FILED: June 19, 2002

KEITH BROWN LUMBER YARD,
an Oregon corporation,

Appellant,

v.

B & L ELECTRIC, INC.,
dba Custom Electric,
an Oregon corporation;
PARR LUMBER COMPANY,
an Oregon corporation;
BILL STANLEY HOMES, INC.,
an Oregon corporation;
JOHN or JANE DOES 1-20;
BETTY STANLEY;
and BILL STANLEY,

Defendants,

and

TRAN CO.,
an Oregon corporation,

Respondent.

Appeal from Circuit Court, Polk County.

William M. Horner, Judge.

Argued and submitted April 3, 2002.

Terrence Kay argued the cause for appellant. With him on the brief was Terrence Kay, P.C.

David A. Hilgemann argued the cause for respondent. With him on the brief was Law Offices of David Hilgemann.

Before Landau, Presiding Judge, and Brewer and Schuman, Judges.

SCHUMAN, J.

Affirmed.

SCHUMAN, J.

Plaintiff, a lumber supplier, appeals from a judgment rejecting its attempt to foreclose four construction liens it held on property owned and developed by defendant Tran Co. The trial court found that Tran Co. had paid plaintiff, albeit indirectly, for the material on which plaintiff's claim is based. Plaintiff appeals, and we affirm.

Because defendant Tran Co. prevailed on an affirmative defense that was legal in nature--payment of the debt underlying the foreclosure--we review for errors of law and, with respect to facts, for whether there is any evidence to support them. Illingworth v. Bushong, 297 Or 675, 694, 688 P2d 379 (1984); T.M. Peet Enterprises, Inc. v. Plaia, 131 Or App 153, 155, 883 P2d 1329 (1994).

Defendant Tran Co. owned four lots in a subdivision near Salem and contracted with Bill Stanley Homes (Stanley) (1) to build houses on those properties. In the course of construction, Stanley purchased lumber from plaintiff on credit. Plaintiff billed Stanley separately for each job site. Stanley would, on a somewhat monthly basis, present to defendant the recent bills from plaintiff, along with one check to plaintiff drawn on Stanley's own bank account for each of the four projects, made out to plaintiff in the amount necessary to cover the purchases for that project. Defendant's employees then compared the bills from plaintiff with the amounts of the Stanley checks to ensure that the amounts matched and, when they did, forwarded the Stanley checks to plaintiff. Defendant then issued checks drawn on its own account payable to Stanley in the amount Stanley had paid plaintiff. In other words, Stanley paid plaintiff and was then reimbursed by defendant, after defendant assured itself that the amount Stanley paid was exactly what Stanley owed plaintiff for materials used on defendant's projects.

Plaintiff claimed at trial that none of the Stanley checks it received contained any indications from defendant as to which job site it applied and therefore plaintiff was not required to credit those payments to defendant's four job site accounts. Rather, under a contract with Stanley, plaintiff was entitled to apply those payments to Stanley's overdue account balances incurred on other projects. Thus, according to plaintiff, defendant had provided no payment on accounts owed for its job sites, thereby justifying plaintiff's construction liens.

Defendant, on the other hand, presented evidence that the Stanley checks forwarded to plaintiff had either tear-off stubs identifying the project to which they should be applied or, on checks that were not accompanied by a tear-off stub, a written indication on the face of the check with that same information. That testimony is corroborated by evidence in the record, namely, photocopies of checks with their associated check stubs clearly indicating the project to which they applied, as well as photocopies of other checks with no check stub but with handwritten project addresses on the checks' face. Only one check contains neither an associated stub nor handwritten notation indicating for which job site it was an intended payment. Based on this documentary evidence, the trial court found that "plaintiff knew, or reasonably should have known, that the payments were intended to be applied against the cost of material supplied to the four construction sites involved in this lawsuit."

