Alliance Steel, Inc. v. Piercy

• Decision Date: 31 January 1996
• Docket Number: No. 4-95-0395,4-95-0395
• Citation: 277 Ill.App.3d 632,660 N.E.2d 1341,214 Ill.Dec. 392
• Parties: , 214 Ill.Dec. 392 ALLIANCE STEEL, INC., Plaintiff-Appellee, v. Curtis B. PIERCY, Justina H. Piercy and Linda Piercy, Defendants-Appellants (Pre-Engineered Steel, Inc., Bloomington Federal Savings & Loan Association, n/k/a Champion Federal Savings & Loan Association, and Bank of Carlock, Defendants).
• Court: United States Appellate Court of Illinois

Page 1341

660 N.E.2d 1341

277 Ill.App.3d 632, 214 Ill.Dec. 392

ALLIANCE STEEL, INC., Plaintiff-Appellee, v. Curtis B. PIERCY, Justina H. Piercy and Linda Piercy Defendants-Appellants (Pre-Engineered Steel, Inc. Bloomington Federal Savings & Loan Association, n/k/a Champion Federal Savings & Loan Association, and Bank of Carlock, Defendants).

No. 4-95-0395.

Appellate Court of Illinois Fourth District.

Jan. 31, 1996.

Frederic L. Kenney (argued), Winters, Featherstun, Gaumer, Kenney, Postlewait, Stock, Decatur, for Curtis B. Piercy.

David G. Lubben (argued), Keck, Mahin & Cate, Peoria, for Alliance Steel, Inc.

Presiding Justice COOK delivered the opinion of the court:

The trial court entered summary judgment in favor of a subcontractor (materialman) who had brought suit to foreclose a mechanic's lien. The owner appeals. We reverse and remand.

The affidavits filed in connection with the motion for summary judgment show the following facts. Curtis B. Piercy owns and operates Piercy Auto Body in Carlock, Illinois. On August 12, 1991, Piercy entered into a contract with Pre-Engineered Steel, Inc. (the contractor), to erect a steel building at Piercy's place of business. Under the contract, Piercy was to pay the contractor $39,000. The contractor in turn entered into a subcontract, August 27, 1991, with Alliance Steel, Inc., to supply the unassembled steel building which would be erected. Under the subcontract, the contractor was to pay Alliance $18,808.

On October 7, 1991, an Alliance truck driver delivered steel building materials to the Piercy jobsite. The Alliance truck driver requested that Piercy pay for the materials on delivery, and Piercy accordingly gave the driver a cashier's check, showing Piercy as the remitter, made payable to the contractor in the amount of $26,605. The check was received on October 8, 1991, by John Herring, Alliance's former accounts supervisor. Herring immediately faxed a copy of the check to the contractor. On the copy of the fax appear the following notations: (1) "Will send airborne to you tonight please return," (2) "Thanks, John," and (3) "20,000." In its brief, Alliance states the record is not clear whether John Herring made all these notes, and suggests that someone in the contractor's office may have written "20,000" after the fax was received. Alliance, however, did not submit any affidavit from Herring.

The contractor received the $26,605 check by airmail on October 9. That same day the contractor prepared and returned to Alliance a check in the amount of $20,000. The $20,000 check was received and negotiated by Alliance on October 9.

The contractor had previously been involved in other projects where Alliance was the supplier of building materials. In October 1991, the contractor owed Alliance more than $500,000 on those projects. Alliance's practice was that, in the absence of directions from the contractor, it would apply payments it received from the contractor at its discretion, usually on the oldest unpaid invoices. Sometime in October 1991, there was a meeting between the contractor and Alliance to discuss the need to bring the contractor current on its unpaid debts. Around this same time, Alliance decided it was going to start filing liens against the contractor's projects. When Alliance received the contractor's $20,000 check, Alliance did not apply that check to the Piercy account, but instead to two older accounts, Nos. 10796 and 11029.

On January 30, 1992, Alliance mailed a subcontractor's 90-day notice of claim of lien to Piercy. That was more than 90 days after the materials were furnished on October 9, but Alliance's president testified that other materials were furnished later and that the date of last delivery was November 7, 1991. On October 29, 1992, the contractor sent a $500 check to Alliance, with directions to apply it to the Piercy account. Then on December 11, 1992, the contractor sent a letter to Alliance, stating that the $500 check was in error and that the Piercy job was paid in full on October 9, 1991.

Alliance recorded its lien against the Piercy Auto Body real estate on February 20, 1992, then filed this action to foreclose its lien on February 13, 1993. The trial court entered summary judgment in favor of Alliance on February 16, 1995. Piercy appeals.

