Subcontractor Trust Funds are Not Proper Bond and Retention Claimants

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 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.

In addition to taking advantage of the favorable federal employment 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 file these claims despite the fact that 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 lien claim. 

In 2000, however, the Washington Supreme Court decided Trig Electric, holding that ERISA preempted the Washington’s Public Works Lien Statutes.[i] The result of the decision is that trusts cannot 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, however, 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.[ii] 

In 2012, a general contractor faced this very situation in Seattle, Washington after one of its subcontractors completed its work and was paid in full.  The subcontractor became insolvent and did not pay mandatory dues to the union and trust funds (“Trusts”) under its CBA.  The Trusts recorded a lien against the general contractor’s bond and retainage.  The general contractor brought a declaratory action in King County Superior Court and obtained a judicial order that declared, under Trig Electric, that the Trusts’ lien was unenforceable.[iii]  The Trusts attempted to concurrently file a lawsuit in federal court to enforce the same lien, but the case was dismissed upon the general contractor’s motion.[iv]  The Trusts have appealed the state court case directly to the Washington Supreme Court where the Trusts seek to overturn Trig Electric. [v]  The general contractor is opposing the appeal.  

In the Superior Court case and on appeal, the general contractor argued that 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. The general contractor’s position is that the impact on general contractors would be far greater if Trig Electric were overturned because general contractors in these cases have already paid the subcontractor in full, including wages, fringe benefits, union dues, and taxes. 

The general contractor further argues 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 case currently being appealed, for example, the general contractor argued that the Trusts allowed the subcontractor to fall over $750,000 in arrears and expect faultless third-party general contractors to pay without any accountability for the Trusts’ own administrative negligence.   According to pleadings in the federal case, 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.   The general contractor argues that general contractors should not be held accountable for such self-serving choices made by trusts and that the Trig Electric case provides an equitable resolution of this issue because trusts are in the best position to monitor the credit worthiness of their subcontractor contributions.   

Comment: The Supreme Court was asked to overturn Trig Electric on direct review by another group of Trusts in 2008.  The Supreme Court denied that request in 2008.  This is the first time since Trig Electric was decided in 2001 that the Supreme Court will discuss how ERISA preemption applies to the Washington Public Works Statutes.  The Supreme Court has yet to schedule a hearing date on the Trusts’ appeal seeking to overturn Trig Electric.  We will be sure to update this blog when the Supreme Court decides this case.

[i] International Brotherhood of Electric Workers, Local Union No. 46 v. Trig Electric Co., 142 Wn.2d 431, 13 P.3d 622 (2000).

[ii] See Southern California IBEW-NECA Trust Funds v. Standard Indus. Elec. Co., 247 F.3d 920 (9th Cir. 2001).

[iii] W.G. Clark Construction Co. v. Pacific Northwest Regional Council of Carpenters, et al., No. 12-2-22665-2 SEA (King County Superior Court, Oct. 12, 2012) (Order Granting Plaintiff’s Motion for Summary Judgment Against Trust Defendants and Union).

[iv] See Carpenters Health and Security Trust of Western Washington, et al. v. Paramount Scaffold Inc., et al., No. 2:12-cv-01252-RSM (U.S. District Court of Western Washington, 2012).

[v] W.G. Clark Construction Co. v. Carpenters Heath & Security Trust of Western Washington, et al., No. 88080-8 (Wash. Supreme Court).

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