Suppose you're a prime contractor with a financially-shaky
sub, and you agree with the sub's secured lender to make
payments directly to the lender. But someone forgets
to alert your accounts payable person or group, and so your
company continues to pay the sub directly, to the tune of $3.8
million. The sub later goes out of business, and the
lender ends up with a shortfall of $500,000 on its secured line of
credit. The lender then sues you, the prime contractor,
seeking not just the $500,000 shortfall but the entire $3.8
million. What is the outcome under the Uniform Commercial
Code (UCC)?
That was the case decided this week by the Massachusetts Supreme
Judicial Court1. On the facts as outlined above,
the SJC held that the lender was entitled to recover, under the
UCC, the entire amount of misdirected
payments, even though that amount exceeded its actual
losses. Once the contractor received notice of the sub's
assignment of rights to the lender, the
