Hess & Skinner Engineering Co. v. Turney

The writ of error was granted to the Lion Bonding Surety Company, who executed as surety a bond, dated May 1, 1914, wherein the Hess Skinner Engineering Company was principal, to the County Judge and County Commissioners of Bastrop County, in the sum of $45,000, conditioned to be void if the Hess Skinner Engineering Company should faithfully perform a certain contract between it and the County Judge and County Commissioners of Bastrop County, for the construction of a bridge, and should promptly make payments to all persons supplying said Company with labor and material in the prosecution of the work as provided for in the contract, and as provided by articles 6394F, to 6394J, Vernon's Sayles' Texas Civil Statutes.

The Surety Company complains of a judgment against it in favor of the Vincennes Bridge Company for a balance of $6407.09. It is not denied that the Bridge Company supplied the Hess Skinner Engineering Company material, viz: steel, in the prosecution of the work covered by the contract, nor that the balance justly due therefore is $6407.09. It is contended that the Surety Company was discharged from its obligation to pay for this material to the Bridge Company on two grounds: (1), that the Bridge Company shipped the steel without requiring one-half its cost to be paid in cash at point of shipment, when the contract between the Bridge Company and the Engineering Company entitled it to such cash payment; and; (2), that the Bridge Company, when it held an assignment of the contract from the Engineering Company, to secure the purchase price of the steel, consented for $6499.80 to be applied to claims of laborers and local merchants, and that this had the effect to reduce the surety's obligation to the Bridge Company in that amount.

We do not agree with the intimation in the opinion of the Court of Civil Appeals that the rules which determine the rights of uncompensated sureties have no application in determining the rights of corporation sureties, who enter into contracts of suretyship for profit. One who contracts as surety for another cannot be held bound save in so far as the law binds a surety. The views of this Court on that subject are too clearly and emphatically stated in Lonergan v. San Antonio Trust Co.,101 Tex. 77, 22 L.R.A. (N.S.), 664, 130 Am. St., 803,104 S.W. 1061, 106 S.W. 876, to require further statement.

The Surety Company invokes the elementary rules that material change in the terms of a contract, on which one is secondarily liable as surety, such as extension of time for performance, without the surety's consent, will discharge the surety from his obligation under the contract, and that the act of a creditor in releasing collateral securities so as to deprive a surety of the right to have same applied in satisfaction of the debt of the principal, guaranteed by the surety, will release the surety to the extent of the value of the securities.

There never was any change in the contract guaranteed by this Surety Company. Such contract was silent as to the terms on which the material for the construction of the bridge was to be purchased. The bond in effect authorized the contractor to make his own terms, and we see no good reason why it should be held that this did not include authority, while acting in good faith, to change such terms.

As said by the Supreme Court of the United States in United States Fid. Guaranty Co. v. Golden Pressed Fire Brick Co.,191 U.S. 425, 48 L.Ed., 242, 24 Sup. Ct., 144: "The guarantor is ignorant of the parties with whom his principal may contract, the amount, the nature, and the value of the materials required, as well as the time when payment for them will become due. These particulars it would probably be impossible even for the principal to furnish, and it is to be assumed that the surety contracts with knowledge of this fact. Not knowing when or by whom these materials will be supplied, or when the bills for them will mature, it can make no difference to him whether they were originally purchased on a credit of sixty days, or whether, after the materials are furnished, the time for payment is extended sixty days, and a note given for the amount maturing at that time."

The Surety Company was liable, on the bond, for the payment of the debts to the local merchants and laborers, being essentially claims for labor in the prosecution of the work of performing the Engineering Company's contract. Hence, it sustained no injury by the Bridge Company's consent to the application of $6499.80 to satisfy such claims.

On April 30, 1914, the Hess Skinner Engineering Company, "in consideration of the execution of said bond" agreed in writing to reimburse the Lion Bonding Surety Company all amounts of money which it might pay or become liable to pay, on account of the bond's execution, and agreed that all payments specified in the bridge contract, withheld by Bastrop County until completion of the work, should be paid to the Surety Company, and that such agreement should operate as an assignment of the payments, it being stipulated that any residue, after full reimbursement of the Surety Company, should be paid by it to the Engineering Company.

