Page v. Structural Wood Components, Inc.

102 S.W.3d 720, 46 Tex. Sup. Ct. J. 561, 2003 Tex. LEXIS 42, 2002 WL 32069568

• Court: Texas Supreme Court
• Decided: April 3, 2003
• Docket: 01-1122
• Status: Published

Opinions

Chief Justice PHILLIPS

delivered the opinion of the Court,

in which Justice HECHT, Justice OWEN, Justice O’NEILL, Justice SCHNEIDER, Justice SMITH, and Justice WAINWRIGHT joined.

Chapter 53 of the Property Code permits a construction subcontractor to claim a hen on funds retained by the owner if the subcontractor “(1) sends the notices required by this chapter in the time and manner required; and (2) files an affidavit claiming a hen not later than the 30th day after the work is completed.” Tex. PROP. Code § 53.103. In this case, the owner terminated the general contractor and hired other contractors to complete the project. The question before us is when, in fulfilling the affidavit requirement of the statute, “work” is completed. The subcontractor here filed its affidavit thirty-one days after the original contract was terminated but well before subsequent contractors finished the project. The court of appeals held that work is completed when the requirements of the initial contract are finished, either by the first contractor or by subsequent contractors. 57 S.W.3d 524. Because we conclude that work must be defined in relation to a particular contract, and that the work under that contract was completed when the contract was terminated, we hold that the affidavit was not timely filed. Consequently, we reverse the court of appeals’ judgment and render judgment that the subcontractor take nothing.

I

In 1997, Herman C. Page hired Mark Sepolio as general contractor on a $300,000 remodeling and expansion project for a building that Page owned in Houston. Se-polio in turn hired several subcontractors, including Structural Wood Components, Inc. (Structural Wood), to provide labor and materials. Structural Wood completed its portion of the job in mid-March, 1998. As work progressed on the construction, Page made periodic payments to Sepolio totaling $270,000. Before the project was finished, however, Page and Sepo-lio quarreled over the work, and Sepolio requested additional funds to finish the project. Page refused, and on April 14, 1998, he terminated Sepolio’s contract. Page then hired six new contractors to finish the construction. Without hiring additional subcontractors, the new contractors completed the project on July 21, 1998, for a total payment of $27,074.43.

Meanwhile, because Sepolio failed to pay in full for its labor and materials, Structural Wood filed an affidavit claiming a lien on the property on May 15, 1998, thirty-one days after Page terminated the contract with Sepolio. Structural Wood subsequently filed suit to foreclose on its lien. After a bench trial, the trial court concluded that the work was completed on July 21, 1998, when the replacement contractors finished the project. The trial court held Sepolio and Page jointly and severally liable to Structural Wood for $11,861 in actual damages plus pre- and post-judgment interest and costs. The court further ordered foreclosure of the lien on Page’s property and held Page individually liable for $4,000 in attorney’s fees. Page appealed and the court of appeals reformed the judgment to eliminate the foreclosure order, holding that no evidence supported the trial court’s finding that Page had failed to retain ten percent of the contract price as required by section 53.101 of the Property Code. 57 S.W.3d at 529. However, based on section 53.103, the court of appeals upheld the personal judgment against Page, concluding that Structural Wood would still be entitled to a hen on retained funds as long as the lien affidavit was timely filed. Id. at 531-32. Like the trial court, the court of appeals interpreted the statutory definition of completion as the date when the additional contractors finished the project in July 1998. Id.

II

The Texas Property Code requires owners to retain either “10 percent of the contract price of the work to the owner” or “10 percent of the value of the work ... using the contract price or, if there is no contract price, using the reasonable value of the completed work” for “30 days after the work is completed.” Tex. Prop.Code § 53.101. These retained funds “secure the payment of artisans and mechanics who perform labor or service,” including subcontractors such as Structural Wood. Id. § 53.102. A subcontractor or other claimant who wants to make a claim on that retainage must properly give notice and file “an affidavit claiming a lien not later than the 30th day after the work is completed.” Id. § 53.103. The period during which a claimant can and must file a lien affidavit under section 53.103 is therefore the same period that an owner can and must hold retainage under section 53.101— thirty days after the completion of work. It is consequently in the best interest of all construction participants to know when the thirty-day period terminates — the owner so that it can release the remaining funds, the original contractor so that it can budget for its final payment, and the claimant so that it can file the lien affidavit before that date.

