Iowa Supply Co. v. Grooms & Co. Const., Inc.

• Decision Date: 17 August 1988
• Docket Number: No. 87-837,87-837
• Parties: IOWA SUPPLY COMPANY, Appellee, v. GROOMS & COMPANY CONSTRUCTION, INC., Merchants Bonding Company (Mutual) and American Home Assurance Company, Appellants, Smothers Electric Company, Appellee, Steve Ehrenhard, d/b/a Colton Sheet Metal, Central Iowa Regional Housing Authority, Don Robinson, and Koogler Construction Company, Defendants.
• Court: Iowa Supreme Court

Page 662

428 N.W.2d 662

IOWA SUPPLY COMPANY, Appellee, v. GROOMS & COMPANY CONSTRUCTION, INC., Merchants Bonding Company (Mutual) and American Home Assurance Company, Appellants Smothers Electric Company, Appellee Steve Ehrenhard, d/b/a Colton Sheet Metal, Central Iowa Regional Housing Authority, Don Robinson, and Koogler Construction Company, Defendants.

No. 87-837.

Supreme Court of Iowa.

Aug. 17, 1988.

Rehearing Denied Sept. 16, 1988.

Jerrold Wanek of Garten & Wanek, Des Moines, for appellee Iowa Supply co.

Richard C. Bauerle of Johnson, Bauerle, Hester & Walter, Ottumwa, for appellants.

John E. Billingsley of Walker, Knopf & Billingsley, Newton, for appellee Smothers Elec. Co.

Considered by McGIVERIN, C.J., and LARSON, CARTER, LAVORATO, and ANDREASEN, JJ.

ANDREASEN, Justice.

This appeal concerns certain disputes arising from a public housing construction project. In April of 1983, the Central Iowa Regional Housing Authority (CIRHA) entered into a contract with Grooms and Company Construction, Inc., (Grooms) as the principal contractor in the construction of public housing projects in five central Iowa communities (CIRHA project). Grooms entered into a contract with Steve Ehrenhard, doing business as Colton Sheet Metal (Colton), to provide plumbing and heating work on the projects. Grooms also entered into a contract with Smothers Electric Company (Smothers) to perform electrical work on the CIRHA project.

I. Claims between Iowa Supply and Grooms.

In order to complete their work as a subcontractor, Colton ordered certain materials and supplies from Iowa Supply Company (Iowa Supply). Iowa Supply provided materials worth $72,622.82 to Colton from approximately June 1983 through March 1984. These materials were used in the CIRHA project.

In late 1983 or early 1984, an employee of Grooms became concerned about the financial condition of Colton. After discussing this concern with the president of Iowa Supply and the project director of CIRHA, there was an agreement that Grooms would issue checks payable jointly to Iowa Supply and Colton. There was no written or oral agreement as to how the joint checks would be allocated.

In early January of 1984, Grooms issued the first joint check payable to both Colton and Iowa Supply. This check was for $24,524.74. Both payees endorsed the check and the full amount was deposited into an account of Colton's. Colton then wrote Iowa Supply a check for $20,000, which was applied to the amount due from Colton on the CIRHA project. Colton retained $4,524.74 from that joint-payee check. In late January of 1984, Grooms issued a second joint check payable to both Iowa Supply and Colton. This check, for $26,903.61, was endorsed by both payees and deposited in an Iowa Supply account. Iowa Supply wrote a check to Colton for $11,903.61 and retained $15,000, which was credited to the amount due from Colton. As a result of the joint checks from Grooms, Iowa Supply retained $35,000 and Colton retained $16,428.35.

On April 13, 1984, within thirty days of the final delivery to Colton, Iowa Supply filed an itemized statement of claim against Grooms and CIRHA pursuant to Iowa Code section 573.15 (1987). This statement showed a gross amount due to Iowa Supply for materials supplied to Colton of $72,622.82. Iowa Supply deducted the $35,000 received from the joint checks and reported an unpaid balance due of $37,622.82. In April of 1984, Grooms paid Iowa Supply $13,932.19 to be applied toward the amount due Iowa Supply from Colton. At that time, Iowa Supply waived any claim in regard to the $48,932.19 which had been credited to the account of Colton. Subsequently, Grooms made an additional payment of $6,241.59 to Iowa Supply and received $1,020.69 credit from Iowa Supply for returned merchandise and water heaters. Iowa Supply claims a deficiency of $16,428.35, the amount of money retained by Colton from the joint-payee checks issued by Grooms. Colton, meanwhile, filed for bankruptcy.

Iowa Supply filed a petition to establish its claim against Grooms and its bondsman under Iowa Code chapter 573 (1987). Grooms filed a counterclaim against Iowa Supply for tortious interference with a contract. The trial court entered judgment in favor of Iowa Supply for $16,428, but refused to award Iowa Supply a judgment for a two percent late-payment fee Iowa Supply sought from Grooms. The court also dismissed Grooms' counterclaim. Additionally, the trial court did not award either party attorney fees.

