Southern States Supply Co. v. Union Indemnity Co.

This is an appeal from a judgment entered upon a verdict directed by his Honor, Judge Whaley, of the County Court of Richland County, against the defendant, surety upon a building contract, for $1,382.73.

It appears that on November 19, 1928, J.F. Fitzharris, hereinafter referred to as the contractor, and H.L. Buck, hereinafter referred to as the owner, entered into a written contract, by which the contractor undertook to install the plumbing and a heating system in a residence then about to be erected for the owner in Conway, at the price of $3,743.64, increased by additions to $4,156.40.

On March 29, 1929, the contractor and the defendant, surety company, entered into a bond to the owner, in the sum of $1,870.00, the condition of which was as follows:

"Now, therefore, the condition of this obligation is such that if the principal shall faithfully perform the contract on his part, and satisfy all claims and demands incurred for the same, and shall fully indemnify and save harmless the owner from all cost and damage which he may suffer by reason of failure so to do, and shall fully reimburse and repay the owner all outlay and expense which the owner may incur in making good any such default, and shall pay all persons who have contracts directly with the principal for labor or materials, then this obligation shall be null and void; otherwise it shall remain in full force and effect."

The complaint alleges that between November 15, 1928, and August 6, 1929, the plaintiff sold and delivered to the contractor material of the value of $1,436.58, under contracts made directly with the contractor, which was used by him in the residence, and for which the plaintiff has not been paid.

The defendant, in its answer, alleges that the plaintiff has received from the contractor more than sufficient funds, out of payments made by the owner to the contractor upon the contract in question, to fully satisfy the claim declared upon, and denies any liability upon the bond.

The case was tried before his Honor, Judge Whaley, and a jury; he directed a verdict in favor of the plaintiff for $1,382.73, the amount shown upon the statement introduced by the plaintiff upon the trial, and from the judgment entered thereon the defendant has appealed.

It appears that the plaintiff was furnishing to the contractor material for several other jobs, and that no account was kept by it for them separately; all invoices were charged to the contractor upon a general account covering all of the jobs, and that when payments were made by the contractor they were credited thereupon, the plaintiff being uninformed of the sources from which the payments were obtained by the contractor.

The total amount due by the contractor to the plaintiff upon all of the jobs up to March 29, 1929, was $8,760.19, upon which the plaintiff received from the contractor on April 2, 1929, $1,000.00, leaving unpaid, $7,760.19; that this balance was taken up by trade acceptances payable in the succeeding months upon various dates, and that all of them have been paid by the contractor except the last, for $2,000.00. The trade acceptances, according to the plaintiff's testimony, covered only the amount due by the contractor on March 29, 1929, less $1,000.00 paid on April 2d; the invoices for material supplied to the contractor for the Buck job, from November, 1928, to February, 1929, amounting to $316.30, were included in the trade acceptances, which left the invoices from April 20th to August 6th, amounting to $1,169.93, less a credit of $103.50, $1,066.43, unprovided for by trade acceptances.

Between April and August the contractor made payments to the plaintiff, which were applied to the trade acceptances leaving, as stated, $2,000.00 unpaid. As the invoices between November, 1928, and February, 1929, amounting to $316.30 were included in the trade acceptances, they should be regarded as paid by the payments which were made upon them.

In the complaint, it is alleged that the amount due to the plaintiff was $1,436.58; upon the trial a statement was introduced by the plaintiff showing the balance due to be $1,382.73, which included eight invoices between November 15, 1928, and February 11, 1929 (inclusive), amounting to $316.30; on October 22, 1929, a statement was transmitted to Mr. Buck, of Fitzharris' account with the plaintiff, showing a balance of $1,009.72; in this last statement, the eight invoices above referred to do not appear, as also four invoices aggregating $41.71; a reasonable inference would be that these 12 invoices aggregating ($316.30 plus $41.71) $358.01 had been paid.

It appears also that on October 2, 1929, three days before the contractor was adjudicated a bankrupt (on October 5th), counsel for the plaintiff presented to the owner a statement claiming the balance due by the contractor upon material supplied for the house, to be $163.16, a statement evidently based upon information obtained from the plaintiff, and which meant, of course, that the plaintiff had applied payments made by the contractor upon the material supplied for the owner's house; at least, that was an inference which the jury might have been justified in drawing. On October 22d, after the adjudication of bankruptcy, the counsel wrote the owner wishing to amend the notice given on October 2d, "by changing the amount from $163.16, to $1,113.22."

It was a fair inference from this that the plaintiff was endeavoring to shift the credits which it had given to the contractor on account of the Buck enterprise to other accounts, for the payment of which it had no surety bonds.

As between the debtor and the creditor, the rule for the application of payments is thus expressed in U.S. v. Kirkpatrick, 9 Wheat., 720, 737, 6 L.Ed., 199:

"The debtor has a right, if he pleases, to make the appropriation of payments; if he omits it, the creditor may make it; if both omit it, the law will apply the payments, according with its own notions of justice."

It is not a conceded fact by any means that the plaintiff, in the first instance, without having previously applied them otherwise, applied the payments made by the contractor, as it now claims, to the trade acceptances. It is true that the representative of the plaintiff so testified, but the jury was not bound to accept his testimony as true, particularly in view of the rendition of a statement as late as October 2d showing the balance due by the contractor on the Buck job as $163.16. That was an issue of fact in the case; it was error, therefore, to assume the resolution of it in favor of the plaintiff's contention.

It may have been a controlling issue in the case whether the plaintiff had notice of the source of the payments made by the contractor before he should be required to waive the privilege of applying them to other claims not secured by a surety bond. Its representative testified to the absence of such notice; circumstances may have induced the jury to reject this testimony; it was an issue in the case, and it was error to assume that the plaintiff's contention was true.

The authorities are in conflict upon the question whether notice must be brought home to the creditor of the source of the payments before he may be required to waive his right to apply them as his interest may suggest. See note, 21 A.L.R., 704; Crane v. Pacific Co., 36 Wn., 95,78 P., 460; Merchants' Ins. Co. v. Herber, 68 Minn., 420,71 N.W., 624; Columbia Digger Co. v. Sparks (C.C.A.), 227 F., 780.

But aside from the question which of these views this Court may adopt, a question which at this time it does not appear necessary to be decided, a controlling consideration, I think, is presented in this aspect of the case:

Under Section 173 of the Criminal Code of 1922, the plaintiff as a materialman had a lien upon every dollar paid by Buck to the contractor upon the job for which the plaintiff had supplied material, regardless of whether or not the plaintiff had notice of the source. It had no right, when that money was paid to it, without inquiry as to its source, to release such lien by paying it out upon claims not protected by a surety bond to the prejudice of the surety company. There is evidence tending to show that there was a studied effort of the plaintiff, after the payments had been made and after the contractor had gone into bankruptcy, to shift the payments to claims not protected, and hold the surety company for all that was possible.

The plaintiff, while not a party to the contract between the contractor and the owner, nor to the bond, was nevertheless a beneficiary of the bond, and unquestionably had the right to enforce the bond for his protection. He is assumed to have known under the law that he had a lien upon all money paid by the owner to the contractor. He must be assumed to have known that the surety had the right to rely upon that provision for his protection. It strikes me as the limit of injustice to uphold him in his act of deliberately annihilating the equity of the surety company by converting the company practically into an insurer of its claims against other contractors.

MR. JUSTICE BONHAM concurs.