Sandpiper North Apartments, Ltd. v. American Nat. Bank and Trust Co. of Shawnee
| Decision Date | 10 April 1984 |
| Docket Number | No. 57,265,57323,No. 57,323,A,Nos. 57265,No. 57,265 and A,57,265 and A,57,323,57,265,s. 57265 |
| Citation | 1984 OK 13,680 P.2d 983 |
| Parties | SANDPIPER NORTH APARTMENTS, LTD., a limited partnership, et al., Plaintiff, and Chet Leonhardt, Jr., (Plaintiff) Appellee inppellant, in, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF SHAWNEE, Shawnee, Oklahoma, a national banking corporation, (Defendant) Appellant inppellee in, and Midwest Engineering, Inc., a corporation, et al., Defendants. |
| Court | Oklahoma Supreme Court |
Certiorari to the Court of Appeals, Div. 3.
In an action for restitution of misapplied construction trust funds, prosecuted under 42 O.S.1971 §§ 152 and 153 before the District Court, Pottawatomie County, Donald E. Powers, Judge, contractor prevailed against the subcontractor's lender-bank. Both parties sought corrective relief by appeals which were consolidated for disposition. The Court of Appeals affirmed. Certiorari was granted on petitions brought by the bank and the contractor.
OPINION OF THE COURT OF APPEALS VACATED, TRIAL COURT'S DECREE OF RESTITUTION REVERSED IN PART AND AFFIRMED IN PART AND CAUSES REMANDED WITH DIRECTIONSGary F. Duckworth, Hastie & Kirschner, Oklahoma City, for American Nat. Bank and Trust Co. of Shawnee.
David Ingram, Ingram, Lewis & Basham, Shawnee, for Sandpiper North Apartments, Ltd. et al and Chet Leonhardt, Jr.
The questions to be decided on certiorari are: (1) May the construction trust fund doctrine of our statutory law, 42 O.S.1981 §§ 152 and 153, be invoked to impose liability for misapplied trust funds upon persons not specifically charged therein with fiduciary responsibility? (2) If the first question be answered in the affirmative, was the trial court correct in imposing liability for misapplied funds upon the subcontractor's lender-bank qua involuntary trustee? (3) Is there evidentiary support for the trial court's finding that trust funds were misapplied? (4) Was prejudgment interest recoverable? and (5) May the prevailing party be awarded counsel fee in a suit to enforce liability imposable by the statutory construction trust fund doctrine? Our answer is in the affirmative to the first, second and fifth questions and in the negative to the third and fourth.
Two Oklahoma limited partnerships, Sandpiper North Apartments, Ltd., and Sandpiper South Apartments, Ltd. [Owners], were formed early in 1972 for the purpose of building two apartment complexes in Oklahoma City [Sandpiper projects]. Chet Leonhardt, Jr., Karroll Spence and Sidney Davidoff [referred to collectively as Contractor] became prime contractors for these projects. The Contractor then engaged Midwest Engineering, Inc., [referred to as Subcontractor or Midwest] to install heating, plumbing, air conditioning and utilities. Midwest's subcontracts provided for progress payments to be made at certain described stages of construction.
In order to obtain financing from American National Bank and Trust Company of Shawnee [Bank or Lender], Midwest assigned to the Bank the proceeds of its subcontracts as security for loans made with the Contractor's knowledge. Under the arrangement, the Bank and Midwest were to be made co-payees of the progress payment checks drawn by the Contractor and sent directly to the Bank.
For its failure to keep the projects free of liens, Midwest's subcontracts were terminated before the final completion of the job. Contractor later sued both Midwest and the Bank, 1 under the provisions of 42 O.S.1971 §§ 152 and 153, 2 for restitution of all progress payments not applied to the discharge of valid lienable claims against the projects.
The original petition alleged, inter alia, that by force of the statutes under consideration Midwest and the Bank became "co-trustees" of all the progress payments made to Midwest. After the Bank's general demurrer came to be sustained, the Contractor appealed. In that appeal [Sandpiper I] 3 this court reversed the judgment for the Bank. It held that the funds paid jointly to Midwest and the Bank were impressed with statutory trust because each payment carried with it notice that it represented construction trust funds from the Contractor. Our opinion emphasized that proceeds subject to the § 153 trust, which are in excess of valid lienable claims, 4 are unaffected by the statutory trust fund doctrine. The Bank was the only defendant to appear and respond on remand. 5 After a bench trial the court found that (1) by checks payable to both of them, the Bank and Midwest received $712,986.61 in trust funds to be applied, pursuant to § 152, to the payment of valid lienable claims; (2) the Contractor was compelled to satisfy unpaid valid lien claims of Midwest in the total amount of $148,079.32; (3) computed at 6% per annum, the interest accrued on these claims to date of the judgment below amounted to $5,371.09; and (4) the Bank and Midwest both diverted from the trust res in excess of $153,450.41 for payment of expenses that were not valid lienable claims.
