### No. 80-55

IN THE SUPREME COURT OF THE STATE OF MONTANA 1980

GENERAL ELECTRIC SUPPLY COMPANY, Division of General Electric Co., A Corporation, Plaintiff and Respondent,

MONTANA AUTOMOBILE ASSOCIATION, a corporation;BRUCE 

### D. JAMISON,d/b/a JAMISON CONSTRUCTION, et al., Defendantsand Appellants.

Appeal from: District Court of the Thirteenth Judicial District, Inand for the County of Yellowstone. Honorable Charles Luedke, Judgepresiding. Counsel of Record: ForAppellants: Joseph P. 

### Hennessey argued and Larry Grubbs, argued,

Billings,Montana Harrison,Loendorf & 

### Poston,Helena,Montana For Respondent: Fred Dugan argued, Billings, Montana

Submitted: September 15, 1980 

## SEP90

## 19w Decided: 

## SRF3fl

## f$@ Filed:

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ClerkMr. Chief Justice Frank I.Haswell delivered the Opinion of the Court. The defendant Montana Automobile Association (MAA) appeals from a judgment entered inDistrict Court following a nonjury trial. The district judge found that the plaintiffwas entitled torecover $2,956.80, plus costs and attorney fees ina lien foreclosure. Defendant MAA contracted withJamison Construction (contractor) toerect a building on MAA's real property in Billings, Montana. During the fall of 1977, the now bankrupt subcontractor Clawson purchased electrical materials on open account from the plaintiffGeneral Electric Supply Company (GE) forthe MAA job. Clawson already owed GE a large sum of money for materials purchased during the summer of 1977 for other jobs, but the amount was not yet such as to alarm GE. But by December 1977, GE became concerned about Clawson's now overdue accounts. GE contacted Clawson by phone to make arrangements with him to pay at least $37,749.69 on his account of over $100,000, orGE threatened to stop extending credit. On December 29, 1977, at the time that Clawson was paid for the MAA job by the contractor, Clawson made the payment of $37,749.69 on hisGE account. GE applied this check to the past due accounts of $37,749.69, and did not apply it to the accounts reflecting materials purchased for the MAA job--none of which were past due at that time. Appellant contends that this application of funds was contrary to Clawson's instructions. InFebruary 1978, GE filed a materialman's lienagainst MAA for failure to pay for the electrical supplies. Suit was later brought to enforce the lien, and judgment was entered in favor of GE. We affirm. The issues presented to this Court for purposes of appeal all relateto one central question: Did the District Court err infinding that a valid lienexisted against MAA? Both parties to this action agree that 

### ifthe materialsused inthe construction of the MAA building were supplied by GE but were not paid for that GE has a valid basis for a lien. But, appellants contend that 

### GE was notified that Clawson's payment to GE was to be applied to the 

### MAA account; therefore the 

### MAA debt should be considered as having been paid. 60 

### Am Jur 2d Payment 

## $5 81, 82; Monidah Trust v. Hruze (1922), 62 Mont. 444, 449, 205 P. 232, 233-234. A creditor is bound by the instructions given to him by the debtor as to the application of a payment. Section 28-1-1106, MCA, sets out the creditor's duties: "Application of performance when there are several obligzions. Whenever a debtor under several obliqations to another does an act bv way of performance, inwhole or inpart, which isequally applicable to two or more of such obligations, such performance must be applied as follows: "(1) 

### If, at the time of performance, the intention or desire of the debtor that such performance should be applied to the extinction of any particular obligation ismanifested to the creditor, it must be so applied. "(2) If no such intention or desire isthen manifested, the creditor, within a reasonable time after such performance, may apply it toward the extinction of any obligation performance of which was due to him from the debtor at the time of such performance

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Inorder to find that the creditor (GE) erred inapplying Clawson's payment to the past due accounts, then, itwas necessary for the DistrictCourt to find that Clawson "manifested" his "intention or desire" to GE that the $37,749.69 payment be applied to the MAA account. Clawson contends thatGE knew or should have known how the check was to be applied. Based on the evidence presented at trial, the district judge found that materials valued at $2,956.80 were supplied to MAA, and that the notice to the creditor as to payment was not sufficient to deem the MAA account paid. These findings must be presumed to be correct and will not be set aside unless clearly

erroneous. Rule 52(a), M.R.Civ.P. 

