by Mark Cobb

It would be wonderful to live in a world where a handshake or a person’s word meant something. The Georgia Court of Appeals just handed down a verdict in First Bank of Georgia v. Robertson Grading which will make you question whether or not you can trust any body when it comes to being paid on a construction project.

The background is a little longer than we normally put on our blog; however, we believe that it is very important for our readers to understand that the subcontractor lost all his right to payment even though he made regular visits with the construction lender and was (allegedly) repeatedly told that payment would be forthcoming.

BACKGROUND:

R & B Construction (“GC”) was the general contractor / developer of a subdivision in the Richmond County / Augusta, Georgia area.  The GC contracted with Robertson Grading (the “Subcontractor”) to pave the new streets.  Because the Subcontractor had never worked with the GC before, the Subcontractor requested a list of the GC’s creditors in order to determine the GC’s credit worthiness.  After signing the paving subcontractor, the Subcontractor visited one of the credit references and the construction lender First Bank of Georgia (the “Bank”) in order, ostensibly, to make sure there was money available to pay the $400,000 paving contract.  Although the bank disputes some of the statement, the Subcontractor’s evidence suggested that the bank representative allegedly advised the Subcontractor two things:

1.  The Subcontractor “WOULD GET PAID FOR THE PAVING”; and
2.  The bank would notify the Subcontractor if any problems arose with the GC’s account.

The Subcontractor began the paving project and submitted it’s first invoice which exceeded $100,000; when the first invoice wasn’t paid, the Subcontractor returned to the bank and learned two more things:

3.  The parties wanted to wait until the paving was complete to issue one check; and
4.  The bank representative allegedly said that, ”[w]hen you put the last ton of asphalt down . . . I promise you [,] you will get paid.”

Apparently relying upon the bank’s representative’s statement, the Subcontractor continued its work on the subdivision.  Due to some delays, some additional work requested by the GC, and an increase in material cost, the project was completed later than the Subcontractor had advised the bank and a second invoice was sent which exceeded $300,000.  With the two outstanding invoices totalling $448,600.65, the Subcontractor contacted the bank when payment wasn’t made immediately.  At this point, the Bank informed the Subcontractor:

5. The GC missed it’s most recent interest payment due on the construction loan and that the Bank was not disbursing any further funds on the account.

YIKES!

The grading Subcontractor immediately filed a Mechanics and Materialmen’s Lien pursuant to Georgia’s lien statutes; when the GC subsequently filed bankrptucy, however, it was determined that the Subcontractor’s lien was invalid as it had not been properly “perfected”.  Thus, the Subcontractor was limited to pursuing collection of its payment as an unsecured creditor.

PRACTICAL TIP–FILE YOUR LIEN BUT DON’T FORGET TO PERFECT IT: If you are owed money on a Georgia construction project and you file a materialman’s lien, your lien will expire 395 days from the date the lien was filed UNLESS you properly perfect the lien.  There are several ways to perfect your lien depending upon the circumstances of the claim; if the lien is not properly perfected, then you will lose your lien rights.

Despite the GC’s bankruptcy, the Bank was allowed to foreclosure upon it’s security interest in the project; eventually, the Bank was able to sell all of the lots and, even, admitted the following:

6.  It would not have been possible to sell the subdivision lots without paved streets.

THE TRIAL COURT’S DECISION:

Without a valid construction lien, the Subcontractor had limited recourse in the GC’s bankruptcy and/or the Bank; nonetheless, the Subcontractor attempted to recover from the Bank by bringing a lawsuit for claims based upon (i) promissory estoppel, unjust enrichment, (iii) negligent misrepresentation, and (iv) fraud.  The trial court awarded the Subcontractor $448,600.65 in damages plus and additional $149,500 in attorneys fees.  The Bank appealed to the Georgia Court of Appeals which reversed the trial court’s decision!

Technically, the Bank appealed the trial court’s denial of the Bank’s motion for a directed verdict.  Simply stated, a judge may “direct” the jury to give a certain “verdict” is he or she finds that no reasonable jury could reach a decision to the contrary.  Since the trial court judge did not grant the Bank’s motion for a directed verdict, the Bank appealed and won.

Let’s look at the Subcontractor’s claims which the Court of Appeals effectively denied:

Claim # 1: Promissory Estoppel:

What is Promissory Estoppel?  In the law of contracts, the doctrine of promissory estoppel states that a promise is enforceable by law when the person making the promise makes a promise another who, in turn, relies on the promise to his or her detriment.

Since the Subcontractor was seeking payment from the Bank, it was, for all practical purposes, relying upon the Bank to be a guarantor of the GC’s debt to the Subcontractor.  The Statute of Frauds, however, requires that an agreement by one person (or entity) to take on the debt for another must be in writing.  The doctrine of promissory estoppel is an equitable doctrine which can be an exception to the written requirement of the Georgia’s Statute of Fraud.  Thus, the Subcontractor agued that it relied upon the Bank’s representative’s statements that the Bank would make sure that Subcontractor was paid for its grading and paving services.

