Court Opinion

ID: 8877218
Source: CourtListenerOpinion
Date Created: 2022-11-26 19:29:17.109371+00
Date Added: 2024-06-11T17:06:25.928738
License: Public Domain

IRVING R. KAUFMAN, Circuit Judge
(dissenting) :
While I agree with my brother Moore that the simple question to be asked is “What are the equities?”, I find myself unable to concur in his reslution of that inquiry. The difficulty with the ma*140jority’s rationale is that it does not seem to recognize that the heavy duty it imposes on Hyland with respect to the application of Franchi’s payments is an exception to the general rules governing the apportioning of payments where several debts are owed by the debtor to the same creditor. These general rules are clearly set forth in the St. Paul Fire and Marine Ins. Co. case cited by the majority and are contained in § 387 of the Restatement of Contracts:
(i) The payment is applied as the debtor intends and so manifests to the creditor before or at the time of payment.
(ii) If the debtor fails so to indicate, the payment is applied as the creditor, within a reasonable time, determines.
(iii) If neither the debtor nor the creditor seasonably so indicates, the payment is applied as a just regard to its effect upon the debtor, the creditor, and third persons makes it desirable that it should be applied. This usually results in its application to the oldest unsecured account. 309 F.2d at 25.
Adapting these guidelines to this case, it seems to me that since Fairway, the debtor, instructed Hyland, the creditor, how to allocate the Franchi checks, Hyland acted properly when it followed those instructions.
There is, as I have indicated, an exception to the general rules set forth above, and it is this treatement, sui generis in character, which the majority would utilize in this case. The anomaly, recognized by the court in the St. Paul Fire and Marine Ins. Co. case, is contained in § 388 of the Restatement of Contracts which provides:
Limitation of the Payor’s Power of Controlling Application
If the payor is under a duty to a third person to devote money paid by him to the discharge of a particular debt the payment must be so applied if the creditor knows, or has reason to know, of the payor’s duty, in spite of the fact that the payor directs that the payment shall be applied to the discharge of another debt. (Emphasis added.)
In order to determine whether this exception is properly adaptable to the present case, therefore, we must ask whether Hyland knew, or had reason to know, that Fairway had a duty to apply the Franchi checks toward payment for the Burlington storage facility materials supplied by Hyland. Although the majority opinion seems to realize that this query is appropriate, it proceeds to merge the issues of duty and estoppel in the same “general inquiry,” and this in fact appears to have resulted in an examination only of those principles governing the doctrine of estoppel.
I would suggest instead that quite different considerations should determine whether Hyland had a duty to use the funds it received from Fairway solely for the purpose of reducing the Burlington project account, and that we need not deal with the question of whether Franchi should be estopped from asserting Hyland’s equitable duty simply because the facts in this case indicate that no such duty existed. The majority recognizes that “the case law supports the notion that, at least where the prime contractor has no notice as to how his subcontractor’s supplier has applied funds, the source of which is the prime contractor, the supplier is under an equitable duty to apply the funds received to the secured account.” But, my brothers also know that in not one of the cited cases did the prime contractor have notice that the funds were in fact being applied to a different account. These cases are, therefore, dubious authority, and cannot be relied on to support the diverse proposition that when the prime contractor does have such knowledge, as it did here, an equitable duty still binds the supplier to apply the funds to the secured account.
It is undisputed that Hyland sent its ledger cards to Franchi, indicating clearly the amount by which the Burlington project account had been reduced. This knowledge on Franchi’s part is crucial, because Hyland was required to apply *141the total amount of the checks to the Burlington project account only if it “[knew] or had reason to know” that Fairway was under a duty to Franchi to apply those checks to that particular account. See Restatement of Contracts § 388, supra; Corbin on Contracts, § 1231. But, the evidence is clear that when Franchi learned from the Hyland ledger cards that only a portion of the checks had been applied to the storage facility account, it never voiced any objection to Hyland; instead Franchi continued to forward its checks and to acquiesce in the way these payments were being applied. Under these circumstances it cannot be said that Hyland had “reason to know” that Fairway was under an obligation to use those checks only to reduce the Burlington account; and, since actual or implied knowledge of Fairway’s duty was non-existent, the rule set forth in § 388 of the Restatement of Contracts was inapplicable, and no duty was imposed on Hyland to apply the funds only to the secured account. Hyland, therefore, acted properly when it followed Fairway’s orders and should recover, as Judge Gibson held, the monies never paid for the materials supplied to construct the storage facility totaling $9,647.38.
I should add that I do not agree with the majority that finding Franchi liable for this amount would subject it to “double liability.” The evidence indicates that Franchi has not paid for the materials in question. The total value of the electrical supplies purchased by Fairway was $18,647.38. The two Fran-chi checks actually paid totaled $19,597. A third check for $4000 or $4500 was also forwarded although payment was stopped when Franchi learned of Fairway’s petition in bankruptcy. Since the total amount of the 3 checks far exceeded the amount due for materials, it is evident that the checks were intended not only to pay for the materials in question, but also to compensate Fairway for the labor it had furnished in connection with the project. And, I believe it is fair to infer from Franchi’s acquiescence in the manner in which the checks were applied, that only $9000 of the first 2 checks was intended to pay for materials supplied by Hyland.
While I would affirm Judge Gibson’s judgment as to Franchi, I would reverse his holding with regard to the surety, Maryland Casualty. There is nothing in the case to indicate that the funds which Franchi forwarded to Fairway were not related to the Burlington project. The cases cited by the majority clearly indicate that Maryland was entitled to have those funds applied against the debt for which it was acting as surety. Since there is no evidence that Maryland was aware of the misapplication of the funds it should not be bound by Franchi’s acquiescence, and should be relieved of its obligations under the surety contract.