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Edward Hines Lumber Co. v. Dell Corp.





APPEAL from the Circuit Court of Cook County; the Hon. THOMAS J. JANCZY, Judge, presiding.


This is an appeal from an order of the Circuit Court of Cook County wherein Hines Lumber Company (Hines) and Des Plaines Lumber and Coal Company (Des Plaines) were decreed to have mechanic's liens against a certain apartment project.

On appeal, the defendants contend, inter alia, that the trial court erred in striking their defense under section 21 of the Mechanic's Lien Act (Ill. Rev. Stat. 1975, ch. 82, par. 21) and in reforming a certain lien waiver. The relevant facts follow.

In January 1972, construction began on an apartment and townhouse project commonly known as Runaway Bay (Project) located on a 20-acre site near Palatine, Illinois. The Project was constructed by Dell Corporation (Dell) under a written contract with the American National Bank and Trust Company of Chicago, as Trustee under Trust Agreement 76129 (Trustee). The Project was financed primarily by an FHA insured mortgage. The contract between Trustee and Dell provided that Dell was to receive $200,950 as a builder's fee, evidenced by an unsecured, non-interest-bearing note of the Trustee, payable in 40 years. All documents filed with the FHA were standard form and delineate the Trustee as owner, and Dell as the original contractor. The principal shareholders and directors of Dell are Robert N. Sklare and Jerome P. O'Connor. The beneficiary of the land trust and the Project developer is the Woodbridge Way Development Company, an Illinois limited partnership. Dell and Messrs. Sklare and O'Connor are the general partners of the Woodbridge Way (Partnership) with a combined equity of 31.875%. Since the partnership had no employees of its own, all of its functions were handled by Dell's employees.

On April 11, 1972, Dell entered into a contract with Cal-Mar Construction Company (Cal-Mar) whereby Cal-Mar was to furnish labor and material for all of the rough carpentry and certain of the finished carpentry work on the Project. The contract price was for $1,015,705. Shortly thereafter, Cal-Mar sought to contract with Des Plaines for the supply of the material it would need. At the same time, Cal-Mar informed Des Plaines that in order to complete the Project it would need financial assistance. Thereafter, in exchange for Cal-Mar's promise that Des Plaines would be Cal-Mar's lumber supplier, and that Cal-Mar would obtain an agreement with Dell whereby all of Dell's payments to Cal-Mar would be made by check payable jointly to Des Plaines and Cal-Mar, Des Plaines agreed to co-sign Cal-Mar's notes with the Des Plaines National Bank, which in turn would advance money to Cal-Mar. Dell agreed to the conditions, and signed the Des Plaines joint check agreement on April 13, 1972. Cal-Mar then entered into an oral agreement with Des Plaines for the supply of necessary materials for use on the Project at the then prevailing fair market price. Pursuant to both their agreements with Cal-Mar and Dell, Des Plaines supplied materials as needed. They received payment for the material as follows: at the end of each month, Des Plaines would submit its lien waiver (using standard waiver forms) and invoice to Cal-Mar who would issue its check to Des Plaines for the invoice amount. Des Plaines would hold the check until Cal-Mar, using the Des Plaines waiver as part of its payment request to Dell, obtained Dell's check payable jointly to Cal-Mar and Des Plaines. Representatitives of both payees would then endorse the check and deposit it in Cal-Mar's account. Des Plaines would then cash its check from Cal-Mar. This circuitous method of obtaining payment was necessitated by the fact that the check drawn by Dell contained additional funds due only Cal-Mar for labor costs.

Sometime in May 1972, Cal-Mar entered into an oral agreement with Hines to purchase additional lumber and materials for use on the Project. By July 1972, Hines had become alarmed at the amount of Cal-Mar's outstanding receivables and sought Dell's assistance in obtaining payment. Upon Des Plaines' assurance that they had no objections, Dell agreed to assist Hines. The parties then formulated a separate joint check method of payment, dissimilar from the Des Plaines method. Under the Hines-Dell payment method, Hines would present its lien waiver to Dell in return for Dell's trust receipt. As used in the trade, a trust receipt is a document whereby Dell, in consideration for the waiver, agreed to act as trustee for the benefit of Hines, to assure that Hines would be paid. After presenting its lien waiver to Dell and receiving Dell's trust receipt, Hines would submit its invoice to Cal-Mar. Cal-Mar would then apply to Dell for payment. Dell would issue its joint check payable to Hines and Cal-Mar. Cal-Mar would endorse the check, and deliver it to Hines, who in turn would deposit it and cancel the trust receipt. In any case where Dell did not issue its joint check, the waiver and trust receipt were to be returned.

