Town of River Junction v. Maryland Casualty Co.

SIBLEY, Circuit Judge.

The Town of River Junction was building a sewerage system with aid from the Public Works Administration; Gadsden County State Bank was lending the contractor money to pay his labor and material bills; and Maryland Casualty Company was surety on the contractor’s bond. Towards the end of the job the contractor got from the Bank $4,000, $400, and $400 on an assignment to it dated June 28, 1937, of his “June estimate check” and used the money to pay for labor and materials. The June check was not promptly issued, and on Aug. 18 the contractor defaulted and the surety was called in and completed the job at an outlay of about $2,000. The Town thereafter paid the Bank its claim with interest, $5,105. The surety, in order to exonerate itself against outstanding material bills against the contractor, brought a petition against the Town, the Bank, the contractor and thirty-six materialmen, praying that the money in the Town’s hands, about $10,700, which included $8,200 retained percentages under the building contract, be applied to the material bills, and the $5,105 paid the Bank be restored and likewise applied. The Town and the Bank answered separately defending the payment to the Bank, but on motion these defenses were stricken. On a motion for summary judgment, the surety’s obligations to the thirty-six materialmen were disposed of, and they having been paid by the surety a decree was rendered in favor of the surety against the Town for $15,810. While no judgment was given against the Bank, it stands to lose the $5,-105, for in receiving payment from the Town it gave an indemnifying bond. The main question is whether the payment to the Bank was good as against the surety.

The controlling ruling is that striking the answers. Under the Rules of Civil Procedure the facts alleged must be taken as true. If no motion is made for a more definite statement, general averments must be taken at their face value. By Rule 9(b) (c),- 28'U.S.C.A. following section 723c, averments of fraud and mistake only must be particularized, but the occurrence of conditions precedent need not be. Though not identical the two answers agree in substance, and are as follows:

The construction contract exhibited in the petition is admitted. It provides for a partial payment to the contractor within the first fifteen days of each calendar month for work done the preceding month on a certified estimate, ninety percent to be paid over and ten percent retained until final completion. By the 20th of the month the contractor is to pay all labor and ninety percent of the cost of materials, tools and expendible equipment delivered the preceding calendar month, and such payment is a condition precedent to receiving the next partial payment. The application by the contractor to the surety for the bond is also exhibited, though the answers say it was unknown to the defendants. In it the contractor, besides agreeing to indemnify the surety against all loss, assigns to the surety “as of the date hereof” all tools, equipment and material to be used on the job; and “in the event of claim or default under the bond all payments due or to become due under the contract” shall be made to the surety.

The answers next say that the partial payment of ninety percent to which the contractor was entitled at the end of each thirty day period was free of any trust or lien; and the surety’s right to control it did not, under the contract with it, arise unless or until the contractor was in default. On June 28, 1937, when the contractor had not defaulted in his contract, and after the progress payment for the work done in the thirty day period from May 28 to June 28 had already been earned and had accrued to the contractor, but could not be paid because the engineer in charge had not made the estimate and because (the Town states) there had occurred a delay in its securing funds to pay the contractor, he went to the Bank and borrowed $4,000, $400, and $400 and used it all to pay his payrolls and material bills, for all-of which the surety was liable and of which it obtained the benefit. As security the contractor executed to. the Bank an order addressed to the Mayor “Will you kindly send our June Sewer Estimate cheque direct to the Gadsden County State Bank for our account when the same is ready to be paid”, and on the same sheet an assignment: “For value received we hereby sell, transfer, and assign the above described cheque, or any amount thereof required to pay the sum of $4,000 and interest on same and for such further sums that the Gadsden County State Bank may advance to us for payment of labor and material." The Town was duly notified of said assignment, and acquiesced in it, neither the Town nor the Bank knowing of any assignment to the surety. The amount due to be paid on the June estimate was more than enough to pay the claims of the Bank, and it was through no fault of the Bank that the June estimate wás not seasonably made and paid. The Town paid the Bank on advice that it had the better right, after the contractor had defaulted on or about Aug. 18, 1937.

These then are the facts before us. We are bound to take it that on July 26, when the Bank advanced its last payroll money, the contractor had not failed in any obligation. The scheme of the building contract is that at the end of each calendar month (the 25th or 28th seems to have been taken as the date) there should be an estimate made of labor and material put into the work during that month, and by the 15th day of the next month ninety percent thereof should be paid the contractor; and by the 20th he should use the money to pay ail his labor and ninety percent of his material bills for the month estimated. If he should fail to do this he would not be entitled to draw the next payment. The arrangement is of vital practical importance. The ten percent retained each month has, since the decision in Prairie State Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412, been established to be an agreed security to be held by the owner for the protection of himself and the surety, just as though the contractor had pledged so many Liberty Bonds. This is but an application of the general principle that a surety has a beneficial interest in all collateral pledged to the creditor by the principal debtor. 50 C.J., Prin. & Surety, §§ 381, 384. In these retained percentages the contractor can give no one a right superior to that of tile surety, for the surety’s right dates from the making of the contract which pledged them.

