Court Opinion

ID: 7020607
Source: CourtListenerOpinion
Date Created: 2022-07-24 04:41:43.054774+00
Date Added: 2024-06-11T11:56:14.437836
License: Public Domain

PRESIDING JUSTICE STOUDER delivered the opinion of the court: This action was commenced by Graybar Electric Company, Inc. (Graybar), against McCoy Construction Company (McCoy) and Fidelity and Deposit Company of Maryland (Fidelity) on a commercial surety bond relating to a construction project for the Covenant Children’s Home in Princeton, Illinois. The circuit court of Bureau County entered judgment in favor of Graybar and against Fidelity in the amount of $21,019.65. Fidelity has appealed from this judgment. Graybar has also cross-appealed, arguing the trial court erroneously reduced its claim by $1,885 and erroneously declined to award contract interest. As a condition of the Covenant Children’s Home construction project, McCoy was required to provide the commercial surety bond which is the subject of this litigation. The bond executed by Fidelity provided in the usual terms for indemnification of those supplying material and labor on the project. McCoy subcontracted a portion of the work to Grawey Electric Company, and in turn Grawey Electric Company (Grawey) purchased electrical supplies from Graybar. After the project was completed Graybar claimed it had not been paid in full by Grawey, so this action was commenced on the bond. From the evidence, it appears during the period from July 1980 to May 1981 Graybar supplied materials for the Covenant project to Grawey amounting to some $62,000. During the same period McCoy paid Grawey some $112,000 and the subcontractor paid the supplier some $115,000. However, the supplier applied only $36,000 to the Covenant project, leaving a balance due thereon of $26,000. The balance of the $115,000 received from Grawey by the supplier was allocated to other accounts which Grawey owed the supplier. According to Graybar, this allocation was made pursuant to the direction of Grawey. On this appeal the surety phrases the issues as follows: I. Did the plaintiff satisfy the necessary conditions precedent to recover under the bond? II. Was the finding of the trial court that Grawey Electric, Inc. (Grawey), directed the application of funds paid by it to the plaintiff against the manifest weight of the evidence? III. Was the decision of the trial court that the surety did not have special equities in the funds paid by Grawey to the plaintiff against the manifest weight of the evidence?  Fidelity’s first contention is that Graybar failed to satisfy a condition precedent of the language of the bond itself, the condition precedent being that notice of nonpayment be sent by registered mail. While we acknowledge that this technicality could have been a possible defense, it is not available in this case. It is not available because Fidelity, while desirous of following the technicalities of its bond, failed to follow the technicalities of Illinois pleading and practice. In its complaint, Graybar alleged generally that it had performed all conditions precedent. Fidelity entered a general denial to this allegation. Supreme Court Rule 133 required Fidelity to allege facts “in connection with the denial showing wherein there was a failure to perform.” (87 Ill. 2d R. 133(c).) Fidelity waived the claim of nonperformance of this condition precedent by failing to specifically plead. Next we turn to the merits of the surety’s appeal. In summary, the surety’s objections to the trial court’s judgment are twofold. First, it argues there is insufficient competent evidence to support the claim by Graybar as approved by the trial court of the allocations of payments by Graybar pursuant to Grawey’s directions. Second, the surety argues even if the directions by Grawey were supported by competent evidence, the special equitable interest in the funds from the Covenant project traceable through Grawey to Graybar required the allocation of such funds to the payment for material supplied for the Covenant project. The major premise of the surety’s argument is that it has a special equitable interest in the funds received by Graybar from Grawey because they are traceable from the Covenant project for which the material was supplied. In response, Graybar argues the evidence is insufficient to support any claim of special equitable interest in the funds but even if so the direction of the subcontractor to apply funds to nonproject accounts was both properly proved and legally authorized. If the surety did not establish its special equitable interest in the funds, it would follow that whether funds received by the supplier were or were not properly allocated would be immaterial since the surety would have no interest in such funds. This is one of the teachings of Alexander Lumber Co. v. Aetna Accident & Liability Co. (1921), 296 Ill. 500, 129 N.E. 871, which makes the special equity of the surety dependent upon proof that the funds received by the creditor were derived from the construction contract. According to the court in Alexander Lumber Co.: “Without reviewing in detail here the mass of evidence and accounts in the records, we are of the opinion that the weight of the evidence supports the master’s finding regarding the source of the funds paid to defendant in error by Freeman & Brooks. The tracing of certain moneys and payments in the evidence, together with the testimony of Thomas Evans, a public accountant, and others, produces the unavoidable conclusion that payments to the amount of defendant in error’s claim for materials furnished for the chemistry building were, in fact, made from funds arising from that building.” (296 Ill. 500, 508.) In fact the opinion in Alexander Lumber Co. indicates the creditor in that case, unlike the creditor in the instant case, did not dispute the source of the funds which it received.  