Construction Law

U.S. Fourth Circuit Court of Appeals: Unpaid Subcontractors Have No Absolute Right to Interpleaded Funds Owed to a Contractor in Bankruptcy on Government Projects

By Ryan McCabe

The U.S. Fourth Circuit Court of Appeals held in In Re: Baltimore Industries, Incorporated, that unpaid subcontractors do not have an absolute right to interpleaded funds (funds were deposited into court to determine who was entitled to the remaining funds)  when a government contractor has filed a petition for bankruptcy.

The Court reasoned that unpaid subcontractors are not subrogated (substituted as a creditor or party) to a contractor's interest, unlike a surety (bonding company) that would step into the shoes of the contractor.  Therefore, the Court reasoned that the remaining funds from the project were to be included into the bankruptcy estate.

Lessons for the subcontractor and material supplier:

• Verify that the contractor is financially sound before providing work, if possible;
• On large projects, verify that a payment bond is available;
• Timely submit applications for payment and follow up on payment;
• Preserve mechanic's lien rights when available (were not available in this case)

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Full post as published by The South Carolina Construction Law Blog on February 24, 2007 (boomark / email).