Contractor Fraud: opened line of credit against our property

[Scott Byer]

I need advice. I am building three new construction single family homes at the same time with a contractor. Cutting to the chase, the contractor put in a draw for $23,000 for framing lumber. We paid him as requested. Months later, we were notified by the lumber yard that the contractor opened a line of credit against our projects and after at least one hot check never made a single payment to them. They have since put a lien against him and each of our projects at approximately $7500 each. 
We feel trapped with him between our contract (which he violated multiple times), the $23k he owes us, and his builder’s warranty. I’ve become utterly aware how naive It is to think this guy will repay us or honor his warranty. 

My main questions concern the line of credit he opened.
1.  Is this fraud on the contractors part?
2.  The lumberyard never contacted us to okay the line of credit. We never knew about it until the lien was being processed. How is this legal and legitimate?   If I take my car in to a mechanic and pay him cash to fix my car he couldn’t use my car as collateral to buy parts, right?  

Any advice or similar experiences out there?  Looking for hope of success getting this resolved. 

[Jay Hinrichs]

Originally posted by @Russell Brazil:

@Jay Hinrichs does new construction, he might have some insite. 

this is very common.. builder has an account with supplier..  supplier supplies labor or materials to your job.. no denying the lumber showed up right..  and was used to frame the house..  so as long as the supplier followed the state liens laws they have a right to lien the property 

or sue for unjust enrichment..  

your issue is solely with the contractor who did not pay his bill.. and took your draw money and used it somewhere else its happened to all of us.. 

now for me after learning this lesson the hard way.  WE pay the suppliers direct and hire the GC on a fee basis.. and of course we DEMAND lien releases other wise no other draws will go out..  this is on new construction remodel little tougher to control .. 

So bottom line contractor owes you money.. lumber supplier has a legit lien most likely and you will pay twice for the framing lumber.

and by the way 7500.00 for framing lumber for a house is soooooo cheap if that was the entire framing package we pay 30 to 50k for lumber and truss's for a 2k to 2500 foot home out our way..  Now I know how you guys in Texas build so cheap at least it appears why.

So going forward just demand to pay suppliers directly.  or at the least proof they have been paid within a few days of you paying.