Alliance argues that Piercy breached his duty under section 5 of the Mechanics Lien Act (Act) (770 ILCS 60/5 (West 1994)) to demand a sworn written statement from the contractor listing the subcontractors and amounts due or to become due each. Alliance suggests that fact alone requires judgment in its favor, although it recognizes that "Piercy could have protected himself and Alliance in a second way, but again did not." That second way would have been to have withheld an amount sufficient to pay Alliance until receiving assurance (perhaps a lien waiver) that Alliance had been paid.

The Act attempts to balance rights and duties of owners, contractors, and subcontractors (materialmen). A subcontractor may give the owner written notice of its claim (and thereby protect itself against subsequent disbursements) any time after the subcontractor enters into its contract with the general contractor, but no later than 90 days after the subcontractor's completion of the contract. (770 ILCS 60/24 (West 1994).) Even if the subcontractor never gives notice to the owner, it is the owner's duty, before making any payments, to require the general contractor to provide a sworn written statement listing the subcontractors and amounts due or to become due each. (770 ILCS 60/5, 21 (West 1994).) The fact that the contractor gives a sworn written statement, however, does not afford complete protection to the subcontractor. The owner is protected against subcontractors not listed or amounts understated on the sworn written statement unless those omissions are with the knowledge or collusion of the owner. (770 ILCS 60/27 (West 1994).) A subcontractor who relies on the contractor's sworn written statement accordingly puts his trust in the contractor.

The Act provides that the owner shall not be required to pay a greater amount than the contract price "unless payment be made to the contractor * * * in violation of the rights and interests of the persons intended to be benefited by this act." (770 ILCS 60/21 (West 1994).) The Act provides that no payments to the contractor shall be regarded as rightfully made, "if made by the owner without exercising and enforcing the rights and powers conferred upon him in sections 5, 21 and 22 of this Act." (770 ILCS 60/32 (West 1994).) That is not to say, however, that every time a subcontractor is not paid in full there is a claim against the owner. The Act does not require that the owner obtain lien waivers before the owner makes any payments. (Contractors' Ready-Mix, Inc. v. Earl Given Construction Co. (1993), 242 Ill.App.3d 448, 454, 457, 183 Ill.Dec. 266, 270, 271-72, 611 N.E.2d 529, 533, 534-35 (where the sworn written statement understated the amount due the subcontractor).) The failure to obtain a contractor's sworn written statement does not result in absolute liability on the part of the owner. As Alliance concedes, there are other steps which an owner may take to protect itself.

Alliance concedes that it could have no complaint if Piercy had included its name on the $26,605 check made payable to the contractor, even if Piercy had not obtained a contractor's sworn written statement. In the present case, it appears that Alliance had the equivalent of its name on the check: the check was delivered into its possession by Piercy, and Alliance was free to (and did) impose any conditions it chose on the contractor's negotiation of that check. Piercy did not make payment to the contractor; he made payment to Alliance, although his check had the contractor's name on it. It is difficult to see how Alliance would have been any better off if Piercy had requested a contractor's sworn written statement before Piercy gave Alliance the $26,605 check made payable to the contractor.

It is no defense under the Act that the owner has paid the contractor the amounts due the subcontractor. (Hudson v. Caterpillar Tractor Co. (1983), 117 Ill.App.3d 720, 723, 73 Ill.Dec. 55, 58, 453 N.E.2d 880, 883.) An owner who simply pays the contractor runs the risk that the contractor will fail to pay the subcontractor. Even if the contractor pays the subcontractor, the owner runs the risk that general payments will not be designated to his account. A particular owner is not entitled to credit for general undesignated payments made by the contractor to the subcontractor, even if the funds are later traced from the owner to the contractor to the subcontractor. (See Liese v. Hentze (1927), 326 Ill. 633, 638-39, 158 N.E. 428, 430.) If the contractor does make payment to the subcontractor, however, and designates that the payment be applied to the owner's account, the owner will have a defense, even though he has not required a contractor's sworn written statement. See Associated Lumber Industries, Inc. v. Grammer (1977), 54 Ill.App.3d 39, 12 Ill.Dec. 33, 369 N.E.2d 530.

The trial court in this case focused on the contractor's $20,000 check to Alliance, concluding that the contractor did not make any specific designation how those funds would be applied. The court may very well be correct that the contractor made no specific designation, although it seems clear Alliance knew where the $20,000 came from. Even where there is no specific designation by the contractor, other circumstances may require the subcontractor to apply the payment to the owner's account. What is most important here is the delivery of Piercy's $26,605 check the previous day, not to the contractor but to Alliance itself. Once it had the $26,605 check in its possession, Alliance had complete power to protect itself on this project, and apparently did so, insisting that it receive $20,000 of the $26,605, and...