Tennessee Supreme Court Holds Contractor Potentially Liable For $300-Per-Day Penalty

June 30, 2021

The Tennessee Supreme Court today held that a general contractor may be required to pay a $300-per-day penalty under Tennessee law for its failure to pay a subcontractor for work completed on a Nashville construction project. Applying Tennessee’s Prompt Pay Act, the Court reversed the trial court’s decision that the subcontractor’s claim was filed too late; it held the general contractor could be liable for the penalty for the year before the subcontractor filed its lawsuit.

In 2013, general contractor Holladay Construction Group, LLC hired subcontractor Snake Steel, Inc. for structural and steel work on a construction project in Nashville for owner 2200 Charlotte Avenue, LLC. Tennessee law allows contractors to withhold “retainage,” that is, a percentage of the total pay withheld to ensure satisfactory completion of construction work. As allowed, Holladay withheld as retainage five percent of Snake Steel’s total compensation, approximately $18,000.

Early in 2014, Snake Steel satisfactorily completed its work on the Nashville project. In October 2014, Holladay paid Snake Steel for most of its work, but did not pay the $18,000 retainage. In 2015, the owner paid Holladay all amounts due, including all retainage withheld for subcontractors, including Snake Steel. Despite the fact that the owner had released all of the subcontractor retainage, Holladay still did not pay Snake Steel its retainage.

In September 2017, Snake Steel filed suit against Holladay in the Chancery Court for Davidson County. Among other things, the lawsuit alleged that Holladay’s failure to pay the retainage made Holladay liable to Snake Steel for penalties under the Prompt Pay Act.

The Prompt Pay Act was enacted to ensure that contractors and subcontractors on construction work are timely paid the full amount they are due. It allows owners and general contractors to withhold retainage, but to motivate prompt payment of the retainage, it requires them to deposit the retainage into a separate interest-bearing escrow account. Important to this case, if they fail to, the Act provides for a $300-per-day penalty for every day the retainage is not deposited in escrow.

Neither party was aware of the escrow requirement or the penalty until Snake Steel filed its lawsuit, so the retainage withheld for Snake Steel was never placed in escrow. In its lawsuit, Snake Steel sought payment of the retainage plus the $300-per-day penalty for several years, going back to when Snake Steel completed its work on the Nashville project. Once the lawsuit was filed, Holladay quickly paid Snake Steel the $18,000 retainage, so the only issue for the trial court was whether Holladay was liable for the penalty under the Prompt Pay Act.

The trial court dismissed Snake Steel’s claim. It held that the one-year statute of limitations applied and Snake Steel had filed its lawsuit too late. Snake Steel appealed to the Court of Appeals, which agreed that the one-year statute of limitations applied but said Snake Steel could recover the $300-per-day penalty for the one-year period before the lawsuit was filed. Holladay was then granted permission to appeal to the Tennessee Supreme Court.

Snake Steel argued that its claim should not be barred by the one-year statute of limitations because it could not have known Holladay had not deposited the retainage into an escrow account. The Supreme Court rejected this argument. Even though neither party was aware of the Prompt Pay Act requirements, it said, state statutes are public knowledge, so neither could rely on ignorance of the law. Snake Steel could have asked Holladay if the retainage was in an escrow account, but it did not.

The Supreme Court agreed with the Court of Appeals that Snake Steel’s claim was not entirely barred by the statute of limitations. It held Snake Steel could potentially recover the $300-per-day penalty from Holladay for the one-year period before the lawsuit was filed, a total of almost $110,000. This was based on the language of the Prompt Pay Act, which assesses the penalty “per day,” for “each and every day” retainage is not deposited into an escrow account. The Court also based its decision on the purpose of the Act, which was to prevent the very thing Holladay was accused of doing—for years after Snake Steel completed its work, Holladay allegedly kept the use and benefit of retainage that rightfully belonged to Snake Steel.

For that reason, the Court reversed the trial court’s dismissal of Snake Steel’s claim and remanded the case back to the trial court.

Justice Cornelia A. Clark, joined by Chief Justice Jeff Bivins and Justice Sharon G. Lee, filed a separate opinion, fully concurring in the majority opinion, but requesting that the Legislature clarify certain provisions of the Prompt Pay Act. Specifically, according to the concurring justices, it is not clear whether a general contractor, like Holladay, has an obligation under the Prompt Pay Act to deposit retainage originally withheld by the property owner for subcontractors, like Snake Steel, into a separate interest-bearing escrow account after it receives the retainage from the owner, or, instead, whether its only obligation is to pay the retainage to a subcontractor within ten days after receiving it from the owner. The concurrence asked the Legislature to amend the Prompt Pay Act to clarify that point.

To read the majority opinion in Snake Steel, Inc. v. Holladay Construction Group, LLC, authored by Justice Holly Kirby, and the separate opinion authored by Justice Cornelia Clark, go to the opinions section of TNCourts.gov.