Templeton v. Sam Klain & Son, Inc., 2-1277A446

• Decision Date: 04 March 1980
• Docket Number: No. 2-1277A446,2-1277A446
• Citation: 400 N.E.2d 1198
• Parties: G. C. TEMPLETON, Jr., Appellant (Defendant Below), v. SAM KLAIN & SON, INC., Appellee (Plaintiff Below).
• Court: Indiana Appellate Court

Page 1198

400 N.E.2d 1198

G. C. TEMPLETON, Jr., Appellant (Defendant Below), v. SAM KLAIN & SON, INC., Appellee (Plaintiff Below).

No. 2-1277A446.

Court of Appeals of Indiana, First District.

March 4, 1980.

Charles G. Reeder, Johnson & Weaver, Indianapolis, for appellant.

Marvin Mitchell Eskenazi, Mitchell, Yosha & Hurst, Indianapolis, for appellee.

ROBERTSON, Presiding Judge.

This appeal arises out of a judgment to foreclose a mechanic's lien by a materialman against the owner of improved real estate. Four issues are presented for our review by the owner. The first issue is whether the trial court erred in finding that the materials were not paid for by a subcontractor. The second issue is whether the trial court erred in finding that evidence of delivery to the job site established a presumption that the materials were incorporated into the project under the facts of this case. The third issue is whether the trial court erred in finding the owner personally liable. The fourth issue is whether the trial court erred in awarding attorney fees to the materialman for legal work leading up to the judgment and also for defending the judgment on appeal.

We affirm in part and reverse in part.

The facts necessary for understanding the issues presented for review are that G C. Templeton, Jr. (Templeton), the appellant-defendant, owned real estate in Indianapolis which he wished to develop, with himself as general contractor, into condominium units known throughout litigation as the "Overlook" project. In 1974, Templeton and the Dallas Company (Dallas) entered into an agreement whereby Dallas would perform the plumbing and heating work on the project. Dallas began work on the project in August of 1974 and continued until February 21, 1975, when Dallas was forced out of business by a secured creditor. Dallas had gotten supplies and materials for the project from the appellee-plaintiff, Sam Klain & Son, Inc., formerly the Sam Klain & Son partnership (Klain), with whom Dallas had been doing business for some time.

The trial court found that Klain had not been paid by Dallas for materials incorporated into the Overlook project in the amount of $7,674.86. The trial court further found that Templeton was indebted to Dallas in a sum in excess of $7,674.86. The trial court also found that Klain had fulfilled all the statutory notice and filing requirements necessary to obtain a mechanic's lien. Judgment for the above sum, interest and attorney's fees was awarded to Klain against Templeton and an order to foreclose a mechanic's lien also given. This appeal began and the trial court further ordered attorney's fees to be given for defending the judgment on appeal.

The first issue presented for review is whether the trial court erred in finding that the materials which are the subject of the lien were not paid for by Dallas. The problem is one of application of the sums paid to Dallas by Templeton and those paid to Klain by Dallas. We first review the payment practice of the parties in this case. Dallas had done business with Klain for a number of years previous to the job out of which this case arises. Klain's method of billing was through the use of invoices, on which there was a number which signified the job for which Dallas was using the materials. Klain reviewed those invoices to check on how much credit was being given on any one job. The trial court specifically found that Klain extended credit based on the job on which Dallas was working. Klain kept, however, one open account for Dallas and did not keep job by job accounts. A monthly total was kept and the amounts owing were split in the length of period the account was due or overdue. As payments came in, Klain applied the sums, not on a job by job basis, but rather to the oldest invoices due. Dallas was aware of the Klain billing method. At the start of the Overlook job, Dallas had an unpaid balance of over $100,000.

Templeton paid Dallas six times, once a month, starting September 10, 1974, a total sum of $85,976. The check with which Templeton paid Dallas contained a restrictive endorsement that stated in part, "Payee certifies . . . that he/it has paid for all labor and material for which this check is payment." Templeton did keep a retainage for work done each month. Dallas placed the sums from these checks into a general account with other funds from other sources. During the period of September 10, 1974 through January 13, 1975 Dallas made six payments to Klain on Dallas' account in the total sum of $102,438.79 and also received credit from Klain for returned goods in the amount of approximately $45,000.00. Again, these credits and payments were applied to the oldest outstanding invoices.

