A Key Lesson for Owners and Prime Contractors About Payments
Consider the following scenario: A prime contractor with a
financially-shaky subcontractor agrees with the subcontractor's
secured lender to make payments directly to the lender, but the
word is not passed along to the accounts payable person or
group, so the company continues to pay the subcontractor
directly—to the tune of $3.8 million. Sometime later, the
subcontractor goes out of business, and the lender ends up with
a shortfall of $500,000 on its secured line of credit. The
lender then sues the prime contractor, seeking not just the
$500,000 shortfall, but the entire $3.8 million. What is the
outcome under the Uniform Commercial Code (UCC)?  That was the
case decided this week by the Massachusetts Supreme Judicial
Court (SJC).1 On the facts as outlined above, the SJC held that
the lender was entitled to recover, under the UCC, the entire
amount of misdirected payments, even though that amount exceeded
its actual losses. Once the contractor re