Mack Mfg. Co. v. Mass. Bonding Ins. Co.

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] March 29, 1920. The opinion of the Court was delivered by Action by the Mack Manufacturing Company on a bond executed by Bowe Page and the Massachusetts Bonding Insurance Company to the city of Greenville.

The object of the action is to recover some $12,000 for brick supplied by the Mack Company to Bowe Page to pave the streets of the city of Greenville.

Pursuing the terminology adopted in 108 S.C. 164,93 S.E. 713, we shall refer to the Mack Manufacturing Company, the materialman, as the Mack Company; to the Massachusetts Bonding Insurance Company as the bond company; to the Carolina National Bank as the bank; to the city of Greenville as the city; and we shall refer to Bowe Page as the contractors; and to the Greenville Traction Company as the traction company.

We held on a former appeal that the complaint states a cause of action in the Mack Company against the bond company,103 S.C. 55, 87 S.E. 439.

Thereafter, a party hitherto not in the cause, the bank, was brought into it on motion of the bond company, 108 S.C. 164,93 S.E. 713.

The present appeal is from the opinion of the Circuit Court which tried the cause on the merits; for a trial by jury was waived, the master took the testimony, and the Court tried the cause.

The judgment of the Court went practically to sustain all the contentions of the bond company, and the Mack Company and the bank have appealed.

But before so much shall be considered it is meet to here dispose of the first of two exceptions made by the bond company.

The first exception of the bond company goes to the point that the city and the bond company never intended, by the paper writing which they signed called the bond and extensively set out in 103 S.C. 55, 87 S.E. 439, to protect the materialmen; and if they expressed any such intention it was a mistaken expression.

There is no testimony of any weight which would warrant us to conclude that the parties did not intend to say that which we have before concluded they did say.

The bond being intact, the bond company seeks to defeat the instant recovery upon it on these grounds, to wit:

1. That the contract of August 29, 1910, between the contractors and the Mack Company, which the bond operated to secure, was abrogated by three other written agreements which the contractors entered into, to wit:

(a) One dated October 24, 1910, between the contractors and the traction company touching the pavement of the car trackway.

(b) One dated May 16, 1911, between the contractors and the Mack Company about the method of payment, etc.

(c) One dated August 17, 1911, between the city, the contractors, and the Mack Company about a transference of attachment lien from brick to money, etc.

2. That the same contract of August 29, 1910, was abrogated by the following several acts of the contractors and the Mack Company, to wit:

(a) By the receipt of $10,000 by the contractors from the city on January 5, 1911, when only $7,263.62 was due to be paid to the contractors.

(b) By the assignment by the contractors to the bank of their several monthly installments of payment from the city, when the same had been hitherto assigned by the contractors to the bond company.

(c) By the stoppage in transit by the Mack Company of eleven cars of brick bound for the contractors and the subsequent release of the same to the city.

(d) By the Mack Company's attachment of brick and other property of the contractors, and then releasing the attachment.

3. That the Mack Company, as creditor of the contractors, is estopped to set up its present claim by the record in the bank against the city to the extent of the recovery by the city in that case.

4. That the Mack Company's present right to set up its claim has been lost by the city's culpable negligence at the completion of the work by it, in paying to the bank the balance it then had on hand, instead of applying the same to the materialmen's claim.

5. The bond company lastly contends that if these defenses shall fail and the bond be yet intact, yet the bank is liable ahead of the bond company to pay the plaintiff's claim.

Before any of these defenses shall be examined, there ought to be stated so general a rule of law as is possible and which will ordinarily operate to discharge such a surety as the bond company. To that end the bond company has cited for reliance our own case of Greenville v. Ormand,51 S.C. 121, 28 S.E. 147. The sureties in that case were personal; the sureties in the instant case are "bondmen and insurers" for a compensation.

It is true the bond company's liability is not absolute; those for whom they undertake may do acts which are substantially hurtful to the bond company and in real contravention to the terms of the bond contract, and in such a case the bond company will be discharged. But the liability which the bond company assumed was not confined in time and place to the performance of a single act by the contractors, as is commonly the case with strict sureties. The contract, evidenced by the bond, the application, and the specifications, contemplated many and complicated transactions by many parties in many periods; and the relationship of the bond company thereto was not simply one of passivity. The bond company was constituted a possible actor in the whole transaction from start to finish. Its attitude was to be at attention. See 21 R.C.L. 1060; Greenville v. Guaranty,83 S.C. 90, 64 S.E. 518, 964; Mack v. Mass., 103 S.C. 55,87 S.E. 439; Atlanta v. Laurinburg, 163 Fed. 690, 90 C.C.A. 279; Guaranty v. Pressed Brick, 191 U.S. 416,24 Sup. Ct. 142, 48 L.Ed. 242; Hill v. American, 200 U.S. 202,26 Sup. Ct. 168, 50 L.Ed. 437; Phil. v. Fidelity,231 Pa. 208, 80 A. 62, Ann. Cas. 1912b, 1085.

