Texas Court Rejects General Contractor's Fraud Claims Against Owner's Lender

A Texas court of appeals recently rejected a general contractor's claims for fraud against the project owner's lender.

In that case, the general contractor did not receive several progress payments for its work on the project, and was not paid its retainage by the owner. The owner defaulted on its construction loan, which led to the lender foreclosing on its lien on the property.

The general contractor filed suit against the lender, claiming (among other things) that lender fraudulently misrepresented that it was withholding retainage from the loan amounts disbursed to the owner for the general contractor's periodic pay applications. The trial court granted summary judgment in favor of the lender on the fraud and constructive-trust claims.

The court of appeals affirmed. It pointed out that the general contractor had failed to present evidence showing the lender had made any "misrepresentations" concerning retainage. The lender's witness stated that the lender did not actually withhold any retainage, but instead forwarded the full amounts to the owner. The general contractor, in turn, did not present any evidence that its requests for payment were presented directly to the lender, or that the lender withheld any of the retained funds for the owner. Absent such evidence, the court held that the general contractor failed to raise an issue of material fact on whether the lender made any misrepresentations.

The opinion is David Wight Constr. Co., Ltd. v. FDIC, No. 14-12-01003-CV (Tex. App--Houston [14th Dist.] Feb. 25, 2014, no pet. h.).

Though the court did not discuss the issue, by analogy, some statutes in Texas expressly exempt lenders from certain obligations concerning construction loans. For example, the Texas Trust Fund Act expressly exempts lenders from any obligations to hold construction payments in trust for the contractors who work on projects. Tex. Prop. Code Sec. 162.004(a). However, this exemption would not excuse the lender from liability for any fraudulent misrepresentations to the general contractor.

Has anyone seen a successful claim for fraud or negligent misrepresentation by a contractor against a lender? Would allowing such claims expand the lenders' liability in a manner that would interfere with the normal administration of pay applications in commercial construction projects?