Bank May Be Liable for Converting "Trust Fund" Progress Payments Made to General Contractor
It is often the case that funds paid by a project owner to a general contractor -- while intended for use on the project to pay off subcontractor liens -- get drained off to other purposes, leaving the owner in the position of having to pay twice. This important new case will give owners a significant newly recognized remedy in efforts to chase down the misapplied proceeds. Division 1 held that:
- Progress payments made by a project owner to a general contractor constitute "trust funds" for the benefit of subcontractors, when the agreement between owner and contractor is based on AIA A201 (1997)
- If the bank that finances the operations of the general contractor has "knowledge sufficient to require inquiry" whether the funds deposited by its borrower were trust funds, that bank may be liable for misappropriating trust funds when it uses the proceeds to pay down the borrower's debt to the bank,
- The bank may also be sued for conversion based on essentially the same facts, but is not liable for any potential violation of the Consumer Protection Act, and
- The bank may avoid liability if it were established that the trust funds were "properly accounted for" i.e., that the seizure of the funds, from an accounting standpoint, did not cause injury to the owners.