SENATE BILL REPORT

SB 6655

BYSenator Lee

Establishing new procedures for managing the proceeds of construction loans.

Senate Committee on Economic Development & Labor

Senate Hearing Date(s):January 23, 1990

Senate Staff:Dave Cheal (786-7576)

AS OF JANUARY 22, 1990

BACKGROUND:

In order for the construction industry to function efficiently and smoothly, funds must flow promptly and be directed properly.  Construction projects of any consequence involve many players:  the prime contractor, one or more layers of subcontractors, material and equipment suppliers, professionals of various disciplines, one or more lenders, and of course the owner.  Cash from the owner or the lender passes through several different hands during the life of the project.

The failure of the owner or prime contractor or subcontractor to make payments promptly can exert considerable hardship on those to whom payment is due.

There are many opportunities for misappropriation of funds, or failure to pay, which can result in an owner having to pay a lien claim after having fully paid the contractor.

Insolvency proceedings and changing corporate identities can shield clearly improper misallocation of funds.

SUMMARY:

Interim or construction financing proceeds received by an owner or contractor or money received by a prime contractor or subcontractor from the owner for use in the improvement of real property are considered to be held in trust for the benefit of persons who furnish labor, materials, equipment or professional services on behalf of the project.

Funds held in trust are not required to be placed in a separate account.  However, use of funds held in trust by an owner, prime contractor, or subcontractor for any purpose other than to pay those to whom the funds are due is prime facie evidence of intent to defraud in a civil action.

Any officer, director or employee of an entity that retains or uses money held in trust for any other purpose than to pay those to whom it is due, with intent to defraud, is personally liable to the person damaged and the retention or misuse of the money constitutes a violation of Chapter 19.86 RCW, the Consumer Protection Act.

A right to prompt payment by those performing under construction contracts is provided.  Those performing under a contract with an owner in which no specific time for payment is provided shall be paid within the earlier of 30 days after the owner takes possession, or 30 days after the occupancy permit is granted.  If the contract provides for a specific time for payment then payment must be made within seven days of that time.

If the contract is with someone other than an owner, then payment is to be made within seven days after the prime contractor or subcontractor receives the payment from which payment to its subcontractor is to be made.

After 21 days from the days specified for payment, the person entitled to payment is also entitled to a penalty of 1 percent per day up to a maximum of 15 percent of the contract amount.  A court may impose a higher penalty.

Courts are also given express authority to award equitable relief, interest and costs, and in a proper case, attorneys' fees to the prevailing party.

Appropriation:  none

Revenue:   none

Fiscal Note:    none requested