It's a problem that many subcontractors face. The general contractor fails to pay all the amounts that are due for the subcontractor's work. Then the general contractor proves to be insolvent. The owner has held back funds in retainage. The subcontractor does not have the right to assert a mechanic's lien claim (although it may have a right to make a claim against a bond) in a public works project, which frequently helps solve this problem in a private contracting relationship.

In a recent case, a general contractor had been discharged by the State of Indiana because of dissatisfaction with the quality and pace of the contractor's work. A subcontractor on the project, which obtained a judgment against the general contractor for unpaid work and services, contended that the discharged general contractor "owned" funds held in retainage. The subcontractor contended that the claim was not asserted directly against the state, which the subcontractor conceded would fail because there was no contractual relationship between the state and the subcontractor. The subcontractor also conceded that the state had not been unjustly enriched by the subcontractor's work because the state had paid the general contractor for the work performed by the subcontractor. Nevertheless, the subcontractor contended that it was entitled to assert a claim on the money that the state held for the general contractor in retainage.

The Indiana Court of Appeals disagreed. It concluded that the subcontractor had made no showing that the general contractor "owned" the retainage. Rather, the court concluded that the state was entitled to set off amounts due to the general contractor that were held in retainage against the amounts owed by the general contractor because of the general contractor's breach of the parties' contract.

Case citation for lawyers: Department of Natural Resources v. CCI, LLC, 860 N.E.2d 651 (Ind. Ct. App. 2007).