In order to invoke a claim for promissory estoppel, four elements would have to be met:

1.  The Bank would have to have made promises;
2.  The Bank would have expected the Subcontractor to rely upon those promises;
3. The Subcontractor did reasonably rely upon the promises; and
4.  An injustice could be avoided only by enforcing the promise.

The Court of Appeals found, however, that the Subcontractor “failed to establish exclusive or reasonable reliance upon any statement by the Bank.”  Although there were several points made to substantiate the Court’s holding, the Court specifically pointed out that the Subcontractor had entered into its subcontract with the GC prior to contacting the bank.  Thus, it seems evident that the Subcontractor did not rely upon the Bank’s statement to enter the original contract.

PRACTICAL TIP: It doesn’t matter whether you are a prime contractor, a specialty subcontractor, or a material supplier, you should thoroughly investigate the other party’s credit worthiness BEFORE you sign the contract.

Although this is compelling, it does not address the Subcontractor’s alleged reliance upon the Bank’s statements that they wanted to write one check after the project was completed.  The Georgia Court of Appeals wrote:

In addressing this aspect of [the Subcontractor]’s argument, we begin by noting that it was undisputed between the parties that at the time this second conversation between [the Subcontractor] and the Bank occurred in early September 2007, Robertson Grading believed that the paving work would be completed in two to three weeks’ time, putting the completion date somewhere toward the middle or end of September, and [the Subcontractor] made that representation to the Bank. Nevertheless, [the Subcontractor] testified at trial that the project’s completion was delayed by extra work the company took on to complete the public right-of-way/deceleration lane, all at [the Subcontractor]’s request, pushing the ultimate completion date to one or two days before November 7, 2007. To sum up, then, [the Subcontractor] made two representations to the Bank in seeking the Bank’s assurance that it would be paid for its work on the project: (1) that, “if everything went according to schedule,” the work would be completed within to two to three weeks …….. and (2) that it would be performing paving work. But as it turns out, neither of these representations by [the Subcontractor] ended up being accurate, and [the Subcontractor] admitted at trial that he did not have any additional meetings with the Bank or otherwise advise it about the work delay or agreement between [the Subcontractor] and [the GC] to expand the scope and expense of the work to include grading-and-shoulder work. Suffice it to say, [the Subcontractor]  cannot claim that it reasonably relied upon an assurance of payment by the Bank when it unilaterally changed the very terms upon which that assurance was based. [footnotes omitted, emphasis added].

PRACTICAL TIP: Although this is not addressed in the Court’s decision, the Subcontractor should have considered taking different steps when its first invoice was not paid.  Option open to the Subcontractor may have including filing a materialman’s lien in Richmond County, Georgia, stopping work for the GC’s breach (failing to pay), or enter into a side-agreement with the bank.

Claim # 2: Negligent Misrepresentation:

The Subcontractor’s claim that the Bank negligently misrepresented information also failed according to the Court of Appeals.  The Court enumerated three elements which the Subcontractor would have to have proven. The three elements of negligent misrepresentation are as follows:

1.  The Bank would have to negligently supply false information;
2.  The Subcontractor would have to had reasonably relied upon that false information; and
3.  The Subcontractor would have to prove economic injury proximately resulting from the Subcontractor’s reliance.

Using the logic developed by the court in denying the Subcontractor’s promissory estoppel claim, the court used similar facts to conclude that the Subcontractor did prove these three elements.

Claim # 3: Unjust Enrichment:

Unjust enrichment is another equitable claim that says that an owner who is “enriched” by another may have to pay “just” compensation.  In this case, the Court makes the distinction that the Bank was not the owner who hired the Subcontractor for the paving project; instead, the Bank took title to the real estate pursuant to its loan documents, and, a normal part of the foreclosure process included the improvements which had been made to the real estate (including the paving).

WARNING TO SUBCONTRACTORS:  The Subcontractor’s proper remedy, the Court pointed out, was via the “Georgia’s materialman’s statute (which it did, although unsuccessfully due to its failure to perfect that lien).” [emphasis in original].   

Consequently, the Court of Appeals agreed with the Bank that the Subcontractor did not have a claim under a theory of the Bank’s unjust enrichment.

This lawsuit is another pertinent reminding for every construction professional who work on or supplies materials to Georgia construction projects.  In some ways, this decision confirms that it’s “every man for himself” when it comes to collections; before you rely on assurance from another party, get the promises in writing.  Also, although this case does not go into the reasons why the Subcontractor’s materialman’s lien was not perfected, but it is a reminder that every Georgia lien claimant must strictly comply with Georgia’s materialmen’s lien statute and that includes meeting every deadline for filing and perfecting your claim of lien.

What do you think about this decision?