Hochevar v. Maryland Casualty Co.

• Decision Date: 15 October 1940
• Docket Number: No. 8266.,8266.
• Parties: HOCHEVAR et al. v. MARYLAND CASUALTY CO.
• Court: U.S. Court of Appeals — Sixth Circuit

114 F.2d 948 (1940)

HOCHEVAR et al. v. MARYLAND CASUALTY CO.

No. 8266.

Circuit Court of Appeals, Sixth Circuit.

October 15, 1940.

George C. McKelvey, of St. Clairsville, Ohio (Ross Michener, of Bridgeport, Ohio, and Geo. C. McKelvey, of St. Clairsville, Ohio, on the brief), for appellants.

Earl R. Lewis, of St. Clairsville, Ohio (F. E. Pausch, of Baltimore, Md., and Thornburg & Lewis, of St. Clairsville, Ohio, on the brief), for appellee.

Before HICKS, SIMONS, and ARANT, Circuit Judges.

ARANT, Circuit Judge.

The Commissioners of Belmont County, Ohio, entered into a written contract with the Burd Construction Company on June 20, 1928, for the grading and paving of a section of county road by November 1, 1929. The County was to retain fifteen per cent of monthly estimates until completion of the work.¹ Appellee executed a bond, conditioned to be void upon performance of the contract and payment by the Burd Company of "all lawful claims of subcontractors, materialmen, and laborers for labor performed and materials furnished in the carrying forward, performing or completing of said contract."

A subcontractor had done the grading, and the Burd Company had moved its machinery on to do the paving, when it was requested, in the midsummer of 1929, to begin work one hundred feet from an intersecting state highway that was also being paved, because its grade had not yet been established. As work progressed, estimates were approved and, after deduction of fifteen per cent, paid by the County.

The road was opened to traffic November 11, 1929, after the Company had paved all but the one hundred foot strip. A month later it requested a final estimate and payment of the retained percentages, which then amounted to $18,278.34. Relying upon advice of counsel that clause 10² of the contract made Ohio G. C. § 6947-1³ applicable and upon the contractor's promise to pay immediately all materialmen and laborers, some of whom had already given notice of their claims, but none of whom had filed the attested accounts necessary to perfect a statutory lien against the funds in the County's hands,⁴ the Commissioners, without knowledge or consent of appellee, paid the contractor the retained percentages, minus $1,000 estimated necessary to complete the paving and fifteen per cent additional as required by statute.

The contractor moved its equipment to another job outside the state. Upon its later refusal to complete the strip, the County demanded that appellee do so, but appellee refused and immediately brought this suit, joining as defendants the Burd Company, the County Commissioners and various unpaid laborers and materialmen. The $1,150 retained by the County was used to complete the paving.

The District Court awarded judgments against appellee in favor of all materialmen and laborers who established claims; and also awarded appellee a judgment against the County for an amount equalling the judgments against appellee, on the theory that, by prematurely paying the percentages that had been retained pursuant to the contract, the County violated its duty to appellee.

We are of the opinion that judgment was properly rendered against the County. The percentages to be retained were to secure performance of the contract; as they mounted, the security increased. That the surety is entitled to the benefit of security held by the obligee is too elementary to require citation of authority. The security for which the surety knew the obligee had stipulated must have entered into its measurement of the risk involved; and the surety was entitled to believe that the obligee would deal with its security as do holders of security generally, and as expressly provided in the contract. Release of the security increased the risk the obligee knew the surety contemplated when the bond was executed. When the obligee sues the surety, it is generally agreed that failure to retain the percentages is a pro tanto defense to the surety; and some contend that the surety should have a total defense because of the impossibility of determining with exactitude the degree to which premature payment removes the incentive to perform. However, the obligee's premature payment of retained percentages cannot affect the rights of third party beneficiaries against the surety. The percentages were to be retained by the County in this case to assure performance of all the contractor's obligations. From paragraphs 12 and 15 of the contract, it is clear that the parties contemplated that each estimate should be preceded by the filing with the County Engineer of either a consent that materialmen and laborers be paid or an affidavit that they had been paid. Implicit therein is a promise that no estimates would be paid until these conditions had been satisfied. Fidelity & Deposit Co. of Maryland v. Board of Education, 202 N.C. 354, 162 S.E. 763; Robinson Mfg. Co. v. Blaylock, 192 N.C. 407, 135 S.E. 136. See also National Surety Co. v. County Board of Education, 4 Cir., 15 F.2d 933; Claiborne Parish School Board v. Fidelity & Deposit Co., 5 Cir., 40 F.2d 577; Fort Worth Independent School District v. Aetna Casualty & Surety Co., 5 Cir., 48 F.2d 1, 77 A.L.R. 222; American Surety Co. v. Plank & Whitsett, 159 Va. 1, 165 S.E. 660; United States Fidelity & Guaranty Co. v. City of Montesano, 160 Wash. 565, 295 P. 934. See Corbin, "Third Parties as Beneficiaries of Contractors' Surety Bonds," 38 Yale Law Jour. 1.

The decision of the Ohio Court of Appeals in Village of Beachwood v. Ohio Casualty Insurance Company, 47 Ohio App. 212, 191 N.E. 797, is not applicable, inasmuch as the Village was not obligated by the contract, as was the County here, to retain the percentages until materialmen and laborers were paid, and, because of the dissimilar facts involved, no importance should here be attached to statements therein that the rights of the surety can rise no higher than those of materialmen or laborers; nor could we extend the rule of that case to this without disregarding the implications of State v. Schlesinger, 114 Ohio St. 323, 151 N.E. 177, 45 A.L.R. 371, decided by the Supreme Court of Ohio, whose declarations alone are binding upon us in this case. West v. American Telephone & Telegraph Co., 6 Cir., 108 F.2d 347; Summers v. Travelers Insurance Co., 8 Cir., 109 F.2d 845, 127 A.L.R. 1336; New York Life Ins. Co. v. Stoner, 8 Cir., 109 F.2d 874. The Ohio cases refusing to impose quasi-contractual duties upon counties are not applicable, because the County's duty arises from express provisions in its contract.

Inasmuch as appellee's...