So the real inquiry is: Have the supplementary agreements of the contractors before referred to, and the acts or omissions of the contractors, or of the city or the Mack Company before recited, operated to do a real hurt to the bond company by an attempted material alteration of its bond contract, or by the loss of a right not now available to it?

Reverting. now, to the aforespecified defenses in their order, that one is plainly untenable which refers to the effect of the contract between the contractors and the traction company touching the paving of the trackway.

The city and the traction company first agreed that the traction company should bear the cost of paving the trackway; the contractors made a contract with the traction company to do that work; the bond company made a bond along with the contractors to the traction company to save the traction company harmless, and in it made special reference to the contract between the contractors and the traction company; the bond company thereby assented to the contract between the city and the traction company and between the traction company and the contractors, and cannot now say the contrary.

The alleged modification agreement of May 16, 1911, was the sequel of a movement begun by letter on March 4, 1911, by the Mack Company to collect from the contractors and the city deferred installments due for brick. On March 4, 1911, the Mack Company's counsel wrote to the city a letter and called its attention to the obligation of the contractors under their contract with the Mack Company to make monthly payments on engineers' estimates for brick delivered; and further that up to that time no payment had been made and nearly $14,000 was then due for brick.

On March 8th the Mack Company commenced a suit with attachment against the contractors to get payment; and, amongst other things, recited that the contractors had assigned all moneys due and to become due to them to the bank.

The agreement of May 16th, was a composition of this agitation by the Mack Company for payment, and the preamble of it recites that differences had arisen between the parties, "especially with reference to the method of payment for said brick." And the agreement in short substance stipulates that thereafter, excepting the April vouchers issued by the city to Bowe Page and to the traction company which the Mack Company expressly released, the Mack Company shall receive monthly one-half the total of each monthly voucher issued by the city for paving. There are other stipulations in the agreement; but they are irrelevant to any contract relationship which existed between the bond company and the city and the Mack Company.

The agreement only modified the primary contract between the contractors and the Mack Company of August 29, 1910, by providing for the payment to Mack Company after the agreement of 50 per cent. of the monthly vouchers to be issued by the city, instead of 80 per cent. thereof as was provided by the primary contracts, and by the contract between the city and the contractors for the performance of which the bond was made.

But as it so turned out that the contractors paid to the Mack Company nothing practically after May 16th, there is no room to hold that the making of the agreement as to future payments operated to injure the bond company; its performance, had it been performed, would at least have lessened the present liability of the surety company.

Coming to the effect of the release of the April vouchers, the Mack Company released only its right to the April vouchers issued by the city to the contractors and the traction company. The bond company insists that such "release" operated to completely discharge its liability under the bond. The Mack Company's answer to that is that it never had any lien on or equitable property in the vouchers; all it had was a contract with contractors to have 80 per cent. thereof paid to it; that, if there was any lien on or equitable property in the vouchers, the bond company and the bank had so much by reason of the separate assignments of the monthly payments made to them by the contractors. And so much is true.

The Mack Company had no right which it might presently have reduced to a payment. The bond company has not been discharged by the agreement unless it shows that it was materially hurtful to the bond company. Phil. v. Fidelity,231 Pa. 208, 80 A. 62, Ann. Cas. 1912b, 1085.

But the testimony is that the April vouchers were paid to the bank which had aforetime advanced money to the contractors to "finance the enterprise." And there is no testimony by the bond company tending to show that the money which the contractors got from the bank was diverted from the enterprise in hand. The April vouchers, therefore, instead of being diverted from the enterprise in hand, went to its furtherance, and, instead of injuring the bond company, they minimized its liability to that extent.