On appeal, plaintiff first challenges the admissibility of the checks issued by Stanley to plaintiff. Plaintiff argues that, because the Stanley checks were not issued by defendant, they are not relevant to the affirmative defense that defendant "has paid for all or a substantial portion of the labor and materials allegedly provided by Plaintiff." Plaintiff, in other words, would have this court hold defendant to a hyper-precise reading of its pleading, such that the assertion that "Tran Co. has paid" plaintiff must mean only that Tran Co. has directly paid plaintiff, and not that Tran Co. has provided the money with which Stanley paid plaintiff. Defendant responds that whether it paid plaintiff directly by means of its own checks or indirectly through Stanley is immaterial; in either case, plaintiff received payment, traceable to defendant, for materials plaintiff provided for use on defendant's properties, and therefore the Stanley checks are relevant to the affirmative defense.

We agree. Defendant's theory of the case is that it used elaborate procedures to ensure that moneys it paid to Stanley by reimbursing Stanley for payments to plaintiff were used only to pay for materials supplied for use on defendant's properties. Those procedures included verification that Stanley's checks to plaintiff and defendant's checks to Stanley were issued only in the amount of bills for materials used on defendant's projects. Given that theory, the Stanley checks were undeniably relevant to the issue of whether plaintiff received payment ultimately traceable to defendant for materials supplied to defendant's properties. Hilker v. Kruse, 152 Or 197, 52 P2d 1119 (1936) (plaintiff's acceptance of payment from third party admitted as evidence of payment); T.M. Pete Enterprises, Inc., 131 Or App at 156-57 (admitting evidence of payments on separate contract relevant to whether those monies "were, in fact, paid on this contract").

Further, to the extent that defendant's proof does not precisely match the wording of its affirmative defense, the difference is immaterial and not prejudicial. See ORCP 12 B ("The court shall, in every stage of an action, disregard any error or defect in the pleadings * * * which does not affect the substantial rights of the adverse party."). Defendant pled that it paid plaintiff; its evidence showed that plaintiff was paid by means of checks issued by Stanley out of funds provided by defendant for the purpose of paying defendant's accounts. Plaintiff did not argue that it was misled or prejudiced in its ability to present its case as a result of that variance, nor do we see any basis for such an argument. City of Lake Oswego v. $23,232.23 in Cash, 140 Or App 520, 525-26, 916 P2d 865, rev den 324 Or 322 (1996). The trial court did not err in admitting the Stanley checks as proof of payment.

On the merits, plaintiff argues that the trial court used the wrong legal standard in concluding that plaintiff had to direct payments to the accounts associated with defendant's properties, instead of to Stanley's unrelated preexisting debt, if plaintiff knew or should have known that the funds were directed to the specific accounts; plaintiff contends that it had responsibility only with respect to payments with directions of which it had actual knowledge. Plaintiff also argues that defendant failed to prove that plaintiff had such knowledge. We conclude, however, that the trial court's standard, "knew or should have known," is correct and that plaintiff in fact did know or should have known how to credit the payments.

A debtor may direct that a given payment be applied to a particular account, and a creditor is obligated to apply such a payment as directed. Gayer and Gayer, 326 Or 436, 952 P2d 1030 (1998); Empire Building Supply v. EKO Investments, 40 Or App 739, 744-45, 596 P2d 593 (1979). When the direction is on the face of a check, that direction must be sufficiently specific to provide the creditor (and a reviewing court) with information from which it can determine how to make the application. See Block v. Love et al., 136 Or 685, 692, 1 P2d 588 (1931) (direction ineffective where a check referenced two different accounts but did not specify distribution or priority between them).

Effective direction to a specific debt may take the form of express instructions or it may be inferred from circumstances manifesting the debtor's intent:

"A debtor who chooses to direct payment to a particular debt must manifest to the creditor an intent to do so 'at or before the time of payment.' Johnson Lbr. Corp. v. Leonard et al., 192 Or 639, 668-69, 236 P2d 926 (1951) (quoting Restatement of the Law, Contracts,