On appeal Grooms asserts that by endorsement of the joint-payee checks, Iowa Supply has waived any right to the $16,428.35 turned over to Colton. Grooms contends that Iowa Supply did not comply with the filing requirements of Iowa Code section 573.15 (1987). Grooms also claims that the trial court erred in dismissing its counterclaim against Iowa Supply. Iowa Supply appeals the trial court's denial of the late-payment fee as well as denial of attorney fees.

This case was tried in equity; review on appeal is de novo. Iowa R.App.P. 4.

A. Joint payee checks. In Central Ready Mix Company v. John G. Ruhlin Construction Company, 258 Iowa 500, 505, 139 N.W.2d 444, 447 (1966), a general contractor issued joint-payee checks payable to the materialman and subcontractor for amounts due the materialman. The joint-payee checks were issued following a conversation and informal agreement between representatives of the general contractor, subcontractor, and materialman. Because the materialman knew of the intention to utilize the joint-payee checks as a method of insuring that the materialman was paid, we held the materialman was required to retain the joint-payee checks and enter the full amount of the checks as payment on the subcontractor's account. Id. at 505, 139 N.W.2d at 447. We stated, "[f]ailure of [the subcontractor] as payee to properly apply the payments does not lead to further liability of [the general contractor]." Id., 139 N.W.2d at 447. After Central Ready Mix we summarized the law concerning joint-payee checks in a hospital lien case with the comment "a check made payable to multiple payees constitutes payment." Broadlawns Polk County Hosp. v. Estate of Major, 271 N.W.2d 714, 715 (Iowa 1978) (citing Central Ready Mix, 258 Iowa at 505, 139 N.W.2d at 447).

In Central Ready Mix, we cited two California cases, Edwards v. Curry, 152 Cal.App.2d 726, 313 P.2d 613 (Cal.Dist.Ct.App.1957), and Westwood Building Materials Co. v. Valdez, 158 Cal.App.2d 107, 322 P.2d 79 (Cal.Dist.Ct.App.1958). In Edwards v. Curry, the California District Court of Appeals held that a general contractor was released from liability to the materialman when the general contractor made payment by check payable jointly to the subcontractor and materialman. Edwards, 152 Cal.App.2d at 730-31, 313 P.2d at 615-16. In Westwood Building Materials Company v. Valdez, the California District Court of Appeals held that when the owner issues a joint check to the subcontractor and materialman, and there is no agreement to the contrary, the joint payees should ordinarily understand that the owner intends for the full amount of the check to be used to discharge the lien rights of the materialman. Westwood, 158 Cal.App.2d at 113, 322 P.2d at 83.

These California cases culminated in the California Supreme Court decision of Post Brothers Construction Company v. Yoder, 20 Cal.3d 1, 5, 141 Cal.Rptr. 28, 30, 569 P.2d 133, 135 (1977). In Post Brothers, the court articulated what has become known as the "California Rule" concerning joint-payee checks. That rule provides: "[W]hen a subcontractor and his materialman are joint payees, and no agreement exists with the general contractor as to the allocation of proceeds, the materialman by endorsing the check will be deemed to have received the money due him." Id. at 5, 141 Cal.Rptr. at 30, 569 P.2d at 135. Several other jurisdictions have also adopted this rule. See, e.g., Anchor Concrete Co. v. Victor Sav. & Loan, 664 P.2d 396, 399 (Okla.1983); Medford School Dist. 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); Glidden Coatings & Resins v. Suitt Constr. Co., 290 S.C. 240, 243-44, 349 S.E.2d 89, 91 (S.C.App.1986); 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).

The joint-payee check rule articulated in Central Ready Mix and Post Brothers was developed in cases involving private, not public, construction projects. In such cases, the contractor and materialmen have the opportunity to protect their claims with a mechanic's lien on private property. See Iowa Code Chapter 572 (1987) (mechanic's lien statute). Here, the CIRHA project is a public works project governed by Iowa Code chapter 573. See Iowa Code ch. 572 (1987) (bonds for public works).

Iowa law treats claims in public works contracts and claims in private construction projects differently. See Economy Forms Corp. v. City of Cedar Rapids, 340 N.W.2d 259, 263 (Iowa 1983). We recognize that immunity of public property from private liens is the primary reason for this different treatment. See id.; see also Lennox Indus., Inc. v. City of Davenport, 320 N.W.2d 575, 577 (Iowa 1982); Calhoun, Suretyship for the Iowa Lawyer, 67 Iowa L.Rev. 219, 245 (1982). To provide protection in public works projects for contractors, subcontractors and materialmen unable to utilize a mechanic's lien, chapter 573 requires that the general contractor execute and deliver a bond running to the public corporation sufficient to insure the fulfillment of the conditions of the contract. See Iowa Code §§ 573.2, .5 (1987). This bond can be the object of a subcontractor's or materialman's claim, see Iowa Code § 573.7 (1987), and serves as a substitute for the protection of a mechanic's lien.

In resolving questions under Iowa Code chapter...