United States Fidelity & Guaranty Co. v. Levy

• Decision Date: 24 May 1935
• Docket Number: No. 7598.,7598.
• Parties: UNITED STATES FIDELITY & GUARANTY CO. v. LEVY et al.
• Court: U.S. Court of Appeals — Fifth Circuit

77 F.2d 972 (1935)

UNITED STATES FIDELITY & GUARANTY CO. v. LEVY et al.

No. 7598.

Circuit Court of Appeals, Fifth Circuit.

May 24, 1935.

H. H. Grooms and Frank E. Spain, both of Birmingham, Ala., for appellant.

J. Kirkman Jackson, of Birmingham, Ala., for appellees.

Before BRYAN, FOSTER, and HUTCHESON, Circuit Judges.

HUTCHESON, Circuit Judge.

After many years of contesting its liability in a common-law suit, through two trials and two appeals, appellant, in addition to its legal defenses, claimed an equitable offset against the whole demand. The claimed offset was allowed against the recovery to the extent of the plaintiffs' interest in it. It was denied as to the 20 per cent. fee interest appellees, plaintiffs' attorneys, claimed to have in it by an equitable assignment of and a statutory lien on the cause of action in suit. This appeal is from the judgment in their favor for that interest. Neither the judgment for plaintiffs, nor the offsetting as to their interest is complained of here. We are to decide only whether appellees' equity to have their fee interest satisfied out of the judgment they obtained for plaintiffs is subordinate, or superior to, defendant's equity of offset.

Appellant insists that the District Judge erred in proceeding with the trial of the law cause before hearing the equitable plea, and erred after hearing the plea in refusing to give the set-off effect as to plaintiff's whole demand, including the claimed fee interest. It insists that the statutes of Alabama control. It argues that under the Alabama decisions its statutes give an attorneys' lien, not on the cause of action, but on the judgment, and that the lien is always subordinate to set-offs available against a client's judgment. It insists that since appellant's equitable right to set off its claim against Union's demand accrued to it prior to the entry of judgment, it wiped plaintiff's demand out, leaving nothing for plaintiff to go to judgment on, and therefore nothing to which appellees' fee claim could attach.

Appellees urge here what they successfully urged below, that their fee contract, and the work they did under it, created an equitable lien upon or effected an equitable assignment of, the cause of action, and that the applicable statutes of Alabama, section 6262 of the Code of 1923, gave them a statutory lien on the suit. That when they acquired their interest in it plaintiff's demand was not subject to set-off, either legal or equitable, both because the claim of appellant against Union had not then in law accrued, and because if it had accrued, there was no legal right to set-off, because the claim was entirely independent of the one in suit, and no equitable right, because Union was then solvent. That when the equitable right of set-off arose upon the accrual of Union's debt to appellant on the bond, and Union's subsequent insolvency, appellees' equity in Union's demand had already become fixed as prior in time and in right, to appellant's equity of set-off.

There is no dispute about what occurred or as to the order of the occurrences. A brief chronological statement will, we think, at once make sharply clear the precise point to be decided here, and what the decision should be.

On July 27, 1928, Union Indemnity Company, hereafter called Union, went surety for Bessemer Construction Company on a public road construction contract. On August 7, 1928, United States Fidelity & Guaranty Company, hereafter called appellant, went surety for Flowers, a subcontractor to whom Bessemer had sublet the whole project. On or about February 25, 1929, Flowers defaulted, and appellant was notified. On April 23, 1929, Bessemer transferred to Union its claim on Flowers' bond. In a short while Bessemer defaulted, and Union called on to, did, complete the project. A dispute having arisen between Union and appellant as to the latter's liability on Flowers' bond, Union, in July, 1930, employed London, Yancey & Brower, attorneys at law, to sue appellant on the bond, their compensation to be 20 per cent. of the amount found to be due. Appellant was sued August 26, and served August 28, 1930.