The trial court then ruled that (1) vis-a-vis the Owners, Contractor and the lien claimants of Midwest, the Bank and Midwest were "co-trustees" of all the progress payments made to them; (2) the Bank and Midwest violated a fiduciary duty by their failure to pay from the statutory construction trust fund valid lienable claims in the total sum of $153,450.41; (3) the Contractor was entitled to restitution from the Bank and Midwest in the amount of $153,450.41, with 12% postjudgment interest. Also awarded to the Contractor was an attorney's fee of $30,000.
On its appeal the Bank contended that (1) the construction trust fund statutes may not be invoked to impose liability upon a subcontractor's lender; (2) the trial court's finding of a wrongful diversion by the Bank of over $153,450.41 is not supported by the evidence; and (3) attorney's fees are not recoverable in a suit brought to enforce the §§ 152 and 153 liability.
Contractor, who brought a separate appeal, urged that (1) the trial court erred in failing to find an additional wrongful diversion from the trust res of $54,200; (2) the amount of prejudgment interest should have been $81,624.43, rather than $5,371.09, with 6% interest added upon the excluded sum of $54,200. Owners did not appeal.
Both appeals were consolidated for disposition by a single opinion. The Court of Appeals affirmed the trial court's decree of restitution as well as its order awarding an attorney's fee. On consideration of petitions by both the Contractor and the Bank, certiorari was granted to settle important first-impression issues of the statutory construction trust fund law.
THE CONSTRUCTION TRUST FUND STATUTES MAY BE INVOKED TO
IMPOSE LIABILITY UPON PERSONS NOT SPECIFICALLY
The express purpose of the §§ 152 and 153 trust device is to prevent the use of construction-generated funds for any purpose other than payment of valid lienable claims. 6 These sections of the statute not only safeguard the rights of lien claimants on the job but also protect an owner, contractor, subcontractor, or other beneficiary from exposure in excess of the contract limit. 7 All obligees with lien rights are thus shielded from improper disbursement of funds paid for their benefit. 8 Subsections (1), (2) and (3) of § 152 mention three classes of payment recipients in whose hands the proceeds of any building contract, mortgage, or warranty deed stand impressed as trust funds. These classes include any contractor or subcontractor, mortgagor or vendor. Although § 152(1) does direct how the trust funds shall be used, the statute does not explicitly identify the parties who are charged with the duty properly to apply the money. The Contractor contends that § 153(2) extends fiduciary responsibility to "any party receiving any money". We disagree. This subsection does no more than clarify the scope of liability borne by the parties who are named in § 152.
The Legislature's intent doubtless was that the named recipients be charged with a fiduciary duty over construction funds. The term "recipient", within the context of these enactments, denotes one who is in control of the trust funds and is thus able to effect their disbursement. The attributes of control make the statutory recipient a trustee ex lege. If some person other than a statutorily identified recipient is found to have actually exercised control over disbursement of any money, knowing it to be a part of the trust funds, that person may be regarded pro tanto as an involuntary trustee. But the mere fact that one other than a statutory trustee is actually able, or has the opportunity, to control the application of some or all trust funds is alone insufficient to cast that person in the role of involuntary trustee. The involuntary trustee status may be imposed only on one who knowingly takes charge of the trust res, or any of its parts. 9 A lender may thus become liable qua trustee of a construction trust res over which it assumed to exercise control and from which money came to be wrongfully diverted or misapplied. One who, though not a trustee ex lege, stands liable qua trustee for misapplied fiduciary funds is known in equity jurisprudence as an involuntary trustee or trustee de son tort. 10
When the lender either knows or should have known that repayment from the borrower (a) is derived from a statutory construction trust fund and that (b) it constitutes an unauthorized or improper expenditure from that fund, the lender is liable in restitution for the amount received. But mere acceptance of the borrower's unauthorized repayment will not subject the lender to liability qua involuntary trustee for any sums diverted from the fund by its statutory trustee to the credit of other improper recipients. 11
Although the Bank was both a co-payee of the Contractor's checks as well as assignee of their proceeds, this alone is not indicative of the Bank's...
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