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CITY LUMBER CO. v. NATIONAL SURETY CORP.

March 19, 1956

CITY LUMBER COMPANY, RESPONDENT,
v.
NATIONAL SURETY CORPORATION, APPELLANT.



The opinion of the court was delivered by: Oxner, Justice.

March 19, 1956.

This is an action against the surety on a bond for the performance of a contract by Southern Construction Company, Inc., of Augusta, Georgia, to construct a housing project at Abbeville, South Carolina. Under the terms of the bond, the contractor and its surety were obligated to pay for all labor, materials and equipment performed and furnished on the job.

Respondent, City Lumber Company, alleged in its complaint that it sold to one W.C. Drake, a subcontractor, a large amount of paint used on the project, and that there was a balance due of $2,251.74, which both Drake and the prime contractor, after demand, had refused to pay. Judgment was sought against the surety for said amount. The surety claimed that respondent had been paid by the Southern Construction Company, Inc. for the paint purchased by Drake, and further asserted the defenses of waiver and estoppel. The trial resulted in a verdict for respondent in the amount of $2,251.74. The sole question presented on this appeal is whether the trial Judge erred in refusing the surety's motion that recovery be limited to the sum of $234.38, for which liability was admitted.

The Southern Construction Company, Inc. sublet the painting work to W.C. Drake, a paint contractor, for a lump sum price. Drake commenced purchasing paint from respondent in October, 1951 and continued to do so on open account until February 21, 1952. During this interim his purchases amounted to $3,251.74. Drake paid on this account $500.00 on January 1, 1952 and $500.00 on February 18, 1952, leaving a balance unpaid of $2,251.74. On February 21, 1952, Drake, due to some misunderstanding or controversy with Southern Construction Company, quit the job and never returned. This action was instituted against the surety on October 16, 1952.

Four or five days prior to the last payment of $500.00 on February 18, 1952, Drake, accompanied by James M. Mann, manager of the City Lumber Company, approached J.T. Bryan, a vice-president of Southern Construction Company, Inc., supervising this construction job, and urged Bryan to make a payment to Drake on his contract in order that he might be able to make payments on his labor and paint accounts. Bryan did not give them any encouragement, but said that as soon as he got back to the home office in Augusta, he would see what could be done about making a payment. After returning to Abbeville from Augusta, Bryan on February 15, 1952 delivered to Drake's foreman a check of Southern Construction Company payable to the joint order of W.C. Drake and City Lumber Company for $3,500.00, earmarked "advance on contract." On the night of the same day, Drake, who lived in Greenwood, called Mann, who lived in Abbeville, on the telephone and told him about the check and asked Mann's permission to endorse the name of City Lumber Company on the back of the check in order that he might collect it and pay his pressing labor bills, and promised to make a substantial payment on the account of City Lumber Company. Mann agreed to this request and several days later received from Drake a check for $500.00 as a payment on the paint account.

At the time of this check transaction, there was still much work to be done by Drake before completing his contract. Drake continued purchasing paint for the job until he quit on February 21, 1952. The amount purchased between February 15 and February 21, 1952 amounted to $234.38. On the trial of the case, appellant admitted owing this amount but vigorously denied liability on the paint bills incurred prior to the negotiation of said check, asserting payment, waiver and estoppel.

"Q. So in letting Mr. Drake take off this $3,500.00 check, with authorizing him to have City Lumber Company's name endorsed on it without making any demand from him that he pay you a certain amount, you were just taking a pretty big risk there, weren't you? A. What do you mean by a demand?

"Q. You said you didn't demand any specific amount. A. I requested that he make a substantial amount. We understood that verbally. The conversation was over the phone and he said he'd make a substantial payment on it."

Mann admitted that he probably told Bryan the amount Drake owed his firm, but said that he was never given any notice that he was to collect respondent's account from the check, and claimed that had he known he was expected to do so, he would not have authorized the endorsement of the check.

Bryan was quite positive that in the conversation he had with Drake and Mann, the latter told him that the amount owing by Drake was around $2,500.00. It further appears from Bryan's testimony that prior to the issuance of the $3,500.00 check, the Southern Construction Company had issued to Drake on account eight checks totaling $5,367.38, each of which had been payable directly to Drake. Bryan estimated that in giving the $3,500.00 check, the Southern Construction Company was paying on the paint job approximately $900.00 more than was due Drake at that time.

We think the action of respondent in endorsing the check without collecting the past due account of Drake, which then amounted to $2,517.36, released the Southern Construction Company and its surety from liability for such indebtedness. It is true that the check for $3,500.00 represented approximately $1,000.00 more than the amount Drake then owed to respondent and that the Southern Construction Company did not expressly request respondent to collect from the check the unpaid paint bills. But the only reasonable inference warranted by the circumstances is that respondent was made a co-payee to enable it to collect whatever amount might be owing to it by Drake. If the Southern Construction Company had intended to vest in Drake the right to the unrestricted use of the proceeds of the check, Drake would have been made the sole payee, as was done when checks were previously issued to him.

Several days prior to the issuance of the check, respondent's manager, along with Drake, approached the vice-president of Southern Construction Company for the purpose of soliciting "a little money," stating "we definitely need payment on the account." Perhaps not knowing the exact amount owed by Drake to respondent and realizing that Drake needed funds for labor, the check was issued for $3,500.00 payable to the joint order of the parties, a practice frequently followed in the business world when several persons are interested in the amount to be paid. As an experienced business man, respondent's manager was bound to have known, without being specifically so advised, that he was expected to collect respondent's account from the proceeds of the check. Instead of doing so, he authorized Drake to endorse respondent's name on the back and use all of the proceeds except $500.00. He may have done this through a desire to continue selling paint to Drake, thinking that the latter would continue on the job and pay respondent's indebtedness from subsequent payments made by the Southern Construction Company, but such considerations cannot be allowed to penalize the prime contractor and its surety.

The $3,500.00 check was given for the purpose of satisfying claims which the prime contractor and its surety were obligated under the terms of the bond to pay. The source of the money was known to the respondent. The surety was equitably entitled to have the check applied to the discharge of the debts for which it was bound, but this was not done because of the negligence of respondent in empowering Drake to use the funds for any purpose which he desired. This is not ...


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