When disputes arise between an owner and its lender, and the lender, for any number of reasons, stops funding a project, the question of whether the contractor can sue the lender sometimes arises. The theory often advanced is that the lender knew the contractor had started work and, if it did not intend to advance the loan funds, it should have notified the contractor immediately, rather than remaining silent while the contractor proceeded.
The contractor’s ability to sue the lender is limited by the absence of a contractual relationship, and while in most cases it’s unlikely that grounds will exist for a claim against the lender, there are unique circumstances that might warrant a claim. A recent Pennsylvania project provided one possible fact scenario. The project involved funding from both a bank and the City of Harrisburg. Three contractors that were unpaid on the project sued both the bank and the City alleging, among other things, that (i) the bank made payments to the developer that were supposed to go to the contractors, when the bank knew the developer was using the funds to pay his personal debts to the bank; (ii) neither the City nor the bank had adequate financial controls in place; and (iii) the audits that the City and the bank had pledged to conduct never took place. This case has not been resolved; however, since the bank has subsequently taken over the project from the developer, it’s likely that the contractors will end up being paid by the bank without having to litigate their claims.
Other possible legal theories exist for a contractor’s claims against a lender, the most likely one being promissory estoppel. A promissory estoppel claim arises when, even though two parties have not entered into a contract, one of the parties has provided assurances that the other has reasonably relied upon to its detriment. A bank’s notification to a contractor that the owner’s financing has been approved and that the bank intends to fund the project might provide the facts necessary for such a claim.
As a practical matter, the contractor will seldom need to sue an owner’s lender. If a contractor has properly filed its lien, it should have priority over the lender and should get paid out of the property. The unique situation in which the contractor might need to consider a suit is where either (i) the contractor fails to properly file its lien or (ii) the property has insufficient value to cover the contractor’s lien.
Lawsuits by contractors against an owner’s lender are rare and will only be available in limited situations. Nevertheless, they may at times be worth considering.