Swan Air Conditioning Co. v. Crest Const. Corp.

• Decision Date: 05 July 1977
• Docket Number: No. 49046,No. 2,49046,2
• Citation: 568 P.2d 1330
• Parties: 22 UCC Rep.Serv. 438 SWAN AIR CONDITIONING COMPANY, a corporation, formerly known as Swan-Sigler, Inc., a corporation, Appellee, v. CREST CONSTRUCTION CORPORATION, a corporation, Appellant, and Liberty National Bank and Trust Company of Oklahoma City, a National Banking Association, Intervenor-Appellee, and Melrose Air Conditioning & Heating Company, Inc., a corporation, and Ray D. Melrose, an Individual, Defendants
• Court: United States State Court of Criminal Appeals of Oklahoma. Court of Civil Appeals of Oklahoma

Page 1330

568 P.2d 1330

22 UCC Rep.Serv. 438

SWAN AIR CONDITIONING COMPANY, a corporation, formerly known

as Swan-Sigler, Inc., a corporation, Appellee, v. CREST CONSTRUCTION CORPORATION, a corporation, Appellant, and Liberty National Bank and Trust Company of Oklahoma City, a

National Banking Association, Intervenor-Appellee,

and

Melrose Air Conditioning & Heating Company, Inc., a

corporation, and Ray D. Melrose, an Individual, Defendants.

No. 49046.

Court of Appeals of Oklahoma, Division No. 2.

July 5, 1977.

Rehearing Denied July 28, 1977.

Appeal from the District Court of Oklahoma County; David M. Cook, trial judge.

Action by material supplier against subcontractor to foreclose security interest on accounts receivable and materials supplied, and to recover proceeds of checks drawn on bank by general contractor and payable jointly to supplier and subcontractor. At supplier's request, bank exchanged checks into cashier's checks without indorsement. General contractor demanded that bank replace funds into its account. Bank intervened to interplead cashier's checks and made general contractor an additional defendant. General contractor cross-claimed against bank to recover damages for sums alleged due to third-party lien claimants when bank honored presented checks without payees' indorsements, or to have third-party lien claimants paid out of the proceeds of the checks in the custody of the court. Judgment awarded material supplier total proceeds of checks and denied general contractor any relief against bank. From order overruling its motion for new trial, general contractor appeals. AFFIRMED.

John C. Harrington, Jr., Lytle, Soule & Emery, Oklahoma City, for appellees.

Robert E. Manchester, McClelland, Collins, Sheehan, Bailey & Bailey, Oklahoma City, for appellant.

NEPTUNE, Judge.

To make clear the nature of the action prompting this appeal requires a relation of most of the facts surrounding the case.

This action was brought by material supplier Swan against subcontractor Melrose seeking to foreclose a security interest on accounts receivable and on materials supplied to the subcontractor and to recover the entire proceeds of four checks totaling nearly $30,000 drawn by general contractor Crest on its account at Liberty Bank payable jointly to supplier Swan and subcontractor Melrose. All parties, Melrose, Crest, and Swan are Oklahoma corporations. The checks were delivered to Melrose for work and materials furnished by the subcontractor Melrose on two Arkansas apartment projects. When Melrose sought Swan's consent for division of the funds, as had customarily been done in the past, Swan refused and demanded the whole of the proceeds. Swan then commenced its action to replevy the checks. Melrose surrendered the checks to Swan without a court order but without indorsement. At supplier Swan's request, Liberty Bank exchanged the four checks into two cashier's checks payable to Melrose and Swan. Later, Crest discovered that Melrose and Swan were litigating for the proceeds of the four checks and that Liberty Bank had charged Crest's account for the issuance of the cashier's checks. When the general contractor Crest formally demanded that the bank replace the funds into its account, Liberty intervened in Swan's action against Melrose for the purpose of interpleading the cashier's checks and making Crest an additional defendant. Crest cross-claimed against the bank, asking the court either: (a) for damages of $9,753.32, caused by Liberty's honoring the checks without payees' indorsements, the damage being alleged as the amount due from Melrose to third-party lien claimants against the two apartment projects; or (b) that the lien claimants be paid out of the proceeds of the checks in the custody of the court because these funds are trust funds by statute. The trial court rendered judgment for Swan awarding it unconditionally the total proceeds of the four checks and denying Crest any recovery against Liberty Bank.

Crest appeals from the order overruling its motion for new trial.

I

Appellant's first proposition is:

"Where drawer of a check directs his bank to pay to the order of joint payees and the bank honors the check in the absence of the payees' indorsement causing loss to the drawer of the check, the bank is liable to the drawer in the amount of the loss."

