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Central Nat. B. & T. v. Consumers Const. Co.

APRIL 25, 1972.




APPEAL from the Circuit Court of Winnebago County; the Hon. ALBERT S. O'SULLIVAN, Judge, presiding.


Plaintiff appeals from a judgment denying recovery from defendant, Consumers Construction Co., for amounts allegedly loaned by plaintiff to defendant's subcontractor in reliance on letters executed by the defendant.

On September 5, 1969, James D. North and Frank E. Suddarth, who, with Donald J. Sutton, represented three businesses found by the lower court to be operating in partnership, met with officers of plaintiff bank to discuss the financing of a construction project on which their companies acted as a subcontractor, and defendant was the general contractor. Since their financial position was weak, the bank refused to loan money on the partners' signatures alone. Then, on September 8th, the partners submitted to the bank two letters addressed to the bank and signed by Consumers Construction Co. The first stated that Consumers had a contract with the subcontractor, that on approximately the 15th of every month the company would pay for 90% of the work in place, and that the company banked at the Park National Bank in Chicago. The second stated that Mr. Sutton, as of that date, had completed work in the amount of $8,850, which would be paid during the week of September 15th by a check payable to Sutton and plaintiff bank. Upon receipt of the letters, plaintiff loaned 80% of the amount stated therein to the partnership, taking its promissory note in return. As stated in the letter, a check for $8,850 was received from Consumers, whereby the note was canceled, and the remaining 20% was deposited in the partnership account.

Approximately twenty-five more letters addressed to plaintiff and signed by defendant were received between September, 1969 and February 2, 1970. These were in the form of "retention" letters, stating only that the subcontractor had certain retention balances due. The plaintiff again loaned 80% of the amounts stated in each letter, and again received checks for all of the amounts from Consumers.

Thirteen more letters, representing payments totaling $34,166.50, were received in the period from February 4, 1970 to March 18, 1970. As was the case with all but two of the previous letters, they were hand carried to the bank by one of the partners. Their language, with minor differentiations, was as follows:

Central National Bank and Trust Co. 201 North Main Street Rockford, Illinois 61101 Re: Parkside Manor Belvidere, Illinois

Dear Sir:

(Name of subcontractor) has the following draw: ($ ) This has been approved by us, as of this date, and will be paid to Mr. Sutton approximately the week of the 15th of (April-May). The check will be made payable to D.J. Sutton Builders and to the Central National Bank and Trust Co.

Very truly yours, /s/ Raymond Reichard Raymond Reichard Consumers Construction Co.

As the bank received each letter, it again loaned 80% of the amounts set forth. About the middle of March, the subcontractor failed to provide waivers of liens on the work referred to in the thirteen letters, which put them in default of their contract with Consumers. Defendant took over the completion of the work which was to have been performed by the subcontractor and failed to remit the $34,166.50 to the bank, asserting that it owed the subcontractor nothing and therefore owed the bank nothing. The bank placed its notes against the subcontractor in judgment, but the subcontractor became bankrupt, and the judgment remains unpaid. This suit and the suit in which the bank placed its notes in judgment against the subcontractor parties were consolidated.

The trial court, sitting without a jury, found for defendant on the theory that the plaintiff was a third party beneficiary of a contract between the defendant and the subcontractor, and "where a contract is entered into by two parties for the benefit of a third, the third party's rights are subject to the equities between the original parties."

The trial court decision must stand or fall on the basis of the legal effect of the thirteen letters, as viewed in light of the previous letters transmitted. Appellant contends that these letters formed a contractual relationship between Consumers and the bank, giving the bank a direct right of action against Consumers without regard to the rights of the subcontractor. Consumers argues that the trial court was correct in depicting this as a third party beneficiary relationship, or alternatively that the bank received these letters by assignment from the subcontractor, and in either case have no greater rights than those of the subcontractor.

Defendant contends that plaintiff's theory of a direct contract between it and the defendant was not presented to the trial court and cannot be advanced here for the first time. Defendant points to the letters attached to the complaint and to the allegation that "defendant has neglected and refused to pay the draw as guaranteed by its letter attached as an exhibit." (Emphasis added) We do not conclude that plaintiff is limited to proving a "guarantee" in any technical sense. Under the pleading and proofs plaintiff may properly raise as an issue here whether the letters, together with the circumstances surrounding them, created a contractual obligation by defendant to pay to plaintiff the sum of $34,166.50 drawn by the subcontractors.

The trial court determined that the contract between the defendant contractor and the subcontractor also established the relationship between the plaintiff and the defendant. Plaintiff was thus held to be a third party beneficiary of this contract. The legal result which would follow from this conclusion was correctly stated to subject the third party beneficiary to the equities existing between the primary contracting parties. Since the subcontractor defaulted under the agreement by failing to submit waivers ...

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