep in mind that documents or instruments meeting the criteria of Tex. Govt’ Code § 51.901(c) are “presumed to be fraudulent.” Tex. Gov’t Code § 51.901(c) provides that instruments are presumed fraudulent when:

“(1) the document is a purported judgment or other document purporting to memorialize or evidence an act, an order, a directive, or process of:
(A) a purported court or a purported judicial entity not expressly created or established under the constitution or the laws of this state or of the United States; or
(B) a purported judicial officer of a purported court or purported judicial entity described by Paragraph (A);
(2) the document or instrument purports to create a lien or assert a claim against real or personal property or an interest in real or personal property and:
(A) is not a document or instrument provided for by the constitution or laws of this state or of the United States;
(B) is not created by implied or express consent or agreement of the obligor, debtor, or the owner of the real or personal property or an interest in the real or personal property, if required under the laws of this state, or by implied or express consent or agreement of an agent, fiduciary, or other representative of that person; or
(C) is not an equitable, constructive, or other lien imposed by a court with jurisdiction created or established under the constitution or laws of this state or of the United States; or
(3) the document or instrument purports to create a lien or assert a claim against real or personal property or an interest in real or personal property and the document or instrument is filed by an inmate or on behalf of an inmate.”

Ordinary Certificate of Acknowledgement Instead of Short Forms for Certificates of Acknowledgement. Interestingly, a “Motion for Judicial Review of Documentation or Instrument Purporting to Create a Lien or Claim,” under Tex. Gov’t Code § 51.903(a), requires use of the “Ordinary Certificate of Acknowledgment,” (See Tex. Civ. Prac. & Rem. Code § 121.007) and not the commonly-used “Short Forms” (See Tex. Civ. Prac. & Rem. Code § 121.008).

Statutory Damages for Fraudulent Liens. If the Action on Fraudulent Lien on Property applies, then the movant should probably also file for relief under Section 12.002 of the Texas Civil Practice & Remedies Code. Under Tex. Civ. Prac. & Rem. Code § 12.002, anyone filing a claim knowing it to be fraudulent is liable to each person injured by the claim for the greater of $10,000.00 or actual damages, plus court courts, attorney’s fees, and exemplary damages. Tex. Civ. Prac. & Rem. Code § 12.002(b). With mechanic’s liens, there is no liability under this section unless the contractor “acts with intent to defraud.” Tex. Civ. Prac. & Rem. Code § 12.002(c).

This is also a great statute to know about when you pay off a collateralized loan and have a lender or bank that drags their feet in providing the release of lien that is indisputably required. A well-written demand letter that cites the applicable lien release statutes tends to get results.

Criminal Law on Fraudulent Liens. Refusal to execute a release of a fraudulent lien or claim, under Tex. Penal Code § 32.49, is a Class A misdemeanor. Also see Bowles v. State, NO. 14-99-01396-CR, 2001 Tex. App. LEXIS 6311, at *11 (App.—Houston [14th Dist.] Sep. 13, 2001). The owner, holder, or beneficiary of a purported lien or claim that is fraudulent, under Text. Gov’t Code § 51.901(c), who does not provide a release of lien by the twenty first (21st) day after the receipt of actual or written notice by certified mail or fax requesting release of the claim faces criminal liability. If that person fails to execute a release of the claim within twenty-one (21) days, then the person is “presumed to have had the intent to harm or defraud another.” Tex. Penal Code § 32.49(b). The violator could also be looking at a perjury charge depending on circumstances. Tex. Penal Code § 37.01(2)(A).

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

How to Avoid Mechanic’s Liens

Usually, the lawyer gets a phone call when a problem with a mechanic’s lien has already arisen. However, there are preventative measures that property owners can take to avoid getting into mechanic’s lien situations in the first place. One method is to obtain advance or periodic mechanic’s lien waivers from your contractors. Another is to bond around any potential mechanic’s liens. Both methods require strict compliance with the relevant sections of the Texas Property Code to ensure effectiveness.

Waiver:

Residential Advance Waivers. Statutory mechanic’s liens generally cannot be waived in advance by the contractors. See Tex. Prop. Code § 53.286. However, a big exception to this rule exists for single-family homes. Under Tex. Prop. Code § 53.282(a)(3), a waiver of mechanic’s lien is enforceable if it is in a “written original contract . . . for the construction, remodel, or repair of a single-family house . . .” and is “made before labor or materials are provided under the original contract.” So, generally you can have your contractors waive their rights to file mechanic’s lien affidavits to cloud your title if it is a single-family residential project and the waiver is in the original contract signed before labor or materials or provided. Developers doing residential rehabs should consider including this waiver language in their original contracts with each of their contractors to avoid mechanic’s liens.

Statutory Progress Payment Waivers. Another waiver worth mentioning here is the statutory form waivers for progress payments. In Section 53.284 of the Texas Property Code, property developers can find a form for waiving mechanic’s liens upon the making of a progress payment. In a multi-stage development project, use of these forms contemporaneously with the payment of each draw is a best practice. Keep in mind that you cannot tell the contractor that you will not pay the contractor unless the contractor signs the waiver. You have to pay the contractor first, and then get the waiver signed. See Tex. Prop. Code § 53.283. You could tell the contractor that the contractor may not do any additional work or receive any additional payment until the contractor signs the waiver for the draws that have already been completed and paid. This way, you are waiving liens in stages as the project nears completion so that you do not get stuck with a large lien claim at the end of the project.

