An occasional issue for a construction attorney is whether the contractors can directly sue the project’s lenders. That question was addressed in APCO Industries, Inc. v. Braun Construction Group, Inc., 2020-Ohio-4762 (10th Dist. 2020).
Mid-project the developer failed to make an interest payment, which resulted in the lenders stopping payment, accelerating the loan balance, and declaring the full principal due. The developer then directed the general contractor to stop work but at that point over $9 million of work had already been performed which remained unpaid for. Next the lenders foreclosed on the project, the developer declared bankruptcy, and the general contract and subcontractor enforced their mechanic’s liens. The lenders had priority over the mechanic’s liens and the low property sale amount left nothing to pay on the contractor liens.
The general contractor, however, also filed claims directly against the project lenders. The court in Apco addressed the contractor’s claims under the facts and loan terms before it.
The constructive fraud claim was not successful because the general contractor had little direct dealings with the lenders. There was also no evidence it had entrusted the lenders with important or confidential matters. As a result, a confidential or fiduciary relationship was lacking to support the claim.
The breach of loan agreement claim was also not successful. The contractor contended it was an intended third-party beneficiary. But the court found the purpose of the loan agreements was to benefit the developer, not the contractor. The contractor was only an incidental beneficiary.
The promissory estoppel claim was unsuccessful as well. Promissory estoppel is an equitable doctrine that comes into play when the requisites of a contract are not met, yet the promise should be enforced to avoid injustice. The project lenders had made their promises in a contract (the loan agreements). Due to the promise being in a valid contract, the promise to disburse funds for the project was not subject to promissory estoppel.
On the other hand, the court found that the tortious interference claim was not necessarily unsustainable. The theory was the lenders improperly withheld loan advances causing the developer to default on its payments to the general contractor. If the lenders withheld funds before an event of default occurred then they were not justified in withholding funding. The court found the facts were subject to a material dispute on whether the refusal to disburse loan proceeds was justified. As a result, the appeals court held further proceedings would be necessary on the issue.
Schwandner Law Firm is a construction law firm in Cincinnati that represents contractors across Ohio for payment and performance disputes. Construction contractors can reach the firm at 513-429-4099 or email@example.com.