Gardner Plumbing, Inc. v. Cottrill

• Decision Date: 10 December 1975
• Docket Number: No. 74-1042,74-1042
• Citation: 44 Ohio St.2d 111,73 O.O.2d 390,338 N.E.2d 757
• Parties: , 73 O.O.2d 390 GARDNER PLUMBING, INC., et al. v. COTTRILL et al., Appellees, Dollar Federal Savings & Loan Assn., Appellant.
• Court: Ohio Supreme Court

Page 111

44 Ohio St.2d 111

338 N.E.2d 757, 73 O.O.2d 390

GARDNER PLUMBING, INC., et al. v. COTTRILL et al., Appellees Dollar Federal Savings & Loan Assn., Appellant.

No. 74-1042.

Supreme Court of Ohio.

Dec. 10, 1975.

Early in 1969, appellees, Charles and Norma Cottrill, contrcted to purchase a parcel of real estate in Fairfield, Ohio, with the intention of building a house. Through a real estate agent, appellees contacted, and later hired, Taylor and Associates (Taylor), as the general contractor for the construction of the home.

In July 1969, the Cottrills filed an application for a mortgage loan to finance the lot and house with Dollar Federal Savings & Loan, appellant herein. The parties agreed that appellant would make an 80 percent loan, and the Cottrills would supply the remaining 20 percent. The loan agreement was closed on July 31, 1969, in the amount of $47,400.

The contract price for the construction of the home was payable in four installments, according to what stage the work had progressed on the house. Although it is disputed as to what oral assurances were given appellees by appellant concerning the bank's inspection of the construction site prior to the issuance of any checks, appellant did promise to examine the premises to see that sufficient work was done to warrant a payment to the contractor.

From August 14, 1969, to November 4, 1969, appellant issued four checks to the Cottrills, each marked payable 'to the order of Charles F. Cottrill and Norma Jean Cottrill.' The last three checks provided for a special endorsement of the Cottrills by stating on the back, 'Pay to the order of Taylor and Associates.' Along with each check, appellant gave the Cottrills an inspection report whch stated the percentage of work completed and the amount due Taylor and Associates. The reports did not include any affidavits from subcontractors or materialmen indicating any unpaid claims. After receiving each check and report, the Cottrills endorsed the check over to Taylor and Associates.

During the middle of November 1969, appellant and appellees were informed that Taylor and Associates was not paying its subcontractors and materialmen. Taylor gave assurances that they would be paid, but failed to do so. As a result, Taylor and Associates performed no further work and appellant made no additional disbursements.

Subsequently, an action was brought by a subcontractor against the Cottrills and others, in the Court of Common Pleas, to foreclose a mechanic's lien arising from the work completed. (Other subcontractors then filed similar claims against the Cottrills which were consolidated with the original suit.) in that action, the Cottrills filed a cross-claim against appellant, alleging it was liable for the liens filed by the subcontractors and for other expenses incurred by appellees in defense of these liens. (The subcontractors' claims were then tried separately and are not at issue here.)

On the cross-claim, the court found that appellant owed no contractual or statutory duty to the Cottrills to see that subcontractors' claims were satisfied before payments were made by the Cottrills to Taylor, and dismissed the cross-complaint. The Court of Appeals reversed, holding that an agency relationship existed between appellant and the Cottrills, and that appellant was negligent in failing to require of Taylor the affidavits of subcontractors indicating the amount of unpaid claims.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Weinberger, Grad, Wolf & Hoy and Leo Weinberger, Cincinnati, for appellees.

Beirne & Wirthlin, C. R. Beirne, Michael A. Fulton, Cincinnati, and John A. Pierce, Hamilton, for appellant.

PER CURIAM.

Appellant initially contends that R.C. 1311.04 does not impose a duty upon a mortgagee, prior to disbursing funds of a construction loan to the mortgagor, to require affidavits of subcontractors and materialmen indicating the amount of unpaid claims owing to them.

R.C. 1311.04, in pertinent part, provides:

'Whenever any payment of money becomes due from the owner, part owner, or lessee, or whenever the original contractor desires to draw any money from the owner, part owner, or lessee, under their contract, or whenever any mortgagee makes a written demand, such contractor shall make out and give to the owner, part owner, lessee, or mortgagee, or his agent, a statement under oath, showing the name and address of every laborer in his employ who has not been paid in full and also showing the name and address of every subcontractor in his employ, and of every person furnishing machinery, material, or fuel, and giving the amount which is due or to become due to them, or any of them, for work done, or machinery, material, or fuel furnished to him, which statement shall be accompanied by a certificate signed by every person furnishing machinery, material, or fuel to him.'

In construing the applicable provisions of the statute, the Court of Appeals stated:

'Dollar Federal's failure to require such affidavits from Taylor and Associates amounts to negligence and left the Cottrills exposed to the danger of having liens attached to their real estate. Dollar Federal may not now, in claiming to be a mere mortgagee, abrogate that statutory duty and impose it upon the Cottrills.'

An examination of the above statutory language reveals that no mandatory duty is imposed upon the mortgagee to make a written demand upon the contractor. By making the relevant parts of R.C. 1311.04 applicable to a mortgagee 'whenever any mortgagee makes a written demand,' the General Assembly gave the mortgagee discretionary power to demand affidavits from subcontractors. It follows however, that it is not imperative that the mortgagee exercise this discretion.

Additional support for appellant's position is found in R.C. 1311.14, which states, in part:

'* * * Sections 1311.01 to 1311.68, inclusive, of the Revised Code do not require the mortgagee to ascertain by affidavit or otherwise the respective claims of contractors, subcontractors, laborers, or materialmen, or to determine priorities among lien claimants.

'The mortgagee is not responsible for a mistake of the owner in determining priorities, or for any failure of the payee properly to distribute funds paid on the written order of the owner.

'* * *

'This section shall, as to mortgages contemplated by this section, control over all other sections of the Revised Code relating to said mechanic's, materialmen's, contractor's, subcontractor's, laborer's, and all liens that can be had under Sections 1311.01 to 1311.68, inclusive, of the Revised Code, and shall be liberally construed in favor of such mortgagees, a substantial compliance by such mortgagees being sufficient.'

As they relate to R.C. 1311.04, these provisions of R.C. 1311.14 were intended to relieve a mortgagee from any statutory duty to make a written demand for affidavits in order to ascertain claims of subcontractors.

Contrary to the finding of the trial court, the Court of Appeals further determined that an agency relationship was established between appellees and appellant upon the execution of the mortgage and note, and that such relationship was reinforced by the oral assurances given by the lender at that time. Hence, appellees submit that appellant was negligent in disbursing the mortgage funds without exercising proper care to see that claims of subcontractors were satisfied.

To hold appellant liable on an agency theory for negligently disbursing the funds of the mortgage, appellees must establish by competent evidence that such a relationship existed, the burden of proving the agency being upon the party who asserts it. See Union Mutual Life...