Fraudulent Lien Law Issues. One final note on waivers, filing a mechanic’s lien affidavit despite a valid waiver does violate the Texas Fraudulent Lien Law (Tex. Civ. Prac. & Rem. Code § 12.002), but only if the property owner sends “a written explanation of the basis for nonpayment, evidence of the contractual waiver of lien rights, and a notice of request for release of the lien to the claimant at the claimant’s address stated in the lien affidavit” and “the lien claimant does not release the lien affidavit” within fourteen (14) days. See Tex. Prop. Code § 53.282. If the reason for the lien being fraudulent does not relate to waiver, then the Fraudulent Lien Law is violated at the time that the lien claim is filed, not when the claimant refuses to release it. Vanderbilt Mortg. & Fin. v. Flores, 692 F.3d 358 (5th Cir. [Tex.] 2012).

Prompt Payment Act. It should also be noted that liability for 18% interest on unpaid amounts under the Texas Prompt Payment statute cannot be waived in a residential construction contract, but can be limited to payments not made by 60 days after the date that the owner receives the written Tex. Prop. Code. § 28.002(a) request from the contractor. Also, on residential contracts, the prompt pay good faith withholding allowed is 110%, not 100%. Tex. Prop. Code § 28.003.

Bonding Around Mechanic’s Liens:

An appropriate preventative bond will keep mechanic’s liens from arising during a project. After a dispute arises and a lien has already been filed or attempted, however, the cloud on title can still, generally, be cleared with a remedial bond.

The Texas Department of Insurance can be a good place to start looking for the right bonding company:

http://www.tdi.texas.gov/commercial/pcbond.html#type

Preventative Bonds:

Though rarely used for small residential projects, mechanic’s and materialman’s liens can be stopped with a bond that complies with Sections 53.201–53.211 of the Texas Property Code. Under § 53.201 of the Texas Property Code, “If a valid bond is filed, a claimant may not file suit against the owner or the owner’s property . . . .” “If a payment bond meets the statutory requirements, a claimant may not file lien claims against the property owner or seek foreclosure of the claimant’s lien on the owner’s property. Tex. Prop. Code § 53.201. Instead of looking to the property, claimants must look to the payment bond.” Laughlin Envtl., Inc. v. Premier Towers, L.P., 126 S.W.3d 668, 671 (Tex. App.—Houston [14th Dist.] 2004). Furthermore, “For a property owner to reap the benefits of Tex. Prop. Code § 53.211 and thereby enjoy the protections it affords, there must be a bona fide attempt to comply with the statutory requirements. Id. Under Section 53.211 of the Texas Property Code, attempted compliance with the bonding requirements of Section 53.202 of the Texas Property Code and other applicable law may be sufficient even if technical compliance is not present. Regardless, the prudent property owner or original contractor will try to strictly comply with the requirements of Section 53.202 of the Texas Property Code.

Remedial Bonds:

Remedial bonds, under Section 53.171 of the Texas Property Code, do not prevent mechanic’s liens from arising. Remedial, or indemnity, bonds can, however, clear title as to a specific lien after the claim has been filed.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Mechanic’s Lien Law Basics

The State of Texas is a good place to be a contractor and building material supplier. The rights of these “mechanics” and “materialmen” to place liens upon real estate improved by their labor or materials arise not just from any statute, but from the Texas constitution itself. Article XVI, Section 37 of the Texas Constitution provides that “Mechanics, artisans and materialmen, 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.” The Texas Legislature followed its constitutional mandate with the mechanic’s lien laws in Title 5, Chapter 53 of the Texas Property Code.

Mechanic’s Liens Cloud the Property Owner’s Title, Which Can Induce the Property Owner to Pay the Contractor:

Mechanic’s lien laws are complex, can cloud title even without a lawsuit and associated lis pendens, and are quite favorable to the contractor or material supplier. Without the mechanic’s lien laws, a contractor wanting to assert rights to a mechanic’s lien would need to file a lawsuit in a Court with appropriate jurisdiction and file a lis pendens in the real property records for the county that the property is located in. This procedure is cost-prohibitive because the suit generally needs to be filed in a District Court because District Courts generally have exclusive jurisdiction over title disputes. See Escobar v. Garcia, 2014 Tex. App. LEXIS 5157, *3 (Tex. App.—Corpus Christi May 15, 2014, pet. denied). District Courts are the highest level of trial Courts in the State of Texas and tend to be the most burdensome and expensive Courts to litigate in from an attorney’s fees standpoint.

Corporations and Limited Liability Companies Must Have an Attorney in Court. To cloud title through a lis pendens, a contractor would need to hire an attorney unless the contractor has not incorporated his business. Only a contractor doing business as a sole proprietor may represent himself in District Court on a pro se basis, or in other words, without an attorney. Corporations and other legal entities may not appear in Court without an attorney, even if the company is owned and operated by a single person. See Kunstoplast of Am. v. Formosa Plastics Corp., USA, 937 S.W.2d 455, 456 (Tex. 1996); Marin v. Gilberg, No. V-07-62, 2008 U.S. Dist. LEXIS 53341, at *8 (S.D. Tex. 2008).

