Alerts
Texas Legislature Now Requires Award of Attorney Fees and Costs to Prevailing Lien Holders
by Jeremy Sanders
March 9, 2012
While historically there have been specific remedies available to parties who have perfected their lien rights on property, it can be time consuming and expensive for parties to pursue those remedies and further their rights under the law. New legislation in Texas could make these remedies more rewarding to the prevailing party.
The Texas Legislature recently passed a bill that awards attorney fees and costs in any proceeding (1) to foreclose a lien, (2) to enforce a claim against a construction-related bond, or (3) to declare that any lien or claim is invalid or unenforceable under the law governing mechanic’s, contractor’s or materialman’s liens. However, with respect to a lien or claim arising out of a residential construction contract, the court is not required to order the property owner to pay costs and attorney fees. The law became effective September 1, 2011 for any actions commenced on or after that date.
Texas Senate Bill 539 amends the 53.156 of the Texas Property Code to require, rather than authorize, a court to award costs and reasonable attorney's fees as are equitable and just. Prior to September 2011, a judge had discretion regarding the award of costs and reasonable attorney's fees to the prevailing party in a successful suit in this context. Recent court cases also held that a mechanic's or materialman's lien holder who forecloses on a lien or bond is not entitled to court costs or reasonable attorney fees.
This new law could lead to more construction-related lawsuits for parties willing to pursue their lien rights and interests under the law.
Pipeline Safety Bill Signed into Law
by Jeremy Sanders
February 27, 2012
On January 3, 2012, President Obama signed into law a pipeline safety bill that gained momentum after a string of high-profile incidents in 2010. A September 2010 explosion in northern California killed eight people, injured dozens and destroyed 38 homes. Other pipeline malfunctions have occurred in Michigan, Montana, and Pennsylvania. U.S. Rep. Fred Upton, R-Mich., chairman of the House energy and commerce committee, said pipeline accidents during the last few years provided regulators with valuable lessons for the new law.
The new law, referred to as the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, contains the following:
- Doubles the maximum fine for pipeline safety violations to $2 million and extends federal safety oversight of gas, oil and other liquid pipelines through 2015.
- Authorizes the Pipeline and Hazardous Materials Safety Administration to hire 10 more safety inspectors.
- Commissions studies to determine if more needs to be done to secure transmission pipelines throughout the system and in more populated areas as well.
- Contains a strong incentive for states to remove current one call exemptions, requiring all entities that excavate around pipelines to call a hotline before they dig to learn about what might be below – a provision that is sure to help reduce the number of accidents due to digging,
- Newly constructed pipelines will be required to include automatic shutoff valves that isolate a section of pipe in event of a rupture, preventing further gas or liquid from escaping.
- Pipeline operators must confirm, through records or testing, the maximum safe-operating pressure of older, previously untested pipelines in populated areas.
It does not include a National Transportation Safety Board recommendation to require such shut-off valves on existing pipelines in heavily populated areas. The call for automatic shut-off values on existing pipelines has faced industry opposition because of cost.
“This is landmark legislation that provides the regulatory certainty necessary for the pipeline industry to make critical investments and create American jobs,” Rep. Bill Shuster (R-Pa.), who chairs a House subcommittee that oversees pipelines, said in a statement.
"Safety is always of the highest priority and this law strengthens current law, fills gaps in existing law where necessary, and focuses on directly responding to recent pipeline incidents with balanced and reasonable policies..."
This new law provides a strong framework to prevent future accidents and the enactment of this federal law could begin a trend of broader safety laws throughout the states. California has already passed legislation requiring such shut-off valves on all pipelines in densely populated and seismically active areas.
New Construction Anti-Indemnity Laws Now in Effect
by Jeremy Sanders
January 16, 2012
The Texas legislature recently passed new anti-indemnity and anti-additional insured legislation that will bring significant changes to the construction industry. On June 17, 2011, Texas Governor Rick Perry signed House Bill 2093, which makes certain indemnity provisions in construction contracts void and unenforceable if they require a person to indemnify, defend, or hold harmless another party for a claim caused by that party's own negligence or fault. The bill also prohibits construction contract provisions requiring the purchase of additional insured coverage if the scope of such coverage would be prohibited when contained in an indemnification agreement. This legislation, which creates what will become the new "Chapter 151" of the Texas Insurance Code, governs construction contracts and consolidated insurance programs established on or after January 1, 2012.
