This weekend was all about The Rise of Gru. I love Gru so much that when my children ask for money, my best Gru-like voice belts back: “Now, I know there have been some rumors going around that the bank is no longer funding us….In terms of money, we have no money.” And that’s precisely what many lenders say on distressed projects when the owner fails to make final payment and the contractor looks to the bank for funding: “We have no money for you contractor!”

In BCD Associates., LLC v. Crown Bank, CA No. N15c-11-062 (Super. Ct. Del, May 2, 2022), the trial court found that when a bank pays a contractor directly, it can create a legally binding relationship subject to the terms of the construction loan agreements with the owner.

The project involved a $13m construction loan between the lender and the owner to renovate a hotel. The owner and contractor entered into an AIA Contract for the construction management services. During construction the contractor would submit payment applications to the lender, who would review and approve the invoices for payment. The lender then would pay 90% of the approved payment application and hold back the remaining 10% as retainage. The contractor was supposed to be paid the final retainage upon completion, which it did not receive in accordance with the terms of the AIA Contract.

While the contractor asserted numerous claims against the lender—including breach of contract, unjust enrichment, promissory estoppel, and misrepresentation—ultimately the court found that the lender breached contractual obligations owed to the contractor. Applying New Jersey law, the court held:

The controlling documents are the Loan Commitment and the Loan Agreement. The Court recognizes that [contractor] is not a named party in those agreements. Moreover, the Court acknowledges that the Loan Agreement specifically provides that there are no third-party beneficiaries to the Loan Agreement. But, contractually, factually and practically, [contractor] is the intended third-party beneficiary to the Loan Commitment and the Loan Agreement. Moreover, [owner] and [lender] treated [contractor] as a third-party beneficiary to the applicable agreements.

The court found it important that the lender chose to “cut out the middle man” by paying the contractor directly at all times. Finally, the court also found sufficient basis to find in favor of the contractor on its unjust enrichment and promissory estoppel claims, but was not able to recover for misrepresentation.

Lessons learned. For contractors, the decision in BCD Associates is a good reminder to look beyond the owner for sources of funding. Even if the lender on the project says there is no more funding, the bank may nonetheless be on the hook if it has made direct payments to the contractor during the project. For owners and lenders, be aware that your actions may create third-party beneficiaries despite clear language in the loan documents to the contrary.