Fidelity Guaranty Co. v. Allied Products Co.

The parties appear in this court in reverse order. The Allied Products Company entered suit in the common pleas court against the United States Fidelity Guaranty Company, alleging in substance that during the year 1929 it sold to B.K. Hines, who was engaged in the construction of roads and other public improvements, certain building materials which were used by him in and for constructing a certain road known as Middle Ridge Road, Lake county, Madison township, Ohio, under a contract between B.K. Hines and the board of county commissioners of Lake county, said contract being executed September 22, 1928, and that the amount due the plaintiff thereon is $4,857, with interest. At the time the contract was executed between B.K. Hines and the board of county commissioners of Lake county the said B.K. Hines, as principal, and the defendant, the United States Fidelity Guaranty Company, as surety, executed their joint and several bond in the sum of $43,689, conditioned in part as follows: "Now if the said principal shall well, truly and faithfully comply with and perform each and all of the terms, covenants and conditions of such contracts on his part to be kept and performed, according to the tenor thereof and within the time prescribed, and will perform the work embraced therein upon the terms proposed and within the time prescribed and in accordance with the plans, specifications and estimates furnished therefor, to which reference is here made, the same being a part hereof, as if fully incorporated herein and will indemnify the county against any damage that may result by reason of the negligence of the contractor in making said improvement, or doing said work, and shall pay all lawful claims of subcontractors, material men and laborers, for labor performed and materials furnished in carrying forward, performing or completing said undertaking, said principal and sureties agreeing and consenting that this undertaking shall be for the benefit of any material man or laborer, having a just claim as well as for the obligee herein, then this obligation shall be void, otherwise the same shall remain in full force and effect; it being expressly understood and agreed that the liability of the surety for any or all claims hereunder shall in no event exceed the penal amount of this obligation, as herein stated."

The action is prosecuted under favor of Section 2365-3, General Code, which extends the benefit of a surety bond, given for the construction of public improvements, to laborers and materialmen.

The petition alleges that the plaintiff has fully complied with the provisions of the law by furnishing the defendant with a statement of the amounts due, and that more than sixty days have elapsed between the time of furnishing the statement and the institution of this suit. Wherefore the petition prays for judgment.

The answer filed by the United States Fidelity Guaranty Company admits the corporate capacity of plaintiff and defendant, but otherwise denies all the other allegations of the plaintiff's petition.

The common pleas court rendered a judgment in favor of defendant in error.

It appears from the record that on February 7, 1929, B.K. Hines assigned to the Johnson Material Company all the money to become due to him by estimates on the Middle Ridge Road job in Madison township, which was embodied in his contract with the county commissioners. It further appears that the United States Fidelity Guaranty Company was not consulted about this assignment at the time of its execution; that it had no knowledge thereof, nor has it consented thereto. In the finding of facts made by the trial judge, we find the following: "Defendant, (i.e. United States Fidelity Guaranty Company) at no time consented to said assignment nor was it consulted by anyone about it at the time of the execution thereof."

This assignment was accepted by the auditor of Lake county, and payments due on said contract were thereafter made to the Johnson Material Company until some time in September, 1929, when the attention of the county prosecutor was called to this alleged unlawful diversion of payments in violation of the rights of the surety, and the practice was thereafter stopped. Before the intervention of the county prosecutor, however, the Johnson Material Company had received on estimates due B.K. Hines the total sum of $57,311.80.

Mr. O.B. Loomis, who was treasurer and director of the Johnson Material Company, testified that he had applied part of the proceeds to the payment of the Johnson Material Company account, part to the account of the Allied Products Company, and had repaid B.K. Hines in part. Altogether he remitted to B.K. Hines sums totaling $20,000. Mr. Loomis was also treasurer and director of the Allied Products Company, and treasurer and director of the Goff-Kirby Company. He was designated as the statutory agent for the Goff-Kirby Company and the Allied Products Company.

We are of the opinion that the claim of the United States Fidelity Guaranty Company that the payments received by O.B. Loomis as treasurer of the Johnson Material Company were likewise received by him as treasurer of the Allied Products Company is fully sustained by undisputed evidence on this point.

When O.B. Loomis made these arrangements with B.K. Hines whereby he induced the latter to make the assignment referred to above to the Johnson Material Company, he acted simultaneously in behalf of all the companies which he represented. The common directors, common statutory agent, common officers, common supervision of books and records, common preparation of attested accounts, common use of stationery, and the common knowledge of what O.B. Loomis was doing, lead to but one conclusion, resting upon undisputed evidence, that O.B. Loomis received these payments under the assignment from B.K. Hines to the Johnson Material Company in the capacity of treasurer of the Allied Products Company as well as treasurer of the Johnson Material Company.

We agree with the statement of the law contained in plaintiff in error's brief, namely, that it is an elementary principle in the law of suretyship that "the contract of a surety imports entire good faith between him and the creditor, which must be kept inviolate in all subsequent dealings between the creditor and the principal debtor." White's Admr. v. Life Association ofAmerica, 63 Ala. 419, 35 Am. Rep., 45.