On February 20, 1915, the Engineering Company gave to defendant in error, First National Bank of Smithville, its note for $500, and, on February 26, 1915, it gave to said Bank its note for $1000, for borrowed money, and to secure the payment of the notes, the Engineering Company gave the Bank an order on Bastrop County, to be paid out of the money to become due the Engineering Company on the bridge contract, and the County, acting by the County Judge, accepted the order. The Engineering Company represented to the Bank that the borrowed money was needed to pay wages of laborers, employed in the prosecution of the work of constructing the bridge, and the money was so applied. The laborers were not parties to the loans, and no assignment was taken by the Bank of their claims.

The outstanding claims for material and labor, protected by the bond other than the debt of the Bank, exceeded the amount due the Engineering Company, which was withheld by the County.

On these facts the trial court gave the Bank judgment against the Surety Company, for the amount of the two notes of the Engineering Company, and also adjudged that the Bank be first paid out of the sum of $6854.33, which had been paid into the registry of the court by Bastrop County, said sum having been withheld until completion of the work, in accordance with the terms of the bridge contract.

The Court of Civil Appeals reformed the trial court's judgment so as to deny the Bank a personal judgment against the Surety Company but affirmed the direction that the fund in the registry of the court be first applied to the payment of the Bank's debt.

By proper assignment, the Surety Company challenges the correctness of the judgment ordering payment of the notes to the bank out of the fund on deposit in court.

The opinion of the Court of Civil Appeals holds that though the Bank held a mere equitable assignment of sufficient of the money due the Engineering Company by the County to satisfy its notes, and though the assignment to the Surety Company was prior in time, and though the Bank was subrogated to no right of the laborers, nevertheless the Bank held an equitable claim on the money in the registry of the court superior to any right thereto of the Surety Company, for two reasons: first, that there was no consideration for the assignment to the Surety Company and the money obtained from the Bank was actually used to pay claims for labor on the bridge; and, second, that the assignee of a chose in action who first gives notice to the debtor is entitled to precedence, in determining priority between assignees.

In our opinion the rule is sound, which gives priority in rank to equitable assignments in the order of their dates, without regard to notice to the debtor. Brander v. Young, 12 Tex. 335; Harris Co. v. Campbell, 68 Tex. 27, 2 Am. St., 467,3 S.W. 243; Milmo Natl. Bank v. Convery, 8 Texas Civ. App. 181[8 Tex. Civ. App. 181], 27 S.W. 829; Harris Co. v. Donaldson, 20 Texas Civ. App. 9[20 Tex. Civ. App. 9],48 S.W. 791; Henke v. Keller, 50 Texas Civ. App. 533[50 Tex. Civ. App. 533], 110 S.W. 784.

The debtor is fully protected because he is not affected by the assignment until notified, and the subsequent assignee, in dealing with a chose in action, is chargeable with knowledge that he can get no better right than that of his assignor.

It increases uncertainty in the law's administration to substitute the date of notice to the debtor as the test of priority for the date of assignment; and we can see how grave harm would follow for us to now depart from our thoroughly established simple test of priority in right from priority in time of the assignment.

The assignment to the Surety Company was supported by a valuable consideration. Campbell v. Grant Co. 82 S.W. 794.

The case of Harris County v. Donaldson, 20 Texas Civ. App. 9[20 Tex. Civ. App. 9], 48 S.W. 791, involved a controversy between assignees of a fund held by Harris County to pay the contract price of certain furniture. The debt of the senior assignee had no relation to the contract, while that of the junior assignee was for work in installing the furniture under the contract. The senior assignment was given precedence, because the junior claimant "had no lien upon this fund, and his rights in it arose from his assignment alone, and the assignments take rank in the order in which they were given." 48 S.W. 794. The same principle is equally conclusive here against the Bank's claim of a superior equity because of the nature of the debt.

We agree with the conclusion of the Court of Civil Appeals that the Bank did not become subrogated to the rights of the laborers, and there can be no doubt that its debt is not protected by the bond. Gaylord v. Loughridge, 50 Tex. 577; Lion Bonding Surety Co. v. Bank, 194 S.W. 1012; People's Natl. Bank v. Corse,182 S.W. 917; United States v. Rundle, 107 Fed., 227, 52 L.R.A., 505, 4 C.C.A., 252.

The Bank and the Surety Company each hold merely an equitable assignment of the fund in the registry of the court, and the Surety Company's, as the elder, must prevail.

The remaining assignments complain of rulings, in which we find no error.

It is therefore ordered that the judgment of the Court of Civil Appeals be so reformed as to deny the Bank any recovery herein, and that said judgment, as so reformed, be affirmed.

Reformed and affirmed.