John Ahlers Ahlers & Cressman PLLC
Under Washington’s Public Works Statutes (RCW 39.08 and 60.28) general contractors who perform public works are legally required to post payment bonds and have retainage withheld. The purpose of these laws is to protect the public entity (owner) from subcontractor and supplier claims against the public project while preserving the interests of mechanic’s lien rights (subcontractors and suppliers are provided bond claim and retainage rights but have no lien rights in the public property).
The public policy behind this law appears to protect the interests of all parties; however these statutes create risk for general contractors against which there is little if no protection. Some subcontractors performing public work are signatories to collective bargaining agreements (“CBA”) with national unions to provide labor on multiple projects.
An issue arises when union subcontractors who become insolvent and fail to pay the CBA dues and trust fund contributions (i.e. health and security trust retirement trust vacation trust etc.). The trust funds (“trusts”) may file lawsuits under ERISA (Employment Retirement Income Security Act) and LMRA (Labor Management Relations Act) in federal courts directly against the subcontractor/employer for payment. Congress enacted these favorable statutes to protect the interests of employee benefit plan participants and their beneficiaries by allowing trusts to collect contributions owed and assess interest and liquidated damages against subcontractors/employers who do not timely pay the trusts.
Nonetheless in addition to taking advantage of the favorable federal law the trusts may also seek recovery under the state bond claim statutes in instances where the subcontractor is defunct by lodging claims against the general contractor’s bond and retainage. The trusts can lodge the claim despite the fact the general contractor paid the subcontractor in full and had no knowledge of the subcontractor’s non-payment of trust contributions. Much like a contractor enforces its mechanics’ lien the trusts must file a lawsuit in court to enforce such a bond claim.
In 2000 the Washington Supreme Court decided in International Brotherhood of Electric Workers Local Union No. 46 v. Trig Electric Co. et al. 142 Wn.2d 431 13 P.3d 622 (“Trig Electric”) that ERISA preempted the Washington’s Public Works Lien Statutes and trusts could not enforce their liens against the general contractors bond and retainage in Washington’s state courts. This decision remains good law today. Notwithstanding the holding in Trig Electric trusts are not precluded from filing lawsuits to enforce these claims in federal court where the interpretation of ERISA preemption is more favorable to the trust funds.
In 2012 an AGC member faced this very situation after one of its subcontractors completed its work and was paid in full. The subcontractor became insolvent and did not pay required dues to the union and trust funds (“Trusts”) under its CBA. The Trusts recorded a lien against the AGC member’s bond and retainage. The AGC member brought a declaratory action in state court and obtained a judicial order that declared under Trig Electric that the Trusts’ lien was unenforceable. The Trusts attempted to concurrently file an action in federal court to enforce the same bond claim but the federal court dismissed the action. The Trusts have appealed the case to the Washington Supreme Court where the Trusts seek to overturn Trig Electric. The AGC member is opposing the appeal.
The Trig Electric decision protects public works general contractors in Washington from being forced to pay for a debt (plus any interest attorneys’ fees and liquidated damages) they do not owe. The Trusts assert that they and future trusts will continue to be “treated unfairly” if Trig Electric is upheld but the impact on general contractors would be greater if Trig Electric were overturned. This is especially true in instances such as the present case where the AGC member has already paid the subcontractor in full including wages fringe benefits union dues and taxes.
Moreover it should not be the responsibility of the general contractors who are not party to the CBA to oversee the accounting of all of their subcontractors on every project to ensure appropriate payments are made to trusts. In the present case for example the Trusts allowed the subcontractor to fall over $750000 in arrears and expect faultless third-party general contractors to pay without any accountability for the Trusts’ own administrative negligence. There is even evidence that the Trusts did not apply funds paid directly by the subcontractor toward the bonded project but instead applied payment to other debts owed by the subcontractors on un-bonded jobs so as to take advantage of those general contractors that were required to have a bond. Certainly general contractors should not be held accountable for such self-serving choices made by trusts.
AGC of Washington believes the Trig Electric case provides an equitable resolution of this issue. Trust funds are in the best position to monitor the credit worthiness of their subcontractor contributions. Based on this rationale AGC of Washington is supporting its member in Washington Supreme Court through a financial contribution and by filing its own “amicus” brief (friend of the court brief) in an effort to persuade the Supreme Court to uphold this important law for general contractors all across the state.
John Ahlers is a Founding Partner with Ahlers & Cressman PLLC and a member of AGC’s Legal Affairs Committee.