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State Supreme Court overturns law protecting general contractors from trust fund liens on public works projects

By John P. Ahlers and Masaki James Yamada

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 from progress payments. 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).

An issue arises when union subcontractors become insolvent and fail to pay dues and trust fund contributions (i.e. health and security trust retirement trust vacation trust etc.). The trust funds 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 make 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 mechanic’s lien the trusts must file a lawsuit in court to enforce such a bond claim.  

In 1994 the Washington Supreme Court decided in Puget Sound Electrical Workers Health & Welfare Trust Fund v. Merit Company 123 Wn. 2d 565 870 P.2d 960 (“Merit”) that ERISA preempted the Washington’s Public Works Lien Statutes and trusts could not enforce their claims against the general contractors bond and retainage in Washington’s state courts. In 2000 the Washington Supreme Court upheld Merit through its decision 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”). Ultimately this law protected general contractors from having to pay trust funds that were supposed to be paid by the subcontractor whom the general contractor already paid.

On March 20 2014 despite the valiant efforts by a well-respected Seattle builder and various contractor groups (Associated General Contractors (AGC) Associated Builders & Contractors (ABC) and National Utility Contractors Association (NUCA)) the Washington Supreme Court in W.G Clark Construction Co. v. Pacific Northwest Reg’l Council of Carpenters — P.3d – (docket no. 88080-8) unanimously decided to overturn the longstanding law established in Merit and Trig. In a very brief written opinion the Washington Supreme Court simply decided it should “join courts across the country and hold that this type of state law is not preempted by ERISA.” As a result general contractors are no longer protected in Washington State courts from these trust fund liens.

What should public works contractors do?

Unpaid vendor and subcontractor claims generally present few problems to the general contractors or subcontractors if the general contractor or subcontractor has notice of the claim. Second tier subcontractors and material suppliers must provide the general contractor with written “pre-claim” notice of the lien or bond claim before filing a lien or making a claim against the bond or retention.

The problem arises with labor. Workers are exempt from having to give notice.  In Washington because the union trust fund claims involve payment to workers the trust fund claims are considered to be “labor” consequently trust funds do not have to give pre-claim notice before making a lien or bond claim. Even though general contractors may obtain lien releases from subtier subcontractors and suppliers since the union trust claim involves “labor” (an unpaid union trust fund retirement vacation health or security payment that a subcontractor missed) the general contractor can be taken by surprise by such “stealth” claims.

The second problem is that often times when general contractors call union trust funds for updates as to whether a subcontractor is current or not on its trust fund payments the general contractor either receives no answer or irrespective of what the answer is right or wrong the bond or lien claim by the union trust fund is not waived by the conversation. In other words only if trust fund waives its bond or lien claim rights is the general contractor protected. Therefore if the trust provides the contractor with the wrong answer the general contractor remains at risk. 

Although we have outlined some steps for general contractors to take to protect themselves in these circumstances the trust fund is under no obligation to either provide accurate information to the general contractor or provide a lien or bond claim releases.

Given this Supreme Court decision Contractors on public works projects should do the following:
• Monitor payments made to trust funds and unions by your subcontractors who have entered collective bargaining agreements;
• Obtain proof of payments and/or a lien release directly from the trust funds and unions not just a lien release from the subcontractor (A lien release from a subcontractor will not protect you against a lien claim by a trust fund if the trust fund can prove it was not paid);
• Some general contractors who are frustrated by the dismal state of affairs as pertains to trust funds have resorted to issuing joint checks to all union subcontractors and their worker’s trust funds (this is a cumbersome process generally fraught with delay and frustration by all involved general contractors subcontractors and union trust funds.  Although theoretically a fine solution we have yet to see this joint check system work in practice); and
• Be aware that provisions in your subcontracts that require a subcontractor to defend and indemnify you against such liens or that require a subcontractor to report payments made to the trust funds are simply ineffective against a defunct subcontractor.

At the same time the W.G. Clark case was being decided by the Washington Supreme Court the United States District Court of Western Washington in Bayley Construction v. Great American E&S Insurance Company — F.Supp.2d – (2013) decided that Professional Liability Insurance should cover at minimum the defense of this type of trust fund claim.  This is a significant holding because many insurance companies attempt to settle claims in order to avoid increasing defense costs. Thus buying the appropriate insurance may also be an alternative in protecting your interests. Therefore if a contractor carries professional liability insurance which many contractors now do because of the prevalence of alternative procurement delivery methods such as general contractor/construction manager and design build contracts the insurance company may provide a defense.

Legislative Fix May Be On The Horizon

The AGC Legal Affairs Committee is considering proposing a statute to the legislature which would eliminate the trust fund trap for unwary contractors and introduce some accountability and fairness into the process. Proposing a statute and getting a statute passed are two different things. It will be difficult passing the bill in this in the current Olympia political environment. We will rally our readers when this bill is proposed to the legislative.

John P. Ahlers and Masaki James Yamada Ahlers & Cressman PLLC are members of AGC’s Legal Affairs Committee.

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