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TX Court Backs Unpaid Subs on GC Claims

Thursday, July 16, 2009

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The Texas Supreme Court has confirmed the right of a construction subcontractor to bring a claim against a general contractor when the sub has missed the strict notice requirements for a claim on a McGregor Act bond.

The ruling came earlier this month in Dealers Electrical Supply Co. v. Scoggins Construction Co. Inc., a case involving an unpaid electrical supplier, but the decision will apply to all subs working on public projects in Texas.

“This ruling is a relief to suppliers from the 13th Court of Appeals’ holding,” explains Ben Aderholt, attorney for the supplier.  “Subcontractors which are usually small businesses working on Texas state and municipal construction projects will know that, when they are not paid, they have recourse on claims in addition to the onerous requirements of the McGregor Act.”

If a subcontractor is not paid for work on a private construction project, he or she can file a lien on the property.  But if the construction is on a public project for a unit of government, a bond is filed and the subcontractor’s usual recourse is to sue on the bond under the McGregor Act.

A claim on a McGregor Act bond has stringent and complex notice requirements: if they are not sent or are sent one day late, the subcontractor will have waived its right to the bond claim.  Many subcontractors are small companies or solos who are not represented by lawyers.  By the time they realize they are not going to be paid, it may already be too late to file a bond claim under the McGregor Act.

Dealers Electrical Supply, an electrical parts supplier, filed suit against Diamond Industries, an electrical subcontractor; Scoggins Construction Company, the general contractor; and Bill R. Scoggins, the president and sole shareholder of Scoggins Construction. Dealers was not paid for electrical materials furnished to Diamond for use in the Ruben Hinojosa Elementary School owned by the Mercedes Independent School District, Mercedes, Texas. The materials were supplied under a joint check agreement among Dealers, Diamond and Scoggins. A joint check agreement is a credit facility frequently used to help a small subcontractor with low or unestablished credit obtain supplies on credit from a supply house.

After trial in April 2006, Judge Aida Salinas Flores ruled that the supplier could sue on the grounds of the joint check agreement and under the Trust Fund Doctrine, which holds that a general contractor who receives funds from the owner must hold the money in a trust for subcontractors and their suppliers. The general contractor has a fiduciary duty to use that fund to pay suppliers and subcontractors, and for direct overhead.

The judge awarded Dealers $135,910.08, but Scoggins appealed to the 13th Court of Appeals in Edinburg, TX. The appellate court reversed the trial court, ruling that the McGregor Act bond claim was Dealers’ exclusive remedy in the case.

The Texas Supreme Court granted Dealers’ petition for review and reversed the Thirteenth Court’s holding and reasoning.  It held that the McGregor Act is not an exclusive remedy just because a bond was issued.

   

Tagged categories: Subcontractors

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