Century Cement Manufacturing Co. v. Fiore , 36 N.Y.S.2d 332 ( 1942 )

Schenck, J.

This is an appeal from an order and judgment granting the motion of respondent, New York Casualty Company, for affirmative relief in its claim to a fund of $3,778.63 remaining in the hands of the State of New York unexpended and available for distribution upon a contract between the State of New York and the defendant Luciano. The appellant is assignee of Luciano’s rights and interest in the proceeds of the aforesaid contract. The respondent is surety on two bonds executed by Luciano in connection with the contract, one covering completion thereof, the other covering payment to materialmen and laborers employed in performance of the contract. The controversy herein arises from .the conflicting claims of these two parties to the aforesaid fund held by the State.

The contract in question was let in August, 1939, being officially approved September 11, 1939. It provided for the performance of certain construction work upon a State highway in Washington county. It also contained certain standard provisions in printed form and made part thereof for termination of the contract by the State under certain circumstances. The more pertinent parts of these provisions appearing on page 6 of the printed part of the contract are as follows:

“ 10. It is further mutually agreed that if at any time during the prosecution of the work the Commissioner of Highways shall determine that the work upon any contract for the construction or improvement of a State or county highway is not being performed according to the contract or for the best interests of the State, that said Commissioner of Highways may suspend or stop the work under contract while it is in progress, and that the Commissioner of Highways shall thereupon complete the work in such manner as will accord the contract, plans and specifications and be for the best interests of the State, or he may cancel the contract and readvertise and relet as provided in Section 40 of the Highway Law, being Chapter 63 of the Laws of 1936, and the amendments thereto, and any excess in the cost of completing the contract beyond the price for which it was originally awarded shall be charged to and paid by the Contractor failing to perform the work.

“ The Contractor further agrees, pursuant- to the provision of Section 40 of the Highway Law, that the State reserves the right to suspend or cancel this contract as above provided, and to complete the work thereunder or readvertise and relet as the Commissioner of Highways may determine.

“ Whenever the Commissioner of Highways determines to suspend or stop work under the contract, a written notice sent by mail to the Contractor at his address and to the surety company, or bond man, at their address, shall be sufficient notice of his action in the premises.

“ 11. It is further mutually agreed that the State Department of Public Works, Division of Highways, may apply any moneys due or to become due under this contract to the completion of the work or to the payment of the second Contractor; and in case a contract let under such forfeiture is let at a figure in excess of the amount remaining unpaid on the contract so forfeited or cancelled free from all liens and other encumbrances, then the principal agrees to deposit, within ten days from the receipt of notice of such reletting, to the credit of the State Department of Public Works, Division of Highways, for the prosecution and completion of the work a sum of money which is equal to such excess. In case the State Department of Public Works, Division of Highways, decides to complete said work in any other manner than by contract, then the said principal agrees to deposit to the credit of the State Department of Public Works, Division of Highways, within ten days from the receipt of notice of the final completion of the work, the amount of any excess cost occasioned by such completion, over the amount remaining unpaid on the contract so forfeited or cancelled free from all hens and other encumbrances. It is further mutually agreed that if the Contractor fails to deposit such sum to the credit of the State Department of Public Works, Division of Highways, and the surety on the bond for the faithful performance of this contract pays or deposits the same, that the State Department of Public Works, Division of Highways, may subrogate to such surety ah rights, claims and titles to any moneys remaining in the hands of the State Department of Public Works, Division of Highways, which are adjudged as belonging to the Contractor Principal.”

In connection with the letting of the contract, furthermore, two bonds were required before Luciano’s bid could be accepted. Both were executed by Luciano as principal, and respondent, as surety. Both ran to the People of the State of New York as obligee. One bond was conditioned upon the completion of the contract in accordance with its terms and in such manner as to hold the State of New York harmless for damages, costs and judgments in excess of the amount of the contract. This is termed the “ completion ” bond. The other bond, likewise running to the People as obligee, is conditioned upon the prompt payment of “ all moneys due to all persons supplying the contractor or a sub-contractor with labor and materials employed and used in carrying out the contract.” This is known as the “ labor and material ” bond. Both bonds were dated August 21, 1939.

Subsequently, after the letting of the contract and after the execution of the bonds, the contractor Luciano made his assignment to the appellant Fiore in consideration of moneys advanced presumably for use in connection with the contract. This assignment was filed November 25, 1939. On the said advances, there is a balance remaining in the sum of $3,950. Upon the basis of this assignment, appellant now claims the funds held by the State.

