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Alternative to a Mechanic’s Lien – UCC Filing Part 2

March 7, 2011 By Leave a Comment

I first need to apologize for missing a few months of my reminders. The last few months have been a perfect storm of trials for me and I always put a high priority on making sure I’m as prepared as possible. So, some of the peripheral items do get put on the back burner sometimes.

Last time, I discussed the distinctions between “fixtures” and “non-fixtures” in construction projects and also explained why this distinction is important to a contractor. I also discussed how to perfect a security interest in a non-fixture. In this article, I want to continue this series and discuss ways to perfect your security interests in fixtures and how these UCC filings help you gain priority over other potential claimants (such as banks or other lien holders).

To recap, a “Fixture” means goods that have become so related to a particular real property that an interest in them arises under the real property law of the state in which the real property is situated. In other words, fixtures are, generally, those products which are physically attached to the building. There are numerous examples of this on a construction project – carpet, tile, countertops, and bathtubs.

A party with a security interest in goods which are considered a fixture must perfect this interest by making a “fixture filing.” Such is accomplished by filing a financing statement in the county where a mortgage on the real property would be recorded. In addition to the usual requirements for a financing statement (as were discussed last time - UCC Filing – Part 1), a fixture filing financing statement must contain the legal description of the real property to which the fixture is attached.

Determining priority in relation to these types of filings can be extremely tricky. However, the general rule is that in a contest between a holder of a security interest in a fixture (i.e. you, for example) and a holder of an interest in the real property to which the fixture is attached (i.e. the mortgagor, for example), the first party to file a fixture filing or record its real property interest prevails (which would almost always be the mortgagor).

However, a contractor can prevail over a mortgagor or someone with a prior interest, in the following situations:

1.   The security interest is perfected in any manner authorized by the code PRIOR to affixing the good to the property. In this case, that security interest will prevail over a real property interest if (1) the collateral is a readily removable office or factory machine; (2) the collateral is readily removable equipment that is not primarily used or leased for use in the operation of real property; or (3) the collateral is a readily removable replacement of a domestic appliance that is a consumer good.

2.   A security interest in fixtures, whether or not perfected, has priority over the conflicting interest of an encumbrancer or owner if (1) the encumbrancer or owner has, in an authenticated record, consented to the security interest or disclaimed interest in the goods as fixtures or (2) the debtor has a right to remove the goods against the encumbrancer or owner. This is something that would have to be included within a security agreement contained within your contracts.

3.   And, if you are not dealing with a construction mortgage but instead are dealing with a conventional mortgage or home equity line of credit (such as in remodel situations), a secured party who makes a fixture filing within 20 days after the fixture was attached to the property (i.e. you) will prevail over a real property interest in the same fixture that was recorded prior to affixation (i.e. the mortgagor).

In layman’s terms, what does this mean to you? Those services which are not the initial construction of a residential or commercial project have a high probability of falling within Exception 3, listed above. If you don’t fit into Exception 3, you can easily fit under Exception 2 and protect your interest in the fixtures you supply if you ensure that your contracts have a security agreement within the terms which is signed and consented to by all owners of the property. If you don’t fall within Exception 3 and do not have your contractual language in order, pursuant to Exception 2, the only thing you can do is see if the goods that you are providing to the Project are goods designated in Nos. 1-3 within Exception 1.

Generally, if you provide goods which can be considered a fixture to a construction project, the real point is that you can usually protect your interest but you have to have a plan, which is set prior to the delivery of the goods, as to how you are going to ensure that the goods you provide fall within one of these exceptions and, thus, have priority over other encumberances to the property.

While this might sound very complicated to a non-lawyer, this is a perfect example of why business owners should meet with their attorney, periodically, to discuss their business, what they are doing, what the business goals are, and how they can legally protect all of their interests. A lawyer can usually help make sure that your corporate formalities, contracts, employment policies, financial interests, etc. are all in order where they protect you. The real trick is seeking the advice before the problems arise!!!

Filed Under: Construction Law Tagged With: , , ,

Alternative to a Mechanic’s Lien – UCC Filing

December 7, 2010 By Leave a Comment

There is a great deal of confusion as to the term “fixtures” in the construction industry and even greater confusion as to what rights a contractor, subcontractor, or supplier has to the fixtures or non-fixtures that are incorporated into a construction project.  Over the next few months, I am going to attempt to explain the difference between a fixture and a non-fixture and provide alternatives to the Texas’ mechanic’s lien process for securing the goods and services provided on a property.

“Fixtures” means goods that have become so related to particular real property that an interest in them arises under the real property law of the state in which the real property is situated.  In other words, Fixtures are generally physically attached to the building.  There are numerous examples of this on a construction project – carpet, tile, countertops, bathtubs, … This should not be confused with the term “removable.”   See http://www.kmdalegal.com/construction-law/foreclosure-of-your-mechanics-lien/

Likewise, “Non-Fixtures” would be those goods which are made a part of a construction project but not permanently affixed as to become an actual part of the property.  For example, furnishings, equipment such as sound systems, tv’s, refrigerators and light fixtures, etc.

