Case Title: Farmers & Merchants State Bank v. SNODGRASS & SONS

Citation: 209 Kan. 119, 495 P.2d 985

Docket Number: 46,298

State: kansas

Court: Kansas Supreme Court

Date: 1972-04-08T00:00:00Z

Document:
209 Kan. 119 (1972)
495 P.2d 985
FARMERS & MERCHANTS STATE BANK OF Derby, Kansas, Appellee,
v.
SNODGRASS AND SONS CONSTRUCTION CO., INC., Appellant.
No. 46,298

Supreme Court of Kansas.
Opinion filed April 8, 1972.
Robert T. Cornwell, of Fleeson, Gooing, Coulson & Kitch, of Wichita, argued the cause, and John Matson, of the same firm, was with him on the brief for the appellant.
Joseph W. Kennedy, of Morris, Laing, Evans & Brock, of Wichita, argued the cause, and Justus H. Fugate, of Aley, Fugate & Maben, of Wichita, was with him on the brief for the appellee.
The opinion of the court was delivered by
PRAGER, J.:
This is an action by a bank against a general contractor for breach of contract for failing to pay retainage to the bank. The case was tried to the court sitting without a jury. The trial court entered judgment in favor of the plaintiff, Farmers and Merchants State Bank, in the amount of $13,000 with interest. The appellant, Snodgrass and Sons Construction Company, Inc., was the defendant in the district court.
In entering judgment in favor of the plaintiff the trial court made extensive findings of fact and conclusions of law which set forth the controlling facts and the legal principles upon which the judgment in the trial court was based. The findings of fact and conclusions of the court are as follows:
"FINDINGS OF FACT
"CONCLUSIONS OF LAW
At the outset this court finds that all of the Findings of Fact of the court are supported by substantial competent evidence. The issues to be determined by this court are issues of law which must be based upon the facts as established by the trial court.
The appellant Snodgrass' first contention is that the "Agreement and Recognition of Assignment of Account" as set forth in Finding of Fact No. 10 by the terms of which Snodgrass agreed to pay the accumulated retainage and additional retainage by check jointly to the subcontractor Jayhawk Service Inc. and to the Farmers and Merchants State Bank constituted a mere assent to the assignment of Jayhawk's rights to retainage under its subcontract. Appellant takes the position that it was not an independent contract which established any obligation on Snodgrass to pay to the bank the entire retainage held under the subcontract. The appellant Snodgrass in substance contends that under the subcontract for mechanical work entered into by Jayhawk as subcontractor, Jayhawk was obligated to promptly pay when due for all labor and materials used and required in completing the subcontract, and authorized Snodgrass to pay bills directly for labor and materials if Jayhawk did not pay the same and to deduct such payment from the amounts retained under the 10% retainage provided for in the subcontract. Snodgrass emphasizes that Jayhawk did not pay for all labor and materials and that Snodgrass was compelled to pay them. It is undisputed that such payments exceeded the amount due Jayhawk by way of retainage under the subcontract.
The rationale which Snodgrass asserts as a basis for its position simply is that an assignee does not have greater rights against the debtor than does his assignor. Starting with this premise Snodgrass reasons that since Jayhawk failed to fulfill its obligation under the contract to pay for labor and materials, Snodgrass was entitled to a setoff for those items it paid against any sums due from the retainage account under the subcontract. Appellant then contends that the bank as assignee stands in the shoes of Jayhawk and therefore Snodgrass is not indebted to the bank.
*124 We cannot accept appellant's rationale. The "Agreement and Recognition of Assignment of Account" which was signed by Snodgrass and which was relied upon by the bank in making the loan to Jayhawk was more than a simple assignment. We have no hesitancy in holding that by virtue of this instrument Snodgrass agreed to pay the entire retainage to the bank. This instrument constituted an independent contract between Snodgrass and the bank and simply provided additional protection to the bank for the making of the loan by the bank to Jayhawk.
The specific language of the instrument is important. In the first paragraph Snodgrass agreed that as of December 5, 1967, Jayhawk Service Inc. had accumulated a retainage on the construction job for the Mulvane Schools in the amount of $12,113.20. Paragraph two declares that since Jayhawk Service Inc. has borrowed in excess of this amount from the Farmers and Merchants State Bank of Derby, Kansas, Snodgrass agrees that when all work is completed by Jayhawk Service Inc. it will pay the entire amount retained plus additional retainage accumulated from this date to date of completion by making a check for the amount due, $17,187.10, to Jayhawk Services Inc. and the Farmers and Merchants State Bank. It should be noted that the amount to be borrowed by Jayhawk is in excess of "this amount" which is the agreed amount of retainage. Snodgrass agreed to pay "the entire amount retained" now plus "additional retainage accumulated from this date to the date of completion." The amount to be paid, $17,187.10, is a fixed amount and constituted the full 10% of the total contract price of $171,871 provided as a retainage in the subcontract to Jayhawk. The "Agreement and Recognition of Assignment of Account" signed by the contractor Snodgrass clearly obligated Snodgrass to pay the entire amount of the retainage of 10% provided in the subcontract of Jayhawk Services Inc. without a deduction for any setoffs for unpaid obligations of Jayhawk for labor and materials. The evidence is undisputed that the bank relied upon this agreement when it made the loan to Jayhawk.
Under the facts of this case, the reliance doctrine as applied by the trial judge, is applicable. The Restatement, Contracts, Section 90, succinctly states the doctrine: "A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice *125 can be avoided only by enforcement of the promise." (p. 110.)
This doctrine has been recognized and applied in State Investment Co. v. Cimarron Insurance Co., 183 Kan. 190, 326 P.2d 299; Sterling Construction Co. v. Humboldt National Bank, 345 F.2d 994 (10th Cir.1965); and in Nello L. Teer Company v. Kanawha Valley Bank, 227 F.2d 306 (4th Cir.1955).
Were this action merely one by an assignee against a debtor, appellant's argument that it had a right to setoff might be more persuasive. In this case, however, the trial court correctly found the breach of an independent contract. Before appellant would be entitled to a setoff against the bank, it would have to establish an independent claim or cause of action against the bank itself and this it has not done.
The appellant's second contention is that even if the bank acquired greater rights against Snodgrass than Jayhawk had by virtue of the "Agreement and Recognition of Assignment of Account" Snodgrass is still not liable to the bank because the obligation to pay was subject to the condition that all work be completed by Jayhawk. Appellant's contention in this regard is that the phrase "work is completed" has a special meaning in the construction industry which requires not only that the labor and materials be furnished but also that the subcontractor must pay for all labor and materials furnished. On this point the trial court held that in the absence of any evidence showing that the bank was aware of a special meaning attached to the phrase "work is completed", the phrase must be given its ordinary meaning. The court concluded that the work was actually completed on or before May 1, 1968, and further found as a fact that the banker, Jones, was not aware of any special or unusual meaning placed on the words "work is completed" in the construction industry. Since there was substantial competent evidence to support the findings of fact of the trial court they will not be disturbed on this appeal.
We think it is also important to note that the "Agreement and Recognition of Assignment of Account" makes no reference whatsoever to the provisions of the subcontract entered into between Snodgrass and Jayhawk. The language of that instrument states unequivocally that Snodgrass will pay to the bank the entire amount retained as of December 5, 1965, plus additional retainage accumulated from that date to the date of completion when all work was *126 completed by Jayhawk. Snodgrass may have improvidently entered into this agreement, but having done so it is bound to carry out its obligations thereunder. For the reasons set forth above the judgment of the district court is affirmed.