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By Clark Thiel
Howrey LLP
The laws of most jurisdictions deem one who has consciously accepted a measurable benefit at the expense of another is "unjustly enriched" and provide remedies to those conferring the benefits, including restitution. Under this principle, a U.S. Court of Appeals held that because a contractor had "improved the lenders' collateral," the lenders had consciously accepted a measurable benefit from the contractor and were required to pay the contractor for work it performed after the lenders stopped funding the project.
Metric Constructors, Inc. contracted with Carolina Energy, LP to build two facilities that would convert garbage to energy. Carolina Energy, an entity with few assets of its own, then entered a credit agreement with a consortium of banks. The banks agreed to make a loan in exchange for a security interest in the project and on condition that certain financial criteria be maintained and that progress milestones be achieved. The banks hired their own engineer to monitor construction and, upon his approval, Carolina Energy would forward Metric's pay applications to the banks for payment. Although no agreement existed between Metric and the banks, the banks made payment directly to Metric.
About nine months into construction, the project no longer met the banks' funding criteria. Although the banks' engineer had certified payment, the banks withheld payment on Metric's most recent pay application and notified Carolina Energy that they would release no more funds. Unaware of the banks' position, Metric continued work on the project. Metric was first advised that the banks had ceased funding the project nearly two months later and only after Metric issued a notice of default for non-payment of the more than $16 million then due. Metric stopped work on the project but maintained a presence on site while Carolina Energy and the banks attempted to restructure the project financing.
The restructuring attempts failed. The banks foreclosed and sold the property for about $2.6 million - a net loss to the banks of nearly $30 million.
Unable to recover from Carolina Energy, Metric sued the banks to recover for the work it performed on the project. Because no contract existed between Metric and the banks, Metric could base its claim only on North Carolina's unjust enrichment laws.
Losing on summary judgment in the trial court, Metric appealed. In Metric Constructors, Inc. v. Bank of Tokyo-Mitsubishi, Ltd., 230 F.3d 1353 (4th Cir. 2000), the appellate court clarified a point of North Carolina law and remanded the matter to the U.S. District Court for further proceedings. The District Court again entered summary judgment against Metric, and Metric again appealed. This time, in Metric Constructors, Inc. v. Bank of Tokyo-Mitsubishi, Ltd., 72 Fed.Appx. 916 (4th Cir. 2003), the appellate court again reversed, finding that Metric had a valid claim against the banks for unjust enrichment.
Because the banks held a first-priority security interest "that was so important to them that they sent their own engineer to monitor Metric's work," the Court of Appeals concluded that the banks had "a direct interest in the construction project." This "direct interest," the court reasoned, was sufficient to establish that the banks benefited from Metric's work to the extent that Metric increased the value of the project and, correspondingly, improved the banks' collateral.
To constitute compensable unjust enrichment, however, the services must have been "rendered and received with the mutual understanding that they were to be paid for." The court noted that by failing to advise Metric that the banks were withholding funding on the project, they "induced Metric's continued work on the project." This fact was pivotal in assessing Metric's reasonable expectations of compensation.
While easily reaching the conclusion that Metric worked on the project "in anticipation of payment" while it was unaware of the banks' position, the court viewed Metric's continued "site presence" differently. Once Carolina Energy notified Metric that the banks no longer were funding the project, the court reasoned, Metric no longer could claim that it had a reasonable expectation of compensation. Metric, therefore, was not entitled to compensation from the banks for that work.
The banks were, therefore, required to pay Metric for the value of the work performed between the date the banks first withheld payment and the date Metric was informed that the banks had withdrawn their funding for the project - a period of about 2½ months.
Because Metric could sue only under the theory of unjust enrichment, its recovery was limited to the value of the benefit conferred on the banks - or the value by which Metric's work enhanced the value of the banks' collateral. Although left to be resolved by further proceedings, it could be argued that the banks' total collateral value was only $2.6 million - the project's sale price. Deducting from this the value of project assets other than Metric's work and the value of the work Metric performed during the first nine months for which it had been paid, it is likely that the "enhanced value" of the banks' collateral would be significantly less than the more than $16 million owed Metric.
Thus, while the theory of unjust enrichment can be a powerful tool in recovering from a beneficiary of services with which no contractual relationship exists, such a recovery may be limited to the value of the benefit to the recipient - not the cost of providing that benefit.
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For more information about the issues covered in this report, please contact Clark Thiel in our San Francisco office at 415-848-4934 or at thielc@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2004 Howrey LLP
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