You might wonder how this relates to you and how this helps you get paid. I am sure at this point you have either personally been burned or know someone who has been burned by filing a mechanic’s lien on the property only to have your lien “foreclosed out” by the bank leaving your remedies extremely limited.   However, in Texas, there are various filings that you can file with the Secretary of State to secure your interest in the fixture or non-fixture you provide to a property.  This is important to you because, in some situations, you can have priority over a bank that has provided the construction loan for the property thus securing your rights even through a foreclosure.

Now I want to go over how Security Interests in Non-Fixtures works. The Uniform Commercial Code Section (UCC) is the central filing office for certain financing statements and other documents provided for under the Uniform Commercial Code since 1966.  Some of the main documents which are filed are financing statements and certain types of liens.  Securing non-fixtures should be done through the filing of a financing statement with the secretary of state.   The financing statement should state: the name and mailing address of the debtor; the name and mailing address of the secured party; an indication of the collateral covered.   The authenticated security agreement itself may be filed as the financing statement if the parties so desire.  “Authenticated” is defined as signed. The financing statement should be filed as soon as possible but certainly not later than 20 days after the first delivery of goods to the person with whom your contract is with.

I know what you are thinking.  More paperwork?  YES.  With our whole country struggling financially, unfortunately, the primary way to protect yourself is through a paper trail.   The good news is that a financing statement or security agreement are simple forms that you probably can have drawn up one time through an attorney.  This does not have to be complicated but you do have to go through the process of having something customized to your type of business that you can repeatedly use for your various customers and clients.

Next month, I am going to discuss Security Interests in Fixtures and explain how these UCC filings can help you gain priority over other potential claimants

Filed Under: Construction Law Tagged With: , , ,

How to Remove a Mechanic’s Lien – Part 2

September 8, 2010 By Leave a Comment

Last month we started talking about how to remove a mechanic’s lien if it fell into either the category of a valid lien or an invalid/fraudulent lien. This month I would like to cover a third category of liens which are liens that were once considered to be valid but are now past the Texas Property Code’s foreclosure time-frame.

Generally, this situation occurs when an Owner, builder or General Contractor had financial problems and multiple subcontractors have filed liens on the property. Most of these situations involve an Owner / General Contractor or Builder being substantially the same person, i.e. they are owned by the same person or entity but might have different corporate names. In situations where the financial conditions were so dire that multiple liens were placed on property, the property often is foreclosed on by the financial lender. At the foreclosure sale, the Lender will attempt to auction the property and generally opens the bidding at the current value of the existing loan on the property plus interest, penalties and attorney’s fees. At the foreclosure sale, the purchaser takes the property subject to any liens which are not considered “inferior” to the Lender (which by the way is the subject of heated debate). The second alternative is that no one successfully bids at the Foreclosure Sale, the Lender purchases its own loan and then the Lender later sells the property to a subsequent purchaser.

If you purchase the property at a foreclosure sale, you will definitely end up having to figure out how to obtain “clear title” to the property. If you purchase it from the Lender directly and not through a foreclosure sale, you could possibly have trouble obtaining a loan to purchase the property thus requiring you or the lender to obtain “clear title” to the property.

These situation can be messy and not for the faint of heart. The best way I have seen to clean all these up is to notify all of the lien holders that the home was purchased at the foreclosure sale by the Lender or a new owner. The bank / owner would want to demand that the lien holder release its lien. If the bank / owner has some cash and some room to play with it is always good to offer some sort of settlement (for instance .10-.25 cents on the dollar) for a sworn affidavit releasing the lien. The bank / owner would need to threaten the lien holder that failure to come to an agreement or remove the lien would necessitate the filing of a lawsuit against them for improper cloud of title. The only way this would truly work would be if the statute of limitations had run and the lien holder was truly not able to foreclose their lien out. This can get complicated because industrious attorneys can always try to find ways to say that their lien was not truly “inferior.” If it was another lien holder that foreclosed the lien instead of the bank, the question of whether or not the other lien holders’ liens were “inferior” to the foreclosing lien holder can get even more complicated.

Generally, you should know that the limitations are as follows:

• Non-Residential – 2 years after last day claimant could have filed lien affidavit or 1 year after completion / abandonment / termination of original contract, whichever comes last.

• Residential – 1 year after last day claimant could have filed lien affidavit or 1 year after completion / abandonment / termination of original contract, whichever comes last.

• Bond on Lien – 1 year from notice of the bond filed.

