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Graybar Elec. Co. v. Mccoy Constr. Co.





Appeal from the Circuit Court of Bureau County; the Hon. C. Howard Wampler, Judge, presiding.


Rehearing denied June 6, 1984.

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?

• 1 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 ...

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