To determine when the thirty-day period ends, we look to the statutory definitions of “work” and “completion of an original contract.” The Property Code provides that “ ‘[cjompletion’ of an original contract means the actual completion of the work, including any extras or change orders reasonably required or contemplated under the original contract....” Tex. Prop.Code § 53.001(15).¹ The Code defines “work” as “any part of construction of repair performed under an original contract.” Tex. PROp.Code § 53.001(14). The parties’ statutory interpretations focus on different words within these definitions.

Page focuses on the phrase “under an original contract”² and contends that work under an individual contract should be deemed completed when the contract is terminated or abandoned. He argues that just as a contract’s retainage amount will change when the contract price is later modified, so too should the retainage period change when the work is modified. Page argues that the work contemplated under a contract is necessarily completed when a contract is terminated, as no additional work is contemplated under that contract.

Structural Wood focuses on the word “contemplated” and counters that because the statute requires “actual completion of the work ... reasonably required or contemplated under the original contract,” a court should determine completion based on when all the work initially contemplated under the original contract is finished. In this case, the original contract contemplated the remodeling and expansion of the building, so the lien affidavit could be filed at any time within thirty days of the project’s completion. In accepting this interpretation, the court of appeals noted that the statute did not “specify that the work only be done by the contractor who started it, as opposed to a substitute contractor.” 57 S.W.3d at 531. Structural Wood argues that the alternative interpretation urged by Page works a hardship on subcontractors, who must file their lien affidavits in a shorter time and who may not know if an owner has terminated the general contractor. Structural Wood posits that only its approach comports with the requirement that courts interpret the mechanic’s lien statute liberally in order to protect hen claimants. See, e.g., First Nat’l Bank v. Sledge, 653 S.W.2d 283, 288 (Tex.1983).³

Although there are strong arguments supporting both interpretations, we conclude that the greater weight of authority supports Page’s contention that the work ends when a contract is terminated. The history of the mechanic’s lien statute demonstrates the Legislature’s intent to make retainage requirements dependent on individual contracts. A previous version of the mechanic’s lien statute phrased the retain-age requirement as:

ten per cent (10%) of the contract price to the owner ... of such work, or ten per cent (10%) of the value of same, measured by the proportion that the work done bears to the work to be done, using the contract price or, if none, the reasonable value of the completed work as a basis of computing value.

Act of June 17, 1961, 57th Leg., ch. 382, § 9, 1961 Tex. Gen. Laws 869 (repealed 1983) (current version at Tex. Prop.Code § 53.101). In Hayek v. Western Steel Co., 478 S.W.2d 786, 792 (Tex.1972), the Court interpreted this language to mean that the owner must retain ten percent of the project’s cost regardless of how many individual construction contracts were awarded. Therefore, we held that a subcontractor who had supplied steel and concrete to the foundation contractor could bring a retain-age claim not just for ten percent of the value of the foundation contract, but rather for ten percent of the entire cost of building the home. Id.

The Court’s decision in Hayek focused on protecting hen claimants who might need to share in the retainage fund, based on the Legislature’s “broad extension of protection and sharing in this fund to a new class of persons (materialmen).” Id. at 793. However, the Legislature determined that Hayek placed too great a burden on owners and original contractors by creating “an unreasonable retainage requirement on owners who enter into original contracts.” Act of May 16, 1973, 63rd Leg., ch. 96, § 3, 1973 Tex. Gen. Laws 215 (repealed 1983) (current version at Tex. Prop.Code § 53.001). In response, the Legislature amended the statute at its next regular session. The bill analysis stated that the “original intent of the legislation was for the 10% retainage requirement to apply to each individual contract, not the total cost of the job” and that the bill’s purpose was to “carry out the intent of the original legislation which created the 10% retainage requirement by limiting the 10% to each individual contract.... ” House Comm. on Judiciary, Bill Analysis, Tex. H.B. 1059, 63rd Leg., R.S. (1973). The new language added references to “an original contract” in the definitions of “work” and “contract price.” “Work” was defined as “any construction or repair ... which is performed pursuant to an original contract,” and “contract price” was defined as “the cost to the owner for any construction or repair ... which is performed pursuant to an original contract.” Act of May 16, 1973, 63rd Leg., ch. 96, § 2(d), 1973 Tex. Gen. Laws 214 (repealed 1983) (current version at Tex. Prop.Code § 53.001).

