Thompson Elec., Inc. v. Bank One, Akron, N.A.

• Decision Date: 06 July 1988
• Docket Number: No. 87-798,87-798
• Citation: 525 N.E.2d 761,37 Ohio St.3d 259
• Parties: THOMPSON ELECTRIC, INC. et al., Appellants, v. BANK ONE, AKRON, N.A., Appellee.
• Court: Ohio Supreme Court

Page 259

37 Ohio St.3d 259

525 N.E.2d 761

THOMPSON ELECTRIC, INC. et al., Appellants, v. BANK ONE, AKRON, N.A., Appellee.

No. 87-798.

Supreme Court of Ohio.

Submitted March 16, 1988.

Decided July 6, 1988.

Syllabus by the Court

1. A subcontractor is an appropriate party to assert a cause of action against a lending institution under R.C. 1311.011.

2. While a lending institution may owe a duty to a homeowner to obtain affidavits before disbursing funds from a construction loan, no such duty extends to subtrades. A lending institution, however, may owe a duty to subtrades to obtain affidavits from an original contractor under a purchase money mortgage loan pursuant to R.C. 1311.011.

Appellants, Thompson Electric, Inc. and Don R. Thompson, Jr., d.b.a. Don Thompson Plumbing, were hired as subcontractors by Jeffrey J. Purcell (hereinafter "Purcell") in late 1983 to provide electrical and plumbing services at six single-family homes that Purcell was building in Summit County. Appellants were well-acquainted with Purcell and his contracting business, Joseph Purcell & Sons, Inc., because they had worked for him on a number of other construction projects for a number of years.

Bank One of Akron (hereinafter "Bank One") financed both Purcell in building the six homes and the ultimate homeowners in buying the completed homes from Purcell. The bank provided a purchase money mortgage plan to the ultimate homeowner, which was secured by a residential first mortgage when the property closed. Prior to the homeowner loan, the bank extended a construction loan to Purcell, which was secured by a mortgage deed on the real estate. When each of the properties closed, the amount due on the construction loan was paid from the homeowner loan and the mortgage was released as part of the settlement process.

A number of affidavits were executed by Purcell during and after construction of the six homes. During construction, when Purcell requested money from his construction loan, the bank would order a physical inspection of the property by an outside appraiser. After the appraiser assured the bank that the work was completed and the materials delivered exceeded the amount of money previously disbursed, the bank--after receipt of a written affidavit from Purcell stating that all bills had been paid and no liens had been filed identifying parties to whom payment was due--would disburse additional funds from the construction loan to the contractor. In addition, after closing five of the six properties, Purcell provided the bank with final affidavits stating that construction of those houses had been "fully completed to the satisfaction of the owner and in accordance with contract plans, and specifications, and that all bills for labor and material going into said construction have been paid in full." These final affidavits also provided that Purcell would indemnify and protect the owners and mortgagee against any and all claims or obligations that might arise in connection with the construction contracts. After these final affidavits were received by Bank One, the homes were bought with funds provided by the purchase money mortgage loans.

Appellants filed affidavits for mechanic's liens on all six properties, claiming they were owed a total of $40,189.68 for services rendered from November 11, 1983 through April 27, 1984. Those properties, the dates they were closed, the dates affidavits were executed by Purcell, and the individual lien amounts claimed by appellants were as follows:

The Holmgren property, located at 8650 Lawton Drive, Macedonia, closed on March 30, 1984. Purcell executed a final affidavit on April 4, 1984. Appellants filed their affidavits to obtain mechanic's liens on May 4, 1984, alleging that Purcell owed them $3,089.29 in electrical services and $3,734 in plumbing services.

The Fink property, 1524 Carriage Hills Drive, Hudson, closed on March 12, 1984. Purcell executed a final affidavit on March 12, 1984. Appellants filed their affidavits on May 4, 1984, alleging they were owed $3,784.83 and $3,876 for electrical and plumbing services, respectively.

The Cervenak property, 2737 Ellsworth Hills Drive, Hudson, closed on March 30, 1984. Purcell executed a final affidavit on April 4, 1984. Appellants filed their affidavits on May 4, 1984, alleging they were owed $3,116.15 and $3,975.

The Labajetta property, 2480 Silver Springs, Stow, closed on April 11, 1984. Purcell executed a final affidavit on April 19, 1984. Appellants filed their affidavits on May 4, 1984, alleging they were owed $2,270.43 and $1,908.60.

