Washington Receiver Rights Upheld in Years-Long Battle with Construction Industry

This article recently appeared in the King County Bar Association.

Workarounds can be effective in the construction world. Unfortunately, they do not work in a court of law, especially when it involves control of assets for companies operating under a receivership. Having just prevailed in two landmark cases that went all the way to door of the Washington State Supreme Court, the intersection of contract law and receivership law in contractor pay disputes has been clarified.

With one short declarative statement, “…the petition for review is denied,” the State Supreme Court drove the final nail into four years of arguments put forth by legal counsel in separate cases involving construction companies – and later joined by two trade associations who filed friend of the court briefs – over who has ultimate control and decision-making authority over liquid assets in receivership. The answer: It is the court-appointed receiver.

By summarily turning away both cases, the Supreme Court left standing earlier orders from Washington State Superior Court and the thorough and thoughtful opinions of the Division 1 Court of Appeals in favor of the receiver. Both cases involved financial disputes that started between general contractors and sub-contractors where work was either not performed or payments not made to materials suppliers. That is when the general contractors tried to take matters into their own hands, literally and figuratively.

The Grab for Cash

In the first case, Revitalization Partners, L.L.C. (RP), as the court-appointed receiver for contractor Applied Restoration, Inc. (ARI), initiated legal proceedings against ARI’s general contractor Andersen Construction Company when the large company tried to claw back funds paid to ARI once it learned the troubled contractor had entered receivership. Andersen, working through ARI contacts, initially managed to pull it off, prompting Nathan Riordan, RP’s lead counsel at Wenokur Riordan PLLC, to successfully obtain a court order mandating turnover of the receivership’s monies.

In response, Andersen launched a series of legal maneuvers arguing against compliance, ultimately telling the court that the funds in dispute were subsequently invested in a project controlled by the Tulalip Indian tribe and that any legal remedies would need to be pursued through tribal court. Andersen proceeded to pursue every avenue of appeal and challenge the receiver at every turn, ultimately losing motions and appeals a total of 13 times.

While that was underway, legal proceedings by RP in a second receivership, of sub-contractor Castle Walls, LLC, against its general contractor, Johansen Construction Company, LLC, began. Although shorter in duration, it was no less byzantine as the parties thoroughly explored the scope of the receiver’s authority in protecting and recovering assets of the estate.

Like the ARI dispute, the general contractor managed to improperly, after the sub-contractor had been placed into receivership, seize from the receiver’s bank account a sizable sum of money in the amount it had paid to Castle Walls before the receiver’s appointment. Johansen was able to do so by reversing a deposit through the banking system of a check that had been issued by Johansen jointly payable to Castle Walls and a materials supplier. Johansen believed it had the unilateral right to do this because the check had not been endorsed by the joint payee, and Castle Walls had failed to pay for the materials. The reversal caused an overdraft on the receiver’s bank account and resulted in funds going to Johansen. Then the general contractor refused to repay the receiver as mandated by law, forcing John Knapp and David Neu, RP’s counsel at Miller Nash LLP, to start legal proceedings to enforce the automatic stay and seek turnover of the money.

Legal Log Rolling

While the primacy of receiverships in cases such as these may be obvious to experienced bankruptcy attorneys, lawyers for the construction industry contended otherwise – specifically, that their contractual provisions should reign without restriction. Over nearly four years, their arguments ranged from abuse of discretion by the lower court (the standard of review by an appellate court when previous rulings are based on the facts in an equitable proceeding), to alleged procedural errors in turnover actions where there are allegedly bona fide disputes, and, finally, the contention that receivers are entitled to no more and no less benefit than the debtor over which they have been appointed in a receivership proceeding. In other words, “they must stand in the shoes” of the contracting party and its rights under the contract. Judges and justices did not find any of those arguments sufficiently persuasive to overturn existing law.

The financial motive for the general contractors was clear: Avoid paying twice for contracted work and materials, since the assets to pay sub-contractors and suppliers were under the control of a receiver who is appointed by the court to represent the interests of ALL creditors and to pay claims in the order of their statutory priority. There is the inherent risk that there will ultimately be insufficient funds to satisfy those claims in full at time of liquidation or sale of the company. Additionally, the general contractors will be responsible to clear liens on the properties where the work was performed or materials were supplied without payment. The general contractors elected to take preemptive measures in an attempt to secure their own individual interests and compensate for their liability on those liens, in direct contravention to foundational receivership law.

In the end the general contractors’ efforts were denied. The result is a victory for the receivership process and provides practical clarity for the construction industry on how to collect on claims and to give proper deference to the court and receiver when assets are part of a receivership estate.

RP’s attorneys carefully and patiently explained how the receivership system was established by the legislature, how it is rooted in past practice yet enhanced by express statutory provisions, and is the filter through which contractual rights are enforced.

Receivers throughout Washington are grateful for the courts’ guidance, support, and instruction in giving effect to that law. The biggest winners, though, were the creditors who rely on modern receivership law to ensure equitable treatment. By turning away attempts to crack the foundation of these laws, some dating back nearly a century, the courts protected the collective interests of ALL creditors, which is precisely what the legislature intended when passing them and receivers have a duty to protect.

Al Davis serves as Principal at Revitalization Partners, L.L.C, a corporate and board advisory firm that specializes in restructuring and receiverships. Through RP, he is a Court Appointed General Receiver in the State of Washington as well as an interim CEO and advisor to middle market companies. He can be reached at adavis@revitalizationpartners.com or (206) 903-1855.