Citizens' Bank v. Pearson , 217 Ala. 391 ( 1927 )

Only the Citizens' Bank of Guntersville appeals and assigns error. The real controversy is between the appellant and the surety company. Although the latter was made a respondent to the bill by the bank, it answered, and by cross-bill asserted its right to the fund, which was a portion of the contract money due by Marshall county to the road contractor.

It should be stated that L. C. Pearson contracted with the duly constituted authorities to build four miles of road under the direction of the state highway engineer in Marshall county. The surety company was the guarantor on the bond for the performance by Pearson of said construction contract. The bank loaned Pearson money at the beginning of his contract, and J. B. Whitaker was the comaker of the notes evidencing the loans. When Pearson defaulted on his contract, the surety company took charge of the work, and completed the contract at its own expense, and was receiving the balance of funds due Pearson under the contract when the same was diverted or collected by the bank. The suit or the original complaint asserted a prior right to the fund, by reason of its loans to Pearson and its order from Pearson to the probate judge directing the latter to deliver monthly estimates to the bank, and on Pearson's formal assignment to Whitaker of the same, for the alleged benefit of the bank, and to further secure said payments of loans. The surety company relied upon an assignment antedating the bank's order and assignment; and also on the terms of the bond itself providing that the surety company may under certain conditions take charge of the work, and the fact that it did so take charge and completed the contract, and therefore should receive the balance of the fund on hand with the county as the contract price of said work. The appellee relied upon the equitable principle that a surety duly completing the contract of its principal, is subrogated to its principal's right to receive the payments under his contract, and a right execution thereof, which was the basis of the suretyship.

The surety company further claimed that, in violation of its rights, the bank, having knowledge thereof, collected $2,327.78 belonging to the surety company, and it sought, by the cross-bill, to compel the bank to account for and repay the same.

One of the evidences of debt given by Pearson and Whitaker to the bank was, in form, a chattel mortgage on a crusher, an engine, tram cars, and rails, which Pearson was using on that road construction, and the bank claimed that the surety company converted the same or some of said property, and should be held to pay therefor. As to this, the surety company insists that, in the beginning of the suretyship, Pearson executed a transfer and assignment of all equipment, including the crusher, engine, cars and rails to it, and that Pearson had duly surrendered said equipment to the surety company upon the latter's taking over the execution of the contract; that is to say, that its assignment prior to the bank's mortgage, and having gone into possession under the assignment before the bank's mortgage was ever recorded, and, without actual knowledge, subordinating its claim to that of the bank's, the surety company claimed a prior right to the equipment.

It follows from this the inquiries of fact are: (a) Whether the bank or the surety company had the better right to the fund. (b) If the surety company's rights were superior to the bank's, whether the latter was liable to the surety company for having collected the $2,327.78. (No appeal or assignment of error challenges the ruling as to said item of $2,327.78.) (c) Whether the surety company was liable to the bank for the conversion of the equipment on which the bank held the unrecorded chattel mortgage.

As to the superior right to the fund, it will be noted that Pearson contracted with the county for building the New Hope and Guntersville road; that the contract included the plans and specifications, and the latter, by appropriate reference, included the bond that was given by appellee for the due prosecution and execution of the contract. This was but one transaction; and said undertakings, when duly executed, are considered together, or are necessarily and materially related to the other. First Nat. Bank v. Fidelity Deposit Co.,145 Ala. 335, 40 So. 415, 5 L.R.A. (N.S.) 418, 117 Am. St. Rep. 45, 8 Ann. Cas. 241.

The surety has the right to stand upon the agreement, with reference to which it entered into the contract of suretyship, and to exact compliance with the stipulations thereof; that is to say, that parties, not under disability, within the law, may prescribe obligations and limitations of contracts by which they will be bound, and their words employed, if unambiguous, will be given their ordinary and accepted meaning, the contrary not being indicated by the context. Fite v. Pearson, 215 Ala. 521,111 So. 15.

It follows that the bank and the surety company rely upon the contract for the establishment of their respective rights to the fund, proceeding, as it did, out of the contract relations of the several parties to the common end with the state and county authorities.

There was evidence showing that Pearson was a substantial contractor, not wholly dependent upon the bank for the potential existence of his ability to prosecute the work of construction, and notwithstanding the fact that shortly after commencing the work he borrowed moneys in question from the bank. The fact that Whitaker was a comaker with Pearson on said obligations to the bank may afford the basis for an inference that the loans by the bank were at the instigation of, or upon the credit of, Whitaker, or that the latter was in some wise interested in the contractor or his undertaking with the authorities.