A lis pendens is a notice of pending lawsuit that is filed publicly in the real property deed records of the county in which the property is located. The lis pendens must be indexed under the name of each party to the proceeding so that it shows up in a title search performed by an attorney or title company. The lis pendens generally has the effect of putting the world on notice of the claim and of subordinating any future unrecorded claims to the claim recorded in the lis pendens. See Tex. Prop. Code § 12.007 (2015).

Consequently, a contractor seeking to cloud title to real property, without the protections of the mechanic’s lien laws, would need to hire an attorney, file a District Court lawsuit, draft and file a proper lis pendens, and complete service of the foregoing using a private process server. For attorneys, lawsuits can be like marriages—easy to get in, hard to get out. Any attorney who makes an appearance as lead counsel under Tex. R. Civ. P. 8 must be “responsible for the suit” until such attorney withdraws from the case. Making an appearance is as simple as appearing in court on behalf of someone or filing any written document with the court. Withdrawing from the suit, on the other hand, is much more time-consuming. The attorney wanting to withdraw must follow Tex. R. Civ. P. 10, which requires the attorney to (1) show good cause, (2) submit a written motion to the court, (3) prove that the withdrawal is not sought for delay only, (4) deliver a copy of the written motion to the client, (5) notify the client in writing of the client’s right to object to the motion, (6) find out whether the client is opposed to the motion or not, (7) state the client’s last known address and (8) list all pending settings and deadlines. Moreover, the court can impose conditions before granting leave to withdraw. Finally, the notice to the client must be made by regular and certified mail.

Accordingly, most attorneys will not file a new District Court lawsuit without a substantial, up-front retainer of several thousand dollars. Even a relatively simple District Court lawsuit will cost the attorney a tremendous amount of time, energy, paperwork, and organization. Due to Tex. R. Civ. P. 8 and 10 and because getting a new attorney up to speed on the details of a case requires expenditure of substantial time and effort, finding an attorney who will file a District Court lawsuit and lis pendens for a low, flat-rate fee is highly unlikely for the aggrieved contractor.

Statutory Mecahnic’s Liens Can be Recorded Without Filing a Lawsuit:

Fortunately for contractors, Title 5, Subtitle B, Chapter 53, Subchapter C of the Texas Property Code (§§ 53.051–53.080) provides a way around the necessity of a District Court lawsuit and lis pendens. Many contractors see this as a Do-It-Yourself1 way to cloud the property owner’s title in hopes of cajoling payment from the recalcitrant property owner. Essentially, the contractor can file a mechanic’s lien affidavit in the real property deed records of the county. This affidavit will cloud the title and prevent most title companies from closing on a sale of the real property. The owner who wants to sell the property will then face a conundrum—whether to settle with the contractor or figure out a way around the lien affidavit. Often, when a property is being rehabbed, the eventual purpose of the rehab is a sale of the property with the improved rehab value. Accordingly, the lien affidavit tends to get contractors paid. The rules for how to properly perfect a mechanic’s lien using a mechanic’s lien affidavit are exceedingly complex. Accordingly, those rules are beyond the scope of this article. However, even an improper mechanic’s lien affidavit can cause enough problems at the property owner’s title company to induce the property owner to make a settlement offer to the contractor.

Work Stoppage Issues:

On the owner’s side, if the contractor is fired, then the owner should be prepared to show that the contractor was given reasonable notice. Tex. Bus. & Com. Code § 2.309. The prudent owner should set concrete deadlines or conditions and make it clear, and expressed in writing, that the failure to comply will result in termination of the contract. The prudent owner will give as much advance written notice to the contractor as possible if the owner is considering a lock-out to avoid a submission of the issue of reasonable notice to a jury.

On the contractor’s side, the contractor, if the property is not a detached residence and the contractor intends to use a work stoppage, i.e., suspension of work, due to nonpayment, then the contractor should make sure to give written notice, following the statutory requirements, to the owner and owner’s lender. See Tex. Prop. Code § 28.009. Failure to follow the rules in Tex. Prop. Code § 28.001–28.010 could result in losing the special rights granted to contractors by the Texas Prompt Payment Statute, like 18.00% interest on unpaid amounts due. The owner, upon receipt of the foregoing notices, may need to list specific reasons in writing for nonpayment to the contractor. Tex. Prop. Code § 28.009(d).

The following is a table showing the rules for contractors who are trying to perfect mechanic’s liens:

Mechanic’s Lien Rules Matrix

Original Contractor

Subcontractor

Residential

Provide the disclosure statement. Tex. Prop. Code § 53.255.

Provide the list of subcontractors and suppliers. Tex.
Prop. Code § 53.256.

For homesteads, get the contract signed by both spouses,
file it with the county clerk, and make sure to include the
notice in Tex. Prop. Code § 53.254(f) on the lien
affidavit.

File the lien affidavit by the 15th day of the
third calendar month after job completion or termination.
Tex. Prop. Code § 53.052(b).

Send copy to owner within five days. Tex. Prop. Code §
53.055.

Make sure that the original contractor complied with Tex.
Prop. Code § 53.255 & 53.256.

Give written notice by registered or certified mail of
unpaid balance to original contractor and the property
owner by 15th day of second month after “each
month in which all or part of the claimant’s labor was
performed or material . . . was delivered.” Tex. Prop. Code
§ 53.252(b), with the notice required by Tex. Prop. Code §
53.254(g) if homestead.

For homesteads, make sure to include the notice in
53.254(f) on the lien affidavit.

To trap funds, the notice must also contain the statements
in Tex. Prop. Code § 53.252(c).