In practical terms, the new construction laws mean that owners and general contractors can no longer require subcontractors to (1) indemnify them for the owner or general contractor's own negligence or (2) purchase insurance coverage for the owner or general contractor's own negligence. However, there are certain key exceptions. Among them, parties may continue to provide indemnification against claims for "the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier." HB 2093 also specifically excepts contracts for residential and public works projects.
Indemnification has been a topic of concern for subcontractors for several years. Upstream parties, such as owners and general contractors, have frequently required indemnification from downstream parties on a project, such as the mechanical contractors. For an indemnification agreement to be legally enforceable under Texas law, it needed to satisfy the "express negligence doctrine." The express negligence doctrine provides that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms (and be specifically stated within the four corners of the contract). If a general contractor required a sub to indemnify it, the sub would have to indemnify the general contractor not just for the sub's negligence, but also for the general contractor's own negligence.
The reality of this shift in responsibility and risk of exposed liability has not always proved favorable for the downstream contractors. Nevertheless, certain contractors would often execute the construction contracts and take the risk of indemnity later in the project. This is where the legislature stepped in and changes were made. Under the new anti-indemnity laws, a general contractor can no longer require a sub-contractor to indemnify the general contractor for their own negligence. Even if a contract provision includes this indemnity language, the provision is unenforceable and the parties are prohibited from waiving this anti-indemnity provision.
With these new changes, owners and contractors should evaluate and revise their construction contracts and insurance programs to address any issues impacted by this legislation.
Texas Railroad Commission Passes Fracking Disclosure Rules
by Jeremy Sanders
January 13, 2012
The Texas Railroad Commission approved "landmark" fracking disclosure rules in December 2011 that rank as some of the most comprehensive in the nation.
Fracking, or hydraulic fracturing, is a process in which drillers blast a mixture of water, sand and chemicals deep underground to break up rock and retrieve oil or gas. The process has been widely utilized in the various shale plays around the country. However, the chemical content involved in the process — largely unknown for individual wells — has stirred environmental concerns.
The new Texas rules require disclosure of chemicals for all wells permitted on or after February 1, 2012. The rules also explain how landowners can challenge "trade secrets" claims, a provision that has troubled environmentalists because it allows industry to withhold information on certain chemicals for competitive reasons.
Drillers must reveal the names of all chemicals they use during fracking on a national website, fracfocus.org, also known as the FracFocus Chemical Registry. However, under House Bill 3328 passed by the Texas Legislature in the spring of 2011, oil and gas operators are required to reveal concentrations only for chemicals deemed hazardous to human health. That means about half of the chemicals disclosed by Texas companies will not publicly include concentrations.
"With this new rule, Texans will know more about what is going in the ground for energy production than about the ingredients that go into their sodas," Elizabeth Ames Jones, the Commission's chair, added in a statement.
Oil & Gas Company v. Royalty Owner: Texas Supreme Court Rules in Favor of Due Diligence
by Jeremy Sanders
January 5, 2012
The Texas Supreme Court has ruled that mineral rights owners often bear the burden to make sure oil and gas operators don't underpay them — whether it's a mistake or outright fraud. On December 16, 2011, the high court issued an opinion reversing lower court findings that Shell Oil Co. must reimburse $72,532.09 to a Texas royalty owner named Ralph Ross.
In Shell Oil Co. v. Ross, No. 01-08-00713-CV (Tex. App.-Houston [1st Dist.] February 25, 2010, no pet. h.), Ross, a mineral interest owner, brought a breach of contract, unjust enrichment, and fraud action against natural gas lessee, Shell. Ross alleged that Shell failed to pay royalties in accordance with the lease agreement and that it fraudulently deprived him of royalties by making payments "based on an arbitrary amount even below the internal transfer price." He further alleged that Shell sent him royalty statements containing false representations that the royalties were based on actual sales prices.
A Houston area jury had found that Shell fraudulently reported lower prices for its natural gas to Ross and then underpaid him, violating the terms of their lease contract. A lower appellate court had upheld the finding for Ross. However, the Supreme Court found that Ross had an obligation to investigate further and conduct research of public records that could have alerted him to the underpayments by Shell. The high court did not seem moved by the fraud arguments and any bearing those findings may have had on a final decision on royalty payments.
"We hold that the fraudulent concealment doctrine does not apply to extend (the statute of) limitations as a matter of law when the royalty underpayments could have been discovered from readily accessible and publicly available information before the limitations period expired," wrote Justice Debra Lehrmann for the court. The court added: "[I]n this case, the Rosses could have timely discovered the underpayments through the exercise of due diligence."
