Construction Law News Blog

RECENT SIXTH DISTRICT OHIO COURT OF APPEALS DECISION: Potential Liability of a Bank to a Contractor

   A recent decision by the Sixth District Ohio Court of Appeals suggests that there may be instances where a bank loan officer’s statements to a contractor may create liability for the bank to the contractor.  In Advantage Renovations, Inc. v. Maui Sands Resort, Co. LLC, et al., 2012-Ohio-1866, 2012 WL 1493826 (Ohio App. 6 Dist.), a general contractor, Mosser Construction Inc., was hired for the construction of a $17.4 Million complex in Sandusky, Ohio.  Mosser asserted claims against a bank financing the project, Charter One, for breach of contract, promissory estoppel, negligent misrepresentation and unjust enrichment.

   A recent decision by the Sixth District Ohio Court of Appeals suggests that there may be instances where a bank loan officer’s statements to a contractor may create liability for the bank to the contractor.  In Advantage Renovations, Inc. v. Maui Sands Resort, Co. LLC, et al., 2012-Ohio-1866, 2012 WL 1493826 (Ohio App. 6 Dist.), a general contractor, Mosser Construction Inc., was hired for the construction of a $17.4 Million complex in Sandusky, Ohio.  Mosser asserted claims against a bank financing the project, Charter One, for breach of contract, promissory estoppel, negligent misrepresentation and unjust enrichment.

   These claims were based upon communications between Mosser and the Bank’s loan administrator.  When work on the project began, the CFO of Mosser, who was a former bank loan officer, attempted to contact the Bank to establish a more direct relationship with the Bank.  Only after the Bank received permission from the Owner to speak with a third party did the loan administrator engage in conversations with Mosser.  There were three conversations in total; the first two occurred in February and March of 2008.  These two conversations were initiated by Mosser because of rumors that there were cost overruns and insufficient funds.  During those two conversations, the loan officer stated that there was enough money in the proposed budget to cover the remaining work, although no guarantees were made that Mosser would be paid if it continued to work.  

   In April 2008, however, the Owner notified the Bank that the project was over budget, and not to tell Mosser about the overruns as they would likely cease to continue work.  Despite the loan being put into default, the Bank continued to disperse loan funds to the Owners in order to complete the Complex in time.  The Bank was invested in this Project and thus, continued to do so in order to prevent the loan from failing completely and in hopes of generating future revenue when the Complex was completed.  Then in May 2008, the Owner requested all loan funds be paid out despite the fact that the final draw requirements were not met. The Bank released the funds even though it was well aware that request was unusual since none of the final draw requirements were satisfied.  

   In June 2008, Mosser contacted the Bank inquiring for a third time about the loan funds as it had not been paid for work already performed and inspected.  At this time, the loan administrator told Mosser that there were no loan funds, but there were other sources in the budget to cover their contract and the remaining costs.  These assurances, however, were untrue as there were no additional sources of funds.  Ultimately, the Complex was completed, but Mosser was not paid for $1.63 million of its work performed- $60,000.00 of which was incurred after the third conversation with the Bank.

   In the underlying case, the trial court found in favor of the Bank dismissing Mosser’s claims and granting the Bank’s Motion for Summary Judgment.  On appeal, the Court of Appeals reversed the trial court’s decision and remanded the case back to the trial court finding that there were material issues of fact.  Ultimately, the Court of Appeals held that the trial court must determine whether the statements of the Bank’s loan administrator and Mosser rose to the level of “if you work, you will be paid.”  If they did, then the conversation between the two would be considered an oral contract.  This is extremely important as such a determination could possibly lead to Mosser prevailing on a breach of contract claim with the Bank, even though the Bank did not enter into a written contract with Mosser.

   This determination would also affect Mosser’s claim for promissory estoppel and negligent misrepresentation.  Should an oral contract be found to exist, then the Bank would no longer be dealing with Mosser at arm’s length as with normal non-customers and would then have owed a duty of reasonable care to Mosser.

   At this time, there is no ultimate decision since the case has been remanded to the trial court.  In the meantime, however, this case serves as a reminder that when facing the challenge and risk of getting paid, obtaining permission to communicate with the bank financing the project and doing so to obtain assurances regarding payment may allow a contractor to assert claims for payment from that bank, even though neither party directly entered into a written contract.

Submitted by Bonnie Wolf.

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