Court Upholds Protection Against Liens if Subs Do Not Pay Trust Funds

By Jesse Miller Stanislaw Ashbaugh

Washington law continues to protect prime contractors from claims by employee benefit trust funds against general contractors payment bonds or retainage funds when subcontractors fail to pay their trust fund contributions.

In 1994 in Puget Sound Electrical Workers Health & Welfare Trust Fund v. Merit Co. the Washington State Supreme Court ruled that the employee benefit trust funds that are owed contributions by subcontractors do not have rights against a general contractors bond or retainage. Then in 2000 in IBEW Local No. 46 v. Trig Electric Constr. Co. the Supreme Court reaffirmed its ruling that these trusts do not have the right to come after general contractors (and their bonds or retainage funds) for any unpaid amounts.

Recently these trusts geared up in an effort to get the Supreme Court to overturn its previous two decisions and allow for trust funds to go after general contractors bonds and retainage funds for unpaid amounts. In the case of Berschauer/Phillips Construction Co. v. Masonry Security Plan of Washington employee benefit trust funds (the Mason Trusts) filed liens against Berschauer/Phillips bond and retainage for amounts that a subcontractor apparently had not paid.

Rather than simply allow the Mason Trusts to bulldoze it local general contractor Berschauer/Phillips Construction Company took the fight to the Mason Trusts. Upon receiving notices of claims of lien against its payment bond and retainage funds by the Mason Trusts Berschauer/Phillips - represented by Stanislaw Ashbaugh - sued the Mason Trusts in a Washington State Superior Court asking the Court to declare the Mason Trusts lien claims legally invalid. The trial court granted Berschauer/Phillips request. The Mason Trusts then appealed and the Washington State Court of Appeals quickly affirmed the trial courts ruling. At this point the Mason Trusts decided to try and put the issue before the Washington State Supreme Court for the third time in 14 years.

Because the Washington State Supreme Court is not required to hear any cases but rather chooses which cases it deems worthy of Supreme Court review Berschauer/Phillips fought to keep the case out of the Supreme Court. These efforts were successful. The Supreme Court recently declined to review the case and in doing such erased any doubt that Merit and Trig will continue to be the law of the land in Washington State. This was a great win for general contractors because it means that Washington state law continues to protect general contractors and their payments bonds.

In terms of what this means in everyday practice general contractors should continue to closely monitor whether employee benefit trust funds are filing notices of lien claims against their payment bonds and retainage funds. Upon receipt of a lien claim a general contractor should immediately contact its attorney to determine whether to immediately initiate a lawsuit in state court rather than allow the trusts to initiate a lawsuit in federal court. If given the opportunity the trusts may try to sue the general contractor and its bond and retainage fund in federal court because the law in federal court is far friendlier to the trusts. The trusts know that if they have to litigate in state court they are likely to lose because of the Supreme Courts decisions in Merit Trig and most recently its decision not to readdress the holdings of those earlier decisions. Therefore the contractors goal frequently is to make sure any lawsuit occurs in state court and the best way to ensure this is to act quickly.

So general contractors continue to be protected under Washington state law in lawsuits by employee benefit trusts for unpaid amounts but to benefit from these protections the general contractors must make sure that the lawsuits are fought in state court.

This article was provided by the AGC Legal Affairs Committee. Jesse Miller is a lawyer at Stanislaw Ashbaugh and focuses his practice on Construction Law. Contact him at jmiller@lawasresults.com.