State ex rel. General Electric Supply Co. v. Jordano Electric Co.

Citations: 53 Ohio St. 3d 66; 558 N.E.2d 1173; 1990 Ohio LEXIS 333Docket: No. 89-1053

Court: Ohio Supreme Court; August 8, 1990; Ohio; State Supreme Court

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CMHA is entitled to a setoff against escrow funds due to Jordano's breach of contract. The court of appeals affirmed the trial court’s partial summary judgment favoring CMHA. The relevant statutory framework under R.C. Chapter 1311 addresses mechanics’ liens by subcontractors and others on escrow payments for public projects. Specifically, R.C. 1311.26 allows laborers and materialmen to file a sworn statement of their claims within four months of completing their work. R.C. 1311.28 mandates that governmental owners withhold payments from principal contractors up to the amount of filed claims, placing such funds in escrow as per R.C. 153.63. The principal contractor must notify the owner of any disputes within ten days under R.C. 1311.31, or else the claim is deemed uncontested. R.C. 1311.32 enables lien claimants to seek enforcement through mandamus or to sue the owner for payment. In this case, GESCO, COD, and Fairfield filed their claims, leading to funds being escrowed; Jordano failed to dispute these claims, resulting in GESCO initiating mandamus for payment. The statutory scheme aims to protect subcontractors from defaults by principal contractors. The escrow funds serve as a safeguard against the risk of loss in payments owed to claimants who cannot secure their interests otherwise.

The rights of GESCO, COD, and Fairfield as lien claimants are subordinate to those of the principal contractor, Jordano, as established by case law, particularly in Bullock v. Horn and reiterated in Turzillo. These cases dictate that the rights of subcontractors and material-men are contingent on the contractor's contract with the owner, meaning if the owner can withhold payment from the contractor, they can similarly withhold from the lien claimants. The lien claimants concede that Jordano did not earn the final payment deposited into escrow and that, as such, they lack a claim to those funds in light of CMHA's setoff.

The lien claimants argue that amendments to R.C. 1311.28 in 1963 and 1975 have altered their rights, suggesting that the legislature intended to grant lien claimants priority over the owner’s setoff claims when funds are placed in escrow. They contend that under the pre-1963 version, lien claimants were limited to amounts due to the contractor, while the 1963 amendment allowed for retention of interim payments to satisfy mechanics' liens. This amendment is viewed as recognizing that interim payments are earned before project completion, establishing the lien claimants' rights at that time. Consequently, they assert that once an owner decides to release an interim payment, their rights to any detained portion are fixed, and the owner cannot subsequently claim a setoff. Additionally, the lien claimants argue that the 1975 amendment, which introduced an escrow requirement, signifies legislative intent for the owner to relinquish interest in the funds upon their escrow placement, making them available for distribution to lien claimants.

Appellants contend that the court previously endorsed an interpretation of amended R.C. 1311.28 in the case of State, ex rel. Dinneen Excavating Co. v. Sykes, which required that when amounts owed to subcontractors are agreed upon, the owner must distribute funds based on R.C. 1311.31. The Dinneen case clarified that if the principal contractor acknowledges the correctness of the lien claims, the funds can be released from escrow. However, Dinneen did not address the issue of a public owner's right to a setoff, as the owner in that case did not claim one but merely argued that a court order was needed to determine the distribution of escrow funds.

The court rejected the appellants' argument that amendments to R.C. 1311.28 altered the timing of when lien claimants' rights become fixed, stating that legislative intent should be derived from the statute's language, without inferring unexpressed meanings. It pointed out that R.C. 1311.28 does not clarify whether a public owner's setoff takes precedence over mechanics’ liens; instead, R.C. 1311.32 governs the payment obligations to lien claimants.

The court emphasized that claims of subcontractors are limited to those of the principal contractor, as established in prior cases. CMHA, the public owner, demonstrated that Jordano, the contractor, failed to fulfill contract terms, necessitating compensation to another contractor for corrective work. Consequently, CMHA can assert defenses against the lien claimants that it could against Jordano, namely the defective work. Since Jordano's failure to perform as contracted justifies a setoff against the escrow funds, CMHA is entitled to this offset, even though GESCO, COD, and Fairfield, the lien claimants, met their contractual obligations.

Due to insufficient escrow funds to compensate all parties, the claims of GESCO, COD, and Fairfield must yield to CMHA's right to setoff. The court affirmed the judgment of the court of appeals that granted partial summary judgment in favor of CMHA for the setoff claimed.