File the lien affidavit by the 15th day of the
third calendar month after job completion or termination.
Tex. Prop. Code § 53.052(b).

Send copy to owner and original contractor within five
days. Tex. Prop. Code § 53.055.

Commercial

File the lien affidavit by the 15th day of the
fourth calendar month after job completion or termination.
Tex. Prop. Code § 53.052(a).

Send copy to owner within five days. Tex. Prop. Code §
53.055.

Give written notice by registered or certified mail of
unpaid balance to original contractor by 15th
day of second month after “each month in which all or part
of the claimant’s labor was performed or material
delivered.” Tex. Prop. Code § 53.056(b).

Give same notice to owner and original contractor by the 15 th day of the third month. Tex. Prop. Code §
53.056(b).

File the lien affidavit by the 15th day of the
fourth calendar month after job completion or termination.
Tex. Prop. Code § 53.052(a).

Send copy to owner and original contractor within five
days. Tex. Prop. Code § 53.055.

1Fraudulent Lien Law Warning. While many contractors in Texas try to perfect mechanic’s liens without the assistance of a licensed attorney who has studied this area of law, such Do-It-Yourself attempts should be highly discouraged. The mechanic’s lien laws are highly complex. Additionally, under Texas fraudulent lien law (Tex. Civ. Prac. & Rem. Code § 12.002; Tex. Gov’t Code § 51.901(c) and Tex. Penal Code § 32.49), the contractor can incur civil liability of the greater of $10,000.00 or actual damages (no actual damages necessary, See Harris County, Texas v. MERSCORP, Inc., 791 F.3d 545 (5th Cir. 2015); Vanderbilt Mortg. & Fin., Inc. v. Flores, 692 F.3d 358, 370, 372 (5th Cir. 2012)), plus costs and attorney’s fees, and exemplary (punitive) damages. Section 12.002(c) of the Texas Civil Practice and Remedies Code provides some protection to the uninformed lien-filing contractor by stating that “intent to defraud” is required, but “intent to defraud” can arise from claiming a larger amount than what is, in fact, owed (Taylor Elec. Servs. v. Armstrong Elec. Supply Co., 167 S.W.3d 522, 530 (Tex. App.—Fort Worth 2005, no pet.), but see RMDG Construction, LLC, et al. v. Oakwood Custom Homes Group, Ltd., 2014 Tex. App. LEXIS 6032 (Tex. App.—Waco June 5, 2014, no pet.)), refusing to release the lien, among other things (Gray v. Entis Mech. Servs., LLC, 2012 Tex. App. LEXIS 3278 (Tex. App.—Houston [1st Dist.] Apr. 26, 2012, no pet.)), or re-filing a previously released lien (Roberts v. Dixon, No. 12-15-00181-CV, 2016 Tex. App. LEXIS 2449, at *6 (App.—Tyler 2016)). Refusal to release a fraudulent lien is also a Class A misdemeanor. See Tex. Penal Code § 32.49. While courts may differ on what conduct sufficiently demonstrates “intent to defraud,” the wise and prudent contractor should consult with a competent, licensed Texas attorney in conjunction with any attempts to perfect a mechanic’s lien.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Related Case Pleadings in Dallas, TX, a Potential Pitfall for Temporary Restraining Orders (TRO)

Local Rule 1.06-1.08 of the Dallas County Civil Courts local rules adopted January 15th, 2014 provides a related-case requirement that can potentially prevent a Temporary Restraining Order from being granted. Under Rule 1.06, the Judge in the earliest case filed of any related cases has the option of consolidating the later-filed cases into the earliest case. Rule 1.07 defines later cases and the definition is quite broad. Rule 1.08 requires the filing attorney to make a detailed disclosure of the related case in the pleadings. Rule 1.08 requires the answering attorney to point out any failure of the filing attorney to make this disclosure in the pleadings. Moreover, both filing and answering attorneys, by failing to properly disclose related cases, certified that there are no prior related cases.

In the event that a party files for a Temporary Restraining Order (TRO), either ex parte or otherwise, and fails to make the proper related case disclosure for an eviction case, title dispute, or other applicable related case, then the TRO may be denied on the grounds of failure to include the related case in the pleadings. Due to the certification by nondisclosure rule, the failure to disclose the related cases could result in parties waiving rights to contest transfers or failures to transfer.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Investment Fraud Recovery – Ponzi-Type Schemes

When an investment promoter pays your investment returns to you using newly-invested money from other investors, the essential characteristic of a Ponzi scheme is present. The beauty of this scheme is that as long as the promoter continually adds new investors, the scheme can look like a successful business indefinitely. As long as the scheme grows, the scheme can go on without investors becoming suspicious. The key to a Ponzi scheme’s success lies in the investor’s principal remaining invested. If too many investors try to make principal withdrawals, then the fact that the principal does not exist will become known.

These characteristics can cause Ponzi schemes to balloon out of control because the scheme must perpetuate itself through continual growth or it will die. Thus, the promoter of the Ponzi scheme must grow the scheme at all times and at all costs. Bernard Madoff targeted charities, hedge funds, banks, wealthy individuals, and universities because these entities rarely sought to withdraw principal while good returns were being paid. For these reasons, schemes like Charles Ponzi’s international reply coupon arbitrage in the 1920s and Bernard Madoff’s arbitrage and stock option scheme from 1991 to 2009 tend to grow to monstrous proportions.