Just as clearly the monthly progress payments are agreed to go to the contractor to be used by him in financing the work, so long as he is in no default. The surety agrees to this as a party to the building contract. This also appears in the private application for the bond, for while he stipulates therein for an immediate though secret assigment of equipment and materials on the site, he contracts for no right in these progress payments unless or until the contractor defaults or a claim is made against the surety under the bond. Until then it is the contractor’s right to have and is his duty to administer these payments. This court held in Kane v. First National Bank, 5 Cir., 56 F.2d 534, 85 A.L.R. 362, on a review of the authorities, that there was no trust attached to them and that a check issued for one could be negotiated as commercial paper though the taker knew its source. The matter was again gone over in Third National Bank of Miami v. Detroit Fidelity & Surety Co., 5 Cir., 65 F.2d 548, and it was held that a bank could take assignments from material-men and laborers it paid and succeed to their rights against the bond. We recognize, however, that a bank acquires no subrogation to claims for labor or material by the mere application of its money to them, because a voluntary lender is never subrogated, as was held in Prairie State Bank v. United States, supra. We think also that there is probably an implied obligation on the contractor, especially if he he insolvent, not to divert money from the job, which may be enforced by the surety in equity. But that is immaterial here, for the money was not by its assignment diverted, for the proceeds of the assignment were used for a faithful furtherance of the job and for the protection of the surety.

Can the contractor arrange with his hank for cash needed for payrolls by assigning a particular progress payment already earned, to save the work from stopping till payment shall he made? Will the assignment, notified to and acquiesced in by the owner, hold good against the surety if the contractor defaults in a later month? If the answer is No, hanks cannot safely lend. Laborers must wait or quit. Contractors must more often fail, and sureties be more often called in, with added delay and expense to the work. The whole matter of public contracts will be seriously affected. If the answer is Yes, the work and the workers will be facilitated and no one injured. The surety cannot object on the ground that the contractor might divert the money, for he has agreed to trust the contractor until he defaults. In the present case the surety got the full benefit of the arrangement, and if his permission had been asked in advance we cannot doubt it would have been given.

It is the assignment of the June estimate that gives the Bank standing. The meaning of the whole instrument is that the entire June payment is to go to the Bank, which is to take out what it may advance and account to the contractor for the remainder. There is no splitting of the demand against the Town. It being the assignment of an already existing obligation, and of the whole of it, it is a legal rather than an equitable assignment, though the latter would be equally good when supported as here by a present valuable consideration. Notice of it was duly given to the Town, which acquiesced. The Bank’s right to receive the money became fixed, and it should have been paid by July 15. It was no longer due to the contractor. His default thereafter could not undo the assignment. Ilis failure to make and have approved an estimate, and the Town’s failure to have funds to pay, ought not to defeat the assignment. Equity should regard that as done which ought to have been done. Theatre Realty Co. v. Aronberg-Fried Co., 8 Cir., 85 F.2d 383, page 387, and cases cited. It being established that over $5,105 was really due to be paid and has now been by the Town paid in recognition of the assignment, the Town ought not to have to pay the surety again. The more clearly is this true since the money involved actually went to pay only what the surety would have owed if the assignment had not been made.

The surety in the petition set up as a prior assignment to it the agreement in the application for the bond about the payments due the contractor. As before pointed out, it was not to be operative till default, and Town and Bank were without notice of it till months after the Bank’s rights became fixed. This money was not then due to the contractor but to the Bank. Moreover as between successive assignments of the same right the assignee first giving notice prevails. 4 Am.Jur., Assignments, § 107. Especially should this be so when the assignment of which notice is first given is a legal one for full value and the second is only an equitable assignment attempted before the thing was in existence; because a bona fide purchaser for value without notice will not be interfered with by a court of equity.

Of the authorities urged to the contrary no case is like this. The leading case is Prairie State Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412. It dealt with the reserved percentages and held them to be pledged from the. date of the contract as a security in which the contractor could not -give his bank a claim superior to the surety’s right of subrogation. The bank’s assignment was void because a claim against the United States is not assignable. As a matter of equitable right the bank had no subrogation because a voluntary lender. No one now doubts any of these holdings. None applies to this, case.

