Home > Blogs > Construction Industry Counselor > Massachusetts Federal Court: Contractor and Contractor's Owner Personally Liable for Fraud and Conversion for Failing to Pay Subcontractor; Contractor Also Liable for Millions Resulting From Termination for Cause

Massachusetts Federal Court: Contractor and Contractor's Owner Personally Liable for Fraud and Conversion for Failing to Pay Subcontractor; Contractor Also Liable for Millions Resulting From Termination for Cause

Posted: October 13, 2021

A recent decision from the United States District Court for Massachusetts held a contractor and its owner personally liable for failing to pay a subcontractor and held that the contractor was liable for millions in damages to the owner resulting from owner’s termination of the contractor for cause. See BRT Mgmt. LLC v. Malden Storage, LLC, No. CV 17-10005-FDS, 2021 WL 4133298 (D. Mass. Sept. 10, 2021).

Contractor BRT Management LLC (“Contractor”) entered into three separate contracts with an ownership group, Banner Storage Group, LLC (“Owner”), for the construction of three self-storage facilities, two in Massachusetts, one in New York. In early 2015, the first project was completed and included a $300,000 settlement of a change order dispute. As part of that settlement, the Contractor waived its right to $178,171 in dispute.

On the next two projects, Contractor overbilled Owner for work by subcontractor Storage Structures (“Subcontractor”) on projects in New York and Massachusetts; $185,000 for work Subcontractor never performed on the New York project and $142,282 for work that Subcontractor never performed on the Massachusetts project. Despite settling the payment dispute on the original project, Contractor’s owner testified that Contractor was entitled to a $142,000 payment as compensation for punch-list work on the original Massachusetts project based on a supposed secret deal.   

Owner terminated Contractor for cause on the second and third projects. Owner alleged, and the Court agreed, that the Contractor properly was terminated for cause due to Contractor’s failure to timely complete the work, failing to timely and accurately complete pay applications, failing to pay a subcontractor, and failing to obtain a non-exclusive license for drawings and plans. Upon termination, Contractor instructed its subcontractors to not communicate with Owner. 

After a bench trial, the Court ruled strongly against the Contractor and the Contractor’s owner. Specifically, the Court held Contractor and Contractor’s owner personally liable for $185,000 and $142,282 for conversion and fraud in connection with receiving payment for Subcontractor work that never was performed. The Court also held Contractor liable to Owner for over $6.8 million in damages, consisting of costs incurred by Owner over and above the amount Owner had contracted to pay Contractor to complete both projects. Subsumed within the $6.8 million in damages are over $50,000 in damages resulting from Contractor’s tortious interference with Owner’s business relations due to Contractor directing its subcontractors not to communicate with Owner after Contractor had been terminated for cause. The Court also awarded Owner of its attorney’s fees and costs, to which Contactor has sought over $2 million dollars (no specific amount has been ordered as of the date of this blog).

This case serves as a reminder to contractors and their owners that there can be severe consequences for overbilling and defaulting on a contract’s performance obligations.