Texas Supreme Court Evens Playing Field For Unpaid Subcontractors In Texas

November 3, 2009

The Texas Supreme Court last week, in a ruling in Dealers Electrical Supply Co. v. Scoggins Construction Co., Inc., 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.  Ben Aderholt of the Houston office of Gray Reed & McGraw represented Dealers Electrical Supply before the Supreme Court.

"This ruling is a relief to suppliers from the 13th Court of Appeals' holding," explains Ben Aderholt.  "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 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 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 between 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.

The Dealers v. Scoggins case was tried to a judge in the 398th District Court of Hidalgo County in Edinburg in April 2006. Judge Aida Salinas Flores agreed with the plaintiff that the company could sue on the grounds of the joint check agreement and under the Trust Fund Doctrine. The Trust Fund doctrine holds that, when a general contractor on a construction project receives funds from the owner, the money is held 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 as damages, attorney fees, and interest against Bill Scoggins and Scoggins Construction. Scoggins appealed to the Thirteenth Court of Appeals in Edinburg, which reversed the trial court on the basis that the McGregor Act bond claim was Dealers' exclusive remedy in the case.

The Texas Supreme Court granted Dealers's petition for review and reversed the Thirteenth Court's holding and reasoning.  The Texas Supreme Court rejected the exclusivity theory upon which the Thirteenth Court founded its opinion.  The Court reasoned that the Court of Appeals' holding was contrary to the text and the purpose of the McGregor act and The Construction Trust Fund act.  The Texas Supreme Court held that the McGregor Act is not an exclusive remedy just because a bond was issued.

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