However this may be in fact, the bank took an order (February 18, 1920) by Pearson to the probate judge of the county to "deliver to the Citizens' Bank * * * any warrants that may become due * * * for work on roads" in the county, and effective without further notice; and that, after the surety company had taken charge of, and was completing, the construction contract work, Pearson executed to Whitaker an assignment of his rights under his contract with the county.

The bank must rest its claim upon the order to the probate judge of February 18, 1920, and the assignment of November 20th to the comaker on the bank notes an assignment for its benefit, coupled with the alleged equity of the bank that the money loaned Pearson was expended in the prosecution of the work per contract in the initial conduct thereof. And we have stated that the surety company rests its claim to the fund on the assignment executed by Pearson at the inception of the suretyship, the express terms and conditions of the bond, which, by adoption, became an inherent part of the contract out of which the fund arises, and upon the principle of subrogation whereby a surety who is compelled to complete his principal's undertaking becomes entitled to receive the payment of the contract price in full when the same is executed by the surety.

On September 12, 1919, at the inception of Pearson's contract, and when the surety company signed the bond, Pearson agreed with it as follows:

"In further consideration of the execution of the said bond, I do hereby agree, as of this date, that the United States Fidelity Guaranty Company shall, as surety, be subrogated to all my rights, privileges, and properties as principal and otherwise in said contract, and I do hereby assign, transfer,and convey to said company all the deferred payments, retainedpercentages, and any and all moneys and properties that may bedue and payable to me at the time of such breach or default, orthat may thereafter become due and payable to me on account ofsaid contract, or on account of extra work or materials supplied in connection therewith, hereby agreeing that all such moneys and the proceeds of such payments and properties shall be the sole property of the United States Fidelity Guaranty Company, and to be by it credited upon any loan, cost, damage, charge, and expense sustained or incurred by it as above under its bond of suretyship." (Italics supplied.)

Thus Pearson assigned to the surety company the right to the fund in question "as of this date," which was September 12, 1919, before he gave an order to the probate judge to deliver his vouchers for estimates to the bank, or before he formally assigned to Whitaker, for the benefit of the bank any interest in the contract or the proceeds thereof.

The surety company's bond was an inherent part of the contract, material to the conduct or construction of the work, and the production of the fund. It was stipulated:

"Provided, further, that upon the failure of the said L. C. Pearson to promptly and efficiently prosecute said work, in any respect, in accordance with the contract, the above bound United States Fidelity Guaranty Company, as sureties, shall take charge of said work and complete the construction at their own expense, pursuant to its terms, receiving, however, any balance of the funds in the hands of said county due under said contract, said sureties may, if they elect so, by written direction given to said state highway engineer or said county of Marshall, Ala., authorized and require said state highway engineer or said county to complete said work according to said contract at the expense of said sureties, and such sureties hereby agree and bind themselves to pay the expenses of the completion of such work, less any funds in the hands of the county remaining due to the above bound contractor."

This was ample provision for annulment of the contract; yet it is further stated in the specifications as follows:

"The contract of which these specifications form a part, may be annulled by the State Highway Engineer for the following reasons:

"(1) Substantial evidence that the progress being made by the contractor is insufficient to complete the work within the specified time.

"(2) Deliberate failure on the part of the contractor to observe the requirements of these specifications.

"(3) Failure on the part of the contractor promptly to make good any defects in materials or workmanship that may be pointed out to him by the engineer.

"Before the contract is annulled, the contractor and his bondsmen will first be notified in writing by the state highway engineer of the conditions which make annulment of the contract imminent. Fifteen days (15) after this notice is given, if no effective effort has been made by the contractor or his bondsmen to correct the condition complained of, the state highway engineer may declare the contract annulled, and notify the contractor accordingly."

Pursuant to annulment, the accredited authority or highway engineer gave notice to the contractor of date of July 9, 1920, of the delay in the prosecution of the work and the necessity for proceeding therewith within 15 days, and in a satisfactory manner. The surety company's associate manager, Mr. Love, investigated this complaint and its duty in the premises, and found the work suspended, and intervened in the premises under its contract, and the surety company immediately obligated itself, and made payment of the bill, procured other equipment for prosecution of the contract work, proceeded with the prosecution of the same, and to that end expended a large sum therefor without full reimbursement. Thus did the surety company become entitled to the fund thereafter earned and becoming due by specific assignment, and the express terms of the contract, and by general principles of the law of subrogation, upon full discharge of the principal's obligation. 21 R. C. L. 1113; First Nat. Bank v. City Trust Safe Dep. Sur. Co. (C.C.A.) 114 F. 529, 532.

