By QUINN MURPHY
The scenario is all too common. Your construction company provided valuable construction services to a project many months ago, but you still have not been paid. You hear rumors that the upstream contractor is struggling financially, but the contractor assures you payment will be made so you don’t file a mechanics lien.
Then it happens.
The contractor files for bankruptcy and your attorney confirms your mechanics lien rights have expired. With no contractor to pursue for payment, and no legal ability to pursue the project property directly via a mechanics lien foreclosure, your likelihood of getting paid appears slim.
But no matter how slim your prospects may appear, all hope is not lost. To the contrary, three legal tools are readily available to contractors seeking to secure payment, even in the most difficult of economics predicaments.
The stop notice” is one of the most powerful tools to secure payment from project owners in the event of upstream contractor illiquidity. A stop notice is contractor remedy created by state law, in which the contractor who is owned payment instructs the project owner not to pay the upstream contractor until you have been paid in full. The stop notice attaches to project funds, not property, and is limited to the amount you are owed on the project. Stop notices are such a powerful tool and so effective at securing payment that they have been challenged (and struck down) in several states as unconstitutional. Currently, the stop notice only remains a statutory remedy in Alaska, Arizona, California and Washington, and only California allows stop notices on public projects. In the event your upstream contractor fails to make payment or goes out of business while you are still owed payment on a project located in one of these respective states, contractors should utilize this powerful statutory remedy.
Unjust Enrichment Claim
Unjust enrichment is a litigation cause of action that contractors can file against project owners for overdue payment if the owner has accepted the benefit of contractor’s labor and material without paying the upstream contractor for it. On projects where contractors do not have a contract with the owner and thus no breach of contract claim, contractors can sue the owner for unjust enrichment if the owner has not paid the upstream contractor for your work. If owner payment has been made but that payment has simply not made its way down the chain to you, then the owner has been enriched but the law does not consider it “unjust,” thus precluding you from asserting the claim. But if the owner has not paid but has received and retained the benefit of your work, you may sue the owner directly for the reasonable value of services rendered (usually your contract amount) under the legal theory of unjust enrichment.
General contractors are required to post payment bonds on almost all public projects throughout the United States. This requirement is intended to form substitute security for the lack of mechanics lien rights on most public project property. Payment bonds may also be required on private projects if the owner contractually requires it. Payment bonds allow downstream contractors to assert their non-payment claim directly against the payment bond. When a claim against the bond is received, the bond surety will evaluate the claim and pay amounts deemed to have merit. It is not atypical for the surety to require strict proof that payment is required, but if the downstream contractor’s claim is proven, payment should be made. In the event of upstream contractor illiquidity, payment bonds are a robust form of security and should be pursued in accordance with their contractual prerequisites and procedures.
Non-payment for work performed has become an unfortunate and increasing reality in the construction industry and bankruptcy claims are projected to increase in the years to come. By understanding all available avenues to secure payment, even when your upstream contractor files for bankruptcy, contractors can secure payment and continue to operate in even the most challenging economic conditions.
Quinn Murphy heads both the construction and receivable recovery industry teams at Sandberg Phoenix & von Gontard P.C. He represents contractors in non-payment claims in all 50 states and in helping contractors create internal collections policies that maximize net recovery. Murphy can be reached at email@example.com.