Republic Nat. Bank & T. Co. v. Massachusetts B. & Ins. Co.

• Decision Date: 09 January 1934
• Docket Number: No. 7019.,7019.
• Citation: 68 F.2d 445
• Parties: REPUBLIC NAT. BANK & TRUST CO. et al. v. MASSACHUSETTS BONDING & INS. CO. et al.
• Court: U.S. Court of Appeals — Fifth Circuit

68 F.2d 445 (1934)

REPUBLIC NAT. BANK & TRUST CO. et al. v. MASSACHUSETTS BONDING & INS. CO. et al.

No. 7019.

Circuit Court of Appeals, Fifth Circuit.

January 9, 1934.

S. W. Marshall, H. P. Kucera, and Hugh S. Grady, all of Dallas, Tex., for appellants.

F. T. Baldwin, of Houston, Tex., John Hancock, of Fort Worth, Tex., and J. M. Burford, L. E. Elliott, Fred J. Dudley, Ralph W. Malone, William Lipscomb, Tarlton Stafford, W. C. Gowan, Robert Allan Ritchie, F. H. Lowrance, D. A. Frank, Neth L. Leachman, Henry P. Edwards, Irving L. Goldberg, Hoyt A. Armstrong, F. W. Bartlett, Chas. D. Turner, and O. F. Wencker, all of Dallas, Tex., for appellees.

Before BRYAN, FOSTER, and SIBLEY, Circuit Judges.

SIBLEY, Circuit Judge.

This appeal is from a decree in equity which dealt with the claims of furnishers of labor, materials, machinery, and supplies in the building of an airport for the city of Dallas, Tex., by a contractor under a bond on which Massachusetts Bonding & Insurance Company was surety. The parties are numerous and so are the errors assigned. The factual outline of the case is that the contractor, giving a bond under Tex. Rev. Stats. art. 5160, got Republic National Bank & Trust Company to finance him with loans made against an assignment of all moneys due and to become due on the job. The assignment was not presented to or accepted by the city until near the end of the work on February 5, 1932. On April 13th the final payment of about $29,000 was authorized by the city and the bank's representative went with the contractor to arrange collection of it. Three claimants for materials and machinery furnished had notified the city of their claims and asserted liens amounting to $5,674.21 against this payment under article 5472a, Vernon's Ann. Civ. St. Tex. The following day the bank and the contractor got from the city auditor a check for $23,349.77, the excess above these claims, which check the contractor indorsed and the bank applied to a note of about that amount which it held against the contractor. There were numerous other claims due on the job, and because he had nothing to pay with, being insolvent, the contractor on April 15th placed his affairs in receivership in the state courts. Many other claimants thereafter at different dates sought to give notice to the city under article 5472a, or to record their claims against the contractor's bond under article 5160. On September 20, 1932, the surety, Massachusetts Bonding & Insurance Company, a corporation of Massachusetts, filed a bill setting up these facts, making parties defendant the contractor, the city, and the bank, who were citizens of Texas, and numerous claimants, many of them citizens of Texas, and all of a citizenship other than of Massachusetts. The complaining surety acknowledged liability on its bond and offered to pay all sums justly due, but contended for an application of the $5,674.21 still held by the city and of the $23,349.77 taken by the bank to the discharge of the claims against the bond in advance of payment of them by the surety. It asserted an equity in this fund as being reserved payments under the construction contract and under a statute passed in 1929 in amendment of article 5160 (Vernon's Ann. Civ. St. art. 5160) which required the city to retain the final payment until the contractor produced evidence that all just claims for labor and materials had been paid. The surety also claimed the money by virtue of an agreement to assign the final payment which was made by the contractor in his application for the bond. It prayed a decree that the city pay into court the money it held, and that the city and the bank restore what had been diverted to the bank, and, if not done, that judgment be had against them, and that the claims against the bond be established and paid out of the fund, and asked judgment against the contractor for all expenses and losses in the premises.

