Non-Payment Case Filed With Texas Supreme Court
An appeal in April, requesting the reversal of a lower court's
ruling that had found that the McGregor Act was a supplier's only
remedy to recoup a loss on a public work contract, has been filed
with the Texas Supreme Court. Organizations such as the American
Subcontractors Association (ASA)filed briefs, urging the court to
overturn the court of appeals' decision. The organizations argued
that the purpose of the McGregor Act is to provide an additional
remedy to subcontractors and suppliers seeking payment for work
they perform on public construction projects, not an exclusive remedy.
In the case, Dealers Electrical Supply Company v. Scoggins Construction
Company, Inc., the court concluded that a joint check agreement
did not provide grounds for a supplier to circumvent the remedy
provided by the payment bond provision of the McGregor Act.
The McGregor Act was intended to provide subcontractors and suppliers
involved in public work contracts a basis for recovery because a
subcontractor or a supplier may not place a lien against a public
building. The act requires that prime contractors, such as Scoggins
Construction Company, Inc. (SCC), execute a performance bond to
the governmental entity if the public work contract exceeds $100,000.
The performance bond is solely for the protection of the governmental
entity awarding the public work contract. The act also requires
a payment bond for public work contracts exceeding $25,000 to be
paid to the governmental entity awarding the public work contract.
The payment bond is solely for the protection and use of payment
bond beneficiaries who have a direct contractual relationship with
the prime contractor or a subcontractor to supply public work labor
While the recourse for remedy is disputed, the facts of the case
Scoggins Construction Company, Inc. (SCC) had been hired as the
general contractor under a public work contract with a Texas school
district to build a school. In accordance with the McGregor Act,
Scoggins executed performance and payment bonds with Colonial American
Casualty and Surety and Fidelity and Deposit Company of Maryland
for the full contract amount of $5,751,000.
Scoggins in turn hired Arturo Bujanos DBA Diamond Industries as
the electrical subcontractor for the project. Dealers Electrical
Supply Co. served as the supplier of the electrical component parts
used in the project.
Subsequently, SCC, Diamond Industries and Dealers Electrical Supply
entered into a "joint check" agreement in an effort to
arrange for Dealers to extend credit to Diamond. The record reflects
that the joint check agreement required SCC to issue joint checks
to Diamond for labor supplied and to Dealers for materials supplied
when Diamond completed its work and submitted a draw. The underlying
dispute arose in May 2002, when Diamond failed to complete its electrical
subcontract with SCC.
SCC claims that Diamond walked off the elementary school project
and absconded with materials that were to be incorporated in the
elementary school project.
SCC claims that it paid $107,440.27 to other subcontractors to
complete the electrical work on the elementary school project and
to complete the alarm system--both tasks were part of Diamond's
subcontract with SCC.
In March 2003, Dealers sent notice to SCC demanding payment for
$78,123.59 in supplies provided to Diamond for the elementary school
project. SCC refused to pay because the items were never incorporated
into the school project and because Diamond did not complete the
project to the satisfaction of the school district.
On June 10, 2003, Dealers filed suit against SCC, Diamond and the
bond companies alleging violations of the McGregor Act, the Trust
Fund Act and chapter 53 of the Texas Property Code. However, Dealers
had to drop its McGregor Act and Texas Property Code claims and
amend its original petition to allege solely violations of the Trust
Fund Act and the joint check agreement as grounds for recovery after
missing statutory notice deadlines.
The trial court awarded Dealers $135,910.08 in damages.
However, the Texas Court of Appeals reversed the judgment, concluding
that the McGregor Act was Dealers' exclusive and mandatory remedy
on the public work contract, thus rendering the Trust Fund Act inapplicable
in this matter. The Trust Fund Act controls the use of construction
funds used to pay supplier and subcontractors. Furthermore, the
court concluded that the joint check agreement did not provide grounds
for Dealers to circumvent the remedy provided by the payment bond
provision of the McGregor Act and that the joint check agreement
did not provide an alternate remedy for Dealers, considering SCC
executed a valid payment bond.
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