In conclusion, buying foreclosed properties, whether they be lender or other lien holder foreclosures, can be a messy and complicated process. There are generally methods of trying to obtain clear title. However, they can only be successful if your purchase truly wiped out their lien pursuant to the Texas Property Code and subsequent case law. Additionally, these methods can be time consuming and costly. If there are liens on the property you purchased, you are probably going to have a hard time getting a title policy on the property without having the liens removed or released. The only way to do this would be to (1) come to an agreement for the release by the lien holder; or (2) obtain an order from a Court declaring the liens to be invalid and entering an order removing them from the county deed records. For instance, if there are 25 mechanic’s liens, you might be able to find 15 of them and convince them to release their liens. However, that still leaves the other 10 lien claimants that you will eventually have to sue to try and obtain an Order removing them from the property.

Remember, it is best not to go into these transactions blind. Have a title report pulled prior to purchasing the property and consult with your banking, title and legal advisors to make sure that you would be able to obtain clear title on the property if you in fact purchased it.

Filed Under: Construction Law Tagged With: , , ,

How to Remove a Mechanic’s Lien – Part 1

August 4, 2010 By Leave a Comment

I noticed that my website has been getting more traffic with questions on what steps need to be taken to remove a lien, so I want to write a series of posts meant to explain the process one needs to go through to remove a lien.  We’ll start with a few categories the liens may fall under.  The first category we will discuss are valid liens where the money is owed and not disputed; the second category would be invalid or disputed liens; and the third category would be liens which were once valid but a foreclosure proceeding had not been brought within the statute of limitations.  I’ll cover the first two categories in this article.

The first one is, of course, the easiest.  How does an owner, etc. remove a lien which is technically considered valid (meaning, the lien was filed timely and properly perfected in accordance with the Texas Constitution and the Texas Property Code and is a valid assertion of non-payment) and which is not disputed.  The typical way to handle these liens is to work out a settlement with the lien holder for full or partial payment in return for a sworn affidavit releasing the lien which is then filed with the county in which the property is located.

The second one is a bit tougher.  There are many reasons why a lien can be disputed or considered invalid.  One being that a lien can be invalid because the proper procedures/language/timeframes weren’t followed per the Texas Constitution and the Texas Property Code (Texas sometimes can be as picky as Virginia: read here at Construction Law Musings).  Another reason for which a lien can be invalid is due to reasons of fraud (such as a contractor falsely/fraudulently placing a mechanic’s lien on a property) or because the lien amount is disputed.

Regardless of why you dispute the lien or believe it is invalid, you follow the same general steps.  Typically, I would start with a demand letter explaining why the lien is invalid or disputed and demanding that the lien be removed.  Usually, it involves threats to file a trespass to try title, fraud, breach of contract, or similar suit to remove the lien.  I have been successful with just a demand letter in many cases.  The success of a demand letter depends many times on whether the Claimant has an attorney that knows and understands the quagmire of Texas’ Mechanic’s Lien statutes and is really willing to look at the facts and give their client the opinion that ‘yes this deadline/notice, etc. was missed so the lien is invalid’ or ‘you failed to include the mandatory language in your notice letter or lien,  you should remove the lien or be possibly subject to substantial damages and attorney’s fees in a lawsuit.’  Sometimes the Claimant is just misinformed, got bad advice, and is just dead set on not removing the lien.

If they still aren’t willing to remove the invalid or disputed lien the last recourse is to file a suit to remove the lien.  You could also possibly bond around the lien, which is rarely done, should be done with caution, and is probably the subject of another blog post.  Both of these options require that you follow through with your threat as contained within your demand letter.  If you file a lawsuit, it could vary in timeframe and costs depending on the facts of the case.  If it was obvious the lien holder didn’t follow the deadlines, didn’t have the right statutory language in the notice or the lien, or did not fit the definition of a service which qualifies for a lien (see blog post Does your work fit the requirements for a mechanic’s lien), etc., the process is relatively simple but can sometimes be a lengthy time before you actually get your case heard by a Judge.  If the situation involving the dispute is a disagreement with the GC or contractor due to costs, it may be a very fact intensive case based on the events that lead up to non-payment.  However, on the other hand, you might get lucky and have a case where you file the lawsuit and actually get a default judgment removing the lien because the Defendant never responds.  If you prevail you will be able to file the judgment with the county to remove the lien.

So as you can tell, depending on the facts, the fight to remove the lien may not always be an easy one.  Next time I’ll go over what you would need to do to clear the title of old liens that are past the statute of limitations timeframe.

Filed Under: Construction Law Tagged With: , , , ,

August 15th – Texas Mechanic’s Lien Deadlines

August 4, 2010 By Leave a Comment

1st Tier Commercial Claimants:

  • 1st notice letter to the GC is timely for work done any time after June 1, 2010.
  • 2nd notice letter to the GC & Owner is timely for work done any time after May 1, 2010.
  • Your mechanic’s lien is timely for work done any time after April 1, 2010.

Residential – 2nd Tier Commercial – Specially Fabricated Claimants:

  • Notice letter to the GC & Owner is timely for work done any time after June 1, 2010.
  • Your mechanic’s lien is timely for work done any time after May 1, 2010.
Filed Under: Construction Law, Mechanic's Lien Reminders Tagged With: , ,
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