As indicated earlier, the only evidence relating to derivation or source of funds received by Graybar was testimony of the payments made by McCoy from the Covenant project to Grawey during the 10-month period in question totalling $112,000 and the receipts by Graybar from Grawey during the same period totalling $115,000. We fail to see how such evidence supports the conclusion the funds received by Graybar were those derived from the Covenant project contract thereby creating in the surety a special equity in such funds. Based on such evidence, it is just as reasonable to conclude that the payments by McCoy from the Covenant construction project to Grawey were paid to other Grawey creditors or dissipated in other ways. Equally reasonable is the conclusion that the funds received by Gray-bar were from other projects of Grawey. Neither books, records nor bank accounts of Grawey were presented for consideration by the trial court. In Village of Winfield v. Reliance Insurance Co. (1965), 64 Ill. App. 2d 253, 212 N.E.2d 10, the court deals at length with a method which it approves based on an accounting analysis for tracing funds derived from a construction project when payments are made therefrom as well as from other funds received from nonproject sources. No such evidence was presented in the instant case, and any conclusions based on the source of the funds are purely speculative. Although the surety claims his special equity was proved merely because the subcontractor received more money from McCoy than it paid to Graybar, a conclusion which we have rejected, the surety also insists that it was the duty of Graybar, the creditor, to establish that the funds were not derived from the construction contract rather than its burden to establish the' converse. No authority has been cited for this proposition, and we believe the surety’s position is without merit. The surety is in the position of asserting rights based on its special equity in the funds, which is in its nature an equitable defense of payment. Absent the special equities, the usual rules of payment by debtors are applicable and the surety would have no basis for asserting that a special equitable rule should be applied to avoid injustice. Thus, where the creditor initially proves the terms of the surety bond, the supplying of the materials and their incorporation into the building project covered by the bond and the nonpayment therefore, it is the burden of the surety to show that the obligation was paid or otherwise discharged. This is in the nature of an affirmative defense whether so pleaded or not, and where the rights of the parties depend upon a special relationship to the transaction, it should be the burden of the party claiming such special relationship to establish it.  Since we believe that the evidence as a matter of law fails to establish the funds received by the plaintiff were derived from the Covenant construction project, we hold the defendant surety has no special equity in such funds and is in no position to complain that any of the funds received by the plaintiff were allocated to other accounts of Grawey. For this reason we find it unnecessary to decide whether the allocation of the funds to other accounts was supported by proper evidence or was legally permissible.  On its cross-appeal Graybar argues the trial court erred in reducing its claim by $1,885 and by failing to award it contract interest. Apparently, the trial court believed that $1,885 of the $115,000 which Graybar received from Grawey was not allocated to either the Covenant construction project material account or to any other accounts, and accordingly it credited the amount to the Covenant project account. Both parties seem to agree that the evidence does not support this deduction even under the theory applied by the trial court. Both because of such error and because of our position on the appeal of the surety, we conclude the deduction of $1,885 was erroneous. So far as the other objection of Graybar is concerned, we believe the court properly held that Graybar was entitled only to interest provided by statute and not the monthly rate of interest proclaimed on its monthly statements, and, accordingly, we find no error in the trial court’s decision disallowing interest at the contract rate. For the foregoing reasons, the judgment of the circuit court of Bureau County is modified by adding to it the amount of $1,885 erroneously disallowed by the court, and the judgment as so modified in favor of the plaintiff in the amount of $22,904.65 with interest at 5% is affirmed. Judgment modified and as modified affirmed. SCOTT, J., concurs.