Central Towers Apartments, Inc. v. Martin

• Decision Date: 05 December 1969
• Citation: 453 S.W.2d 789,61 Tenn.App. 244
• Parties: CENTRAL TOWERS APARTMENTS, INC., Royal Indemnity Company et al., Appellee, v. Robert Thomas MARTIN, I. W. McGuire, Jr., d/b/a McGuire Construction Company, et al., Appellant.
• Court: Tennessee Court of Appeals

Page 789

453 S.W.2d 789

61 Tenn.App. 244

CENTRAL TOWERS APARTMENTS, INC., Royal Indemnity Company et al., Appellee, v. Robert Thomas MARTIN, I. W. McGuire, Jr., d/b/a McGuire Construction Company, et al., Appellant.

Court of Appeals of Tennessee, Western Section.

Dec. 5, 1969 Certiorari Denied by Supreme Court May 4, 1970.

Jack Petree, and Evans, Petree, Cobb & Edwards, Memphis, for appellant McGuire.

Jack McNeil, Memphis, for appellee Royal Indemnity Co.

MATHERNE, Judge.

This appeal challenges a decree of the Chancellor which awarded to a surety on a contractor's performance bond the sum of $15,109.20 as attorney's fees and litigation expenses incurred by the surety in the defense of a suit brought by the owner against the contractor, the surety and others for damages due to the breach of the construction contract.

The contractor I. W. McGuire, Jr., d/b/a McGuire Construction Company, brings Writ of Error to this Court and assigns six errors. With exceptions herein noted, these Assignments of Error raise the one determinative issue of whether the Chancellor erred in awarding the surety its attorney's fees and litigation expenses.

Central Towers Apartments, Inc., the owner, entered into a contract with McGuire for the construction of an apartment building in Memphis, Tennessee. Royal Indemnity Company executed the contractor's performance bond in the amount of the contract price and received its regular premium therefor. In order to obtain this bond McGuire, the contractor, executed an indemnity agreement to Royal Indemnity the surety wherein McGuire agreed to hold the surety harmless for any amount paid by the surety as an obligation under the contractor's bond.

The apartment building was to be permanently financed by the Federal Housing Administration and all plans, specifications, the construction, payments and the final acceptance of the building were subject to the approval of that Agency.

The construction contract is dated February 24, 1961. This contract is a 'cost plus' contract wherein the owner agreed to pay the cost of labor and material expended plus 6.75 percent, with a top side limitation of $2,074,394.00. The contractor was to commence construction within thirty days and complete the work within twenty-four months from date of contract. This contract had the customary retainage clause to the effect that each month when the contractor submitted a monthly estimate of the labor expended and material in place he would receive 90% Of that sum and 10% Would be withheld by the owner as a retainage to insure complete performance by the contractor. The final contract price was $2,103,013.94, and 10% Thereof was subject to retention until the contract was completed.

The building was completed and accepted by the owner on December 12, 1962. This acceptance was subject to the correction of certain deficiencies noted at that date. The sum of $26,900.00 was set up in an escrow account to insure correction of the deficiencies noted. This acceptance was made with the approval of the owner, the architect, the contractor and the Federal Housing Administration, subject to the correction of listed discrepancies, and subject to a nine month and twelve month inspection and approval of construction by the Federal Housing Administration. The instruments signed on that occasion by the contractor clearly provided that the contractor remained liable on construction contract warranties.

Rather extensive leaks developed in the heating and airconditioning units. The Chancellor found that sometime in January 1963 there had developed about 300 such leaks and the owner at that time knew of this deficiency. The heating and airconditioning sub-contractor repaired numerous leaks at no charge to the owner. It developed that to attempt a repair of the units would not correct the deficiency. The manufacturer of the units, thereupon, at its cost, replaced throughout the building these defective units. This leakage caused some water damage to the building, and the owner alleged it caused him extensive rent loss and other damage. It is to be noted the $26,900 escrow deposit of December 12, 1962 did not specifically cover the defective airconditioning units as they were not listed as defective and apparently were not known to be defective at that time.

