State ex rel. General Elec. Supply Co. v. Jordano Elec. Co., Inc.

• Decision Date: 08 August 1990
• Docket Number: No. 89-1053,89-1053
• Citation: 558 N.E.2d 1173,53 Ohio St.3d 66
• Parties: The STATE, ex rel. GENERAL ELECTRIC SUPPLY COMPANY, Appellant, v. JORDANO ELECTRIC COMPANY, INC. et al., Appellees, W.G. Fairfield Company et al., Appellants.
• Court: Ohio Supreme Court

Page 66

53 Ohio St.3d 66

558 N.E.2d 1173

The STATE, ex rel. GENERAL ELECTRIC SUPPLY COMPANY, Appellant, v. JORDANO ELECTRIC COMPANY, INC. et al., Appellees W.G. Fairfield Company et al., Appellants.

No. 89-1053.

Supreme Court of Ohio.

Submitted May 30, 1990.

Decided Aug. 8, 1990.

John F. Berry, Columbus, for appellant General Elec. Supply Co.

Emens, Hurd, Kegler & Ritter, Thomas W. Hill and David A. Kulwicki, Columbus, for appellees.

Lesh, Casner & Miller Co., L.P.A., and Rex W. Miller, Canton, for appellant W.G. Fairfield Co.

Elleman & Newcome and Ron E. Newcome, Columbus, for appellant Cent. Ohio Depository.

WRIGHT, Justice.

The issue before us is whether CMHA is entitled to a setoff against the funds in escrow to remedy Jordano's failure to perform its contract with CMHA. For the reasons that follow, we hold that CMHA is entitled to the setoff and the court of appeals correctly affirmed the trial court's grant of partial summary judgment to CMHA.

To determine the rights of the parties we must examine the statutory scheme set out in R.C. Chapter 1311 concerning mechanics' liens filed by subcontractors, materialmen, laborers, and mechanics on escrow payments to contractors on public projects. The pertinent statutes are R.C. 1311.26, 1311.28, 1311.29, 1311.31, and 1311.32. R.C. 1311.26 provides that a subcontractor, materialman, laborer, or mechanic who has provided labor or material for a project, pursuant to a contract between the principal contractor or subcontractor and the owner, may, within four months of completing the work, file " * * * a sworn and itemized statement of the amount and value of such labor performed, and material, fuel, or machinery furnished, * * * containing a description of any promissory notes that have been given by the principal contractor or subcontractor to the lien claimant on account of the labor, machinery, or material, or any part thereof, with all credits and setoffs thereon * * *."

R.C. 1311.28 requires that when the lien claimants have filed their statements, an owner which is a governmental entity " * * * shall detain from the principal contractor all subsequent payments as do not in the aggregate exceed such claim or claims." The funds are to be placed " * * * in an escrow account as provided for under section 153.63 of the Revised Code, to be released at such times, in such amounts, and to such persons as may be ordered by a court of competent jurisdiction or by agreement of the principal contractor and the subcontractor, materialman, laborer, or mechanic who filed the notice provided for in section 1311.26 of the Revised Code."

Once the principal contractor receives notification from the owner or lien claimant that a statement has been filed, R.C. 1311.31 gives the principal contractor ten days in which to " * * * give notice of his intention to dispute such claim * * *." Otherwise, " * * * he has assented to its correctness, * * * " and the lien claimant may be paid by the method set out in R.C. 1311.29.

Finally, R.C. 1311.32 allows lien claimants to bring an action in mandamus to enforce the duty to pay them. Or, the lien claimant may bring an action against the owner to recover " * * * the whole or a pro rata amount of his claim or estimate, not exceeding in any case the balance due to the principal contractor. * * * "

The parties followed the above described procedure in this case: GESCO, COD, and Fairfield filed their statements, the amount due Jordano was placed in escrow, Jordano failed to dispute the claims, and GESCO resorted to mandamus to recover its past due payments. The plan proceeded smoothly, and even though Jordano and Merchants were unable to pay the lien claimants, the escrow funds provided an alternate source of funds for at least partial payment. The difficulty arose only when CMHA claimed a setoff.

