Opinion ID: 2089115
Heading Depth: 1
Heading Rank: 10

Heading: Holdbacks.

Text: The lien claimants argue they are entitled to the 10 percent holdbacks on the theory this money is presently due and owing to them on the theory of a third-party-beneficiary contract, a trust, or an escrow. The commitment and building-loan agreement between Associates and Monona and the financing agreement between these parties and Steel and the contracts of the subcontractors all provided for the payment of 90 percent of the value of the work performed, although waivers were required for 100 percent. Ultimately when the work was completed and finally accepted, the so-called holdback would be paid. The financing agreements also provided Associates need not make disbursements unless in addition to the lien waivers there was evidence to demonstrate that the undisbursed funds were sufficient to pay the remaining costs of construction and there were no defaults. The trial court correctly held Associates under the terms of its contract was not obligated to pay out the holdbacks because of Monona's breach. The cases relied on by the claimants for payment on a trust-fund doctrine are not applicable. The constructive trust is an invention of equity by which it imposes liability to prevent unjust enrichment and unfairness. Milwaukee v. Firemen Relief Asso. (1967), 34 Wis. 2d 350, 360, 149 N. W. 2d 589; Masino v. Sechrest (1954), 268 Wis. 101, 66 N. W. 2d 740; Bogert, Law of Trusts (4th ed. 1963), p. 208, sec. 77. Holdback provisions in construction contracts are frequently included for the benefit of the owner or for the joint benefit of the owner and the contractor's surety or lender. Quinn v. United States (1879), 99 U. S. 30, 25 L. Ed. 269; 13 Am. Jur. 2d, Building Contracts, p. 23, sec. 21; see Annot. (1937), Construction and application of provision of construction contract as regards retention of percentage of current earnings until completion, 107 A. L. R. 961. Where the mortgagor or the mortgagee has received all that he is entitled to receive by way of performance or security, the holdback or the amount thereof less any actual damages must be paid. Dullaghan v. Fitch (1877), 42 Wis. 679; Philadelphia, Wilmington & Baltimore Railroad Co. v. Howard (1851), 54 U. S. (13 How.) 307, 14 L. Ed. 157; Whiting-Meade Co. v. West Coast Bond and Mortgage Co. (1944), 66 Cal. App. 2d 460, 152 Pac. 2d 629; Ralph C. Sutro Co. v. Paramount Plastering, Inc. (1963), 216 Cal. App. 2d 433, 31 Cal. Rptr. 174. In this case there was no agreement between Associates and the lienholders to pay them any money other than disbursing loan funds on the conditions of the loan agreement with Monona. This is not a case of surplus funds or retained funds waiting to be disbursed only on the completion of the claimants' work. The project was not completed and Associates did not receive what it bargained for and its contract does not require payment. Associates has a mortgage but it is now subject to a $1,800,000 lien representing the cost of completing this project by the receiver in this action. Consequently, it cannot be said that Associates is unjustly enriched by not paying out the holdbacks and it would be inequitable to impress a constructive trust to do so. Recovery cannot be had under the theory of a third-party-beneficiary contract. This doctrine is discussed in Winnebago Homes, Inc. v. Sheldon (1966), 29 Wis. 2d 692, 139 N. W. 2d 606. In order to constitute these subcontractors a third-party beneficiary there must be a promise or the specific intention to benefit them in the agreement between Monona and Associates and the agreement must be made directly and primarily for the subcontractor's benefit. State Department of Public Welfare v. Schmidt (1949), 255 Wis. 452, 39 N. W. 2d 392. The loaning of money to finance the construction of a building and thus pay contractors is not a third-party-beneficiary contract. While such a contract indirectly inures to the benefit of the contractors, generally there is no specific provision for their direct benefit. But even if the contract between Monona and Associates were a third-party contract, the third-party beneficiaries' rights would be subject to the conditions requiring Associates to make the payments and Associates has a defense to the demands. The escrow theory likewise has no merit. To constitute an escrow, there must be contractual language establishing the funds in escrow. All we have in this record is an agreement to loan money upon certain conditions and to make payouts on behalf of the mortgagor on certain conditions. The agreement to loan did not establish an escrow fund and the contracts with the subcontractors did not establish one. There are other miscellaneous issues such as the restriction of testimony of the lienholders regarding their reliance upon payout procedures and a denial of a motion to modify findings. We have given consideration to them but find they are without merit and do not warrant discussion. By the Court. Judgment affirmed.