164 U.S. 227 (1896), Prairie State Bank v. United States

Citation:164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412
Party Name:Prairie State Bank v. United States
Case Date:November 30, 1896
Court:United States Supreme Court

Page 227

164 U.S. 227 (1896)

17 S.Ct. 142, 41 L.Ed. 412

Prairie State Bank


United States

United States Supreme Court

November 30, 1896



S. contracted with the United States in 1888 to erect a custom house at Galveston. H. was his surety on a bond to the United States for the faithful performance of that contract. The contract gave the government a right to retain a part of the price until the work should be finished. In consideration of advances made and to be made by a bank, S. gave it in 1890 written authority to receive from the United States the final contract payment so reserved. The Treasury declined to recognize this authority, but consented, on the request of the contractor to forward, when due, a check for the final payment to the representative of the bank. Later S. defaulted in the performance of his contract, and H., as surety, without knowledge of what had taken place between the bank, the contractor, and the Treasury, assumed performance of the contract obligations and completed the work, disbursing, in so doing, without reimbursement, an amount in excess of the reserved final payment. The bank and H., each by a separate action, sought to recover that reserved sum from the government. The cases being heard together, it is held that, a claim against the government not being transferable, the rights of the parties are equitable only, and the equity, if any, of the bank in the reserved fund, being acquired in 1890, was subordinate to the equity of H. acquired in 1888.

[17 S.Ct. 143] The real contestants in the controversy below were the Prairie State National Bank and Charles A. Hitchcock, who, respectively, claimed the right to receive from the government

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a balance in its hands of $11,850. This balance arose by the retention from time to time of ten percent upon the estimated value of work done under a contract entered into on May 10, 1888, by the government with Charles Sundberg & Company wherein they agreed, for the consideration of $118,590, to erect a custom house at Galveston, Texas. The right of the government to retain the reserved sums was founded upon the following provision in the contract:

Payments to be made in the following manner, viz.: ninety percent (nine-tenths) of the value of the work executed to the satisfaction of the party of the first part will be paid from time to time, as the work progresses, in monthly payments (the said value to be ascertained by the party of the first part), and ten percent (one-tenth) thereof will be retained until the completion of the entire work and the approval and the acceptance of the same by the party of the first part, which amount shall be forfeited by said party of the second part in the event of the nonfulfillment of this contract, subject however, to the discretion of the Secretary of the Treasury, it being expressly stipulated and agreed that said forfeiture shall not relieve the party of the second part from liability to the party of the first part for all damages sustained by reason of any breach of this contract.

While the respective claims were pending before the Comptroller of the Treasury, and at his request, the Secretary of the Treasury transmitted the same to the Court of Claims under § 1063, Rev.Stat.

The bank bases its claim to the fund upon the following state of facts: on February 3, 1890, in consideration of advances made and to be made by the Prairie Bank, Sundberg & Company gave to one Van Zandt, a representative of the bank, on order or power of attorney authorizing him to receive from the United States the final payment under the contract. The acting Secretary of the Treasury declined to recognize this power of attorney, but expressed a willingness, on request of the contractors, to forward, when it became due, the check for the final payment to the address of Van Zandt. Being informed by the latter that this arrangement would

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be satisfactory to the contractor and himself, the Assistant Secretary of the Treasury gave direction to the disbursing agent of the building to send the final check, drawn to the order of the contractor, to the address of Van Zandt. Between February and May, 1890, upon the faith of the lien upon the final payment alleged to have been acquired by this arrangement, the bank advanced to Sundberg & Company about six thousand dollars, but, although it was claimed by the bank that the amount of the advances in question were in large part actually used in the performance of the contract of Sundberg & Company, the Court of Claims failed to find such to be the fact. It is true that the court, in one of its findings, gives

a full and accurate statement of the checking, deposit, and loan accounts between the bank and Sundberg & Company from January 24, 1890, to August 15, 1890,

but to whom the checks were made payable, or for what purpose they were issued, does not appear.