Focusing on the work initially contemplated may give a subcontractor more time to perfect a lien, but it may also greatly delay payment for contractors in general. As Justice WalkeR pointed out in his Hayek dissent, focusing on the entire project instead of the individual contracts means that a contractor “who has fully performed by constructing the foundation of the building ... cannot be paid in full until 30 days after the painting contractor has finally completed the last work on the building. This may be several years after the work of the foundation contractor was completed.” Hayek, 478 S.W.2d at 797 (Walker, J., dissenting). Under Structural Wood’s interpretation of the current statute, an owner who terminated a general contract before the construction project was completely finished would not have to release the ten percent retainage until thirty days after all the new contractors finished the job. Even if an economic downturn postponed completion for years, the terminated general contractor could not claim its final payment until the project was later completed. Such an indefinite delay in payment is, we believe, exactly what the Legislature was trying to prevent when it added references to “an original contract” in its definitions of “contract price” and “work.” See Tex. Prop.Code § 53.001(1), (14).

Hardship caused by the possibility of such delay would not be limited just to general contractors, but would also affect lien claimants generally. A longer retain-age period would give potential lien claimants a longer time in which to file their affidavits, but would also delay a lien claimant’s ability to enforce a lien on the owner’s retainage. A subcontractor who had finished its work early — for example, the subcontractor who laid the foundation for a building — would take little comfort in having an extended period in which to claim a hen on the owner’s retained funds if those funds were retained for many months or years.

Nor do we agree with Structural Wood’s contention that subcontractors need to be able to rely on the work initially contemplated under the original contract in order to know when the thirty-day period begins to run. Under our interpretation, it is true that a subcontractor would not be able to rely on a visual examination of the worksite in order to determine whether the work has been completed. A subcontractor who viewed a half-completed project and assumed that the lien affidavit was not yet due would run the risk that the general contract had been terminated and that the affidavit deadline had passed. But mere visual examination may not be enough under either interpretation. To borrow the analogy from the Hayek dissent, even under Structural Wood’s interpretation a foundation subcontractor would likely have no way to know when an interi- or-painting subcontractor finished painting, and therefore would not know when the work contemplated by the general contract was finished. Recognizing this hardship, a recent treatise noted that “[i]n many situations, it is difficult to ascertain when all the work is actually completed; therefore, prudent claimants will file their hen no later than 30 days after the date they have finished their own work on the job site.” STERLING W. STEVES & BRENDA T. Cubbage, The Complete Guide to Mechanic’s & Materialman’s Lien Laws of Texas § 3.8.[1] at 3-26 (4th ed.2002). Subcontractors who fohow this precaution and file the lien affidavit within thirty days of completing their own work will remain fully protected, even if the general contract is terminated or abandoned.

Finally, the dissent emphasizes that the Legislature’s “definition of ‘completion’ does not include any reference to whether a contract is abandoned or terminated [but] simply defines ‘completion’ as ‘actual completion.’ ” 102 S.W.3d at 728. However, the Legislature did not define the word “completion” by itself; rather, it defined the phrase “ ‘completion’ of an original contract.” Tex. Prop.Code § 53.001(15). Moreover, the Legislature specified that the term “includ[es] any extras or change orders reasonably required or contemplated” by the contract. Id. Thus, if the parties add additional work to the contract, the original contract will not be completed until that work is also completed. Likewise, if the parties scale back a project, the original contract will be completed when the reduced work is completed. If the owner or the contractor terminates the contract, then no additional work can be contemplated under that original contract.

The mechanic’s hen statute recognizes that construction contracts often change as a project progresses. As one commentator has observed, the retainage requirement is calculated “upon the contract price, as the same may be adjusted from time to time.” 1 Eldon L. Youngblood, Youngblood on Texas Mechanics’ Liens, § 803.1[b] at 8-20 (2d ed.1999). While the retainage may be adjusted upward if additional work is added to the contract, the price may also be adjusted downward. Further, the commentator recognizes that terminated contracts are not uncommon; he writes that “[o]ne eventuality that usually adjusts the contract price and, commensurately, the amount of required re-tainage, is the abandonment of the work by the original contractor.” Id.

