Construction Alert: "Personal Liability for Fraudulent Pay Applications"

A false notarized payment application signed by a Contractor and submitted to an Owner may make both the Contractor and the person who signed the false application personally liable for damages suffered by the Owner.

A recent Texas Court of Appeals opinion holds that a person who signs a notarized payment application is personally liable to the Owner if the representations to the Owner in the application are fraudulent.  In Keith B. Alexander vs. Eddie Kent, the Contractor went broke while the job was pending and did not pay all of the subcontractors.  However, the principal of the Contractor continued to sign notarized payment applications that contained the following representation to the Owner:

The undersigned Contractor certifies that to the best of the Contractor’s knowledge, information and belief the Work covered by this Application for Payment has been completed in accordance with the Contract Documents, that all amounts have been paid by the Contractor for Work for which previous Certificates of Payment were issued and payments received from Owner, and that current payment shown herein is now due.

This representation was signed by Keith Alexander as President of the Contractor. The Owner of the Project chose not to pursue the bankrupt Contractor, but sought to hold Alexander personally liable.  The trial court found that these representations were fraudulent because the subcontractors were not paid as represented and Alexander knew that when he sent them to the Owner for payment.  Because the Owner relied on these misrepresentations in continuing to make payments, Alexander was found personally liable.  The Fort Worth Court of Appeals affirmed the judgment against Alexander. 

The message is clear.  Contractors cannot file false payment applications and expect to receive the normal protection from liability that corporations or other business entities may offer. 

On a side note, because this claim was based on fraud, rather than breach of contract, the Court of Appeals  reversed the trial court’s award of attorneys’ fees to the Project Owner.  Attorneys’ fees are recoverable for breach of contract, but not for fraud, with possible exceptions of seeking attorneys’ fees as an element of punitive damages or under certain fraud statutes that were not in play here.  In this case, no attorney’s fees were awarded on appeal, although costs were awarded. 

If you have any questions about this case, please contact David Peden, or any member of our Construction Law Group at Porter Hedges LLP.