This weekend was dedicated to The Rise of Gru. I love Gru so much that when my kids ask for money, my best Gru voice says, “Now I know there have been rumors that the bank is no longer financing us… In terms of money, we have no more money. And that’s precisely what many lenders say about distressed projects when the owner fails to make the final payment and the contractor turns to the bank for financing: “We don’t have money for you, entrepreneur! »
In BCD Associates., LLC v Crown BankCA No. N15c-11-062 (Super. Ct. Del, May 2, 2022), trial court found that when a bank pays a contractor directly, it can create a legally binding relationship subject to the terms of the loan to construction agreements with the owner.
The project involved a $13 million construction loan between the lender and the owner to renovate a hotel. The owner and contractor entered into an AIA contract for construction management services. During construction, the contractor would submit payment requests to the lender, who would review and approve invoices for payment. The lender would then pay 90% of the approved payment request and retain the remaining 10% as a holdback. The contractor was supposed to receive the final holdback upon completion, which it did not receive in accordance with the terms of the AIA contract.
Although the contractor asserted numerous claims against the lender – including breach of contract, unjust enrichment, promissory estoppel and misrepresentation – the court ultimately found that the lender breached the contractual obligations owed to the contractor. Applying New Jersey law, the court held:
The controlling documents are the Loan Commitment and the Loan Agreement. The Court acknowledges that [contractor] is not a named party in these agreements. Furthermore, the Court acknowledges that the Loan Agreement expressly provides that there are no third party beneficiaries to the Loan Agreement. But, contractually, factually and practically, [contractor] is the intended third party beneficiary of the Loan Commitment and Loan Agreement. In addition, [owner] and [lender] treaty [contractor] as a third party beneficiary of the applicable agreements.
The court felt it was important that the lender chose to “cut the middle man” by paying the contractor directly at any time. Finally, the court also found sufficient basis to rule in favor of the contractor on its claims of unjust enrichment and promissory estoppel, but was unable to recover for misrepresentation.
Lessons learned. For entrepreneurs, the decision in BCD Associates is a good reminder to look beyond the owner for funding sources. Even if the project lender says there is no more funding, the bank may still be liable if it made direct payments to the contractor during the project. For homeowners and lenders, be aware that your actions can create third-party beneficiaries despite clear language in loan documents to the contrary.