Can the Trust Fund Act be Waived

Gray Reed
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Gray Reed

The general prohibition against waiving lien rights under Chapter 53 of the Texas Property Code has been written about extensively, and is well known through the industry.  However, the Construction Trust Fund Act (Ch. 162 of the Texas Property Code) does not contain any such prohibition.  From the Act itself, it is not clear whether construction trust fund rights can be waived or not.  Less than two years ago, the Texas Fourteenth Court of Appeals considered this issue, among several others, in Mesa Southern CWS Acquisition, LP v. Deep Energy Exploration Partners, LLC.  In that case, the Court considered the following provision:

CONTRACTOR shall promptly pay all bills, other indebtedness for labor and for materials furnished or purchased by it involved in or arising out of this Agreement, and shall exhibit receipted payrolls for all labor employed, and receipted statements or invoices for all material used. To the maximum extent permitted by applicable law, CONTRACTOR agrees that, in consideration for entering into this Agreement, CONTRACTOR irrevocably waives any and all rights to lien, sequester, attach, seize or assert a privilege over the Work performed by CONTRACTOR, the real property upon which the Work is located and any hydrocarbon product associated with the Work. CONTRACTOR acknowledges that in entering into this Agreement, CONTRACTOR is relying on the creditworthiness of COMPANY and shall look solely and exclusively to COMPANY for payment and shall not rely on any statutory, common law or other right to seize, attach, sequester, assert a privilege, lien or otherwise encumber the real property of COMPANY or upon which the Work is located or any hydrocarbon associated therewith. Accordingly, CONTRACTOR agrees to keep and maintain the Work free from any liens or privileges asserted by CONTRACTOR or any of its subcontractors both during and after completion of the Work under this Agreement.

The operator (i.e., the COMPANY) filed for bankruptcy.  The Contractor filed suit to foreclose its mineral lien and asserted trust fund claims against the parent company of the operator.  The trial court granted the parent company’s motion for summary judgment apparently based on the above provision.  The appeals court affirmed the trial court holding that the above provision waived the Contractor’s right to pursue anyone other than the Company for payment.  The appeals court held that the above provision could – and did – waive contractor’s trust fund rights (and its mineral lien rights which we previously wrote about here).  This, as far as I know, is the first Texas court to hold that trust fund rights may be waived by contract.  This opinion is unpublished and has not yet been cited by any other opinions for this proposition.  Stay tuned.

For now, suppliers and subcontractors should be wary of any language purporting to waive their construction trust fund rights.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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