Jordan Ramis pc. Attorneys at law
Unjust Enrichment: A High Wire Act of Uncertainty
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This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

BY JACOB ZAHNISER

This article originally appeared in the March 13, 2017, edition of the Oregon State Bar Construction Section Newsletter.

“A person who has been unjustly enriched at the expense of another is required to make restitution to the other.”[1] In the construction context, subcontractors working on private projects have lien rights securing payment. However, it is not uncommon for subcontractors to void their lien rights inadvertently. In that scenario, when the subcontractor remains unpaid by the general contractor, because of insolvency or another reason, the subcontractor may look to the owner for payment under the theory of unjust enrichment. Whether the subcontractor will be successful in that claim is another story.

The three common elements of an unjust enrichment claim are: (1) a benefit conferred, (2) awareness by the recipient that it received the benefit, and (3) it would be unjust to allow the recipient to retain the benefit without requiring payment.[2] In construction disputes, the first two elements are almost always satisfied: owners clearly receive benefits from the materials and services the subcontractor provides and owners are generally aware it is receiving those benefits. The key issue in almost all disputes involving unjust enrichment in a construction context, is whether the owner’s retention of the benefit without payment would be “unjust.” In other words, at the heart of an unjust enrichment dispute is the question of what makes enrichment unjust.

There are three elements to determine if an enrichment would be unjust: “‘(1) the plaintiff had a reasonable expectation of payment; (2) the defendant should reasonably have expected to pay; or (3) society’s reasonable expectations of security of person and property would be defeated by non-payment.’”[3]

In the construction context, an injustice may also exist when a subcontractor has no remedy against the general contractor. For example, in Tum-A-Lum v. Patrick,[4] the plaintiff was a material supplier for the construction of a barn on the defendant’s property. The general contractor ceased working on the project, and the owner would not pay for the materials provided for the project. The material supplier sued the owner for unjust enrichment. In reviewing the claim, the Court observed as follows:
 
In order to state a claim for unjust enrichment, a complaint must contain allegations that the ‘enrichment’ was ‘unjust.’ The mere fact that a benefit was conferred is insufficient. On facts similar to those alleged by plaintiff, a majority of courts have held that, before recovery can be obtained against the landowner, the furnisher of the materials must have exhausted all remedies against the contractor and still remain unpaid.

We adopt the majority rule and hold that, under facts such as pled here, a material element that must be alleged and proved for a claim of unjust enrichment to succeed is that the remedies against the contractor were exhausted. * * * [A] furnisher of materials must exhaust all remedies against the contractor before the ‘enrichment’ can be ‘unjust.’[5]
 
Thus, before an owner’s enrichment will be considered “unjust,” the unpaid subcontractor must first “exhaust” its remedies against the general contractor.

What is exhaustion of remedies?

At one end of the spectrum, the Courts hold that simply naming the general contractor in the lawsuit is not exhaustion.[6]  Beyond that, the Oregon courts have not ruled on what it means to “exhaust” remedies. Nevertheless, the two primary authorities cited by the Court in Tum-A-Lum, Idaho Lumber, and Paschall may provide some additional guidance.

First, the court in Idaho Lumber adopted the same exhaustion requirement and found it satisfied by the general contractor's bankruptcy:
 
Idaho Lumber furnished labor and materials, benefitting the property of Buck [the owner] with whom it had no privity of contract. Idaho Lumber then brought suit against Walker [the general contractor], with whom it did have a contract, but was thwarted by Walker's subsequent bankruptcy. Therefore, Idaho Lumber may maintain an action in quasi-contract against Buck to recover the benefit unjustly retained, so long as the essential elements of quasi-contract are present.[7]
 
Similarly, the court in Paschall determined the plaintiff-subcontractor could recover from the property owner with whom it had no contractual privity because the contractor had thwarted the subcontractor's efforts to collect payment by subsequently declaring bankruptcy.[8]

The question remains, however, whether the remedies are “exhausted” at the filing of the bankruptcy petition or must the supplier or subcontractor pursue their claims to completion in the bankruptcy proceeding prior to seeking payment from the owner. Again, while there is no Oregon case on point, sister jurisdictions have addressed this issue. For example, in UTCO Associates LTD. v. Zimmerman,[9] the Court confirmed an aggrieved subcontractor under Utah law would have to see the bankruptcy proceeding through to the end before it could assert its unjust enrichment claim against the owner unless pursuit of a claim in bankruptcy would, “‘in all likelihood, be fruitless.’”[10]

The substantive principles distilled from Idaho Lumber, Paschall, and UTCO, are as follows: (a) it is not unjust for an owner to retain the benefit of a subcontractor without payment unless the subcontractor cannot obtain payment from the general contractor; and (b) the general contractor’s bankruptcy exhausts the subcontractor’s remedies against it where pursuit of the claim in bankruptcy would be fruitless. Viewed in this light, the exhaustion requirement has a practical element: in order for the owner to be unjustly enriched, the subcontractor must have no practical remedy against the general contractor.