The owner filed suit in the Chancery Court of Shelby County, Tennessee on November 5, 1963 for $350,000.00 as damages due to breach of contract. This suit named as defendants the contractor, surety, architect, heating and airconditioning subcontractor, heating and airconditioning equipment manufacturer, and the plumbing and plastering sub-contractors. After prolonged pleading, cross-bills and amendments to pleadings and cross-bills, and the taking of various depositions the case was set for trial on oral testimony before the Chancellor without a jury on May 8, 1968. On that date the claim of the owner, Central Towers Apartments, Inc. was settled by payment to it of the sum of $28,000.00. The record establishes that after allowance for various set-offs and claims by the parties one against the other, the substance of the settlement was that most of this amount was paid by the heating and airconditioning equipment manufacturer. The surety on the contractor's bond did not pay any amount, and apparently contributed little if any effort toward the settlement. In fact there is competent evidence that the surety was uncooperative toward the efforts to settle.

In the pleadings the contractor brought a cross action against the heating and airconditioning sub-contractor and the manufacturer of that equipment. The surety sought judgment over against the contractor for any amount it might be held liable to pay and also sought judgment for its attorney's fees and litigation expenses as against the contractor. After the matter had been settled as to all parties the Chancellor heard the issue on the surety's cross action against the contractor for its attorney's fees and expenses incurred, and rendered judgment in its favor as heretofore noted.

Based upon the December 12, 1962 acceptance the owner paid the contractor the amount due under the contract as follows: As of December 15, 1962 the owner had paid $1,769,500.00; on January 17, 1963 the owner paid $175,000.00 cash, claimed a credit of $5,503.59 for construction costs paid by it and deposited the $26,900.00 in escrow for correction of deficiencies noted on December 12, 1962, leaving a balance due of $126,110.35; on February 25, 1963 the owner paid $106,110.35 cash and executed its note in the amount of $20,000. The foregoing payments, escrow deposit, claim for credit and note total the contract price of $2,103,013.94. The owner did not withhold the 10% Retainage.

Another matter concerning acts between the owner and contractor must be here noted. The facts establish that to enable the owner corporation to enter into the project the contractor agreed to lend to the owner a sum of between $50,000.00 and $100,000.00 to be used in construction of the building. As consideration and inducement to the contractor to make this loan the owner gave to the contractor an option to purchase 50% Of its common stock at the price of $1.00 per share. The Chancellor found that $98,610.50 was advanced by the contractor to the owner under this agreement. At some point of time thereafter one F. Allen Brown sought to purchase the owner corporation, and in consideration of the contractor assigning to him the option to purchase 50% Of the stock of the owner corporation, Brown executed his note to the contractor in the amount of $150,000.00 dated December 15, 1962, payable in five annual payments of $30,000 each plus interest at 5 1/2% Per annum. This $150,000.00 represented the $98,610.50 advanced by the contractor to the owner corporation which debt was assumed by Brown individually, and the remainder represented consideration for the option to purchase 50% Of the stock of the owner corporation at $1.00 per share. It is to be noted this transaction between the contractor and Brown was after the December 12, 1962 acceptance of the building and before the January date the Chancellor found the owner had full knowledge of the extensive leaks and resultant damage.

The first payment on this $150,000.00 note was made when due. On default of the second and third payments the contractor, under the acceleration clause of the note, filed suit in the Circuit Court of Shelby County, Tennessee against Brown and one Widdicombe the makers of the note. In the meantime the present suit had been filed in the Chancery Court and Brown and Widdicombe filed a suit in Chancery to enjoin the suit at law on the ground that the present suit might result in a holding that the contractor was liable to the owner corporation for some amount due to breach of contract, and the Brown and Widdicombe would be entitled to set off that amount against the note owned to the contractor by Brown and Widdicombe individually. This injunction was denied by the Chancellor and the decree was affirmed in an opinion of the Supreme Court of Tennessee in the cause of Widdicombe et al v. McGuire, 221 Tenn. 601, 429 S.W.2d 601, 1968. In its opinion written by Special Justice Harbison, the Court stated:

'This (the note) was a personal undertaking and obligation of Brown and Widdicombe. On the other hand, the original suit brought in the Chancery Court (present action) in 1963 was brought by and on behalf of the corporation, in its corporate capacity, to recover damages for breach of the building contract. It does appear that thereafter the corporation was dissolved, and that Brown became the sole owner of its assets. We do not regard this fact, however, as constituting any special equity in Brown's favor which would make it mandatory for the Chancery Court to enjoin the Circuit Court action on the personal note given in December, 1962. * * *' (Parenthesis supplied explanatory to this suit.)

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