Appellee bank's response to appellant's proposition is that "a bank may, upon presentation to it of joint payee checks drawn on it, pay the checks by issuing cashier's checks payable to the same joint payees in the same amount without written indorsements of the payees and without liability to the drawer."

Neither litigant has been able to cite authority which clearly supports its position in the circumstances obtaining here. Appellee bank did offer evidence of the practice of banks issuing cashier's checks in exchange for individual customer's checks where for any reason the indorsement could not be obtained. There is authority supporting protection of the bank that pays without indorsement as long as the actual payee or person authorized by payee receives the money ordered by the drawer to be paid. Maynard Investment Co. v. McCann, 77 Wash.2d 616, 465 P.2d 657 (1970). In the cited case, the court said:

"It has long been held that, despite the almost universal custom of requiring a payee to indorse a check before payment, a bank is protected if it pays without indorsement, as long as the payee actually receives the money ordered by the drawer to be paid.

"There is conclusive evidence that all of the funds represented by these two checks were paid to the creditors of the payee, as the payee and transferee had agreed. The cause against the National Bank of Commerce was properly dismissed."

In the case at bar, the bank, by changing the form to cashier's checks, did not alter the rights of the parties named in the four checks. The drawer, Liberty's customer Crest, was not disadvantaged, because its account was immediately chargeable upon presentation and acceptance of the four checks. The payees, Melrose and Swan, were not disadvantaged, because the funds were available to them from the cashier's checks in the same amount. The validity of the customer's order to the bank to make the payment to the two payees was not in question. Thus, the making of cashier's checks payable to the two payees named did not circumvent the purpose of the requirement for indorsements. Indorsements would still be routinely required to negotiate the cashier's checks. 12A O.S.1971, §§ 3-104(2)(b), 3-201 et seq.

In the instant case, the payees effectively received the money ordered by the drawer to be paid even though it was, in the circumstances, put into slightly different form and placed in the custody of the trial court. There is neither allegation nor evidence that the bank was in any way negligent in performing the order drawn by its customer Crest. The trial court's judgment exonerating Liberty is correct.

II

Appellant's proposition two states:

"Where monies are designated as construction trust funds by statute and are clearly identifiable as such, no creditor claims may be asserted against said trust funds until all suppliers of labor and materials who are the beneficiaries of the trust are paid in full."

Appellant relies upon 42 O.S.1971 §§ 152-153 which read as follows:

" § 152. Proceeds of building or remodeling contracts, mortgages or warranty deeds as trust funds for payment of lienable claims

"(1) The amount payable under any building or remodeling contract shall, upon receipt by any contractor or subcontractor, be held as trust funds for the payment of all lienable claims due and owing or to become due and owing by such contractors or subcontractors by reason of such building or remodeling contract.

"(2) The monies received under any mortgage given for the purpose of construction or remodeling any structure shall upon receipt by the mortgagor be held as trust funds for the payment of all valid lienable claims due and owing or to become due and owing by such mortgagor by reason of such building or remodeling contract.

"(3) The amount received by any vendor of real property under a warranty deed shall, upon receipt by the vendor, be held as trust funds for the payment of all valid lienable claims due and owing or to become due and owing by such vendor or his predecessors in title by reason of any improvements made upon such property within four (4) months prior to the delivery of said deed.

" § 153. Payment of lienable claims

"(1) Such trust funds shall be applied to the payment of said valid lienable claims and no portion thereof shall be used for any other purpose until all lienable claims due and owing or to become due and owing shall have been paid.

"(2) If the party receiving any money under Section 152 shall be a corporation, such corporation and its managing officers shall be liable for the proper application of such trust funds."

It is not disputed that the $29,545.44 interpleaded into the trial court by appellee bank are proceeds from appellant to the subcontractor for work performed under a building contract on two Arkansas apartment projects. Under the quoted statute these funds are trust funds for the payment of all valid lienable claims due or to become due through Melrose's activity on the projects for which the remittance was made.

The recent development of statutory lien law in Oklahoma as directed by legislative edict and judicial interpretation is to provide greater protection to those whose labor and materials are used in the improvement of real property. In 1968, sections 152(2) & (3) and 153(2) were added to amend the statute as it was adopted in 1965. ¹ This amendment broadened the protection to valid lienholders by making proceeds from mortgages and warranty deeds subject also to the imposition of a statutory trust.

The legislative intent to enlarge the protection granted by these statutes was noted by this court in Bohn v....