The next suggested hurtful modification is that of August 17, 1911, which is an agreement betwixt the contractors, the city, and the Mack Company. At that period the contractors were hastening towards bankruptcy. They had practically abandoned the enterprise, for two weeks before (August 3, 1911), the city had taken it over under a provision of section 17 of the "Specifications" attached to the "proposal" of the contractors. Of that fact the bond company well knew, for its attorney, in fact, was present at the transaction and made no dissent. The Mack Company had been pressing for payment, and had on August 5th, resorted to the process of attachment upon grounds not stated in the record.

Pending a motion by the contractors to dissolve the alleged attachment, the agreement of August 17th, was made. The essence of that agreement looked to a totally new status, yet one which had been contemplated by the "application" and the "specifications," and underwritten by the bond; that was abandonment by the contractors and a completion of the enterprise by the city. All that was provided in the agreement of August 17th was done, therefore, pursuant to the application, specifications, and contracts, including the bond, therefore made.

It was, therefore, not in derogation of the bond company's contract rights, but in execution of them. And so much is a full answer to the defenses marked c and d of subdivision 2, hereinbefore set out. More than that, the brick upon which it is said the Mack Company relinquished its hold were used by the city to complete the paving, an undertaking which the bond was made to see through. The use of these brick reduced by so much the cost of the completion of the task by the city, and, therefore, reduced by so much the ultimate liability of the bond company.

Another act of the contractors pleaded to defeat the bond was the receipt by the contractors on January 5, 1911, of $10,000, when they were entitled to have only $7,263.62.

The Circuit Court found against this contention of the bond company, and rightly so. There is no testimony tending to show that such payment, confessedly made for brick, in any way injured the bond company.

Next, the bond company charges that it was released by the act of the contractors in assigning on September 2, 1910, to the bank all the monthly payments to be made by the city to the contractors, when same monthly payments had been aforetime assigned by the contractors to the bond company on August 27, 1910.

The act of a second assignment by the contractors was no actionable wrong to the bond company; whether the collection by the bank of such assigned payments constituted a wrong still available to the bond company constitutes the last defense we have before recited, and the consideration of which will be presently had.

The defenses hereinbefore marked 3 and 4 and 5 are so allied in substance that they will be considered together; they arise out of the legal consequences to the Mack Company to the city and to the bank of the recovery by the bank against the city and the payment of that judgment by the city.

To that action the Mack Company was party, in the person of the trustees in bankruptcy, brought into the action on the motion of the Mack Company. And in that action the trustees inter alia alleged for answer:

"That if said city should voluntarily surrender said funds and allow the same to be withdrawn from its custody, such action would constitute a fraud upon the guaranty company which executed as surety the bond given by said Bowe Page to the city of Greenville, guaranteeing the faithful performance of said contract; inasmuch as said guaranty company is entitled to the benefit of any protection available to said city for the purpose of compelling said Bowe Page to perform said contract."

The issue of law made by that allegation was not decided, and could not have been, for the bond company was not party to the action, as manifestly it might have been.

The city completed the paving of its streets, at a period not disclosed in the record, and it then had in hand to the credit of the contractors for distribution to those entitled to have it the sum of $15,584.87.

On February 10, 1912, the bank sued the city to recover a balance due it for money borrowed on the assignments to it by the contractors, and had judgment for $13,283.38, which was paid. 97 S.C. 291, 81 S.E. 634.

The instant action was begun August 19, 1913, and the bank was subsequently brought into it. 108 S.C. 163,93 S.E. 713.

On the issue of estoppel by the record, we shall for clarity of expression call the bank's action the first action, and we shall call the instant action the second action.

Manifestly, the Mack Company is not estopped to set up the claim it has done in the second action by the judgment in the first action. The bond company now pleading the estoppel of the first action was not a party to that action; that action was, therefore, a transaction between other parties which neither benefited nor injured the bond company.

Greenleaf puts it this way: "It is a general rule that an adjudication takes effect only between the parties to the judgment, and that it gives no rights to or against third parties." 1 Greenleaf on Evidence, sec. 154.

Freeman states the same truth in other words: "No person (the bond company) can bind another (the Mack Company) by any adjudication (the bank judgment) who (the bond company) was not himself exposed to the peril of being bound in like manner had the judgment resulted the other way." Freeman on Judgments, sec. 154.

The bond company was not so exposed, because it was not party to the first action.

But though the Mack Company is party to both actions, yet the bond company was not privy to Mack in the first action; for the Mack Company did not represent the bond company in that action. 1 Greenleaf, sec. 536.

The bond company stigmatized as "culpable negligence" the action of the city in the payment of the bank judgment; and that act it says has discharged the bond company.

