Maddux Supply Co., Inc. v. Safhi, Inc.

• Decision Date: 08 September 1994
• Docket Number: No. 2231,2231
• Citation: 450 S.E.2d 101,316 S.C. 404
• Court: South Carolina Court of Appeals
• Parties: MADDUX SUPPLY COMPANY, INC., Appellant, v. SAFHI, INC. and Palmetto Electric Service, Inc., Respondents. . Heard

Page 101

450 S.E.2d 101

316 S.C. 404

MADDUX SUPPLY COMPANY, INC., Appellant, v. SAFHI, INC. and Palmetto Electric Service, Inc., Respondents.

No. 2231.

Court of Appeals of South Carolina.

Heard Sept. 8, 1994.

Decided Oct. 3, 1994.

D. Carlyle Rogers, Jr., and Gregg Meyers, both of Wise & Cole, Charleston, for appellant.

Dunn D. Hollingsworth and Claron A. Robertson, III, both of Robertson & Seekings, Charleston, for respondents.

CURETON, Judge:

Maddux Supply Company, Inc., a construction materials supplier, brought this action to foreclose a mechanic's lien filed in connection with the construction of the Hampton Inn in Mount Pleasant, South Carolina (the "Project"). Maddux sought to foreclose its lien against the owner of the Project, Safhi, Inc., and collect amounts it contends are owed for materials supplied to a subcontractor on the Project, Palmetto Electric Service, Inc. The master-in-equity determined that Maddux was paid in full for the materials it supplied to the Project. The master entered judgment against Maddux and ordered it to pay attorney fees to the general contractor for the Project, Benchmark Construction Company, Inc., which had bonded off the lien against Safhi's property. ¹ Maddux appeals. We affirm.

A proceeding to enforce a mechanics' lien is an action at law. Raines v. Sanders, 134 S.C. 284, 132 S.E. 581 (1926). Since this law case was tried by the master without a jury, we are precluded from disturbing his findings of fact unless they are wholly unsupported by the evidence or controlled by an erroneous conception or application of the law. Sentry Eng'g & Constr., Inc. v. Mariner's Cay Dev. Corp., 287 S.C. 346, 338 S.E.2d 631 (1985).

On August 27, 1990, Safhi entered into a construction contract with Benchmark in which Benchmark agreed to act as general contractor in connection with the construction of the Project. On October 26, 1990 Benchmark entered into a subcontract with Palmetto wherein Palmetto agreed to furnish and install a complete electrical system at the Project. Maddux supplied electrical materials to Palmetto for use in the Project.

When Palmetto entered into the subcontract, it already owed Maddux approximately $125,000 for electrical materials provided to it on an open account in connection with other, unrelated construction projects. Although Palmetto had 14 different jobs for which Maddux supplied materials on credit, it had only one open account with Maddux. Between December of 1990 and June of 1991, Palmetto received approximately $83,000 worth of materials from Maddux for use in the Project. Maddux acknowledges it was paid approximately $17,000 for these materials, but asserts that it is owed the remaining $66,000 balance. Safhi, on the other hand, maintains it paid Benchmark who, in turn, paid Palmetto for all materials furnished to the Project. Safhi contends Maddux improperly credited payments from Palmetto to prior or other debts owed by Palmetto to Maddux rather than for the benefit of Safhi.

From December of 1990 to June of 1991, Palmetto submitted monthly pay applications to Benchmark with attached invoices for materials received from Maddux for use at the Project. Upon approval of the pay applications and after withholding retainage as provided for in the subcontract, Benchmark issued a check to Palmetto for services and materials provided. Pursuant to this process, Benchmark wrote 7 checks to Palmetto totalling $189,977.

During the same time period, Palmetto wrote 6 checks to Maddux totalling $165,466. None of these checks included a written designation that the funds should be applied to invoices for materials used at the Project. However, trial testimony indicated and the master concluded that Maddux refused to allow Palmetto to designate its payment toward the invoices for materials supplied by Maddux for the Project. Furthermore, the master found that on several occasions Maddux was informed that the source of the funds Palmetto expected to receive was in connection with this particular project.

The master concluded that Maddux was charged with knowing that funds it received from Palmetto must necessarily have come from Benchmark in payment for materials furnished to the Project. Accordingly, the master held that Maddux was paid in full for the materials it provided to Palmetto for use at the Project, and Maddux was, therefore, not entitled to recover against the bond pursuant to its mechanics' lien. The master also determined that by filing the bond, Benchmark assumed Safhi's position in the case and, therefore, Safhi was entitled, pursuant to S.C.Code Ann. § 29-5-20 (Supp.1993), to an award of $21,540 for the costs and attorney fees Benchmark incurred in defending the foreclosure action on behalf of Safhi.