The purpose of this statutory scheme is to protect subcontractors, materialmen, and the like from defaulting principal contractors: "Section 1311.26 et seq., Revised Code (in effect prior to September 30, 1963), afford a species of garnishment to protect a subcontractor, laborer or materialman against the risk of loss of payments due him should such payments reach his principal contractor in whose hands they may be subject to the creditors or caprice of the latter." Lee Turzillo Contracting Co. v. Cincinnati Metro. Hous. Auth. (1967), 10 Ohio St.2d 5, 39 O.O.2d 3, 225 N.E.2d 255, paragraph one of the syllabus. Moreover, the " 'principal object [of the statutes] * * * is to provide security for a class of persons whose claims gradually accumulate from day to day, and who can not protect themselves in any other way' (Clark & Co. v. Parker (1882), 58 Iowa 509, 12 N.W. 553). * * *." Id. 10 Ohio St.2d at 11-12, 39 O.O.2d at 7, 225 N.E.2d at 260.

What is also clear from the case law is that the rights of GESCO, COD, and Fairfield as lien claimants are subordinate to those of the principal contractor, Jordano. In Bullock v. Horn (1886), 44 Ohio St. 420, 7 N.E. 737, decided on the basis of the predecessor statutes to R.C. 1311.26 to 1311.32, this court stated that " * * * the rights of the workman and material-man, as against the owner are based upon the latter's contract with the contractor, and * * * are subordinate to the contract * * *." Id. at 424, 7 N.E. at 739. We reiterated this principle in Turzillo, supra, 10 Ohio St.2d at 12, 39 O.O.2d at 7-8, 225 N.E.2d at 260-261: "The subcontractor, to 'the extent of his demand, takes the place of the contractor, so that, if the owner, as against the latter, can withhold the payment of the moneys earned, he can do so, in like manner against the demands of the former. The test is, whether a suit for the money in question will lie by the [general] contractor against the owner. Reeve v. Elmendorf, 38 N.J.L. 125, 130; Stone Post Co. v. Corcoran (1910), 80 N.J.L. 549, 77 A. 1031, 1032." (Emphasis added.) See, also, In re Schilling (N.D.Ohio 1918), 251 F. 966, 971.

The lien claimants do not dispute the fact that Jordano did not earn the final payment that CMHA paid into escrow. Jordano has no claim to that payment since the bankruptcy court provided in lifting the automatic stay that Jordano's estate abandoned its interest in the subject matter of this action. Standing in the shoes of Jordano, then, the lien claimants have no right to the escrow funds in the face of CMHA's claim to a setoff.

The lien claimants assert, however, that the 1963 and 1975 amendments to R.C. 1311.28 evince the legislature's intent to fix the rights of a lien claimant to the detained money at the moment the funds are put in escrow, giving the lien claimant priority over the owner's claimed setoff. Because Horn and Turzillo, supra, were decided under the pre-1963 version of R.C. 1311.28, the lien claimants assert that the principle expounded in those cases, that lien claimants' rights can rise no higher than those of the principal contractor, has been statutorily modified.

Before it was amended in 1963, R.C. 1311.28 provided that upon receiving notice of the filing of a lien pursuant to R.C. 1311.26, the owner was to stop payments to the contractor and detain the money in its own hands. When, on completion of the principal contractor's work, the sum due to the contractor was ultimately determined, that sum became due to the lien claimants. Thus, GESCO and the other lien claimants assert, before the 1963 amendment of R.C. 1311.28 the lien claimants were limited to what was due to the contractor.

The 1963 amendment provided for sums to be detained from interim payments to the principal contractor to satisfy the mechanics' liens. According to GESCO, COD, and Fairfield this amendment represents...