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Lesson #1: Know Who You Are Doing Business With & Their Financial State of Mind

I was asked to review a recent case from New Jersey captioned Vollers Excavating and Construction, Inc. v. Citizens Bank of Pennsylvania (March 5, 2012). It appears to stand for the proposition that a bank is not liable to a subcontractor on a job where the construction borrower of the bank, a general contractor, filed for bankruptcy leaving the subcontractor without a remedy. After reviewing the case, the loan documentation clearly indicated the loan proceeds would not be subject to the claims of any subcontractor.

While the general contractor advised the bank of its problems, the lender continued to provide funds for the project. Vollers’ main argument centered around the lender holding the funds in trust and the lender assumed the position of the general contractor by taking over the project. The court ruled there was no obligation owed to Vollers as there was no contractual obligation with Vollers and the lender did not know the general contractor was going into bankruptcy.

Moreover, the additional security claimed by the lender after default and the efforts to appoint the former general manager as a receiver of the property in the litigation did not impress the judge as a basis for claiming an obligation was owed by the lender to Vollers.

THE BOTTOM LINE: No duty was owed the lender to Vollers as there was: no contract, no communication, no promises, no work performed in reliance upon lender advancing monies and no relationship whatsoever. However, I would have wondered if a bankruptcy judge would have felt the same way if this matter was put to himher? NOTE: New Jersey has a trust fund statute but it does not apply to private jobs.

LESSON: Look at the financing on all projects and make a contact with the lender’s representative.