Subcontractor Wins Payment Claim Against Bank
Promise Made Results in Debt Paid
By Aileen Leipprandt
In the 2011 case, Schippers Excavating v Crystal Creek Enterprises, LLC and Fifth Third Bank, a subcontractor’s shrewd refusal to continue work without written assurance of payment later paid off when the project went south and the construction lender balked at paying.
In Schippers, the developer / general contractor began a subdivision development, but ran into unforeseen costs because its engineer underestimated the site excavation costs. Concerned that the additional costs exceeded the Developer’s construction loan, the excavator refused to continue working unless Fifth Third Bank, the Developer’s lender, provided written assurance that the excavator would get paid for its work. In response, the bank’s “relationship manager” faxed a letter to the excavator confirming that the Bank would provide the necessary financing for the updated costs. Three months later, however, the Bank stopped funding the project and the Developer later defaulted and filed bankruptcy.
The excavator eventually sued the Bank based upon the Bank’s promise to finance the additional costs. The Bank claimed that the statements in its letter to the excavator were not a clear and definite promise to the excavator, but merely confirmed that financing was in place. The Bank also argued that it was unreasonable for the excavator to rely on the Bank for payment because the excavator’s contract was with the Developer, not the Bank. A jury disagreed with the Bank and returned a verdict in favor of the excavator awarding the excavator its requested damages. The Michigan Court of Appeals affirmed that result.
Lesson learned – contractors must be shrewd about the source and amount of construction financing secured for the project. When in doubt about the owner/developer’s ability to pay, the subcontractor should seek written assurance of payment from the lender or require the developer to post other unencumbered collateral. Otherwise, the contractor may be left holding an empty bag.
Michigan’s Unforeseen Site Conditions Statute
By: Mark A. Rysberg
Unforeseen site conditions clauses are not new to construction contracts. In fact, almost all construction contracts contain provisions regarding the claim process for unforeseen conditions and whether adjustments to the contract are to be allowed. However, when working on public projects, it is important to be aware that the contract terms regarding this issue may not ultimately control the outcome. That is due to the fact that Michigan has a statutory scheme of dealing with the claim process for unforeseen site condition claims on public projects that exceed $75,000.
The statute, in pertinent part, requires a contractor that discovers either of the following conditions to promptly notify the owner in writing:
(i) A subsurface or a latent physical condition at the site is differing materially from those indicated in the improvement contract; or
(ii) An unknown physical condition at the site is of an unusual nature differing materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the improvement contract.
Other provisions of the statute control situations that may preclude a contractor’s claim such as failure to provide notice or receiving final payment. The impact of this statutory scheme is that it may conflict with similar contractual provision governing unforeseen site conditions. Since, Michigan courts have yet to address this statute, it is imperative to be aware that this statute may impact such a claim and to be proactive in seeking guidance when presented with unforeseen site conditions.
Liening Leased or Land Contract Property
By Aileen Leipprandt
Contractors learned a painful lesson about the limits of construction liens for improvements made to property under land contract in the recent Michigan Court of Appeals case, Asphalt Specialists, Inc v Steven Anthony Development Co (2011).
In that case, GTR Glacier Golf Holdings (Glacier) contracted with Wells Venture Corporation (WVC) to buy a golf course. Glacier then hired contractors to improve the golf course infrastructure, including installing water, sanitary and storm sewer, and asphalt golf cart paths. Glacier later defaulted on its payments to buy the golf course and eventually forfeited all of its interest in the property to the seller, WVC. Unpaid for their work, the contractors liened the golf course and later sued to foreclose those liens. The Court of Appeals ruled that the liens could not attach to the “dirt,” because Glacier did not actually own the property. Instead, the liens attached only to the actual improvements themselves. Unfortunately, because the improvements were to the infrastructure, the improvements could not be removed and sold.
This case is an important reminder of the limited power of a construction lien when the lien claimant contracts with someone who is buying or leasing property, as opposed to contracting with the actual owner. While the Lien Act gives a lien claimant the right to step into the shoes of the buyer/lessee and assume the buyer/lessee’s contract to buy or lease the property (and thereby protect the lien claimant’s investment), this remedy is rarely effective because few contractors can assume such a large financial obligation, particularly in the Asphalt Specialists case which involved the purchase of a struggling golf course.
Lesson learned – where a contractor contracts with a buyer/lessee, the contractor should carefully consider how it will secure payment, as the Lien Act’s protection is more limited and sometimes impractical. Efforts to secure payment may include requiring the seller/lessor to sign the construction contract, requesting buyer/lessee to post additional collateral, and/or requesting as much payment up front as feasible.