Union Indemnity Co. v. A. D. Drumm, Jr., Inc.

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] The theory that an equitable lien exists in favor of job creditors finds no support either in the law of this state or the contract itself. Section 5338 N.C.L. Job creditors, like any other creditors, must look to the surety if the contractor defaults in his obligations. It is highly significant that in the original public highway law of 1937 there was no proviso requiring payment of retent to contractors without regard to job creditors. That proviso was added by our 1925 legislature and reaffirmed in the 1931 amendment. The intent of the law is clear, with no suggestion of ambiguity, that this proviso was added for the express purpose of dispelling any last lingering doubt which might have existed, so as to effectively deny to job creditors any interest in contract funds remaining unpaid in the hands of the state.

Title to all of the bankrupt's assets, subject to lien or otherwise, vests in the trustee as of the date of filing the petition in bankruptcy. Gross v. Irving Trust Co. (U.S.), 77 Law Ed. 798; Isaacs v. Hobbs (U.S.), 75 Law Ed. 671; Stratton v. New (U.S.), 75 Law Ed. 1085; Petition of Shortridge, 20 F.2d 639; In re Service Appliance Co., 39 F.2d 632; In re Bartlett Oil Gas Corp., 44 F.2d 616; Lubell Bros. v. M.J.L. Shoe Shops, 56 F.2d 158; In re Cramond, 145 Fed. 966.

It is too late now for respondents to raise the objection that the trustee was not properly before the trial court. The time to have done that was at or before the trial.

Platt Sinai, for Respondents The Texas Company and Standard Oil Company of California:

Respondents The Texas Company and Standard Oil Company of California respectfully submit that the judgments which the trial court rendered in their favor should be sustained by reason of the following summarized proposition of law relied upon by said respondents:

First — That A.D. Drumm, Jr., Inc., the bankrupt, had suffered a default to be taken against it in the state court more than four months previous to the filing of the petition in bankruptcy, said default being in favor of the job creditors.

Second — That the laborers, materialmen and supplymen had no recourse to the sureties on the contract bond, since the surety was bankrupt and the bond valueless.

Third — That by reason of the insolvency of the surety the job creditors had an equitable lien upon moneys in the hands of the state controller more than four months prior to the petition in bankruptcy.

Fourth — That in any event, the job creditors were entitled to an equitable lien upon the moneys in the hands of the state controller, under and by virtue of the phraseology of our state statute and under general equitable principles.

Fifth — That the trustee has no greater right nor power than the bankrupt, and the bankrupt had no claim whatsoever upon the funds in the hands of the state controller at the time of the filing of the petition in bankruptcy.

Sixth — That the trustee having intervened in the state court action was bound by state rule and custom and is in no position to assume any rights superior to the bankrupt, nor take unto himself any power to which the bankrupt was not entitled.

Thatcher Woodburn, Forman Forman and John Robb Clark, for Respondents Shell Oil Company (Nevada) and The Western Pacific Railroad Company.

We respectfully submit the judgment of the lower court should be affirmed because:

First — The trustee in bankruptcy failed in his complaint in intervention to allege any facts entitling him to the relief asked or any other relief.

Second — The defendant A.D. Drumm, Jr., Inc., suffered default to be taken against it, and that neither it nor the trustee in bankruptcy ever took any steps whatever to set such default aside.

Third — The judgment of the trial court is right, equitable and just and confirms the equitable duty the State of Nevada owes these respondents and other job creditors to see that they are paid for their labor, material and supplies used in the construction of state highway No. 240.

OPINION On April 15, 1931, A.D. Drumm, Jr., Inc., hereinafter referred to as Drumm, was awarded a highway contract by the department of highways of the State of Nevada, in the sum of $158,791.02. This contract was completed by Drumm and accepted July 15, 1932, at which time there was a balance due on the contract of $33,693.09. On the last-mentioned date Drumm owed on account of the contract something over $50,000. On July 20, 1932, Drumm assigned to the Standard Oil Company and to the Petrol Oil Company, of said $33,693.09 due from the highway department, an amount to cover their respective claims.

Before the jub mentioned was begun, the Union Indemnity Company executed its bond conditioned for the faithful performance of the contract by Drumm and to indemnify the State of Nevada against damages and for the payment by Drumm of all claims which he incurred on account of the performance of the contract.

