Brown Wholesale Elec. Co. v. Beztak of Scottsdale, Inc.

• Decision Date: 05 February 1990
• Docket Number: No. CV-89-0178-PR,CV-89-0178-PR
• Citation: Brown Wholesale Elec. Co. v. Beztak of Scottsdale, Inc., 163 Ariz. 340, 788 P.2d 73 (Ariz. 1990)
• Parties: BROWN WHOLESALE ELECTRIC COMPANY, a California corporation, Plaintiff-Appellee, v. BEZTAK OF SCOTTSDALE, INC., an Arizona corporation, in its capacity as General Partner of Beztak Scottsdale Ranch Limited Partnership, a Michigan limited partnership; Beztak Scottsdale Ranch Limited Partnership, Defendants-Appellants.
• Court: Arizona Supreme Court

Page 73

788 P.2d 73

163 Ariz. 340

BROWN WHOLESALE ELECTRIC COMPANY, a California corporation, Plaintiff-Appellee, v. BEZTAK OF SCOTTSDALE, INC., an Arizona corporation, in its capacity as General Partner of Beztak Scottsdale Ranch Limited Partnership, a Michigan limited partnership; Beztak Scottsdale Ranch Limited Partnership, Defendants-Appellants.

No. CV-89-0178-PR.

Supreme Court of Arizona, In Banc.

Feb. 5, 1990.

Strong and Pugh, P.A. by William K. Strong, Phoenix, for plaintiff-appellee.

Jennings, Kepner & Haug by Donald W. Hart and Chad L. Schexnayder, Phoenix, for defendants-appellants.

CORCORAN, Justice.

Plaintiff-Appellee Brown Wholesale Electric Company (Brown) seeks review of the court of appeals' reversal of the trial court's grant of summary judgment in its favor. We granted review to consider the applicability and effect of the joint check rule in materialmen's lien cases. We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3), and A.R.S. § 12-120.24.

FACTS AND PROCEDURAL HISTORY

Brown brought this action to foreclose a mechanics' and materialmen's lien. Brown is an electrical supply company that provided materials for use in the construction of the La Privada apartment project at Scottsdale Ranch. Defendant-Appellant Beztak of Scottsdale, Inc. (Beztak) is the general partner of Beztak Scottsdale Ranch Limited Partnership, owner of the real property where the project is located. Beztak engaged Beztak of Arizona, Inc. (BOA), an affiliated company, as general contractor.

Brown supplied materials pursuant to a subcontract with High Sierra Electric, the electrical subcontractor on the La Privada project. High Sierra commenced performance in late 1984, and Brown first delivered materials on February 13, 1985. The BOA/High Sierra subcontract provided for payments to be made pursuant to a progress schedule. The project consisted of 38 buildings, and the work to be done by High Sierra on each building was divided into 3 phases, namely, underground, rough-in, and finish. A payment schedule in the BOA/High Sierra contract listed the price to be paid for each phase of electrical work on each building. These figures totalled $550,000.00, the subcontract price. BOA was to make monthly progress payments to High Sierra. To obtain payment, High Sierra submitted invoices to BOA covering particular buildings on which it had completed either underground, rough-in, or finish. No payment was required for work that fell short of these specified progress levels. The invoices from High Sierra to BOA included within the total amount a figure for the materials purchased by High Sierra from Brown. BOA deducted a 10% retention from the amount due High Sierra pursuant to their contractual arrangement.

High Sierra subsequently requested that BOA make its progress payments by check payable jointly to High Sierra and its materialman, Brown Wholesale. BOA complied with this request. The joint checks issued by BOA to High Sierra and Brown at issue in this case are:

Date Amount Materials Retained by Brown

3/22/85 $11,123.10 $4,667.56 $ 6,673.86

4/17/85 22,124.57 7,775.00 13,274.74

5/20/85 21,306.66 3,254.80 12,784.00

7,109.10

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Totals $54,554.33 $22,806.46 $32,732.60

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The figure listed for materials represents the invoice amount, and does not reflect the 10% deduction for retention. As can be seen, the portion of each joint check retained by Brown exceeded the figure for materials that High Sierra included in its invoice to BOA. The summary judgment record does not show how Brown calculated the amounts retained. However, at the time Brown endorsed each joint check, High Sierra's account with Brown was in arrears in excess of the amount of the joint check.

In June 1985, BOA terminated the High Sierra subcontract due to inadequate performance. At that time, High Sierra had only completed 10%-15% of the La Privada contract. BOA withheld the final monthly progress payment requested by High Sierra, in the amount of $14,168.16, of which $5,509.84 was designated as payment for materials. High Sierra subsequently filed a petition in bankruptcy.

Brown brought this action in superior court against Beztak to foreclose its materialmen's lien. Brown sought compensation for electrical supplies furnished to High Sierra before its default. The amount of Brown's claim has been reduced substantially since the filing of this action and now approximates $59,522.88.