On February 26, 1931, verdict and judgment went against appellant. Reversed on appeal,¹ and tried again September 9, 1932, appellant had verdict and judgment in the cause. On January 15, 1933, Union went into the hands of receivers, who perfected an appeal and secured a reversal of² this judgment. After this reversal, appellant, on March 19, 1934, filed an equitable plea in the suit. This plea asserted an indebtedness of Union to appellant arising out of a matter entirely independent of the matter in suit,³ it alleged Union's insolvency and appellant's inability to enforce its claim in an independent action at law, and advanced it as an equitable set-off against Union's demand. The prayer was that Union's suit be stayed pending the determination of appellant's set-off, that the plea be taken as an equitable defense to the suit, and that upon a hearing an equitable set-off be established in an amount sufficient to liquidate Union's demand. The court, reserving the determination of the special plea until after the verdict of the jury on Union's demand, and the entry of judgment until the determination of the special plea, overruled the motion to stay. On March 21, 1934, there was a verdict for plaintiff for $27,998.24. On March 22, 1934, appellees, London, Yancey & Brower, intervened to assert their fee interest. Motions to strike and demurrers directed to the special plea and to the intervention were overruled. On July 21, 1934, the issues on the plea and on the intervention coming on to be heard before the court on stipulated facts,⁴ the court rendered its final judgment for interveners for $5,757.88. This judgment was arrived at in this way: Plaintiffs were awarded judgment on the verdict for $27,998.24 and appellant was allowed to offset its claim against the judgment except as to the 20 per cent. attorneys' fee interest.

Appellant argues that the whole manner of proceeding was erroneous and produced erroneous results. It argues that by the statute law of Alabama an attorney's lien attaches only to the judgment, and an attorney takes his lien subject to all set-offs to which the judgment is subject. It insists that if the plea of set-off had been heard first, it would have snuffed Union's demand out, leaving nothing to go to judgment, and therefore nothing to which the fee interest could attach. Appellees deny that the statute law of Alabama is as claimed by appellant. They insist that the lien the statute gives is in terms upon both judgment and suit, and that the lien the statute gives on the suit primes set-offs against the cause of action arising after the lien just as a lien on the judgment would prime set-offs, the right to which accrued after their obtaining. Portneuf-Marsh Valley Canal v. Brown, 274 U. S. 630, 47 S. Ct. 692, 71 L. Ed. 1243; Sheffield v. Preacher, 175 Ga. 719, 165 S. E. 742, 84 A. L. R. 1159; note, 34 A. L. R. 331; Warfield v. Campbell, 38 Ala. 527, 82 Am. Dec. 724; Mosely v. Norman, 74 Ala. 422. They argue further that the statute aside, the case is one of general equitable cognizance in which they stand as equitable assignees and lienors, holding equitable claims acquired prior to appellant's equity of offset, and therefore superior to it. They insist that while it is undoubtedly true that they took their assignment of and lien on Union's demand subject to all defenses appellant then had against it, including all legal set-offs, arising or growing out of that claim, and all equitable set-offs then existing, they did not take it subject to equitable set-offs accruing or arising in appellant's favor after their rights had become fixed. It is settled law, they say, that an equitable assignee of or lienor on a claim or judgment takes it free from the offset of claims acquired or accruing afterward against the assignor, takes it subject only to those existing when the assignment was made, the lien fixed. They insist that appellant's right of offset did not arise until long after appellees' interest had become fixed. They point out that though the shortage had occurred before Union's suit was filed, Union's liability to appellant did not accrue under the reinsurance agreement until some years afterward. They point out, too, that if it had accrued, this would not better appellant's position, for Union was solvent when appellees' rights attached, and its insolvency, the basis of appellant's right of offset here, did not occur until long afterward.

We think it quite clear that appellees are right in both of their contentions, and that the decree should be affirmed. We think it cannot be doubted that the contract they had for their fee, and what they did under it, operated to fix an equitable charge in their favor on the cause of action, a...