On August 5, 1932, the indemnity company brought suit in the district court of Washoe County, Nevada, to restrain the payment to Drumm of the balance due on the contract and to compel its application to the payment of debts incurred by Drumm in performing the contract. To the complaint in this action, Drumm filed a general demurrer. In due time the demurrer was overruled, and thereafter default was entered for failure to answer. No motion to set the default aside was ever made, either by Drumm or the trustee hereinafter mentioned.

On January 30, 1933, the state controller filed a separate action in the district court of Ormsby County, Nevada, to compel all creditors of Drumm to interplead and set up their claims to the balance of $33,693.09 due Drumm. The actions were thereafter consolidated. Before judgment in either of the suits mentioned, and on January 31, 1933, an involuntary petition in bankruptcy was filed in the federal court, against Drumm, which was adjudicated a bankrupt, and on July 15, 1933, Charles L. Hill was chosen trustee in bankruptcy and duly qualified. On December 1, 1933, the trustee, without objection by any party, filed his complaint in intervention in the above actions, denying the alleged equitable claim of liens, and denying the validity of the said assignments.

Upon the trial, judgment was rendered sustaining the assignments and the claim of equitable liens in favor of the job creditors.

The trustee has appealed from the judgment and the order denying a motion for a new trial.

On this appeal the trustee raises two questions: First, have the job creditors a lien on the balance unpaid on the contract? and, second, has the trustee in bankruptcy, in any event, the right to administer the unpaid balance?

1. Prior to disposing of the questions raised by appellant, we will consider the contention made by respondents to the effect that the trustee represents Drumm — having, as they say, stepped into his shoes — and not having applied to the trial court to vacate the default theretofore entered against Drumm, is in no position to resist the contentions made by respondents, and, in fact, has no right to prosecute this appeal.

Without pretending to know what the courts have held, or what the law is, we have assumed that the trustee in bankruptcy generally represents both the bankrupt and the creditors. However, we need not decide this point, for the reason, as urged by appellant in his reply brief, it was not made in the trial court. Paterson v. Condos, 55 Nev. 260, 30 P.2d 283.

We will now consider the contention that the lower court erred in adjudging that an equitable lien exists in favor of the job creditors in question, to the exclusion of the general creditors.

Our preconceived predilection on this point was in favor of the contention of respondents, and it was not without considerable difficulty that we are led to abandon that view. In presenting this question, both sides quote from the bond given by Drumm, as well as from our statute pertaining to the letting of contracts by the department of highways, hereinafter referred to as the department. Respondents rely chiefly upon cases in the federal courts to sustain their position, and the trial court founded its opinion on this point upon the following federal decisions: Henningsen v. United States F. G. Co., 208 U.S. 404,28 S.Ct. 389, 52 L.Ed. 547; In re Scofield Co. (C.C.A.), 215 F. 46; Belknap Hardware Mfg. Co. v. Ohio River Contract Co. (C.C.A.), 271 F. 144.

Our highway act (Stats. 1917, chap. 169, p. 309, as amended by Stats. 1925, c. 132, pp. 216, 217, section 5337 N.C.L., as amended by Stats. 1931, c. 210, p. 359, sec. 1) provides for the letting of contracts, and for the giving of a bond by the successful bidder, with sureties, conditioned, among other things, that "two-thirds of such bond to be conditioned that such work under the contract shall be performed in accordance with the plans and specifications and the terms of contract, and one-third of such bond to be conditioned as an additional protection for labor, material and supplies furnished" or used about the performance of the work under the contract, and for the payment of any obligations incurred by the contractor in fulfilling the terms of his contract. The act also provides that any creditor of any such contractor, whose claim has not been paid, and who desires to be protected under said bond, shall file a claim within thirty days from the completion of the contract with the department, and that any person filing such claim may at any time within six months thereafter commence an action against the surety on the bond. Section 15 of the said act as originally enacted (Laws 1917, c. 169, p. 315) authorized the highway engineer to make partial payments to any contractor, not to exceed 85 percent of the contract price, in advance of full completion and acceptance of the work. Said section 15 (N.C.L. sec. 5338) was amended by Stats. 1931, c. 210, p. 362, sec. 2, as above pointed out, so as to provide for the completion of the work in case the contractor defaulted, and to further provide: "That such retained percentage as may be due any contractor shall be due and payable at the expiration of the thirty-day period as hereinafter provided for filing of creditors' claims, and such retained percentage shall be due and payable to the contractor without regard to creditors' claims filed with the state highway department."