If you have been promised returns that seem “too good to be true” based on the underlying investments, then you may have invested in a Ponzi-type scheme. If the scheme is growing faster than it should, then you may have invested in a Ponzi-type scheme.

Perhaps most importantly, if you have invested in a Ponzi-type scheme, then you need to consult with an attorney who can recover assets due to investment fraud. Time is of the essence in such a situation. Once the scheme is uncovered, it will unravel fast, and those who do not act quickly will be the ones left “holding the bag.”

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Reimbursement of Your Attorney’s Fees When You Win Your Case

The so-called “American Rule” provides that, in most of the United States—Texas included, each side to a lawsuit, Plaintiff and Defendant, must pay its own attorney’s fees. While we inherited most of our legal system from the British common law, we do not generally follow the “English Rule,” which states that the losing side pays the other side’s attorney’s fees. In Texas, however, there are countless exceptions to the American Rule. For example, attorney’s fees are recoverable from the losing side in breach of contract cases, cases involving a declaratory judgment, Uniform Fraudulent Transfers Act claims, etcetera.

What the general public rarely understands is that reimbursement of your attorney’s fees when you win your case is hardly automatic. Attorneys will rarely (probably never) accept a breach of contract case for a plaintiff and simply bill the defendant for the legal work. The reason is that when the trial ends, together with all of the appeals (if a supersedeas bond has been posted), the winning party does not actually receive payment for the legal fees. Instead, the winning party receives a monetary judgment against the losing party for the attorney’s fees. That monetary judgment can then be enforced using all of the post-judgment collections procedures that are available under Texas law. This generally means recording an abstract of judgment in counties where the judgment debtor owns real estate and filing for a writ of execution against any non-exempt property owned by the judgment debtor, but there are other collections methods as well, like garnishment, receivership, or turnover proceedings. The amount of legal work that is necessary to collect on a monetary judgment can be quite substantial and no one wants to perform all of the legal work necessary to complete a trial, only to create more post-judgment legal work for themselves, unless the prospects for recovery are high. Also, the attorney’s fees incurred in performing the post-judgment collections activities are generally non-recoverable. So, you may get a judgment for your attorney’s fees, and still have to pay your attorney to go collect on that judgment.

To make things more complex, the winning side does not receive a judgment for attorney’s fees actually “incurred.” See Sloan v. Owners Ass’n of Westfield, Inc., 167 S.W.3d 401, 405 (Tex. App. San Antonio 2005) (“The terms of the fee agreement between the [Defendant] and its counsel are irrelevant to the [Defendant’s] right to recover reasonable and necessary attorney’s fees from the [Plaintiff].”) Instead, the winning party generally receives a judgment for “reasonable and necessary” attorney’s fees, which may be completely different from the fees that the party actually incurred. Interestingly enough, the terms of the party’s contract with his or her attorney may be completely irrelevant to the amount of fees that will be awarded at trial. Moreover, an attorney representing himself or his law firm can probably recover attorney’s fees for his or her own time spent on the case. McLeod, Alexander, Powel & Apffel, P.C. v. Quarles, 894 F.2d 1482, 1488 (5th Cir. Tex. 1990).

Contingency Fees:

When an attorney accepts a case based on a contingency fee, the contingency fee may be determined by the Court to be “reasonable and necessary.” Sloan v. Owners Ass’n of Westfield, Inc., 167 S.W.3d 401 (Tex. App. San Antonio 2005). Generally, “the fact that attorney’s fees are based on a contingent fee agreement does not make the fees requested or awarded unreasonable.” Cooper v. Cochran, 288 S.W.3d 522, 537 (Tex. App. Dallas 2009).

Winning on Some Claims and Losing on Other Claims:

If you prevail on some claims for which attorney’s fees are available, yet lose on other claims, then the attorney’s fee award gets very tricky. If your attorney provides detailed, itemized billing sheets and proves those sheets up in Court, then the sheets may be enough evidence for the Judge to break out the recoverable fees from the non-recoverable fees. Even if the bill sheets do not exist because it is a contingency fee case, your attorney should “reconstruct” the work to “provide the trial court with sufficient information to allow the court to perform a meaningful review of the fee.”
Long v. Griffin, 442 S.W.3d 253, 256 (Tex. 2014).

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Monetary Damages in Texas Eviction Suits

In Texas, if you ask for too much in your eviction suit, then you could end up with nothing. Landlords typically ask the Court to evict the tenant and award money damages to the landlord for all amounts owed by the tenant. In addition to delinquent rent, landlords often ask the Court to award penalties, late fees, parking fees, unauthorized pet fees, fines for community rule violations, and even monetary damages for unrelated causes of action. The landlord typically feels entitled to all of this money and does not understand that, by pleading for too much, the landlord could lose all of it.1

In Texas, your local Justice of the Peace Court (“JP court” or “justice court”) has exclusive jurisdiction over forcible entry and detainer suits. In layman’s terms, this means that Texans must file their eviction suits at the local JP court. Usually, the district and county courts will all be located downtown at the largest city in your county, while there will be several justice court subcourthouses spread throughout the county, often sharing office space with your local city hall or the local branch of the tax collector’s office. In 2013, the Texas legislature abolished small claims courts and gave jurisdiction over small claims cases to the JP courts. So, the JP courts also function as small claims courts.