By motions to dismiss, the city and the bank challenged jurisdiction, both federal and equitable. There is on the face of the bill diversity of citizenship and a sufficient amount involved, but the contention is that the claimants, many of them citizens of Texas, are interested with the surety as against the city and the bank, and ought to be aligned accordingly, especially since by their answers they have joined in the prayer for a restoration of the $23,349.77. If thus aligned, there would be citizens of Texas on both sides of the controversy. But the rights of claimants under article 5160 are against the bond directly, while those of claimants under article 5472a are against the city and against the cash in its hands. The surety stands as a debtor to the first class of claimants, and as a beneficiary of the fund opposed to the second class of claimants. The basis of the surety's case is an equity of exoneration, an assertion that there are funds of its principal properly applicable to the claims against the bond that ought in equity to be so applied before the surety is called on to pay. We examined and upheld this right of the surety on a construction bond under circumstances much like the present in Glades County v. Detroit Fidelity & Surety Co. (C. C. A.) 57 F. (2d) 449. The bill is thus based on the surety's own peculiar rights and seeks its protection as surety. If some of the defendants favor the relief prayed, it occasions no realignment of parties to the destruction of the surety's right to federal jurisdiction. Venner v. Great Northern Railway Co., 209 U. S. 24, 28 S. Ct. 328, 52 L. Ed. 666; Franz v. Franz (C. C. A.) 15 F.(2d) 797, 799. It is further urged that the agreement to assign the final payment made by the contractor to the surety in applying for the bond is one made by a citizen of Texas and does not entitle the assignee to sue in right of the assignee's citizenship. But the agreement to assign is not in law an assignment, and would require a bill to enforce it. It is no necessary part of the surety's right of action. His equity originates in the agreement of the city and contractor, reinforced by the act of 1929 to the same effect, that certain percentages of the earned payments shall be reserved for a final payment for the security of the city and surety, and equity treating this fund as a trust will see to its protection and application, recalling it if misapplied. This is the heart of the bill. Prairie State Nat. Bank v. United States, 164 U. S. 227, 17 S. Ct. 142, 41 L. Ed. 412; Glades County v. Detroit Fidelity & Surety Co. (C. C. A.) 57 F.(2d) 449; First National Bank v. Fidelity & Deposit Co. (C. C. A.) 65 F.(2d) 959; Fidelity & Deposit Co. of Maryland v. Claiborne Parish School Board (D. C.) 11 F.(2d) 404. The motions to dismiss were properly overruled.

Attack was also made on the jurisdiction to entertain the so-called cross-bills against the city and the bank filed by claimants who were citizens of Texas, wherein they sought money judgments against the city and the bank for the amount of their claims. These judgments a federal court could not grant. By the main bill it acquired jurisdiction over the retained payment and the surety's liability on the bond as a fund for distribution, and could deal fully with those subjects. A dependent jurisdiction arose to settle disputes even between citizens of the same state and involving amounts less than $3,000 so far as necessary fully to administer that fund. But dependent jurisdiction exists only because and so far as it is necessary to fully exercise the main jurisdiction. It cannot here be extended to render purely personal judgments in favor of one citizen of Texas against another for a supposed wrong done by the city in paying and by the bank in receiving money which ought to have been retained by the city. These judgments must be reversed and the cross-bills dismissed in so far as they seek such judgments.

The fund sought to be raised and administered is affected by the two statutes, article 5160 and article 5472a. The former is the statute requiring bond by contractors for public work to pay "all persons supplying him or them with labor and materials in the prosecution of the work provided for in such contract," and giving "any person * * * who has furnished labor or materials used in the construction" a right to go on the bond. The claimant must within ninety days from the date of delivery of materials and the performance of the work file with the county clerk for record a sworn, itemized claim as required by the mechanics' lien statutes. By Act of March 14, 1929 (chapter 226, ß 1 Vernon's Ann. Civ. St. art. 5160) this article was amended by adding: "Provided further that after completion and acceptance of completed project all moneys due contractor under said contract shall be held by the State or its counties or school districts or other subdivision thereof or any municipality until such a time that satisfactory evidence is submitted and affidavits made by the contractor that all just bills for labor and material under this contract has have been paid in full by the contractor." Articles 5472a, 5472b, Vernon's Ann. Civ. St. Tex., are wholly separate legislation passed in 1925, and provide that any person "furnishing any material, apparatus, fixtures, machinery or labor to any contractor for any public improvements in this State, shall have a lien on the moneys, or bonds, or warrants, due or to become due to such contractors for such improvements; provided, such person * * * shall, before any payment is made to such contractor, notify in writing the officials of the State, county, town or municipalities whose duty it is to pay such contractor of his claim. That no public official, when so notified in writing, shall pay all of said moneys, bonds or warrants due said contractor, but shall retain enough of said moneys, bonds or warrants to pay said claim, in case it is established by judgment in a court of proper jurisdiction." (Italics supplied.) Claims amounting to...