American Surety Co. of New York v. Westinghouse Electric Mfg. Co. , 75 F.2d 377 ( 1935 )

WALKER, Circuit Judge.

The appellant was the surety on a bond in the sum of $3,940, given in pursuance of statute (40 USCA § 270) to secure performance by one Gray of his .contract with the United States for drilling a well at the Pensacola Naval Air Station, which contract included the provision that the contractor would promptly make payment to all persons supplying the contractor with labor and materials in the prosecution of the work provided for in the contract. Gray completed the work contracted for, but remained indebted, in the sum of $5,677.85, to appellees, who had supplied materials used in the work contracted for; and Gray was adjudged bankrupt. Appellant appeared in a suit instituted in the court below on the bond, and paid into court the amount of the penalty of the bond, $3,940, which amount was distributed ratably to the appellees, leaving substantial balances still owing by the contractor' to the appellees. After the completion. of the work called for by the contract, the United States owed the contractor $2,774.23, being the amount of 10 per cent, of estimates, retained pursuant to a provision of the contract. That sum was paid to the trustee of the estate of the bankrupt contractor. In the bankruptcy proceeding the ap-pellees claimed that they were entitled to a lien on that fund and to priority of payment therefrom of the balance remaining due to them; and the "appellant asserted the claim that it had a lien on or a prior right to that sum for the repayment to it of the amount of the penalty of the bond which had been paid. The proof of claim filed by the appellant made an exhibit thereto a copy of a contract of indemnity executed to the appellant by the contractor prior to the time of appellant "becoming surety on the bond, which indemnity contract contained the provision : “And the Indemnitor further agrees in the event of any breach or default on his part in any of the provisions of the-contract covered by" said suretyship that the said Surety, as Surety, shall be subrogated to all the rights and properties of the Indemnitor in such contract, and that deferred payments and any and all moneys and securities that may be due and payable at the time of such default, or on account of extra work or materials supplied in connection therewith, or that may thereafter become due and payable on account of said contract, shall be credited for any claim that may be made upon the said Surety by reason of its suretyship as aforesaid.” The appellees filed objections to the claim filed by the appellant. The referee sustained those objections, and denied the claim of priority asserted by the appellant. The court approved that action of the referee.