In accordance with this principle it is generally held that where a principal tenders payment of his debt the creditor is bound to receive it. If he declines it, or, having received it, he reloans or repays it to the principal, the surety is discharged.

"The rule is well settled that a surety is discharged if a tender of payment made after the debt is due is refused by the creditor or his duly authorized agent. One of the reasons sometimes assigned for this rule is that the transaction amounts to a payment of the debt, and a new loan to the principal. * * * If the principal tenders payment in full, after the debt is due, it is bad faith toward the surety, on the part of the creditor, to refuse it, for he may thereby invert the order in which principal and surety are liable, as between themselves; and he changes the nature and character of the liability of the surety, compelling him to guarantee for a further and additional period of time the ability of the principal to make the payment." 21 Ruling Case Law, 1046.

In the case at bar the evidence is undisputed that O.B. Loomis, treasurer of the Allied Products Company, the Johnson Material Company, and the Goff-Kirby Company, personally drew checks upon funds received upon the contract of B.K. Hines, whereby he released and gave back the sum of $20,030 after it was once in the possession of and under the control of said O.B. Loomis as such treasurer.

In White's Admr. v. Life Association of America, supra, the court held: "If the creditor has in his hands moneys of the principal which he may rightfully retain, and voluntarily surrenders them to the principal, whom he knows to be insolvent, he is guilty of bad faith to the surety, and the latter is discharged to the extent of such moneys."

See, also, Fegley v. McDonald, 89 Pa., 128.

In Spurgeon v. Smitha, 114 Ind. 453, 17 N.E. 105, the court said: "The contract made by the creditor and the principal, wherein the former, after accepting part payment of the debt, reloaned the latter the remainder of the money due, released the sureties. * * * The act of the creditor, in refusing the money tendered him by the principal debtor, released the sureties. * * * It seems clear to us that where the creditor declines to receive the money offered him he elects to change the contract, for it is as much part of the contract that he should accept the money when tendered as that the debtor should pay it."

When Mr. Loomis, acting for his companies, brought about the arrangement whereby B.K. Hines made a complete assignment to the Johnson Material Company of all that was due to him from time to time under his contract with the county commissioners of Lake county, and when he received various payments from the county commissioners under said assignment, it became his duty to apply them to the full satisfaction of the claims due to the various companies for which he was acting. Having chosen to repay part of the money received by him to B.K. Hines, instead of applying the same to the full discharge of the debts due to the various companies Loomis was representing, the surety is discharged to the extent of such money repaid.

We also agree with the assertion of plaintiff in error that the arrangement for and the taking of the assignment of estimates due the principal, B.K. Hines, without the knowledge and consent of the United States Fidelity Guaranty Company, amounts to a material alteration of the contract, which operated as a discharge of the surety. A reading of the suretyship contract which the United States Fidelity Guaranty Company signed discloses that it provides that payments should be made by the county commissioners to the contractor B.K. Hines. It did not provide that such payments should be made to one of his creditors. The funds due to the principal are not the subject of an assignment. The principal has no legal right or power to assign such funds to a creditor whom he may choose to prefer. The funds belong as much to the surety as to the principal, and cannot be diverted by him to the payment of any one creditor. In this arrangement between Loomis as treasurer of the Johnson Material Company, the Allied Products Company, the Goff-Kirby Company, and B.K. Hines, the rights of the surety company are materially affected. The surety had a right to retain the funds for its own use in the event that it should be required to take over and complete the contract upon the default of the principal contractor. Mr. Loomis, in acting as he did, sought to make his own private arrangements in behalf of his companies for additional protection by becoming the custodian of the funds due B.K. Hines under the contract. The surety company was not at any time consulted by Mr. Loomis, nor asked to give its judgment as to the proper distribution of the funds so assigned to him. When Mr. Loomis assumed financial control of the contract, he thereby deprived B.K. Hines of his own judgment and ability to procure and pay for materials where and as he chose. This arrangement was not within the contemplation of the surety when it executed the bond.

It will be observed that the bond executed by the surety company does not expressly mention the Allied Products Company. The Allied Products Company seeks the benefit of the protection of the bond by virtue of the General Code which extends to materialmen the benefit of such bond. Generally speaking, a suretyship contract for the performance of public work, which under the law is operative for the benefit and protection of laborers, mechanics, and materialmen, will be effective for their protection regardless of changes and alterations subsequently made between the principal contractor and the other contracting party, even though the same are made without the knowledge and consent of the surety on the contractor's bond. This is so because the laborers, mechanics, and materialmen have no control of the actions of the contracting parties.

In the case at bar, however, not only did the Allied Products Company have knowledge, but it participated through its agent, Loomis, in bringing about material changes in the manner of payment under the construction contract.

We are of the opinion that the trial court committed error in overruling the motion of the plaintiff in error for judgment. The judgment of the common pleas court is therefore reversed and final judgment is entered in favor of the plaintiff in error.

Judgment reversed and judgment for plaintiff in error.

McGILL, J., concurs.

LIEGHLEY, P.J., dissents.