In Prairie State Nat. Bank v. United States, 164 U.S. 227,232, 17 S.Ct. 142, 144, 41 L.Ed. 412, 416, Judge White said of such a case:

"Under the principles thus governing subrogation, it is clear whilst Hitchcock was entitled to subrogation the bank was not. The former in making his payments discharged an obligation due by Sundberg for the performance of which he, Hitchcock, was bound under the obligation of his suretyship. The bank, on the contrary, was a mere volunteer, who lent money to Sundberg on the faith of a presumed agreement and of supposed rights acquired thereunder. The sole question, therefore, is whether the equitable lien, which the bank claims it has, without reference to the question of its subrogation, is paramount to the right of subrogation which unquestionably exists in favor of Hitchock. In other words, the rights of the parties depend upon whether Hitchcock's subrogation must be considered as arising from and relating back to the date of the original contract, or as taking its origin solely from the date of the advance by him. * * *

"To the argument that the extra advances really went into the work and so inured to the benefit of the sureties, Lord Langdale, master of the rolls, answered as follows ([Calvert v. London Dock Co., 2 Keen, 638] page 644):

" 'The argument, however, that the advances beyond the stipulations of the contract were calculated to be beneficial to the sureties, can be of no avail. In almost every case where the surety has been released, either in consequence of time being given to the principal debtor, or of a compromise being made with him, it has been contended that what was done was beneficial to the surety, and the answer has always been that the surety himself was the proper judge of that, and that no arrangement, different from that contained in his contract, is to be forced upon him; and bearing in mind that the surety, if he pays the debt, ought to have the benefit of all the securities possessed by the creditor, the question always is, whether what has been done lessens that security.' " L.R.A. 1918D, 736 note.

This is the law of the case, and further discussion is unnecessary of this phase. Donnelly's Law of Pub. Con. § 344.

There was no cross-appeal challenging the decree in its failure as to allowances to the surety company. It is therefore unnecessary to consider the rulings as to this feature of the litigation.

Thus we have noted there was no error in ruling as to the foregoing phases of the case, and we come now to consider the alleged conversion by the surety company of the crusher, engine, cars, and rails, the subject of the bank's mortgage of date of July 7, 1920. The priority of right in the bank rests upon the chattel mortgage — not of the date of September 24, 1920, that of its record and constructive notice after the surety company had taken possession of the equipment under its bona fide claim and right given in the inception of the suretyship, but upon the requirements of the statute having application (section 6890 of the Code).

The fact that the evidence shows (witness Cheek) that the property was surrendered to, or taken over by the surety company about September 1st (appellant's counsel treats that date as being September 2, 1920, and such is Love's testimony), and without the objection of Pearson, does hot authorize a decree for appellees as to these items embraced in the bank's mortgage. The letter of September 2, 1920, by Love to the bank gave information that the work was taken over and supervised by its representative Cheek for the surety company. Mr. Pearson testified of the fact that Mr. Cheek came to the work right "at the first of September — along early in the fall," and that all the "money that went into the job came from Mr. Cheek through the U.S. F. G. Co."; "that Cheek drew upon the surety company to meet the pay rolls," did "all the buying and giving instructions, so far as the work was concerned, to Jackson, and he and witness carried the same out, and that Cheek was so acting for the company with the understanding and under the construction contract with Pearson and the state and county officials.

The fact remains that the right of the surety company to the property embraced in the mortgage to the bank, and taken over by the surety company, rests upon the unrecorded equitable mortgage or instrument in the nature thereof for indemnity to the surety company. The bank's mortgage was executed prior to the property being taken or surrendered to the surety company. The fact that last named mortgage was recorded at a subsequent date is immaterial. The statute (section 6890 of the Code) applies, and is extended to a mortgage or instrument providing indemnity, and is inoperative as effecting the right of creditors and purchasers. This phase of the court's ruling is presented for review by assignments of error 34, 37, and 38, and the case should be retried in respect to this phase of the case or respective rights of the parties growing out of the mortgaged property and the right of the surety company.

The judgment of the circuit court is reversed, and the cause is remanded.

Reversed and remanded.

ANDERSON, C. J., and SOMERVILLE and BROWN, JJ., concur.

On Rehearing.