The condition of the above-mentioned bond, after a recital of the making of the above-mentioned contract, follows: “Now Therefore, If the principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements of said contract during the original term of said contract and any extensions thereof that may be granted by the Government, with or without notice to the surety, and during the life of any guaranty required under the contract, and shall also well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreements of any and all duly authorized modifications of said contract that may hereafter be made, notice of which modifications to the surety being hereby waived, and if said contract is for the construction or repair of a public building or a public work within the meaning of the act of August 13, 1894, as amended by act of February 25, 1905, shall promptly make payment of all persons supplying the principal with labor and materials in the prosecution of the work provided for in said contract, and any such authorized extension or modification thereof, then, this obligation to be void; otherwise to remain in full force and virtue.” The bond, like the statute requiring it, has two purposes: (1) To secure to the government faithful performance of the contractor’s obligations to the government; (2) to protect third persons who furnish labor and material to the contractor.- The furnishers of labor or material for the work contracted are, like the government, beneficiaries of the bond. Equitable Surety Co. v. U. S. to Use of W. McMillan & Son, 234 U. S. 448, 454, 34 S. Ct. 803, 58 L. Ed. 1394. In the absence of a statute on the subject, furnishers of labor or material to a contractor have the legal status of general creditors. Before the enactment of any federal statute on the subj ect, it was not unusual for the government to recognize the existence of a moral duty to protect furnishers of labor or material for a public work against dishonest or reckless contractors by requiring the insertion in a contract for such work of a provision requiring payment by the contractor of amounts owing by him to furnishers of labor or material for the work contracted for, or entitling the government to withhold payments to the contractor if he failed to pay promptly those who furnished labor and materials. Greenville Sav. Bank v. Lawrence (C. C. A.) 76 F. 545. It appears from decisions referred to below that the government’s observance of that duty in practical and effective ways was the precursor of judicial recognition of an enforceable equitable right of unpaid furnishers of labor or materials for that work in or to a part of the contract price thereof remaining in the possession of the government after the completion of that work by the contractor. Nothing contained in the statute in pursuance of which the bond on which appellant was surety was executed is inconsistent with the government’s recognition of the continued existence of a duty to protect fur-nishers of labor or material, with the result of making such furnishers beneficiaries of the funds withheld by the government. The conclusion that, in the circumstances disclosed in the instant case, the appellees had claims on the fund in question superior to the claim asserted by the appellant is supported by the decision in the case of Henningsen v. United States Fidelity & Guaranty Co., 208 U. S. 404, 28 S. Ct. 389, 391, 52 L. Ed. 547. That case was a contest between the surety on the bond of a contractor for a public building and a bank which was the assignee of the contractor; the surety, after the completion.of the building by the contractor and his failure to pay amounts owing by him to furnishers of labor and materials for the building, having paid those amounts; and the contractor, pending performance of the contract, having assigned to the bank all payments which were then due, or might thereafter become due, on account of the contract, to secure the payment of a loan made by the bank to the contractor. The subject of the contest was a sum of money in possession of a United States official which was due under the contract after the completion of the building by the contractor. The bond given by the contractor, like the bond on which the appellant was surety, provided for the contractor making prompt payment to furnish-ers of labor or materials for the work contracted for. The court’s opinion contained the statement, made in support of the expressed conclusion that the surety’s equity was superior to that of the bank: “It paid the laborers and materialmen, and thus released the contractor from his obligations to them, and to the same extent released the government from all equitable obligations to see that the laborers and supplymen were paid.” Following that statement and a further discussion of the question presented, the court stated the conclusion that the surety by subrogation had a superior claim to the fund in question, without expressly stating to whose rights the surety was subrogated. As the contractor’s obligation to the government had beén complied with before the surety paid the debts owing to furnishers of labor and materials, there was no right of the government subject to be acquired by the surety by subrogation. The rights subject to be acquired by the surety by subro-gation being those possessed by the furnish-ers of labor and materials, it is a reasonable, if not necessary, inference that the successful contestant’s recognized superior right was acquired by subrogation to the rights of the furnishers of labor and material for the building contracted for. With reference to the last-cited case, the following was said in the opinion rendered in the case of Belknap Hardware & Mfg. Co. v. Ohio River C. Co. (C. C. A.) 271 F. 144, 149: “When Henningsen’s surety paid up, the United States, the secured creditor, had been satisfied, and had no further claim on the fund, unless it bore the duty to devote the fund to the labor and material claimants; hence the latter proposition must be considered as affirmed. Obviously, the retained fund is devoted to the payment for such labor and material as may be necessary to finish the work after the contractor defaults.” As to the fund in court in the instant case, the appellant was not subrogated to any right of the government, as the government had no claim on the fund after the contractor had completed the work contracted for. The appellant was not subrogated to the rights of the appellees, as the debts owing to the latter by the contractor remained unsatisfied. The conclusion that the appellees, in the circumstances disclosed, have an equitable claim on the fund in question, superior to the claim asserted by the appellant, is supported by the decisions in the two cases last cited, and by other federal decisions, including the following: In re P. McGarry & Son (C. C. A.) 240 F. 400; Cox v. New England Equitable Ins. Co. (C. C. A.) 247 F. 955; Alfred Richards Brick Co. v. Rothwell, 18 App. D. C. 516; Exchange State Bank v. Federal Surety Co. (C. C. A.) 28 F.(2d) 485, 488.

The assignment and the indemnity agreement under which the appellant claims did not have the effect of subordinating the rights of the appellees to those of the appellant. The contractor being under an implied obligation to indemnify or reimburse the appellant, an express agreement to do so added nothing to appellant’s rights. Hardaway v. National Surety Co., 211 U. S. 552, 29 S. Ct. 202, 53 L. Ed. 321; Springfield National Bank v. American Surety Co. (C. C. A.) 7 F.(2d) 44.

The appellees being creditors of the appellant’s assignor, the insolvent contractor, the appellant’s claim is subordinate to those of the appellees for the additional reason that the appellant, the surety of the insolvent debtor, is not, prior to the creditors being fully paid and satisfied, subrogated to rights or remedies the enforcement of which would operate to the prejudice or injury of the creditors. Jenkins v. National Surety Co., 277 U. S. 258, 48 S. Ct. 445, 72 L. Ed. 874; United States v. National Surety Co., 254 U. S. 73, 41 S. Ct. 29, 65 L. Ed. 143; State of Mississippi v. First Nat. Bank of Greenwood (C. C. A.) 66 F.(2d) 9; Peoples v. Peoples Bros. (D. C.) 254 F. 489; Glades County, Fla., v. Detroit Fidelity & Surety Co. (C. C. A.) 57 F.(2d) 449.

The ruling in question was not erroneous. The order or decree appealed from is affirmed.