In Henningsen v. United States F. & G. Co., 208 U.S. 404, 28 S.Ct. 389, 52 L.Ed. 547, a contract with the United States was again involved, and the bank had a general assignment of “all payments due or to become due”. The assignment was void. The Prairie State Bank case was followed in holding the surety entitled to subrogation, but the bank as a volunteer not so entitled.

Martin v. National Surety Co., 300 U.S. 588, 57 S.Ct. 531, 81 L.Ed. 822, again involved a government contract and the contractor’s assignments were void, but there were agreements which were given effect against a bad faith interloper, the contractor and surety both being insolvent, to protect the materialmen. The surety took nothing.

A case from Florida is Union Indemnity Co. v. City of New Smyrna, 100 Fla. 980, 130 So. 453, 455. There is no Florida statute regarding assignments except that the true party in interest may sue. General authorities are considered applicable. McClure v. Century Estates, 96 Fla. 568, 120 So. 4, 9. In the New Smyrna case the court held the assignment “conveyed to the bank no greater right in the funds in the hands of the city than that right which [contractor] had at the time of making the assignment.” The case involved only the retained percentages, which the contractor had no right to affect. The bank’s assignment was to secure an antecedent debt. It was of $1,000 out of the June estimate, and the contractor defaulted and the surety took over the job by June 22, so that the contractor never earned what he had partially assigned.

First National Bank of Dothan v. American Surety Co., 5 Cir., 53 F.2d 746, held only that a bank which loaned money to a contractor to pay his bills could not sue the surety on the bond. It had no subrogation to the claims so paid.

First National Bank v. City Trust Co., 9 Cir., 114 F. 529, is noteworthy for its mistaken assumption that under the decision in the Prairie State Bank case there is no difference between the retained percentages and progress payments. Justice McKenna, who was presiding, dissented and accurately stated the ruling in the Prairie State Bank case. The majority, however, were probably right in thinking the bank had not a good assignment, for it was an equitable assignment in solido of four months’ estimates made before any was earned, and only two months passed before the contractor defaulted and the surety took the work over.

In Farmers’ Bank v. Hayes, 6 Cir., 58 F.2d 34, 37, the court held the bank had no assignment but only a revocable order to mail checks to it till further notice. Its broad statement that the “lien of the surety” extends not only to the retained percentages but also “to sums earned under contract and retained by the owner” cannot be sustained as to an earned sum validly assigned to another by the contractor before default, with notice to and acquiescence by the owner; especially where the surety receives the full benefit of the assignment.

In the case at bar it is argued that enough appears from what was proved on the hearing for summary judgment and in the answers to interrogatories for discovery to show the surety finally paid in 1938 $17,000 or more of the contractor’s material hills, and some of these must have existed and been in default in June, 1937. The allegations of the stricken pleadings cannot be thus overridden. When the motion for summary judgment under Rule 56 was heard the stricken allegations were no longer a part of the pleadings. That rule contemplates that the judge shall take the pleadings as they have been shaped to see what issues of fact they make, and then shall consider the “depositions, and admissions on file, together with the affidavits” to see if any such issues are real and genuine. If they are not, judgment is given without further trial. In this case there was left no material issue in the Town’s and Bank’s answers. Oral evidence was heard as to the claims of the other thirty-six parties over the objection of the Town and the Bank. Its reception on summary judgment was irregular, but the irregularity was cured by the ruling of the court that it was not admitted against the Town and Bank. The evidence cannot now be considered against them. So also the interrogatories for discovery propounded under Rule 33 to the Town’s Mayor and the Bank’s President are not available. Neither the Town nor the Bank had notice of or opportunity to cross the interrogatories asked the other. The Mayor especially answered only from information and not knowledge. No original documents were produced but only copies. The admissions of one party would not bind the other. Such interrogatories are exploratory, intended to find out facts and witnesses and documents so the propounder may thereafter prepare to prove his case in an orderly manner. They are not' “depositions” referred to in Rule 56 as to be considered on summary judgment. They were in fact never offered in evidence, and nothing in them would have been admissible over objection if offered. And if admitted there would still be no proof that the contractor was in default before Aug. 18, 1937.

On the facts properly before us the surety’s equitable rights were not superior to the Bank’s legal right acquired for full present value and without notice. If what is alleged be proven, the Town ought not to be adjudged liable to pay the surety again what has already been paid out for the surety’s protection and benefit.

For error in striking the portions of the answers of the Town and the Bank the judgment is reversed and the cause remanded for further proceedings consistent with this opinion.