### A review of the evidenceshows some conflict, but this Court will not 

### "'substitute itsweighing of the evidence for that of the trial court. When there isa conflict inthe evidence, the findings of the trial court are presumed to be correct 

### if supported by substantial evidence.

### "' Kosmerl v. Barbour (1979)~ Mont. 

## , 589 P.2d 1017, 1019, 36 St.Rep. 210,213. The evidence at trial on the question of notice came primarily from GE's principal witness Mr. Resch, and from Mr. Clawson. Resch, a credit and collection specialist for

### GE in Salt Lake City testified that GE routinely follows instructions from a debtor as to the application of funds. 

### If no special instructions are given by the debtor, GE normallydeletes the oldest account items first. He testified to such a procedure in this case. InDecember 1977, Resch contacted Clawson by phone about his past due account--none of which was MAA related. At that time, $37,749.69 was 90-120 days inarrears on an account total of over $100,000. Resch's testimony was that Clawson gave him no instructions on the phone as to application of his next payment, nor didResch ever receive any instructions from the GE employees inBill ings. Clawson testified otherwise: 

### "Q. And do you recall the discussions you had with 

### Mr. Resch concerning your account during that general area of December 29th of '77 or shortly

# -- A. Ispoke to him on the phone, and he said that we had to have this amount of money in. Otherwise, they were going to close the account. So Itold himthat when Iget the check fromJamison Construction [the contractor on the MAA job] and Hanson Kelly Construction, I will bring it in. 

### "Q. So you definitely remember saying that you were going to get your money from those two sources? A. They were the only two 

### I had left 

# -- Yes, 

### I do

# -- the only two that 

### I had money coming from." Clawson testified further to having discussed this same matterwith an employee inthe BillingsGE office prior to making the payment, and that at the time of making payment, he toldthe employee: "They paid me. Now here's yours." Clawson's understandingwas that the payments would go to pay off the MAA job and the Hanson Kellyjob.The record does not contain any testimony from the employee inBillings, and infact, it is not clear as to whether the check was hand-delivered toGE by Clawson or 

### if it

was mailed toGE inSalt Lake City. Nonetheless, the check used topay the $37,749.69 contained no notation as to how itwas to be applied or as to the source of the funds. Clawson did not endorse the check from the contractor (Jamison) directly over to GE, but rather deposited Jamison's check and wrote a separate check toGE. Additionally, even 

### ifGE had been toldthat the funds inquestion came fromJamison Construction, the record does not show that GE necessarily knew of the connection between Jamison, Clawson and the MAA job. The GE invoices pertaining to the MAA job were designated "AAA" but no mention of Jamison Construction was on the invoices. Based on this testimony, the DistrictCourt Judge found: "There issome uncertainty as to whether the check was delivered locallyor whether itwas mailed toSalt Lake City, but, inany event, it was delivered to plaintiffwithout anything being expressly said at that tme as to what portion of the account it was to apply upon. In retrospect, Clawson, of AAA Electric, testified that he assumed itwould go to pay off the jobs fromwhich the payment to him had come under his comment at the time of delivery, 'Igot mine, now here isyours.' However, the discussion in which the $37,749.69 payment became fixed re1ated tothe September and October balances, none of which involved the Montana Automobile Association job. So, application of the payment tothe September and October balances did not operate to extinguish liability for the purchases of supplies that went into that job." (Finding of fact, No. 4.) Appellant also points to lienwaivers which the contractor Jamison requiredClawson to sign at the time thatJamison paid Clawson: "29 December, 1977, for labor and material on the Montana Automobile Association contract inthe amount of $4,631.55." (Exhibit A) Appellant contends that the existence of the lienwaivers brings this case withinthe rule of Carroll v. Beck (6thCir. 1945), 151 F.2d 964. Inthat case the rule was set out that a debtor maycontrol the application of funds 

### ifthe debtor owes more than one matured debt to the creditor. But this power islimited. Ifthe creditor knows the source of the debtor's funds and knows of a duty of the debtor to discharge a particular debt, then the creditor must so apply the funds. Carroll, 151 F.2d at 966. Many courts dispute this holding, finding no such duty in the creditor. See Annot., 166 A.L.R. 641, 642. Montana has not ruled directly on this question, a1though Montana appears to support the view of no duty at least insuretyship cases. See National Bank v. Bingham (1931), 

### 91 Mont. 62, 72, 5 P.2d 554, 556-557; Annot

# .,57 ALR2d 855, 859-860. However, it isnot necessary for this Court to address that issue here. There isnothing inthe record to indicate that GE had any knowledge whatsoever of the lienwaivers, nor was there any determination that the lien waivers evidenced a contractual duty of Clawson's to apply the payment to the MAA job. For these reasons, we reject appellant's argument based on Carroll, supra, and related cases. This Court is not unmindful of the harsh results inthis

case. MAA paid itscontractor for the work done on itsbuilding, and now MAA is in a position of having to pay again. GE was able touse MAA's money to pay old and perhaps uncollectible debts, and will now get additional money from MAA to pay the Clawson/MAA debt. However, based on the judge's factual findings, which we find to be supported by substantial evidence, we determine that section 28-1-1106, MCA, requires this result. This Court isfaced with a case inwhich the legislature has set forth a clear mandate, which the Court isobliged to follow. That such an inequitable result occurred here suggests that the legislature should review this statute which has been inthe codes virtually unchanged since 1895, despite drastic changes inthe conduct of business.The judgment of the District Court isaffirmed.



### Chief Justice



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