When Dallas' secured creditor forced Dallas out of business on February 21, 1975, Klain had not been paid under this method for materials used on the Overlook project in the amount of $7,674.86.

Templeton does not question the general rule in the application of a partial payment by a debtor to a creditor to whom more than one debt is due that the debtor has the right at or before payment to direct the application of the payment to whatever debt or debts he chooses, and if the debtor fails to do so the creditor may make the application as he sees fit. Western & Southern Indemnity Co. v. Crower, (1937) 104 Ind.App. 219, 10 N.E.2d 440. It has also been stated that if neither the creditor nor the debtor allocates, the court will apply the payments as justice dictates, generally to the advantage of the creditor in the absence of supervening equities. See American Oil Co. v. Brown Paving Co., 298 F.Supp. 528 (S.D.S.C.1969) (and cases cited therein). It has also been said that, in regard to running accounts, the law will make the appropriation to the oldest account first. Born v. Union Elevator Co., (1918) 67 Ind.App. 97, 118 N.E. 973.

Templeton attempts to invoke an exception to this rule recognized in a growing number of jurisdictions which limits the power of the creditor to apply the payment as he chooses (absent direction by the debtor) when the rights of third parties are affected. In our research we find two general grounds for this exception. One is based on a contractual obligation between the third party and the debtor that the debtor will apply specific funds received from the third party to the creditor in a certain manner. The other ground is based on general equitable considerations to protect, for example, innocent owners who pay in full from liens by materialmen.

Templeton contends, because of the restrictive agreement quoted above, that Templeton directed that the materials be paid out of the proceeds of the payments received by Dallas from Templeton. Dallas, in signing the restrictive endorsement, did certify that he had paid for the materials that Templeton, in turn, was paying Dallas for. We note, however, that there was no agreement here that Dallas would apply the very funds received from Templeton to the materials that Dallas purchased for the project.

Thus, whatever reliance Templeton places on Section 388 of the Restatement of Contracts (1932) is misplaced. ¹ The section states:

If the payor is under a duty to a third person to devote money paid by him to the discharge of a particular debt the payment must be so applied if the creditor knows, or has reason to know, of the payor's duty, in spite of the fact that the payor directs that the payment shall be applied to the discharge of another debt.

The comment to this section states:

. . . it is essential that the debtor shall be under a contract with the third person, not merely to pay a particular debt, but to devote to that debt the very money with which payment was made.

As there was no obligation to use Templeton's payment to pay Klain, Templeton cannot rely on the contractual ground found in Section 388 and cannot rely on such case law as General Plywood Corp. v. S. R. Brunn Construction Co., (1971) Mo.App., 511 S.W.2d 905.

We turn, then, to the second ground which is the general equitable principle recognized in many states that where a contractor owes a materialman more than one debt for materials used in several constructions and the materialman knows that funds paid to him by the contractor were received by the contractor on account of one of those debts, the materialman cannot apply such funds to another debt to the prejudice of the paying owner. Duffy v. Bourg, (1968) La.App., 209 So.2d 502; Ellingsen v. Western Farmers Ass'n., (1974) 12 Wash.App. 423, 529 P.2d 1163; Mutual Lumber Co. v. Gero, (1968) Me., 244 A.2d 564 (if materialman had knowledge of the source and purpose of the payment.) See also 53 Am.Jur.2d, Mechanic's Lien § 330. ²

An examination of Indiana cases suggests that Indiana places great weight on a countervailing consideration. In Western & Southern Indemnity, supra, the court quoted with approval the following excerpt from Salt Lake City v. O'Conner, (1926) 68 Utah 233, 242, 249 P. 810, 814:

In the public interest commercial transactions should not be fettered. The necessary complications of modern business should not be increased by avoidable additions. Money released into trade should be permitted to circulate freely, unburdened by hidden equities or liens. In transactions like the one under consideration, the surety has ample facilities for protecting itself. It may with propriety reserve and exercise a surveillance over the disbursement of the proceeds of contracts for the performance of which it is surety. Materialmen dealing with contractors cannot do so. They cannot, consistent with business proprieties, inquire into the sources of money paid them. When a surety, as in the case at bar, permits money on the contract to be paid the contractor unconditionally, which it must know he may use for general purposes, we see no sufficient reason for sustaining any claim or equity in behalf of the surety, in such money, after it has been paid to another in...