Does exhaustion include pursuing lien rights?

Again, the issue is unsettled in Oregon. The Court in Tum-A-Lum Lumber references lien rights and exhaustion in an ambiguous manner. The Tum-A-Lum Lumber opinion states the plaintiff “could have filed a construction lien against defendants’ property pursuant to ORS 87.001, et seq.” and then notes that “plaintiff did not sue the contractor or file a lien against the property,” which “clearly establishes that plaintiff did not exhaust its remedies against the contractor.”[11] This suggests the Court in Tum-A-Lum Lumber equated a failure to properly perfect a construction lien with a failure to exhaust available remedies.

However, the Court’s observations were relegated to a series of footnotes. Had the Court desired to equate a failure to perfect a construction lien with a failure to exhaust available remedies it could easily have done so in clear simple language: the issue of exhaustion and valid lien rights was squarely before the Court. Further, the Court made clear that, before proceeding against the owner in unjust enrichment, the subcontractor was required to exhaust its remedies “against the contractor.”  A lien foreclosure claim is not necessarily a remedy against the contractor. While a general contractor would be a necessary party to a lien foreclosure action by an aggrieved subcontractor[12], the foreclosure claim itself is not against the contractor per se—the lien simply serves as a security device if the claimant otherwise proves its entitlement to recovery of amounts owed by the contractor. Should the sale of the property upon foreclosure satisfy the amounts owed the aggrieved subcontractor, no further recovery would take place against the contractor.

Thus, whether an element of a subcontractor’s unjust enrichment claim includes pursuit of lien rights is a subject of continued litigation.

Is payment to the general contractor an element of the unjust enrichment claim or a defense?

Perhaps the most commonly asserted fact—in cases where it is such a fact— is the issue of owner’s payment. Specifically, where the owner already paid the general contractor for all, or at least a substantial part of, the amount due, does equity require the owner to pay twice? Related to this issue is who has the burden to prove payment: does the subcontractor need to prove that the owner did not pay the general contractor or does the owner need to prove that they did pay the general contractor?

Not surprisingly, there is no clear answer to these issues under Oregon law. National authorities suggest the owner’s full payment to the general contractor defeats an unpaid subcontractor’s unjust enrichment claim, but a partial payment does not.[13] The requirement for full payment makes sense because in a partial payment scenario, the owner is retaining a benefit it otherwise agreed to pay for. No published Oregon opinion has decided this issue.

As noted above, the third element of an unjust enrichment claim is that “‘it would be unjust to allow the recipient to retain the benefit without requiring her to pay for it.’”[14] This element does not indicate whether an owner’s payment to the general contractor is an element of the claim. However, if the owner already paid for the improvement, it may not be unjust for him to retain the benefit without paying again for the same improvement: “unjust enrichment claims distill to the issue of the ‘acquisition or retention’ of property under circumstances where injustice would result if the defendant was not forced to return the property to the plaintiff.”[15]

Nevertheless, Oregon is no stranger to requiring an owner to pay twice for the same work.[16] Further, to cast the burden to prove the negative (i.e., the owner did not pay the general contractor) upon the subcontractor raises an almost insurmountable obstacle to the subcontractor’s recovery. Typically, a subcontractor would not be aware of whether the general contractor was paid, in part, in full, or not at all. It would be next to impossible for the subcontractor to prove this negative fact because they do not traditionally have access to those payment documents.

Where the substantive law does not dictate which party has the burden of proof on an issue, the Oregon Courts take the following factors into consideration when allocating the burden of proof:
 
1. Precedent; 2. Whether the facts are within the peculiar knowledge of a party; 3. Whether the party has the burden of pleading the affirmative allegation; 4. Upon whose case is the existence of the fact essential; 5. Probability. The extent to which a party's contention departs from conduct which would be expected in the light of ordinary human experience; 6. Whether disfavored contentions (fraud, contributory negligence, statute of limitations, truth in defamation) should be handicapped; 7. In case of a statute, whether the application of the statute is essential to a party's right to recover; 8. In case of a statute, the policy which the statute aims to effect; 9. Timing. Whether matters occurring after the accrual of a cause of action should be treated as affirmative defenses; 10. Whether the burden should be imposed upon the one who pleads the facts; 11. Whether the burden should be imposed on the one who invokes the judicial remedy.[17]
 
Thus, issues over whether owner’s full or partial payment is an element of the unjust enrichment claim or defense and who has the burden to prove payment will be hotly contested.