I.

On appeal, Maddux contends the master erred in holding it was charged with knowing the source of Palmetto's payments. In support of this contention, Maddux asserts it is "undisputed" that Maddux visited and received information about Palmetto's accounts for the first time after the mechanics' lien was filed in June, 1991, and that Maddux's corporate financial manager, Steve Gallimore, testified he did not know the source of Palmetto's funds.

Contrary to Maddux's assertion, Palmetto's bookkeeper, Barbara Dennis, testified she gave information to Gallimore on several occasions between January and June 1991 about the source of the funds Palmetto expected to receive, the dollar amount of the payments expected from Benchmark, and the approximate time when those payments were expected. Dennis also testified that at some point she asked if she could designate Palmetto's payments to Maddux toward the invoices for the materials used at the Project, but Maddux refused and, instead, applied the payments made with Benchmark funds toward Palmetto's prior outstanding balance.

Ordinarily, a creditor must apply payments as instructed by the debtor, but absent a written designation or instructions from the debtor, the creditor may apply payments in its own discretion. Wardlaw v. Troy Oil Mill, 74 S.C. 368, 54 S.E. 658 (1906); American Oil Co. v. Brown Paving Co., 298 F.Supp. 528 (D.S.C.1969). The right of a creditor to apply a debtor's payments as it chooses, however, is qualified by the rule that where the creditor knows or should know the source of the funds from which it is paid, the creditor must, irrespective of the instructions of the debtor, apply those funds so as to protect the rights of the person supplying the funds. American Oil, 298 F.Supp. at 534; Rural Plumbing & Heating, Inc. v. Hope Dale Realty, Inc., 263 N.C. 641, 140 S.E.2d 330 (1965); Northern Va. Sav. & Loan Ass'n v. J.B. Kendall Co., 205 Va. 136, 135 S.E.2d 178 (1964). As rationalized in United States for Use of Carroll v. Beck, 151 F.2d 964, 966 (6th Cir.1945), to allow a creditor to collect an old debt out of the monies paid upon a contract, and to leave the outstanding charges for materials furnished will prejudice the principal and the surety on the bond, and if sanctioned, might cause great harm.

Dennis' testimony, which was believed by the master, adequately established that Maddux was in possession of information indicating the funds it received from Palmetto between January and June 1991 came from Benchmark in connection with the Project. Since there is evidence to support the master's findings that Maddux knew or should have known that Benchmark was the source of the funds Maddux received from Palmetto, we must affirm the master on this issue. See Stoudenmire Heating & Air Conditioning Co. v. Craig Bldg. Partnership, 308 S.C. 298, 417 S.E.2d 634 (Ct.App.1992) (A proceeding to enforce a mechanics' lien is legal in nature and this court's scope of review is limited to determining if there is any evidence to support the ruling of the trial court).

II.

Maddux next contends the master erred in using Palmetto's general ledger to analyze certain deposits and withdrawals to determine the portion of deposits attributed to payments from Benchmark. Maddux argues the master's tracing analysis was improper because: (1) there is no correlation between the payments by Benchmark to Palmetto and the payments by Palmetto to Maddux; (2) bank statements are required to properly trace funds; (3) the ledger only covers a portion of the job; (4) Palmetto admitted it could not trace the payments; (5) Palmetto's payments lacked a pattern; and (6) tracing does not extend to advances.

The theory upon which Benchmark predicates its claim of tracing is that Palmetto's account ledger indicates that in January, February, and March of 1991, Maddux received payment from Palmetto immediately following Palmetto's receipt of payment from Benchmark in connection with the Project. ² This fact alone, Benchmark argues, shows a correlation between these payments, and when it is combined with Dennis' testimony that she was asked to post-date checks to Maddux and that she told Maddux that the funds for these payments came from Benchmark in connection with the Project, the correlation is even stronger. ³

Recognizing that 'identical money' tracing is not required, it is apparent that the January, February and March payments had their origin in payments received from Benchmark. ⁴ Thus, we agree with Benchmark that a undeniable correlation exists between the payments by Benchmark to Palmetto and the payments by Palmetto to Maddux.

Maddux cites no authority in support of its next claim that bank statements are required to properly trace funds, and we find the claim to be manifestly without merit. In American Oil, there is no indication that bank statements must be utilized to trace funds, and, in fact, the district court in American Oil accepted the surety's method of tracing which was the same method used by the master in this case. Id. at 537. Likewise, Maddux's claim that tracing does not extend to advances is also without merit. In American Oil, the court utilized a tracing analysis relating to...