Following the assignment to Fiore, Luciano proceeded with the contract to partial completion. He was unable to complete it, however, and finally defaulted, as a result of which the State terminated the contract pursuant to the provisions thereof quoted above. At the time of the default Luciano had earned $4,925.71 on the contract on an estimate basis which had not been paid to him. The State elected to complete the contract itself at a cost of $1,147.08. This amount was deducted from the balance owing to Luciano, leaving a net balance on hand of $3,778.63, this amount being the subject of the controversy.

While the contract was completed by the State from the point of default at the foregoing comparatively small cost, that amount did not anywhere nearly approximate the total additional cost necessarily incurred in the final termination of the project. At the time, of default, there were numerous claims for materials and labor, wages and costs outstanding. Some apparently were reduced to mechanics’ liens. Others were not, but all seemed to be justified. At least they do not appear to have been controverted upon their respective merits in the present litigation. Because of these claims against the defaulting contractor, the respondent surety company herein paid out an aggregate of approximately $20,000 under the labor and material bond. Upon the basis of these payments, made pursuant to a bond conditioned upon Luciano’s payment of the items involved and upon which he had defaulted, respondent now claims right by subrogation to the funds in the possession of the State.

The order and judgment in favor of the respondent surety company should be affirmed. The assignee of the contractor succeeded to the latter’s rights but there is no basis for a contention that he acquired rights superior to those of the assignor. The contractor defaulted upon the contract. His assignee cannot now recover the fund in question where the surety company has been compelled to expend several times the amount of the fund in paying materialmen and laborers pursuant to the provisions of the labor and material bond. The surety company obligated itself to pay all laborers and materialmen pursuant to the conditions of the bond. That some of the claims had been reduced to liens while others had not is immaterial as far as obligation on the bond is concerned. If the bonding company had not paid the claims, the State would have been justified in using the disputed fund for this purpose, just as it used other moneys owing to the contractor Luciano to complete the work. That the State elected to proceed in this manner is the only reason respondent did not become hable on the completion bond as well as on the labor and material bond..

The respondent is clearly subrogated to the rights of the State under the conditions of the bond. Payments of nearly $20,000 having been made pursuant thereto, respondent is now entitled to enforce its subrogation rights against the money in the possession of the State, exactly as the State would have been entitled to use this money as offset if it had paid the laborers and materialmen itself.

Martin v. National Surety Co. (300 U. S. 588, opinion by Mr. Justice Cardozo) is directly in point and holds that a creditor holding a power of attorney as security for a loan to a contractor is subordinate to materialmen as respects rights to proceeds of the contract in the hands of the United States. It was there held that failure to pay materialmen was a default upon the contract of such nature as to compel the turning over of proceeds of the contract to the surety who guaranteed payment of materialmen. The same holds true in the instant case. The execution of the bonds and the contract constituted in effect one single operation. Without the bonds, assignee, analogous to the creditor in the Martin case, is bound by the obligations to which a contractor has committed himself in obtaining the contract. Those obligations include payment to materialmen and laborers. In case of default the proceeds of the contract are impressed with the equities favoring the laborers and materialmen or, as in the instant case, the surety who was compelled to pay them upon default by the principal. To say that the surety is not bound to pay such claims would nullify the language on the face of the bond, and would further render a nullity the provisions of law requiring such bonds.

Scarsdale National Bank & Trust Co. v. U. S. Fidelity & Guaranty Co. (264 N. Y. 159) involves what is in effect the precise question presented here. It was there held (opinion by Crane, J.) that a surety company which had completed a contract following default by the contractor was entitled to the proceeds which otherwise would be payable to the contractor, even though the latter had assigned all his rights and interests to a third party who had advanced him money for use on the contract. The fact that the a completion ” bond was involved in the Scarsdale case and the “ material and labor ” bond in the instant case is immaterial. As was stated in the Scarsdale case (at p. 164): “ To all rights under this contract the bonding company was subrogated. The equity in favor of the surety company arose at the time of the giving of its bond. The right became available when the surety company completed the work at a loss.” In the instant case, of course, the surety company did not literally “ complete ” the construction work itself, but it did make the payments necessary to the complete termination of the contract, including liquidation of all obligations.

The rule that the surety company’s equitable lien arose at the time of the execution of the bond and is accordingly superior to a subsequent assignment is established by ample authority. The principle is enunciated in Prairie State Bank v. United States (164 U. S. 227). It is supported by a line of Federal court decisions, including Maryland Casualty Co. v. Board of Water Comrs. (66 F. [2d] 730); Lacy v. Maryland Casualty Co. (32 id. 48); Henningsen v. U. S. Fidelity & Guaranty Co. (208 U. S. 404); Hardaway v. National Surety Co. (211 id. 552), all cited as authority in the Scarsdale case.

For these reasons the order and judgment should be affirmed, with costs.

Crapser and Heffernan, JJ., concur; Hill, P. J., dissents in an opinion, in which Bliss, J., concurs.