This decision could trigger a number of lawsuits so that royalty owners can ensure through legal discovery that they are given accurate information from oil and gas operators. In addition, the Texas Supreme Court solidified the four-year limit within which a lawsuit for underpaid or non-paid royalties must be filed in Texas.
Officers Can Be Personally Liable for Non-Payments to Sub-Contractors or Suppliers under Texas Trust Fund Statute
by Jeremy Sanders
December 20, 2011
The Texas Trust Fund Statute (Texas Property Code Section 162) is a powerful tool available to a contractor or subcontractor (independent from a lien) that enforces payment for providing labor or materials on a construction project. The remedy under the Statute is particularly important for a claimant who has failed to perfect a mechanic's lien or bond claim. The benefits of the Statute may be claimed regardless of whether or not a lien has been perfected.
In summary, an owner, contractor or subcontractor violates the Statute when it intentionally, knowingly, or with the intent to defraud, retains, uses, disburses, or diverts trust funds without first fully paying all obligations incurred or owed for labor or materials furnished to the project. For example, when a contractor or subcontractor is paid, but then fails to pay its lower-tier subs or suppliers, the non-paying contractor or subcontractor is in violation of the Trust Fund Statute.
The statutory and case law hold officers of companies that misapply such trust funds personally liable and Texas law imposes both civil and criminal liability on any individual officer who violates it.
In the civil context, the officers, directors and agents of an owner, contractor, or subcontractor who are deemed to be trustees under the Statute, are personally liable for misapplication of trust funds. In other words, they can be individually sued in civil court and criminally prosecuted by the state. It does not matter that the individuals were working within a corporation or partnership at the time such funds were misapplied.
In regard to criminal liability, a trustee who intentionally or knowing misapplies trust funds amounting to $500 or more, commits a Class A misdemeanor. A trustee who misapplies trust funds amounting to $500 or more with "intent to defraud" commits a felony of the third degree.
The Trust Fund Statute offers protection for certain subcontractors or suppliers that qualify. However, it is advisable to read Texas Property Code Section 162 in its entirety to become familiar with the specific definitions and defenses available under the Statute. Although the Statute provides protection, each subcontractor or supplier should always perfect a lien on the property and not rely solely on the protection of the Statute.
Contractors: Remember Your Rights Under the Texas Constitution
by Jeremy Sanders
October 26, 2011
In Texas, a qualified contractor is protected from non-payment of labor and materials on construction projects under the Texas Constitution. Article XVI, Section 37 of the Texas Constitution grants contractors of every class a lien on the buildings and articles made or repaired by them for the value of their labor or material furnished. In essence, a qualified contractor has an automatic lien if he is not paid on a project. However, a contractor MUST QUALIFY for this protection in accordance with the guidelines stated below and there are certain principles that should be understood before pursuing a constitutional lien.
- The contractor must have a direct contractual relationship with the owner. Contractors/ subcontractors not in privity of contract with the owner do not qualify for this type of lien. Subcontractors or suppliers not contracting directly with the owner must perfect a statutory lien or bond claim to protect their interests.
- If the contractor qualifies, constitutional liens are automatic and self-executing, meaning they do not require the contractor to serve any particular notice and the filing of a lien affidavit is not required. However, in order to avoid claims by third-party purchasers (see below), it is nevertheless advisable to file a lien affidavit claiming a constitutional lien in the real property records of the county where the property is located.
- Constitutional liens will not be enforced against a third-party purchaser who has neither actual nor constructive notice of the lien. This is in contrast to statutory liens filed pursuant to the Property Code. When a mechanic's lien is filed of record according to the statutes, it will be enforced against a subsequent purchaser without notice.
- Constitutional liens are binding on an article or building that has been made or repaired by the qualified contractor. Landscaping and other similar work do not qualify under the definition of "buildings and articles" as stated in the Constitution. For that type of work, the contractor is required to perfect a statutory lien or bond claim to protect his interests.
- Constitutional liens are not available for public works buildings or projects.
- Constitutional liens do not specifically provide for the recovery of attorneys' fees. However, the Texas Civil Practice and Remedies Code provides for the recovery of attorneys' fees if the claim is for rendered services, performed labor or furnished material.
This said, a contractor should be aware of all applicable lien deadlines as outlined in the Property Code. When available, contractors should always perfect a statutory lien or bond claim to secure their rights and not rely solely on the protection of a constitutional lien as an automatic remedy. And, while it is beneficial for a contractor to understand all of his remedies including the constitutional lien, contractors should consult the Property Code, Constitution and a practitioner in construction law to fully understand all applicable requirements for perfecting their lien rights.
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