Sprague v. Provident Savings & Trust Co.

• Decision Date: 17 June 1908
• Docket Number: 1,785.
• Citation: 163 F. 449
• Parties: SPRAGUE v. PROVIDENT SAVINGS & TRUST CO. et al.
• Court: U.S. Court of Appeals — Sixth Circuit

163 F. 449

SPRAGUE v. PROVIDENT SAVINGS & TRUST CO. et al.

No. 1,785.

United States Court of Appeals, Sixth Circuit.

June 17, 1908

Proceedings by intervention in suit brought by the Provident Savings &amp Trust Company to foreclose a mortgage upon the Harrison Building in Columbus, Ohio. The case is here on the appeal of Sprague, receiver of Ellis & Co., intervener, from an order made subsequent to the decree of foreclosure and sale denying to appellant a mechanic's lien under the contract of Ellis & Co. for the construction of the Harrison Building and adjudging liens in favor of interveners Esswein, Winston Powell, and the Electric Supply & Construction Company, under their subcontracts with Ellis & Co.

The essential facts are these: On November 14, 1901, one Blackburn, who held a permanent lease (upon the payment of ground rentals) of the lot on which the Harrison Building was later erected, contracted with Ellis & Co. for the erection by the latter of the building in question for the sum of $300,000, covering both labor and materials, the building to be finished by April 1, 1903, payments upon the contract price to be made monthly on architects' certificates to the extent of 90 per cent. of the proportion of work done and 50 per cent. of materials on the ground, the final 10 per cent. to be retained until after 30 days from the final completion of the building, final approval of the architects, and acceptance by the owner. Express provision was made for transfer by Blackburn of his rights in the real estate under the building contract to the contemplated corporation, and that upon such transfer the corporation should be substituted in Blackburn's place. At the same time a side contract was made between Blackburn and Ellis & Co., for the payment by the latter to the former of $60,000 in monthly payments of $5,000 each (later modified by substituting a proportionate amount of each estimate as paid), as so-called rebates. This arrangement was made for the stated purpose of meeting ground rents, taxes, discounts, and commissions on sales of bonds, and interest upon bonds accruing before the completion of the building, together with architects' fees, so that the building when completed would represent a net investment of $300,000. By another arrangement Ellis & Co. were also to pay the commission of one Moling for obtaining the ground lease, the amount of this compensation being stated generally in the record as $5,000, although what apparently is the same item is stated in the written agreement between Moling and Harrison as $4,400. Ellis & Co. were thus to receive net for the building about $235,000. The defendant Harrison later acquired the rights of Moling and Blackburn, the latter receiving a share of the prospective net profits of the Harrison Building Company, and Ellis & Co. were notified by Harrison of the assignments in question; no objection being made thereto. The Harrison Building Company was organized April 10, 1902 (Harrison taking practically all its stock), and soon afterwards received the assignment of the rights of Harrison and Blackburn under the original building contract.

The construction of the building was begun a few days before the formation of the Harrison Building Company, and as a result of an arrangement made on the day of the formation of that company the time for completing the construction was extended until December 1, 1903. The mortgage under foreclosure ($300,000) was made by the building company March 5, 1903, and on June 6, 1903, $115,000 of the mortgage bonds were issued to Harrison on account of his advancements of $110,000 and upwards, made before that time in connection with the construction of the building under the contract with Ellis & Co. The company had also made a temporary loan at the bank of about $23,000. On July 27, 1903, when the building was partially completed, there had been paid to Ellis & Co., under the construction contract, about $128,000, and that firm had repaid, under its rebate contract, $23,649.24. On that date a contract was made between the Harrison Building Company and Ellis & Co. reciting that the building company was contemplating borrowing money to be used in the further construction of the building, and that the amount borrowed on the bonds might be insufficient to pay for the entire completion of the building, and containing an express agreement on the part of Ellis & Co. to complete the work in accordance with the terms of their contract for $140,000 in addition to what had already been paid (with like provision for payments of architects' estimates as in the original contract), and 'to turn over said building fully completed to said Harrison Building Company, its successors or assigns, as provided in said contract, hereby waiving all rights as contractors, or otherwise, to any lien upon said building as against bonds issued by said building company or the mortgage securing the same,' and that such stipulation should operate in favor of any person or corporation loaning money on the security of the bonds.