Even if you wanted to file your eviction suit in county or district court, you cannot do so. There are, however, other causes of action that are possessory in nature, which can be filed in a county or district court (usually district court for jurisdictional reasons).2 Trespass to try title, for example, is a possessory cause of action that must be brought in district court rather than justice court. It’s the Berrys, LLC v. Edom Corner, LLC, 271 S.W.3d 765, 770 (Tex. App. Amarillo 2008).

Because the Texas Rules of Civil Procedure and the Texas Rules of Evidence do not apply in justice court,3 Texans are supposed to be capable of adequately representing themselves without the help of a licensed attorney in justice court and they frequently do so. Consequently, many, if not most, eviction suits are filed at the local JP court subcourthouse without the help of an attorney.

Most landlords filing these cases do not know two critical rules: (1) if you ask for more than $10,000.00 in back rent, or if the Court thinks that more than $10,000.00 in back rent is actually owed, then the JP court will refuse to award anything at all for back rent, and (2) the landlord can only ask for back rent, nothing else—no late fees, no penalties, no fines for unauthorized pets or parking in the wrong spot, etcetera, just back rent, except that, in some instances, amounts owed that are not quite rent may be recoverable if they are “within the nature of rent.”4 Courts differ on what constitutes “within the nature of rent,” and so, in some JP courts, late fees or unauthorized pet fines may be recoverable, but for the most part, those types of monetary obligations are probably not recoverable. Now, on appeal, the rules change and you can amend your pleadings to ask the Court for any damages relating to possession of the property during the pendency of the appeal, and those damages may exceed $10,000.00, but the damages must arise between the date of the JP court judgment and the county court trial date in order to be recoverable in excess of $10,000.00.

Under Tex. R. Civ. P. 510.3(d), an eviction suit can include a claim for back rent, but only if the claim is “within the justice court’s jurisdiction.” Because justice courts have small claims jurisdiction, the justice court has no jurisdiction over suits where the amount in controversy is over $10,000.00. Tex. Gov’t Code § 26.042(a). Hence, back rent claims can be no more than $10,000.00. Also, Tex. R. Civ. P. 500.3(d) makes clear that “A claim for rent may be joined with an eviction case if the amount of rent due and unpaid is not more than $10,000.00, excluding statutory interest and court costs, but including attorney’s fees, if any.”

Whoever loses the JP court eviction suit can appeal to the county court. Because JP courts do not employ court reporters to keep a record of their proceedings and because the Texas rules of procedure and evidence do not apply, no record exists for the county court to review on appeal. Consequently, the county court conducts a trial de novo, which means a brand new trial. Whatever evidence the landlord or tenant offered in the JP court case is gone and irrelevant. The judge of the county court, in fact, will know nothing about what happened in the JP court other than the outcome as expressed in the final order signed by the JP court judge, but the county court judge must decide the new case based solely on the new trial, and so most, if not all, county court judges could not care less about what happened in the JP court.

Now, the county courts normally have jurisdiction up to $200,000.00,5 unless the Texas Government Code provides something different for that particular county. Under Tex. R. Civ. P. 510.11, the landlord can seek damages in a county court eviction appeal for anything “suffered for withholding or defending possession of the premises during the pendency of the appeal.” Courts have construed this broadly to allow damages that are in any way related to maintaining and obtaining possession of the subject property during the pendency of the appeal. See Serrano v. Ramos, 2015 Tex. App. LEXIS 6139, *7-9 (Tex. App. Corpus Christi June 18, 2015); Hanks v. Lake Towne Apartments, 812 S.W.2d 625, 626 (Tex. App.—Dallas 1991, writ denied); Krull v. Somoza, 879 S.W.2d 320, 322 (Tex. App.—Houston [14th Dist.] 1994, writ denied).

At the end of the day, the rule for monetary damages in an eviction suit in Texas is that the landlord can get back rent from the justice court as long as less than $10,000.00 is owed at the time of the filing of the petition. If additional rent coming due before trial brings the total rent owed to more than $10,000.00, then the justice court does not lose jurisdiction because the damages for additional rent accrued “because of the passage of time.”6 For liquidated claims, the plaintiff cannot arbitrarily reduce the amount of the claim to bring it within the jurisdictional limits of the court.7 For unliquidated claims, the plaintiff can reduce the damages to an amount within the court’s jurisdictional limit if the plaintiff pleads in good faith.8 Rent is most likely going to be considered a “liquidated” claim, and consequently, the landlord probably cannot arbitrarily lower the amount of rent due in order to avoid filing a separate suit in county or district court for the rent owed.

If the Judge finds the amount in controversy to be in excess of $10,000.00, then the proper remedy is to sever the forcible detainer cause of action and dismiss the cause of action for rent. It’s the Berrys, LLC v. Edom Corner, LLC, 271 S.W.3d 765, 772 (Tex. App. Amarillo 2008). In other words, if more than $10,000.00 in back rent is owed when the eviction suit is filed, then the landlord gets zero monetary damages. But, pursuant to Tex. R. Civ. P. 510.3(e), any claims not asserted because they cannot be brought “can be brought in a separate suit in a court of proper jurisdiction.” In other words, rent arises out of the same transaction, or subject matter, as possession of the premises and so, normally, a landlord who sued for possession only would be barred by res judicata from bringing a separate suit for the unpaid rent.9 However, if back rent owed is more than $10,000.00 at the time of the filing of the eviction suit or if the court finds that it lacks jurisdiction over the rent, then the landlord must bring a separate suit for the rent. So, the landlord would have one suit in justice court for possession of the property and another, separate suit in county or district court for rent.