The Forkin property, 2650 Ellsworth Hills Drive, Hudson, closed on April 13, 1984. Purcell executed a final affidavit on April 19, 1984. Appellants filed their affidavits on May 4, 1984, alleging they were owed $3,225.07 and $4,615.

The DiFrancesco property, 1051 Brookpoint Drive, Macedonia, closed on April 26, 1984. Purcell did not execute a final affidavit. Appellants filed their affidavits on May 4, 1984, alleging they were owed $2,605.31 and $3,990.

Shortly after appellants had filed affidavits of mechanic's liens against the six properties, the homeowners forced them to release the liens pursuant to R.C. 1311.011 because the homeowners had paid the original contractor in full prior to receiving the affidavits. Thereafter, appellants filed suit against appellee, alleging that Bank One closed on the properties in question with knowledge that subcontractors would not be paid and that it disbursed funds to Purcell without having first obtained proper affidavits in violation of R.C. 1311.011(B)(4)(a). Bank One denied these allegations.

A bench trial in the matter was conducted beginning March 13, 1986. During trial, Purcell testified that he and his company had experienced financial difficulties in early 1984. In fact, Purcell or his corporation applied for and received an additional $170,000 loan from Bank One, which was secured by a mortgage on Purcell's own home and a contract he had obtained for a condominium project. A total of $140,000 of this loan was for the purpose of paying unpaid subcontractors. Appellant subcontractors testified that they were aware of Purcell's financial difficulties and knew he was delinquent in paying their invoices. Yet, they also testified they neither filed any liens on the properties until May 4, 1984, after all the properties had closed, nor informed Bank One in any way prior to that time that Purcell was delinquent.

After hearing this and other testimony, the trial court issued twenty-four findings of fact. Among the court's pertinent findings were that Joseph Purcell & Sons, Inc. was the "original contractor" of the homes; that most of the affidavits obtained by Bank One were not properly notarized, completed, or signed; that Bank One was aware that the six homes were not completed at the time they were closed but accepted affidavits to the contrary; and that Bank One closed on the houses without taking any action to determine whether subcontractors who worked on the houses had been paid other than obtaining affidavits from Purcell.

In its conclusions of law, the trial court held that Bank One had violated a statutory duty it owed to appellants under R.C. 1311.011(B)(4). The court found that Bank One was grossly negligent in making payments because the affidavits it received from Purcell were improperly executed. On appeal, the court of appeals reversed, holding that the trial court erred as a matter of law in finding that appellants were parties who could assert an action against a lending institution for a violation of R.C. 1311.011.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Hoover, Heydorn & Hoover Co., L.P.A., Orval R. Hoover, Robert W. Heydorn and John M. Herrnstein, Cuyahoga Falls, for appellants.

Guy, Lammert & Towne, Ronald N. Towne and Cathy S. Drescher, Akron, for appellee.

WRIGHT, Justice.

In 1977, the Ohio General Assembly enacted R.C. 1311.011 and 1311.012, which materially altered the rights of residential property owners, mechanic's lien claimants, and lending institutions. This legislation, which is commonly known as the "Home Owners Amendment" to the mechanic's lien statutes, changed the respective rights of the various parties involved in the construction or improvement of residential property with the intended result of protecting the property owner and simplifying the procedure for obtaining a mechanic's lien. Distelhorst & Marti, Ohio Mechanics' and Materialmen's Liens (1986) 107, Section 9-1. See, also, Weinberger, Ohio Supplemental Mechanics' Lien Law (1981), 8 N.Ky.L.Rev. 277.

Today, we are asked to interpret R.C. 1311.011, with particular emphasis on the issue of whether subcontractors are protected parties under R.C. 1311.011(B)(5), and, if so, the manner and extent to which a lending institution is liable to such parties.

R.C. 1311.011(B)(4) specifies the duty of a lending institution:

"No lending institution shall make any payment to any original contractor until the original contractor has given the lending institution his affidavit stating:

"(a) That the original contractor has paid in full for all work performed and for all labor, materials, machinery, or fuel furnished by the original contractor and all subcontractors, materialmen, and laborers prior to the date of the closing of the purchase or during and prior to the payment period, except such unpaid claims as the original contractor shall specifically set forth and identify both by claimant and by amount claimed;

"(b) That no claims exist other than those claims so set forth and identified in the affidavit required by division (B)(4) of this section."

R.C. 1311.011(B)(5) specifies the parties to whom the lending institution owes a duty:

"When making any payment under the home construction contract or on behalf of the owner or part owner under a home purchase contract, the lending institution may accept...