Texas courts have long recognized that contract modifications — including termination — can change the amount of funds required to be retained under the contract. See, e.g., McKalip v. Smith Bldg. & Masonry Supply, Inc., 599 S.W.2d 884, 885-87 (Tex.Civ.App.-Waco 1980, writ refd n.r.e.); Dowdy v. Hale Supply Co., 498 S.W.2d 716, 721-22 (Tex.Civ.App.-Fort Worth 1973, no writ). It is therefore consistent to say that contract modifications can also change the work contemplated by the contract, and, by implication, the retainage period. When a contract is terminated, courts have modified the retainage requirement to require retainage of ten percent of the value of the work prior to termination, recognizing that no further payments are contemplated under a terminated contract. See, e.g., Dowdy, 498 S.W.2d at 722. Likewise, no future work is contemplated under a terminated contract, and we therefore conclude that “completion of work” includes a situation in which the initial contract is terminated.

Finally, we note that the Legislature has recently mandated that contractors provide a “disclosure statement” to homeowners engaging in residential construction projects. Tex. Prop.Code § 53.255. The disclosure statement is not applicable in this case, as Page hired Seoplio for a commercial, not a residential, project. Nevertheless, the disclosure statement offers guidance because it provides a plain-English description of an owner’s retain-age duties under the mechanic’s hen statute, and these duties are the same in both residential projects and commercial projects. See Tex. PROp.Code § 53.101. The disclosure statement informs the owner that: “During construction and for 30 days after final completion, termination, or abandonment of the contract ... you should withhold or cause your lender to withhold 10 percent of the amount of payments made for the work performed by your contractor. This is sometimes referred to as ‘statutory retainage.’” Tex. PROp.Code § 53.255(b). The Legislature’s description of the statutory retainage requirement indicates that the Legislature did not intend to require an owner to hold on to the statutory retainage for more than thirty days after the contract’s termination.

Ill

We conclude that the construction contract and the work performed thereunder are complete at the time that the contract is terminated or abandoned, so that the lien affidavit must therefore be filed within thirty days of the contract’s termination. Thus, we hold that Structural Wood’s affidavit was not timely filed in this case, as it was filed thirty-one days after Page terminated Sepolio’s construction contract. We accordingly reverse the court of appeals’ judgment and render judgment that Structural Wood take nothing against Page.

Justice ENOCH filed a dissenting opinion, in which Justice JEFFERSON joined.

1 . At the time this dispute arose, this definition was found in 53.106(e). The statute was amended in 1997 to move the definition of ‘completion’ of an original contract” to Property Code § 53.001(15). For clarity, we refer to the current section 53.001(15).

2 . The dissent is premised on the notion that "Sepolio’s contract was the original contract and that all the work done was work contemplated under that contract....” 102 S.W.3d at 730. "Original contract” does not mean the contract as originally written, however. Rather, the Property Code defines "original contract” as "an agreement to which an owner is a party either directly or by implication of law.” Tex. Prop.Code § 53.001(6). An amended contract can therefore be an "original contract” under the statute, and the owner may enter into a number of "original contracts” with different contractors. In this case, Page had at least seven original contracts: one with Sepolio and at least six with the replacement contractors.

3 . The dissent observes that "[w]e must not forget that the mechanic’s and materialman’s lien statutes are meant to protect the subcontractor, not the general contractor.” 102 S.W.3d at 731 (emphasis in original). However, the statute is not designed to protect only subcontractors. Rather, we have held that "the mechanic’s and materialman’s lien statutes of this State will be liberally construed for the purpose of protecting laborers and materialmen.” First Nat’l Bank v. Whirlpool Corp., 517 S.W.2d 262, 269 (Tex.1974). Although the lien claimant in this particular case is a subcontractor, general contractors may also provide labor and materials. Consequently, we cannot ignore the effect of our interpretation on general contractors: we must consider the statute as it applies to all laborers and suppliers of material.