No one in their right mind who is not a lawyer would guess that the law requires two separate lawsuits for a simple eviction suit when back rent exceeds $10,000.00, making this a stupid and counter-intuitive law. The two separate suits are highly impractical because the results can differ, the legal work must be duplicated and, at the end of day, the issues are far too simple to justify two separate lawsuits, even if one of them is in JP court, particularly given that the JP side of the suit will eventually wind up in county court on appeal. At least in 2007, the amount in controversy was raised from $5,000.00 to $10,000.00 to provide some alleviation for this problem, but it is still a ridiculous situation.

To sum up, the back rent owed at the time of the eviction suit filing in justice court cannot be more than $10,000.00, excluding statutory interest and court costs, but including attorney’s fees. Attorney’s fees and any damages accruing after the justice court suit is appealed; like property taxes, unauthorized pet fees, parking fees, damages done to the property by the tenant, etcetera; can be recovered in the county court on appeal, even if they cause the amount in controversy to exceed $10,000.00, but only if the damages accrued while the appeal was pending.

Frankly, the rules governing evictions are unbelievably complex, considering that the Texas legislature enacted the rules “to provide a speedy and inexpensive remedy for the determination of who is entitled to possession of property.” Johnson v. Fellowship Baptist Church, 627 S.W.2d 203, 204 (Tex. App. Corpus Christi 1981). In Texas, evictions can be fairly expedient and can be fairly simple, on occasion, but the rules governing evictions are not simple at all,10 and a lot can get in the way of simplicity and expediency.

1Technically, the landlord who asks for too much does not lose his or her entitlement to monetary damages altogether, but rather is forced to accept zero monetary damages in the eviction suit, and then must bring a separate lawsuit in district or county court for all monetary damages owed. See Bybee v. Fireman’s Fund Ins. Co., 160 Tex. 429, 331 S.W.2d 910, 913 (1960) (If the petition shows that part of the damages, such as a claim for attorney’s fees, is not allowed by law, that part of the claim is disregarded for jurisdictional purposes); It’s the Berrys, LLC v. Edom Corner, LLC, 271 S.W.3d 765, 772 (Tex. App. Amarillo 2008) (If the Judge finds the amount in controversy to be in excess of $10,000.00, then the proper remedy is to sever the forcible detainer cause of action and dismiss the cause of action for rent). Most landlords are so frustrated by the eviction process that they have no interest in prosecuting an entirely separate lawsuit against their tenant for the sole purpose of recovering a monetary judgment against the tenant. So, the landlord who fails to obtain a money judgment against his or her tenant in the eviction suit typically fails to obtain a money judgment at all.
2 Escobar v. Garcia, 2014 Tex. App. LEXIS 5157, *9 (Tex. App. Corpus Christi—May 15, 2014) (county courts generally have no subject matter jurisdiction over title disputes); but see Tex. Gov’t Code § 25.0592 (county courts in Dallas County have concurrent jurisdiction with the district court in civil cases regardless of the amount in controversy and subject matter jurisdictional problems can be cured by retroactive assignment to district court).
3 Tex. R. Civ. P. 500.3(e).
4 Carlson’s Hill Country Bev., L.C. v. Westinghouse Rd. Joint Venture, 957 S.W.2d 951, 955 (Tex. App. Austin 1997).
5 Tex. Gov’t Code § 25.0003.
6 Continental Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444, 449 (Tex. 1996).
7 Failing v. Equity Management Corp., 674 S.W.2d 906, 909 (Tex. App. Houston 1st Dist. 1984).
8 French v. Moore, 169 S.W.3d 1, 8 (Tex. App. Houston 1st Dist. 2004).
9 See Barr v. Resolution Trust Corp., 837 S.W.2d 627, 631 (Tex. 1992) (claims arising out of the same transaction or subject matter as claims previously litigated are barred by res judicata; Texas has adopted the “transactional” approach to res judicata law).
10 For example, the eviction rules are found in a strange combination of Chapter 24 of the Texas Property Code and Rule 510 of the Texas Rules of Civil Procedure. There are a few important eviction rules that everyone should learn and that are fairly well developed by the caselaw, many of which are explained by this blog post. However, there are many more eviction rules that rarely, if ever, come up and are hardly understood at all by the litigants, including the attorneys and judges.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Global Mutual Liability Releases

Sometimes, at the end of a lawsuit, in the final draft of a settlement agreement that has been months or years in the making, one of the parties will casually throw in a global mutual liability release that is not limited to the transactions or occurrences that are the subject of the litigation. Sometimes, this clause is non-negotiable and sometimes, the party inserting the clause waits until the last possible moment to add the clause to the draft, knowing that the other side will probably sign it rather than throw away months or years of negotiations. The clause is inserted when the settlement momentum is at its peak.

When so much work has been done to reach a resolution and the end is in sight, a firm desire arises to simply sign to the clause now and litigate over it later if it becomes a problem. Since the released claims are often unknown or speculative, it is easy to assume that you cannot possibly release something that you do not know about regardless of what the settlement paperwork says.