Hitchcock's claim to the fund was asserted upon the ground that in May, 1890, Sundberg & Company defaulted in the performance of their contract, and that thereupon he, as surety, without any knowledge of the alleged rights of the bank, assumed the completion of the contract, with the consent of the contractors, and that he had disbursed therein about $15,000 in excess of the current payments from the government. The bond which Hitchcock executed as surety was made pursuant to the following provision contained in the contract between Sundberg & Company and the government:

It is further covenanted and agreed between the parties to this contract that the party of the second part shall execute, with two or more good and sufficient sureties, a bond to the United States, in the sum of thirty thousand dollars ($30,000), conditioned for the faithful performance of this contract, and the agreements and covenants herein made by the said party of the second part.

The Court of Claims held that Hitchcock was entitled to the fund, 25 Ct.Cl. 185, and entered judgment accordingly. The Prairie Bank thereupon appealed, and a cross-appeal was

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taken by the United States in order that it might be protected from a double liability in the event this Court should hold that the Prairie Bank was entitled to any part of the fund.

WHITE, J., lead opinion

MR. JUSTICE WHITE, after stating the case, delivered the opinion of the Court.

The question to be determined is which of the two contestants possesses a superior right to the fund. It is self-evident that, considering the agreements between Sundberg & Company and the bank as an intended transfer [17 S.Ct. 144] pro tanto of the rights of the latter to the results of the contract with the United States, such transfer would be void under § 3477, Rev.Stat. This position was not controverted in the discussion at bar, but it was asserted that, as the bank had advanced money to complete the building, and thus to enable Sundberg & Company to perform their contract obligations with the government, therefore the bank had an equitable lien upon the 10 percent retained by the government, paramount to any lien in favor of Hitchcock, whose lien, it was contended, only arose from the date of his advances made to execute the contract upon Sundberg's default.

Thus the respective contentions are as follows: the Prairie Bank asserts an equitable lien in its favor, which it claims originated in February, 1890, and is therefore paramount to Hitchcock's lien, which, it is asserted, arose only at the date of his advances. The claim of Hitchcock, on the other hand, is that his equity arose at the time he entered into the contract of suretyship, and therefore his right is prior in date and paramount to that of the bank.

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In considering these conflicting claims, it must be recognized at the outset that the terms of the original contract made by the United States with Sundberg were in no wise affected or changed by the agreements subsequently made between Sundberg and the Prairie Bank. Not to so consider would be admitting the application of § 3477, on the one hand, and then immediately proceeding to deny its effect on the other. We shall therefore in examining the rights of the parties, proceed upon the hypothesis that the contract made by the United States remained in full force and effect, and that the rights, if any, of both parties to this controversy were subject to its terms.

That Hitchcock, as surety on the original contract, was entitled to assert the equitable doctrine of subrogation is elementary. That doctrine is derived from the civil law, and its requirements are, as stated in Aetna Life Insurance Company v. Middleport, 124 U.S. 534,

(1) that the person seeking its benefits must have paid a debt due to a third party, before he can be substituted to that party's rights, and (2) that in doing this, he must not act as a mere volunteer, but on compulsion, to save himself from loss by reason of a superior lien or claim on the part of the person to whom he pays the debt, as in cases of sureties, prior mortgagees, etc. The right is never accorded in equity to one who is a mere volunteer in paying a debt of one person to another.

See authorities reviewed at pages 548 et seq.

As said by Chancellor Johnson in Gladsen v. Brown, Speer's Eq.So.Car. 37, 41, quoted and referred to approvingly in the opinion in Insurance Co. v. Middleport, just referred to:

The doctrine of subrogation is a pure, unmixed equity, having its foundation in the principles of natural justice, and, from its very nature, never could have been intended for the relief of those who were in any condition in which they were at liberty to elect whether they would or would not be bound, and, as far as I have been able to learn its history, it...

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