Getting Paid by a Construction Lender When the Project’s Owner Can’t Pay

When a contractor is owed money on a completed, private construction project, and the owner can’t pay, it can be a huge problem.  In most states, the lien of the owner’s construction lender trumps the Mechanics’ Liens, leaving contractors without any realistic way to get paid.  However, an Ohio Appeals Court recently described how a contractor might enforce payment from the construction lender instead of the owner.

The case involved construction of a water park and several hotels in northern Ohio.  Cost overruns had endangered completion of the project, and the bank notified the owners of default.  But, the bank continued to fully disburse the construction loan, so that the project would be completed and would generate the needed money to repay the loan.  Without completion of the project, the bank’s losses would have been much greater.

While the project was still incomplete, a contractor contacted the bank directly, first, when it heard about the cost overruns and was concerned about not getting paid, and later, when it was not paid for some work it had performed.  The bank told the contractor that the construction loan had been fully paid to the project’s owner, but added that there were other sources of funds in the project that were sufficient to cover the remaining completion costs, including the contractor.  In fact, this was false, driven by the bank’s need to get the project finished.  There were no such additional funds.  When the project was completed, the contractor was owed $1.63 million.  It sued the bank.

The court found that the bank made the misstatements in order to induce the contractor to continue its work on the complex, which was in the best interests of the bank.  By misstating that there were other sources of funds available and by concealing that the loan was already in default, the bank essentially was telling the contractor “If you work , you will be paid.”  This created an enforceable oral guarantee, which the contractor could collect against the bank.

General Counsel says:  As a general rule, banks will not talk directly to contractors about the status of an owner’s construction loan.  However, if you are worried about getting paid, you may be able to leverage your remaining completion work in order to get assurances from the bank about payment.  Those assurances may provide another avenue for getting paid in the event of default by the owner.

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