But the city did that which the specifications warranted it to do. That instrument provides that "If after paying all claims (in the construction by the city) there is a surplus under the contract, such surplus shall be paid to the contractor."

The bond company knew the terms of the specifications; it knew that the contractors had abandoned the work; it knew that the city had undertaken to complete the work; it knew that its bond contract bound it to see that the contractors should "deliver the same (works) to the city free from all claims aforesaid," to wit, wages of laborers and claims of persons who furnish material used in the construction of the works.

If there was negligence, it lay at the door of the bond company in its failure to see to a right application of the surplus in the hands of the city at the conclusion of the work.

The bond company was set as a watchman to see that the paving was completed according to the terms of the contract; and one of the terms was that, in the event of abandonment of the task by the contractors, the city might take it up. (Specifications.)

Finally, the bond company insisted that the bank got what was and is of legal right the property of the bond company; and it ought yet to yield it up to the bond company to pay the instant demands on the bond company. And it rests its case in that behalf on Guaranty Co. v. Pressed Brick Co.,191 U.S. 416, 24 Sup. Ct. 142, 48 L.Ed. 242, and Hardawayv. National Surety Co., 211 U.S. 552, 29 Sup. Ct. 202,53 L.Ed. 321, and numerous other authorities to the same point.

Had the bond company been party to the bank suit, and had it there set up the right it now asserts which is to pay the materialmen and then set up (by subrogation) their superior right to that of the bank, it may well be that, in the absence of other mitigating circumstances, the bond company would have prevailed.

But such is not the case before us. The bond company's right springs out of these words in the "application," to wit:

"That the said (bond) company shall as of date hereof (August 27, 1910), be subrogated to all of their (the contractors') rights and properties * * * under said contract; and the applicants (contractors) hereby assign, transfer, set over and convey to said (bond) company all the deferred payments and retained percentages, and all moneys and properties that may be or hereafter become due and payable to the applicants (contractors) at the time of any breach or default in the contract or cessation of work thereunder, or that may thereafter at any time become due and payable to them on account of said contract."

For convenience and clarity we denominate the substance so assigned as the "fund."

This language gave to the bond company an equitable property in the fund. 3 Pom. Eq., sec. 1280.

The bank's right springs out of a loan by it to the contractors made of September 2, 1910, of $5,000, to be used in the execution of the paving contract; and the execution on the same day by the contractors to the bank of an assignment of the said fund to secure the said loan and any further sums to be borrowed from the bank by the contractors in execution of the paving contract. A copy of this assignment was promptly furnished the city. This paper writing executed after that to the bond company gave to this bank also an equitable property in the fund. Thus the bond company and the bank had at most only assignments of the fund, and that of the bond company was first in time.

But the bank reduced its equitable property to a legal judgment and collected the same in April, 1913, before the bond company ever proceeded in May, 1916, to set up its present claim to be paid the fund in preference to the bank. The present result is that the bank has a legal property and ownership of the fund, and the bond company had only an equitable property in it. Betwixt these two the right of the bank is superior. See 1 Pomeroy's Eq. secs. 413-417.

The case is removed by the facts of it out of the sphere of the cases like Prairie v. U.S., 164 U.S. 227,17 Sup. Ct. 142, 41 L.Ed. 412, and Hardaway v. National Surety Co.,211 U.S. 552, 29 Sup. Ct. 202, 53 L.Ed. 321.

The judgment below is reversed, and the cause is remanded to that Court to be concluded on the principles we have announced.

NOTE. — Let the following exhibits be reported:

(1) The specifications which accompanied the contractors' proposal, dated July 23, 1910.

(2) The application for the bond, dated August 27, 1910.

(3) The contract between Bowe Page and the city.

(4) The contract between Bowe Page and the Mack Manufacturing Company.

(5) The bond of Bowe Page and the Massachusetts Bonding Insurance Company to the city.

(6) The agreement between the Mack Company and Bowe Page, dated May 16, 1911.

(7) The agreement between Bowe Page, the city, and Mack Company, dated August 17, 1911.

(8) The assignment by Bowe Page to the bank, dated September 2, 1910.

(9) The contract between the traction company and Bowe Page, dated October 24, 1910.

MR. CHIEF JUSTICE GARY and MR. JUSTICE HYDRICK concur.

MR. JUSTICE FRASER. I dissent. It seems to me that the rights of the bonding company were disregarded in many particulars and the injury manifest.

MR. JUSTICE WATTS disqualified.