sham contract

What is a Sham Contract, and Why It Matters

The following is adapted from Quit Getting Stiffed.

The entire construction industry runs on credit. A lien is the vehicle used to make the amounts you are owed a secured debt. Your business is a living, breathing part of you. Being prepared on the front end and knowing the definition of a lien is essential to running a profitable business. Understanding how valuable this tool is, and how you can use it on your everyday projects, could be the difference between your construction company going out of business or staying afloat.

Defining a Sham Contract

A sham contract is a mechanism that allows you to have a constitutional lien even if you don’t have an agreement directly with the owner. If the owner and the general contractor are the same person, you can still have a constitutional lien. This normally applies when the property is owned by one company and the general contractor is a different company, but the same person owns or controls both companies. When one person owns or controls both the property and the general contractor, the contract between them is considered a “sham contract,” and the law says that you have a constitutional lien and do not have to comply with all the requirements of a statutory lien.

Negotiate Better Subcontracts

At The Cromeens Law Firm, we have extensive knowledge and understanding of construction contract laws and are licensed in Texas, Louisiana, Georgia, and California. We are often able to solve contract disputes for our clients through informal negotiations, mediation, or arbitration. Work with us to equip yourself with the ability to properly evaluate your risks before you sign and negotiate your next subcontract with greater confidence and ease.

Busting the Sham Contract with Liens

We once had a client who was a painting contractor, Jason. Jason was just starting out, and he did a good job and took great pride in his work. Jason’s biggest and only client at the time was a spec home builder, Huge Homebuilder (“Huge”). Huge was building five different communities all at the same time, and Jason was their interior painter. Jason was paid by the square foot plus materials. The relationship was going well; Huge was a little slow to pay, but there were no big issues. After about a year, Jason started to notice he was always broke, even at the price he was charging.

He should have been making decent money—not anything crazy, but enough not to be broke. After some investigation, Jason discovered that Huge was shorting the square footage they paid him for. Jason would never double-check the square footage he was being paid for; he just trusted that Huge would pay him the right amount. After a review of all of the work he had done for Huge over the last year, it turned out Jason had been shorted more than $100,000. He came to our office on the verge of a mental breakdown and had no idea what to do.

After a review of all of the information, we formulated a plan, and it was one of our best. Turns out that Huge did not own any of the properties that Jason worked on; rather, all of the properties were owned by different companies that had the same name as the subdivision. At first glance, it appeared that Jason did not have any lien rights because he was not hired by the owner and did not send timely notice.

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But upon further investigation, it turned out that the same people who owned Huge owned each of the subdivisions, so the contract between Huge and the owners was a sham contract. Jason therefore had constitutional liens on all of the properties on which he had worked. Jason could only have valid liens on the houses that had not sold. It totaled more than fifty liens in three different counties, but we filed them all. We also filed a lawsuit to foreclose the liens and claims against Huge for the amount owed on houses that we could not file liens against.

Almost every day, we got a call from a title company that one of the houses we had liened was going to closing. They needed to know how much Jason was owed so they could make sure he was paid in full for that property and release the lien. At the end of the day, Jason got everything he was owed. It was a long road, but it was worth it. Jason had leverage because of the liens he could file due to the sham contract between Huge and the owners of the properties.

You Need the Help of a Qualified Construction Attorney

Jason was in what seemed like a hopeless situation. If he had not decided to seek legal assistance, his business could have been in shambles. Recognizing that there is a problem and asking for help are the first two big steps to making change happen. When used properly, a lien is the key to securing payment in the construction world. If your lien is invalid, however, not only will you not get paid the money you are owed, but you may have to pay attorney fees incurred to remove your lien or even a $10,000 penalty for filing a fraudulent lien. Make sure you are teaming up with a competent construction lawyer who knows construction law.

In Conclusion

Be proactive and be smart. Don’t just go through the steps blindly and trust that people are always going to do the right thing. Take the time to double-check every part of your process and cover your a$$. Someone’s word in this industry, unfortunately, is not a sure thing. If you find yourself in a situation like Jason or just want to be proactive in your construction projects, call a team of experienced construction lawyers and talk to them about your collection and lien rights. The construction attorneys at The Cromeens Law Firm are ready to take your call and guide you. Call us now at 713-715-7334. You can be sure that this is not a sham—knowing your constitutional lien rights is the first step in securing your right to payment!

For more advice on a Texas contractors’ collection and lien rights, you can find Quit Getting Stiffed on Amazon. You can also find materials referenced in Quit Getting Stiffed, this blog, and correlating information on collection and lien rights for all 50 states in the U.S. at subcontractorinstitute.com.

About Karalynn Cromeens

Author of Quit Getting Screwed, Understanding and Negotiating the Subcontract, and creator of The Subcontractor Institute, Karalynn Cromeens has been a licensed attorney for more than seventeen years. She has spent her entire legal career in construction law, advising countless clients on how to avoid litigation. Karalynn is on a mission to educate and inform subcontractors about the importance of understanding their lien and collections rights, sparking change and leveling the playing field in the construction industry.

This article is intended as a general educational overview of the subject matter and is not intended to be a comprehensive survey of recent jurisprudence, nor a substitute for legal advice for a specific legal matter. If you have a legal issue, please consult an attorney.