On cross motions for summary judgment, the trial court entered judgment in favor of Brown Wholesale, rejecting Beztak's contention that it should prevail based on the joint check rule in materialmen's lien cases. Beztak argued that Brown should have retained funds from each joint check sufficient to satisfy the entire amount then due from High Sierra for materials supplied to the La Privada project. Because it allowed High Sierra to retain a portion of these funds, Beztak argued, Brown's lien for any amount due at the time of endorsement of each joint check should be reduced up to the amount of the check. The High Sierra account was in arrears in excess of the amount of each joint check at the time of each endorsement; therefore, the joint check rule required Brown to retain the entire proceeds, according to Beztak. The checks totalled $54,554.33, of which Brown retained only $32,732.60. Beztak thus contended that the joint check rule should reduce the lien by $21,821.73--the difference between the two figures.

The trial court rejected the joint check defense based on provisions in the BOA/High Sierra subcontract that governed the calculation of progress payments. The court interpreted these provisions as constituting an agreement between the parties concerning allocation of the proceeds of the joint checks, rendering the defense inapplicable. The court noted that the invoices High Sierra submitted to BOA contained a specified amount requested for materials. BOA intended to pay these amounts, less the 10% retention, for materials already incorporated in buildings that had reached a particular progress goal. The court found that BOA's intent supplied the agreement necessary to take the case out of the general rule.

Beztak appealed from summary judgment in favor of Brown. The court of appeals reversed and remanded the case with directions that the trial court hold in favor of Beztak on the joint check issue. See Brown Wholesale Elec. Co. v. Beztak of Scottsdale, Inc., 160 Ariz. 582, 774 P.2d 1372 (App.1989). The court of appeals recognized that the joint check rule had not been addressed by prior Arizona case law, although it has been adopted in various other states. The court approved the doctrine, noting that "[t]he owner should not have to pay the same debt twice." Brown Wholesale, 160 Ariz. at 585, 774 P.2d at 1375. The court of appeals found that no agreement existed governing allocation of the proceeds of the joint checks, and absent such an agreement, Brown's failure to retain the entire amount of each check reduced its lien by $21,821.73--the amount in controversy in this case. We granted review to examine the application of the joint check rule, an issue of first impression in Arizona.

Issue Presented

Did the court of appeals err in remanding the case with instructions to enter judgment for Beztak based on the joint check rule in materialmen's lien cases?

DISCUSSION

1. The joint check rule

Beztak urges this court to adopt the joint check rule as the law of Arizona. The rule was articulated by the California Supreme Court, which restated the doctrine: "When a subcontractor and his materialman are joint payees, and no agreement exists with the owner or general contractor as to allocation of proceeds, the materialman by endorsing the check will be deemed to have received the money due him." Post Bros. Constr. Co. v. Yoder, 20 Cal.3d 1, 3, 141 Cal.Rptr. 28, 30, 569 P.2d 133, 135 (1977).

The joint check rule reflects a widespread practice in the construction industry that allows owners and general contractors to protect themselves from lien foreclosure by materialmen whom subcontractors have failed to pay. The issuance of a check payable jointly to the subcontractor and the materialman enables the materialman to withhold endorsement until he is assured that the subcontractor's account with him is or will be satisfied from the proceeds of the check. This may be accomplished in various ways, including the use of gentlemen's agreements or more formal escrow arrangements. The practice of issuing joint checks protects both the owner/general contractor and the materialman, because each has an interest in ensuring that the materialman is paid. See generally Barrett, Joint Check Arrangements: A Release for the General Contractor and Its Surety, 8 Constr.Law. 7 (1988) (evolution of joint check rule).

Each state court considering the issue has adopted the joint check rule. See, e.g., Post Bros., 20 Cal.3d at 3, 141 Cal.Rptr. at 30, 569 P.2d at 135; Iowa Supply Co. v. Grooms & Co. Constr., Inc., 428 N.W.2d 662, 666 (Iowa 1988); Anchor Concrete Co. v. Victor Sav. & Loan Ass'n, 664 P.2d 396, 399 (Okla.1983); Medford School Dist. ex rel. North Coast Elec. Co. v. Peterson & Jones Commercial Constr., Inc., 76 Or.App. 99, 103-04, 708 P.2d 623, 626 (1985); City Lumber Co. v. National Surety Corp., 229 S.C. 115, 120-21, 92 S.E.2d 128, 131 (1956); F. & C. Eng'g Co. v. Moore, 300 S.W.2d 323, 326-27 (Tex.Civ.App.1957); Dauphin v. Smith, 42 Wash.App. 491, 496-97, 713 P.2d 116, 120 (1986) (dicta).

We join these courts in holding that when an owner or general contractor makes a materialman and a subcontractor joint payees on a check that includes payment for labor and materials furnished, and no other agreement exists between the materialman and the owner or general contractor as to allocation of the proceeds, the materialman, by endorsing the check, will be deemed to have been paid the money due him, up to the amount of the joint...