Subcontractors Take Note – Appellate Division Confirms That Construction Lender Has No Duty To Subcontractor Absent Express Promise To Pay

The New Jersey Appellate Division recently ruled in Vollers Excavating and Construction, Inc. v. Citizens Bank of Pennsylvania, Docket No. A-3844-10T1 (March 5, 2012), that a construction lender has no obligation to pay an unpaid subcontractor on a project when the general contractor files for bankruptcy protection.  In Vollers, Vollers was a subcontractor to Opus East LLC (“Opus East”), the general contractor on a project known as Mercer Corporate Center (the “Project”).  Opus East was the sole shareholder of Mercer Corporate Center, LLC (“MCC”), the owner of the Project.  In 2007, MCC entered into a construction loan agreement with Citizens Bank of Pennsylvania (“Citizens”) for $23.3 million to finance the Project.  Also in 2007, Vollers entered into a subcontract agreement with Opus East for excavation, grading and other related services for the Project for approximately $3.3 million.  Vollers had no agreement with Citizens.

Construction on the Project commenced and, in the fall of 2008, Opus East began to experience cost overruns, which were jeopardizing the Project’s viability.  In May 2009, Opus East warned Vollers that Opus East and MCC may discontinue paying subcontractors.  In June 2009, Vollers filed a construction lien against the Project for $505,754.32.  In July 2009, Opus East and MCC filed bankruptcy petitions for relief under Chapter 7. 

With Opus East and MCC both in bankruptcy, Vollers attempted to collect directly from Citizens.  The trial court granted summary judgment to Citizens and dismissed the matter with prejudice.  The trial court concluded that Vollers’ contract was with Opus East (the general contractor), not with Citizens, and there was no evidence that Citizens knew that Opus East and MCC were in default and going into bankruptcy, but wanted Vollers to continue working without pay.   The trial court found no evidence that Citizens had a duty to pay Vollers for services that were rendered to Opus East and/or the Project.

The Appellate Division affirmed substantially for the reasons expressed in the trial court’s oral opinion.  The Appellate Division did expressly note that a lender providing a construction loan owes no duty to an unpaid subcontractor absent the lender’s express promise or assurance of payment.  Here, Vollers had no communications with Citizens, there was no evidence that Citizens made an express promise or assurance to pay Vollers and Citizens did not direct Vollers to continue working on the Project.

The Appellate Division made clear that Vollers was not a party to any of the loan documents between Citizens and MCC and had no rights thereunder.  There was no privity of contract nor any evidence that Vollers was an intended third-party beneficiary of the agreement between MCC and Citizens.  As a result, Citizens had no obligation to pay Vollers pursuant to Vollers’ contract with Opus East, and Vollers was unable to collect from Citizens. 

The Vollers case makes clear that subcontractors have no rights to collect against the construction lender in the event the general contractor or owner files for bankruptcy or otherwise leaves the project, absent some express promise by the lender to pay for the subcontractors’ work on the project. Absent that express undertaking, the subcontractor is limited to the general contractor (or others in privity, if any), owner (through its construction lien rights) and possibly a surety under a payment bond, if applicable, for recovery for its work at a project.  This is important because the subcontractor’s construction lien rights may be of no benefit if the construction lender forecloses on the Project property based on a defaulted construction loan.