Massachusetts Bonding & Ins. Co. v. Fago Const. Corp.

• Decision Date: 26 February 1949
• Docket Number: Civ. No. 4312.
• Citation: 82 F. Supp. 619
• Parties: MASSACHUSETTS BONDING & INS. CO. v. FAGO CONST. CORPORATION et al.
• Court: U.S. District Court — District of Maryland

82 F. Supp. 619

MASSACHUSETTS BONDING & INS. CO. v. FAGO CONST. CORPORATION et al.

Civ. No. 4312.

United States District Court D. Maryland.

February 26, 1949.

Joseph A. Carey, of Washington, D. C., and James K. Cullen, of Baltimore, Md., for plaintiff.

Bert B. Rand, of Washington, D.C., for Fago Const. Corporation.

Bernard J. Flynn, U. S. Atty. and C. Ross McKenrick, Asst. U. S. Atty., both of Baltimore, Md., for Lt. Col. A. C. Welling.

CHESNUT, District Judge.

In this case a surety on a government contract is asserting a lien by equitable subrogation against a government check made payable to the principal, and now held by the local United States District Engineer. The claim of the surety arose from the fact that it has made large payments under the contract for labor and materials which the principal was obliged to pay but could not pay.

The case is very closely patterned on Morganthau v. Fidelity & Deposit Company, 68 App.D.C. 163, 94 F.2d 632, in the Court of Appeals, D.C., opinion by Judge Groner. The facts of the instant case very closely parallel those involved in the cited case except as to names of the principal and surety and the amounts of money involved. There is, however, no question as to the jurisdiction in this case as there was in the Morgenthau case because here the surety and the principal are of diverse citizenship, the principal as defendant has been served with process and has answered without objection to the jurisdiction either general or as to venue. The citizenship of the resident District Engineer who was made a party, is not expressly alleged but no point is made as to that. In any event, he is a mere stakeholder of the fund. Here, as in the Morgenthau case, the principal and surety executed a bond for furnishing materials and performing the work of construction of Bath Flood Project (Cohocton River) Bath, New York, (near Buffalo) for the contract price of $417,860. The contract was dated May 15, 1947 and work has been physically completed and there is a substantial balance now due from the government to the contractor for the work done. Check for payment on account (not the final payment) in the amount of $41,319.47 has been issued by the government and is in the hands of the District Engineer for delivery to the person entitled to receive it. Prior to the execution of the government contract by the principal and surety, the former made written application to the latter to become surety on the contract, and therein the principal, the Fago Construction Corporation, agreed to assign to the surety percentages of payments retained by the government and other sums to come due under the contract, as security. The check in question is within this description.

About April 1, 1948 when the work was still far from complete, the principal informed the surety that it was unable to further finance the work and requested the surety to advance necessary moneys therefor. This the surety agreed to do and pursuant thereto a joint account was opened in a Buffalo bank and from time to time the necessary moneys were deposited therein by the surety and disbursed on checks jointly signed by the surety's representative, one Crafts, and a representative of the Fago Construction Corporation, one Bieniek. The amount and purpose of each payment was authorized in writing by the Fago Construction Corporation. The checks on the fund bear the printed name of the Fago Construction Corporation but the money disbursed was all furnished by the surety and the bank was instructed to honor checks on the fund only when signed by Crafts and Bieniek. Pursuant to this arrangement the surety has advanced and paid out on account of this contract a total amount of over $200,000. It was further understood and agreed that payments thereafter to be made by the government on the contract to the Fago Construction Corporation as principal were to be credited against these advances. To facilitate collection of such credits the principal notified the government to mail checks to it in care of Crafts; and a formal power of attorney was given Crafts by the principal and lodged with the government whereby Crafts was authorized to receive, endorse and collect the checks. The credits against the fund advanced up to the present time have reduced the amount to $191,253.62, of which amount $170,201.73 was applied for labor and materials alone. If the proceeds of the check for $41,319.47 are received and credited by the surety there will still be a present net loss in large amount, unless further payments hereafter due to the contractor are also received by the surety. The present case, however, deals only with the one check for $41,319.47.

Under closely parallel facts the Morgenthau case held that the surety was entitled by equitable subrogation to receive the proceeds of the check, and if necessary the court would appoint a receiver to receive the check, to collect it and to pay the proceeds over to the surety. Judge Groner, 94 F.2d 635, said: "We are of opinion that the surety's position in this latter respect is sustained by reason and authority. Its bond was that the contractor would complete the contract and pay promptly all persons furnishing labor and materials in connection therewith. The contractor failed to carry out his contract, and the surety advanced the money, and in addition paid all the labor and material bills still unpaid. It did this, not as a...