Conclusion

Obviously, the unpaid subcontractor’s best option for recovery is to timely perfect and pursue its lien rights. Where that is not possible, and the general contractor is insolvent or otherwise a fruitless source of recovery, the subcontractor can turn to the owner for payment under a theory of unjust enrichment.
 
[1] Restatement of Restitution (1937), § 1.
[2] Grimstad v. Knudson, 283 Or App 28, 42 (2016) (quoting Winters v. County of Clatsop, 210 Or App 417, 421 (2007)).
[3] Grimstad, 283 Or App at 42 (quoting Cron v. Zimmer, 255 Or App 114, 130 (2013))
[4] 95 Or App 719 (1989).
[5] Tum-A-Lum, 95 Or App at 721-22 (citing Idaho Lumber, Inc. v. Buck, 109 Idaho 737, 710 P2d 647 (1985) and Paschall's, Inc. v. Dozier, 219 Tenn 45, 407 SW2d 150 (1966)). See also Star Mountain Ranch v. Paramore, 98 Or App 606, 610-11 (1989) (“[A] supplier cannot state a claim for unjust enrichment against a landowner unless the supplier first exhausts all the remedies that it may have had against the contractor”).
[6] L.S. Henriksen Construction, Inc. v. Shea, 155 Or App 156 (1998).
[7] 701 P2d at 655-56.
[8] 407 SW2d at 152 (noting the person ordering the materials “was adjudicated a bankrupt”); id. at 155-56 (remanding “to determine whether or not the defendant [owner] has been so unjustly enriched at the detriment of the complainant [subcontractor] so as to require him to make compensation therefor”).
[9] 419 Utah Adv. Rep 7, 27.P3d 177 (2001).
[10] UTCO, 27 P3d 177 at 181 (citing Knight v. Post, 748 P2d 1097, 1099 (1988)).
[11] 95 Or App at 721, fn. 2, 722, fn. 4.
[12] ORS 87.060(7).
[13] See e.g., Nation Elec. Contracting, LLC v. St. Dimitrie Romanian Orthodox Church, 144 Conn App 808, 74 A3d 474 (2013) (affirming unjust enrichment verdict for subcontractor’s unpaid work despite owner’s partial payment to general contractor); Ontiveros Insulation Co., Inc. v. Sanchez, 129 NM 200, 3 P3d 695 (N.M.Ct.App.2000) (holding that, where homeowners had not paid a very “substantial amount” of funds due to a general contractor, the subcontractors could pursue quasi-contractual relief against the homeowners); Commerce P'ship 8098 Ltd. P'ship v. Equity Contracting Co., 695 So2d 383, 388 (Fla. Dist. Ct. App. 1997), as modified on clarification (June 4, 1997) (noting that “while it may be unjust that a subcontractor was not paid for its services, that injustice was not visited upon the subcontractor by the owner who paid the general contractor in full, but by the general contractor who hired the sub”); Flooring Systems, Inc. v. Radisson Group, Inc., 160 Ariz 224, 772 P2d 578 (1989) (affirming unpaid subcontractor’s unjust enrichment claim where owner withheld $25,000 in retainage); Federal Land Bank of New Orleans v. Jones, 456 So.2d 1 (1984)(affirming unpaid subcontractor’s unjust enrichment claim where owner made two out of three disbursements to general contractor); Green Quarries, Inc. v. Raasch, 676 S.W.2d 261, 264 (Mo. Ct. App. 1984) (“In resolving the issue whether a landowner has been unjustly enriched by a subcontractor's improvements on the owner's real estate, the courts have repeatedly looked to whether the landowner has already paid the general contractor the amount due the general contractor under their express contract. * * * If the owner has indeed paid the general contractor for the materials, the owner's retention of them without further payment has been found not to constitute unjust enrichment”) (internal citations omitted); Holiday Dev. Co. v. J.A. Tobin Constr. Co., 219 Kan. 701, 549 P.2d 1376, 1383 (1976) (explaining, in an analogous unjust enrichment case, that “the prime contractor may already have been paid in full by the owner for the improvements furnished by the subcontractor or materialman and there really is no unjust enrichment”); Paschall's, supra. 219 Tenn 45, 57, 407 SW2d 150, 155 (observing in conclusion that the “most significant requirement” for an unjust enrichment claim was whether the owner already paid for the work: “if the landowner has given any consideration to any person for the improvements, it would not be unjust for him to retain the benefit without paying the furnisher”).
 
[14] Grimstad, supra.
[15] Grimstad, supra. 283 Or App at 44.
[16] See ORS 87.023
[17] Nelson v. Hughes, 290 Or 653, 658-59 (1981).