Follow Us on

Contractor pays suppliers despite defaulted loans




By Patricia Porter Kryder

A large bank made four loans to a building contractor and other borrowers for the acquisition, design, development and construction of residential projects in Sumner County, Tennessee. The loans were evidenced by promissory notes in an original principal amount in excess of $40 million dollars and collateralized by various properties. After the building contractor defaulted and the loans matured with an outstanding balance, the bank sought to appoint a receiver under the loan agreement, in order to preserve the value of the properties.

The building contractor still owed contractors and laborers payment for their services and the material provided to the property. The bank did not agree to reimburse the building contractor for any unpaid bills. Instead, the bank and the building contractor executed a forbearance agreement. The forbearance agreement provided that upon the sale of the property, the proceeds were to be applied to invoices for contractors and suppliers as set forth on an agreed exhibit, and appearing on the closing statement for the sale of the property.

Before the properties were sold, the building contractor had paid some amounts directly to the contractors and suppliers. Those amounts were not included on the closing statement. The building contractor maintained that under equitable subrogation, the bank was responsible for paying all of the contractors’ and suppliers’ claims as listed on the schedule to the forbearance agreement. This arrangement was in place regardless of whether they were paid by the building contractor after the execution of the forbearance agreement and before the property’s sale and therefore, not listed on the closing statement.

Under Tennessee law, the plain language of the contract controls absent ambiguity. The court must determine the parties’ intention from the four corners of the contract and interpret and enforce the contract as written. The federal court in the Middle District of Tennessee concluded that the building corporation was primarily liable for the contractors’ and suppliers’ claims for services provided to the building corporation. The bank did not owe the contractors and suppliers.

Under Tennessee law, the doctrine of subrogation arises only in favor of one who pays the debt of another, and not in favor of one who pays the debt in performance of his own covenants. While the doctrine of subrogation is steadily expanding in its practical administration so as to include cases where complete justice cannot be done without it, the doctrine cannot be extended beyond the settled principles upon which it rests. The right of subrogation is enforced upon the theory that the subrogee succeeds to the rights of the creditor.

Under equitable subrogation, Tennessee law requires the debt paid must be one for which subrogee was not primarily liable. Since the building corporation was solely liable for these contractors’ and suppliers’ claims, the building corporation was not entitled to summary judgment.



0 #1 Jeannette Nance 2015-10-08 05:55
I had many issues with my construction issues but I was lucky to get proper consultation from Miami real estate business attorney. They can also be consulted online.

Add comment

Security code