On November 1, 1972, Cal-Mar invoiced Dell $83,956 for October's labor and materials. On November 4, 1972, after receiving Cal-Mar's check for $33,973.48, Des Plaines issued a lien waiver, in that amount, to Cal-Mar. Likewise, in November 1972, Hines issued lien waivers totaling $22,816 in exchange for Dell's trust receipt. On November 16, 1972, Cal-Mar submitted the aggregated Hines and Des Plaines waivers to Dell as partial support of its November invoice, together with its lien waiver and contractor's affidavit for $83,956. Following the agreed procedures, on November 22, 1972, Dell issued two joint checks, one payable to Des Plaines and Cal-Mar for $61,139.90, and the other payable to Hines and Cal-Mar for $22,816. However, unlike the procedure followed in previous months, Cal-Mar never endorsed and deposited the Des Plaines check nor endorsed and transferred the Hines check. Instead, Cal-Mar retained the checks in order to pay the government a $65,000 arrearage in withholding and social security taxes. The Internal Revenue Service, however, refused to accept the joint checks as tendered. On November 28, 1972, Cal-Mar's representatives returned the checks to Dell and, after explaining their difficulty with the IRS, requested that Dell reissue the checks payable solely to Cal-Mar. Dell refused to comply, voided the checks, and retained the funds. Cal-Mar then abandoned the Project and declared bankruptcy.

Despite Cal-Mar's abandonment, Dell continued to use Cal-Mar's employees on the Project. Hines and Des Plaines, unaware of the abandonment, continued to supply material, which Dell accepted for payment in December. On November 29, 1972, Dell informed Des Plaines and Hines of Cal-Mar's actions and asked them to continue supplying material while Dell cleared up the contractual problems. Both companies refused. On December 1, 1972, the bank returned Cal-Mar's November 4 check (covering October materials) to Des Plaines marked "not sufficient funds." That same day Dell entered into a contract with its wholly owned subsidiary, Dell Realty (Realty), for the completion of the carpentry work on the Project. The original Dell/Realty contract, based upon Dell's estimate, called for completion at a cost of $748,000. Later, the contract price was increased to $1,020,976.15, of which $1,003,976.15 represented the estimated cost to complete the Dell/Cal-Mar contract. Final cost certifications showed that the actual cost of completion was $1,283,613.16 or $267,908.16 more than the Dell/Cal-Mar contract.

Subsequently, Hines filed a mechanic's lien complaint, joining all parties with an interest in the Project premises, including Des Plaines. Des Plaines filed an answer and counterclaim to enforce its mechanic's lien. Defendants Dell, Realty, and Trustee filed their affirmative defense under section 21 of the Mechanic's Lien Act (Ill. Rev. Stat. 1975, ch. 82, par. 21) alleging they were a single entity owner who had paid the contract in full and, therefore, were protected from paying more than the contract price to satisfy subcontractor's liens. On March 27, 1975, the trial court decreed that both Hines and Des Plaines were entitled to mechanic's liens against the Project premises in the amounts of $45,727 and $52,989.81 respectively, plus interest and costs. In addition, the court found, as summarized in pertinent part, as follows:

(1) that at all times material hereto the subject premises were owned by the American National Bank and Trust Company of Chicago, as Trustee, under Trust No. 76129;

(2) that all times material hereto Woodbridge Way Development Company was a limited partnership and the sole beneficiary of the aforesaid Trust;

(3) that Dell and Messrs. O'Connor and Sklare were both the general partners in Woodbridge and the principal shareholders and directors of Dell, and that each was authorized to and did act for Woodbridge with respect to its dealings with Dell as the original contractor;

(4) that Hines and Des Plaines delivered their various materials to the subject premises under separate oral agreements with defendant Cal-Mar; and that Cal-Mar was a carpentry subcontractor of Dell, the original contractor who contracted with the Owner-Trustee to construct the Project;

(5) that on or about July 15, 1972, for valid consideration Hines entered into an oral joint check agreement with Dell as hereinbefore described, and that Hines would have ceased delivering materials at that time unless Dell would promise to pay Hines directly, via the joint check method;

(6) that both Hines and Des Plaines complied fully with all procedural requirements of Chapter 82 of the Illinois Revised Statutes in the ...

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