The federal cases relied upon are no doubt sound in principle, but they are not applicable to the facts in the instant case, for the reason that the statute pursuant to which the contract and bond in question were executed contain language not contained in the federal statute considered in those cases. For instance, our statute provides, as above shown, that the retained percentage held by the department upon the completion of a contract "shall be due and payable to the contractor without regard to creditors' claims filed with the state highway department." There was no such provision in the federal act considered in the federal cases.

Counsel for appellant, in his opening brief, devoted several pages to the language of the statute just quoted, insisting that the fact that it was not embodied in the act of 1917, and the further fact that there was no similar provision in the federal act construed in the federal cases relied upon, is enough to justify this court in rejecting respondents' theory. Notwithstanding this fact, none of the briefs filed in behalf of the respondents comment on this contention of appellant.

2-5. Why the very able counsel who filed briefs in behalf of the respective respondents made no comment on the contention of appellant, just mentioned, is, to our mind, significant. However, it seems to us that the contention of appellant is irresistible. The original highway act did not contain this provision, and it was amended in 1925 so as to incorporate it in the act. As has often been pointed out by this court (Escalle v. Marks, 43 Nev. 172,183 P. 387, 5 A.L.R. 1512) we must look to the intent of the legislature in amending a statute. What could have been the intent of the legislature in 1925 in amending the highway law as pointed out? The language of this amendment seems so clear that there can be no room for construction. By providing that the retent shall be payable to the contractor without regard to creditors' claims filed with the department, it must follow that, where the contract is completed, the retent must be paid to the contractor. We see no escaping this conclusion, for the language is not susceptible to any other construction. It is very evident that the legislature concluded that the one-third of the bond given for the protection of those furnishing labor and supplies was ample, and that, where claims were filed, the parties should be left to their recourse in the courts. The bond provides that the department, with the written consent of the contractor, may use any money in its hands belonging to the contractor to pay claims against him. If this language means anything, it is that the contractor has exclusive right to the fund. The legislature did not and could not anticipate that a widespread depression would occur, carrying down to disaster and insolvency bonding companies, along with other financial institutions. The amendment was an unfortunate one, but the court must apply the law as it finds it. But counsel for respondents make the point that, since the highway act provides that one-third of the bond shall be conditioned as "additional protection" for those furnishing labor and supplies, the legislature contemplated that such persons were protected by an equitable lien. However potent this contention might have been prior to the amendment mentioned, such amendment, in our opinion, completely negatives this theory. Under the highway law as it exists, we cannot escape the conclusion that no equitable lien exists in favor of respondents, the job creditors.

6. Appellant concedes that the assignments given by Drumm are valid, but insists that the amounts thus assigned should, along with the balance due Drumm, go into the hands of the trustee, to be administered. We fail to see the force of this contention. Certainly the case of Straton v. New, 283 U.S. 318,51 S.Ct. 465, 75 L.Ed. 1060, does not sustain it. That case holds, it is true, that the trustee is entitled to all property owned by the bankrupt at the time of the adjudication, even though there be a lien upon it. In the instant matter, the assignments passed title to the funds in question more than four months before the petition in bankruptcy was filed. In the case of a mere lien, the trustee has an equity to protect. Not so where absolute title has passed. In the situation in question, the federal court never acquired jurisdiction over the amount assigned.

7. Many pages of the transcript of the record are carbon copies. Rule IV provides that when the transcript is typewritten it shall be the first impression. Appellant cannot recover costs for these copies. But for the circumstances of the case, we would penalize appellant for using the carbon copies. Nellis v. Johnson, 57 Nev. 18, 57 P.2d 392, 393.

It is ordered that this case be remanded to the trial court with instructions to modify its judgment to conform to the views herein expressed.

It is further ordered that the respondents Standard Oil Company of California and Petrol Corporation recover their costs. Appellant to recover costs against other respondents except as above indicated.