In the same connection an agreement was made between Ellis & Co. and Knauss & Gamble, real estate agents and officers of the Harrison Building Company, reciting the agreement of July 27, 1903, before referred to, and providing that the rebates mentioned should be paid by Ellis & Co. to Knauss & Gamble from time to time, and that the fund so made should be deposited in the Manufacturers' & Merchants' Bank (called the 'M. & M. Bank'), and should be used to pay Ellis & Co.'s estimates on the building at such times and in such manner as they might elect, with the express provision that the signing by Ellis & Co. of the agreement of July 27, 1903, should not release the responsibility of the principals or their successors on the original contract with Ellis & Co. for the erection of the building. The agreement of July 27, 1903, contained a reference to this proposed arrangement with Knauss & Gamble as securing 'W. H. Ellis & Co. in the payment of the balance of the money due on their said contract for said building in addition to the amount of $140,000 stipulated as above. ' In connection with the making of these contracts, an arrangement was made between the building company and Knauss by which the building company issued $175,000 more of mortgage bonds, which, together with the $115,000 of bonds previously issued to Harrison, were deposited with the Columbus Trust & Savings Bank as collateral to a note of $190,000 executed by Knauss, the proceeds of which were to be used in taking up the temporary loan of $23,000 before referred to, paying the discount upon the note and the services of the trust company and providing the $140,000 for payment to Ellis & Co., the balance to be used for construction expenses, ground rents, and taxes. Up to March 7, 1904, there had been paid to Ellis & Co. out of this $140,000 fund in the Columbus Savings Bank & Trust Company $120,182.40, leaving in that fund and in the bank $19,817.60. A controversy having arisen over the construction of the building, Ellis & Co. filed a mechanic's lien, claiming the $300,000 provided by the contract plus $8,000 for alleged extras, and giving credit for payments to the extent of $244,204.85. As a result of this action a suit was begun by the building company against Ellis & Co. in the state court, under which Ellis & Co. were temporarily restrained from proceeding with the erection of the building. April 9, 1904, a stipulation was filed in the suit in the state court providing for an immediate specification by the architects of the particulars wherein the building failed of completion according to the contract, for an immediate completion of the building by Ellis & Co. according to the specifications and contract, and for making payments to the subcontractors, to the extent of the previously unexpended contract price plus such allowance as should be made by the architects for extras; and providing that neither the right of Ellis & Co. to claim additional compensation, nor the right of the building company to claim that the work and materials claimed as extras, were required by the contract were waived, and that the pending suit, as well as the rights of each party under the contract, including such status as the Ellis & Co. lien might have, should be unaffected by the arrangement referred to.

A few days later the architects made a specification of the details in which the building failed of completion according to the contract, estimating that $10,890 was required for such completion, and on May 25, 1904, gave a more detailed statement specifying numerous particulars in which the building was incomplete. September 9, 1904, Ellis & Co. filed a second claim of lien, demanding $37,293.01 for extras in addition to the contract price, and giving credit for payments amounting to $243,254.85. On January 17, 1905, the $290,000 of bonds held by the bank as collateral to the Knauss loan for $190,000 were bought by Harrison for $190,714.45. This was done to prevent a sacrifice of the $115,000 of bonds owned by Harrison, as well as the $175,000 pledged with it under the Knauss agreement. The foreclosure suit was begun January 6, 1906. Subsequently Sprague, receiver of Ellis & Co., intervened by cross-bill under leave of the court, and later the subcontractors, Esswein, Winston, Powell, and the Electric Supply & Construction Company were permitted to intervene. On May 16, 1906, a decree of mortgage foreclosure was made (the amount due being $326,153.02), and sale of the premises was ordered free of liens, the fund arising from the mortgage sale to be substituted for the mortgaged premises, all questions of priority being reserved for further hearing.

The premises were sold to Harrison under the decree...