Grinnell Co. v. City of Crisfield

Finan, J., delivered the opinion of the Court. The facts leading to this appeal are undisputed. The City of Crisfield, Maryland (City), one of the appellees, being desirous of promoting industrial and employment prospects in its area, entered into an arrangement with one of its local business enterprises, the Rubberset Company (Rubberset), the other appellee, whereby it agreed to finance the construction of a warehouse and lacquer dip addition to the Rubberset plant. 1 The agreement en ⁵⁵⁴ tered into between the City and Rubberset is normally referred to as the sale-leaseback method of financing, and as the name implies, it provided that Rubberset would sell to the City certain real property upon which the City would construct the plant addition, and in turn the City would lease back the property to Rubberset. On February 1, 1967, Rubberset executed a deed passing title to the property which was located outside of the City Limits, to the City, and on February 3, 1967, the parties executed a lease agreement which stipulated that the City would complete the acquisition of land upon which the plant addition was to be constructed and erect the improvements called for, and that Rubberset would lease the premises from the City at a specified rental for a term of 20 years, at the end of which term Rubberset would be allowed to repurchase the property.

The City raised the money for the acquisition and construction from the sale of industrial revenue bonds under the authority of Maryland Code (1971 Repl. Yol.) Art. 41, §§ 266A-266I. Also on February 3, 1967, the City entered into a contract with Weidemuller Construction Company (Weidemuller) whereby Weidemuller agreed to build the plant addition at a cost of $390,950.00, and Weidemuller executed labor and material payment and performance bonds pursuant to Code (1969 Repl. Vol.) Art. 90, § 11, naming itself as principal, Fidelity and Deposit Company of Maryland as surety, and the City and Rubberset as obligees.

On February 13, 1967, Weidemuller contracted with the appellant, the Grinnell Company, Inc. (Grinnell) whereby the latter was to provide the materials, equipment and labor for the installation of a fire protection system for the plant addition. As a result of not having been paid for the performance of its contract, Grinnell on August 26, 1968, notified Fidelity and Deposit Company of Maryland and the appellees of its intention to place a mechanics’ lien on the property. On January 13, 1969, it filed a claim for a mechanics’ lien in the amount of $38,022.38 in the Circuit Court for Somerset County and on January 12, 1971, filed a bill ⁵⁵⁵ of complaint to enforce the mechanics’ lien in which it pleaded, in the alternative, for monetary damages. The appellees filed demurrers to the bill of complaint which, after a hearing in the Circuit Court for Somerset County (Duer, J.) were sustained without leave to amend.

The lower court held that “Article 90, sec. 11 of the Code is controlling” and on the basis of this Court’s decision in Hamilton v. Board of Education, 233 Md. 196 , 195 A. 2d 710 (1963) determined that “[T]he sub-contractor has no recourse against the City by way of mechanics’ lien.” The court, further commenting as to why it sustained Rubberset’s demurrers, stated: “Title to the premises is vested in the City and Rubberset’s legal interest is by way of lease only. Rubberset was not a party to the construction contract, and no allegation is made that it ever promised or agreed to assume any responsibility for liability incurred in construction nor has any privity between Rubberset and the lienor been shown. In any case since it is here decided that the interest of the City is not subject to a mechanics’ lien, it follows that the interest of Rubberset being subordinate thereto likewise is not subject to mechanics’ lien.” Grinnell appealed the decision of the lower court. In challenging the sustaining of the City’s demurrer, Grinnell contends that Code (1969 Repl.

Vol.) Art. 90, § 11, is not applicable because the City was not involved in a public construction contract. 2 It concedes that Hamil ⁵⁵⁶ ton v. Board of Education, supra, is dispositive of the issue of whether or not a subcontractor has a remedy by way of a mechanics’ lien in a claim arising out of a public construction contract. There, Judge Hammond (now Chief Judge) writing for the Court stated: “The statutory direction that each public construction contract include the furnishing of a payment bond for the protection of materialmen and subcontractors refutes the claim that the contract between the Board and the prime contractor intended to make suppliers or subcontractors beneficiaries ‘in fact though not in form,’ entitled to demand payment direct from the Board. From the requirement of a payment bond there may be inferred a legislative intent, written into each public construction contract, that the State or other public body is not to have a duty to pay or to see to the payment of materialmen or subcontractors beyond the furnishing of the payment bond.” 233 Md. at 200 . See also Williams Construction Company, Inc. v. Construction Equipment Company, Inc., 253 Md. 60, 67 , 251 A. 2d 864 (1969) ; Rubberoid v. Glassman, 248 Md. 97, 106 , 234 A. 2d 875 (1967) ; and Montgomery County Board of Education v. Glassman Construction Company, 245 Md. 192, 201 , 225 A. 2d 488 (1967).

Grinnell points out, however, that the City’s action in the instant case, where it contracted for the construction of a plant addition to a private, profit-making company, did not constitute involvement in a “public construction” project. Therefore, it contends that Hamilton , wherein the Montgomery County Board of Education was sued by a sup ⁵⁵⁷ plier of labor and materials in its effort to obtain a mechanics’ lien is, on its facts, distinguishable from the case at bar. We do not agree with this deduction for the reason that once the City’s involvement in the construction of Rubberset’s plant addition is placed in its proper perspective, it becomes apparent that its action was motivated by a public purpose. To obtain this perspective we must look to Code (1971 Repl.

Vol.) Art. 41, § 266B, the provision which authorized the City to issue revenue bonds in order to finance the construction of the plant addition. Article 41, § 266B states: “In order to relieve conditions of unemployment or to encourage the increase of industry in this State, any municipality or county may borrow money by issuing negotiable bonds for the purpose of defraying the cost of acquiring any industrial building or buildings * * *, either by purchase or construction, but only after an ordinance or resolution has been adopted by the legislative body of the municipality or county specifying * * * that the industrial building * * * is to be acquired for a bona fide tenant or tenants * * *. Nothing herein shall be construed to authorize any municipality or county to acquire any industrial building or buildings * * * by eminent domain. * * *” (Emphasis supplied.) Grinnell makes no allegation that the City entered into the agreement with Rubberset for reasons other than to “relieve conditions of unemployment” and “encourage the increase of industry,” and, indeed the lease executed by the City and Rubberset specifically states this to be the purpose for the agreement. The Court in City of Frostburg v. Jenkins, 215 Md. 9 , 136 A. 2d 852 (1957) was confronted with a similar question.

In that case, a taxpayer had sought and obtained ⁵⁵⁸ from the Circuit Court for Allegany County an order restraining the City of Frostburg from holding a special election for the purpose of gaining authority to issue municipal bonds to finance the acquisition of land and the construction of a building for a private, profit-making manufacturing company. The taxpayer contended that the Constitutional prohibition against municipalities using public funds for private use prevented the City of Frostburg from exercising the powers granted to it under Chapter 662, § 103 of the Laws of 1953 to “purchase property and to construct or reconstruct