In California, at least, this is true. You cannot settle claims that a “creditor does not know or suspect to exist in his or her favor at the time of executing the release.” Cal. Civ. Code § 1542. California courts have, however, held that Civil Code Section 1542 is waivable, which sort of defeats the purpose of the statute. Mundy v. Lenc, 203 Cal. App. 4th 1401, 1405 (Cal. App. 2d Dist. 2012); Perez v. Uline, Inc. 157 Cal App 4th 953 (2007, 4th Dist.).

At least in some states, you may not be able to prospectively release liability. “[P]rovisions for release from liability for personal injury which may be caused by future acts of negligence are prohibited ‘universally.’” Hiett v. Lake Barcroft Community Ass’n, 244 Va. 191, 195 (Va. 1992).

A release of a negligence claim can be contested on the grounds of fraud, ambiguity, mistake, or fair notice (“express negligence” and conspicuousness). Newman v. Tropical Visions, Inc., 891 S.W.2d 713, 720 (Tex. App. San Antonio 1994). The express negligence doctrine states that a party seeking indemnity from the consequences of that party’s own negligence must express that intent in specific terms within the four corners of the contract. Dresser Indus. v. Page Petroleum, 853 S.W.2d 505, 508 (Tex. 1993).

A release of gross negligence or intentional misconduct is probably unenforceable on public policy grounds. See Restatement (Second) of Contracts § 195 (1979) (“A term exempting a party from tort liability for harm caused intentionally or recklessly is unenforceable on grounds of public policy.”); but see Newman v. Tropical Visions, Inc., 891 S.W.2d 713, 721 (Tex. App. San Antonio 1994) (gross negligence sometimes is not separable from regular negligence such that a waiver of regular negligence, in some cases, may also waive gross negligence).

It also bears mentioning that, in Texas, waivers of Deceptive Trade Practices Act claims are enforceable only if the consumer is not in a significantly disparate bargaining position, is represented by legal counsel, and waived rights under an express provision signed by both consumer and consumer’s attorney. Tex. Bus. & Comm. Code Ann. § 17.42(a).

Escaping a liability release based on unilateral mistake is tough. In Texas, you must show four factors: “(1) whether the mistake is of so great a consequence that enforcement of the contract as made would be unconscionable; (2) the mistake relates to a material aspect of the contract; (3) the mistake was made regardless of the exercise of ordinary care; and (4) the parties can be placed in the status quo.” Torres v. Monumental Life Ins. Co., 1998 U.S. Dist. LEXIS 12145, *10-11 (E.D.N.Y. Aug. 5, 1998).

Mutual mistake, meanwhile, is easier. “The question of mutual mistake is determined not by self-serving subjective statements of the parties’ intent, which would necessitate trial to a jury in all such cases, but rather solely by objective circumstances surrounding execution of the release, such as the knowledge of the parties at the time of signing concerning the injury, the amount of consideration paid, the extent of negotiations and discussions as to personal injuries, and the haste or lack thereof in obtaining the release. See Restatement (Second) of Torts § 152 comment f (1981).” Williams v. Glash, 789 S.W.2d 261, 264 (Tex. 1990). In Texas, under certain circumstances parties may release future personal injury claims. See, e.g., Williams v. Glash, 789 S.W.2d 261, 264 (Tex. 1990); Ortiz v. Jones, 917 S.W.2d 770, 772 (Tex. 1996). If causes of action are never discussed by the parties in the mediation or settlement process, then the lack of discussion constitutes some evidence that the parties may not have intended those claims to be released. Bolle, Inc. v. Am. Greetings Corp., 109 S.W.3d 827, 834 (Tex. App. Dallas 2003). In any situation where a cause of action is not specifically released, the aggrieved party should consider raising mutual mistake allegations and providing evidence of whether the parties “mutually agreed to a release agreement which differed from the one which was ultimately reduced to writing.” Matlock v. National Union Fire Ins. Co., 925 F. Supp. 468, 475 (E.D. Tex. 1996). “If it can be established that a release sets out a bargain that was never made, it will be invalidated.” Williams v. Glash, 789 S.W.2d 261, 265 (Tex. 1990). “Pursuant to the doctrine of mutual mistake, when parties to an agreement have contracted under a misconception or ignorance of a material fact, the agreement will be voided.” Holmes v. Graham Mortg. Corp., 449 S.W.3d 257, 265 (Tex. App. Dallas 2014). “Even if certain claims exist when the release is executed, claims not clearly within the subject matter of the release are not discharged.” City of Brownsville v. AEP Tex. Cent. Co., 348 S.W.3d 348, 354 (Tex. App. Dallas 2011). “This court has held that a trial court may properly refuse to enforce an [Mediated Settlement Agreement (MSA)] that otherwise complies with the statute if a party procures the agreement by intentionally failing to disclose material information, and other courts have held that a trial court need not enforce an MSA that is illegal or that was obtained through fraud, duress, coercion or other dishonest methods. Additionally, the Dallas Court of Appeals has appeared to recognize that the absence of a meeting of the minds would justify a trial court’s rejection of an MSA, which is logical, given that a meeting of the minds is a required element of a valid contract.” Milner v. Milner, 360 S.W.3d 519, 523-524 (Tex. App. Fort Worth 2010).

To avoid a release based on unconscionability and adhesion, there must be a showing of both procedural and substantive unconscionability. Doing so is difficult. See Ramirez v. 24 Hour Fitness United States, Inc., 2013 U.S. Dist. LEXIS 69451, *15 (S.D. Tex. May 16, 2013).


Disclaimer
: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.