RP Farnsworth & Co. v. Electrical Supply Co.

• Decision Date: 02 July 1940
• Docket Number: No. 9138.,9138.
• Citation: RP Farnsworth & Co. v. Electrical Supply Co., 112 F.2d 150, 130 ALR 192 (5th Cir. 1940)
• Parties: R. P. FARNSWORTH & CO., Inc., v. ELECTRICAL SUPPLY CO.
• Court: U.S. Court of Appeals — Fifth Circuit

130 ALR 192, 112 F.2d 150 (1940)

R. P. FARNSWORTH & CO., Inc., v. ELECTRICAL SUPPLY CO.

No. 9138.

Circuit Court of Appeals, Fifth Circuit.

May 18, 1940.

Rehearing Denied July 2, 1940.

J. C. Henriques and Gordon Boswell, both of New Orleans, La., for appellant.

Irving R. Saal and Lawrence K. Benson, both of New Orleans, La., for appellee.

Before SIBLEY, HOLMES, and McCORD, Circuit Judges.

Rehearing Denied July 2, 1940. See 113 F.2d 111.

SIBLEY, Circuit Judge.

R. P. Farnsworth & Co., Inc. (called hereinafter Farnsworth), contracted with the United States to construct a building for the Marine Hospital at New Orleans and gave the bond required by statute, 40 U.S.C.A. § 270, with Union Indemnity Company as surety. The building was finished and occupied early in 1932, but a balance on the contract price was retained by the United States to protect certain final adjustments. This balance was reduced to $82.80, which was paid over June 6, 1935. On July 24, 1935, Electrical Supply Company (hereinafter called Electric), from whom a subcontractor, Freeman, had bought electrical equipment for the building, brought suit on the bond (the United States not having sued) against Farnsworth as principal and the receivers of the surety, to recover $20,287 and interest due for materials so furnished. The receivership had no assets, and the receivers were dismissed from the suit. Farnsworth mainly contended that the remedy on the bond was barred because suit was not instituted within one year after the performance and final settlement of said contract, as limited by the statute; that large payments had been made to Freeman, which had been misapplied to other claims held by Electric against Freeman; and that no interest was recoverable. On a trial before a jury the verdict was directed against Farnsworth for principal and interest, and this appeal followed.

The statute, 40 U.S.C.A. § 270, distinctly provides that furnishers of labor and materials may not sue upon the bond unless the United States have not sued within six months from the completion and final settlement of the contract, but after six months they may sue in the name of the United States, but suit "shall be commenced within one year after the performance and final settlement of said contract, and not later." By "final settlement" is not meant final payment by or to the United States of what is owing, but the administrative determination by the officer having the execution of the work in charge that it has been performed and his finally fixing the amount due to be paid by or collected for the United States; that payment may be held up or refused in the General Accounting Office does not alter the date of the "final settlement" of the contract. Illinois Surety Co. v. United States, 240 U.S. 214, 36 S.Ct. 321, 60 L.Ed. 609; Globe Indemnity Co. v. United States, 291 U.S. 476, 54 S.Ct. 499, 78 L.Ed. 924. In the present case the contract work was substantially done before July 2, 1932, and on that date the Assistant Secretary of the Treasury, having it in charge, wrote the contractor a letter, the material part being as follows: "The building was occupied prior to the expiration of your contract time on Jan. 2, 1932. There remained for correction * * * a number of minor items which the records indicate were completed by you without loss or inconvenience to the Government. There is a balance due you under this contract of $4,332.80. You will be paid at this time on account of your said contract the sum of $4,250, the balance retained, $82.80, being considered sufficient to protect the Government's interests pending final settlement of your contract." Farnsworth contends this was a "final settlement" fixing the amount due him. Electric contends that "final settlement" first occurred July 28, 1934, when a report on the contract was made by the Director of Procurement to the Secretary of the Treasury which showed the original contract price, the additions to and deductions from it from time to time, and the payments on account, leaving a balance of $82.80. It recited the satisfactory completion of the work and the correction of defects and omissions by February 24, 1932, and an adjustment of other minor defects by June 2, 1932. The report concluded: "Final settlement of this contract has been withheld pending the replacement of a section of brick wall by the contractors. This section was removed for a driveway and was not replaced until Sept. 15, 1933. * * * In view of the fact that there was no delay in actual completion of the work and that the apparent delay in final completion of the contract due to the correction of defects and omissions caused no loss or inconvenience to the Government, it is recommended that liquidated damages be waived and authority be given for the payment of the balance due, viz: $82.80, from the appropriation Marine Hospital, New Orleans, Louisiana." This report was indorsed "Approved. Damages waived and contract referred to Comptroller General for direct payment. July 28, 1934," signed by the Secretary of the Treasury. The judge correctly held that as a matter of law the latter and not the former paper was the "final settlement." The letter of July 2, 1932, narrowed the settlement of a very large contract to a very small compass, $82.80 and a breach in the wall; but it was not final. The $4,250 then authorized to be paid was "on account of your said contract", and not in full. The $82.80 was expressly stated to be "retained * * * to protect the Government's interests pending final settlement of your contract." If the wall had not been fixed the $82.80 would not have been paid, and there might have been a claim made against Farnsworth. Not until the wall was rebuilt and the order passed to pay the $82.80 was there a final settlement of the contract. The suit was filed within a year from that date and was not barred.

We think the question of application of payments was wrongly decided. The subcontractor Freeman had dealt with Electric for years before this contract began and then owed it about $20,000. According to some of the witnesses, Electric insisted on being paid all that Freeman should get from Farnsworth on his monthly estimates on this job less his payrolls, and got leave to inspect his books to keep check on him, and used the privilege, and was aware that the moneys paid were from this job though paid by Freeman's personal check. This was denied, but could have been found true by the jury. Assuming its truth, we are of opinion that Electric could not apply moneys so paid to the older items of its account against Freeman and leave the materials furnished for this job unpaid. The circumstances indicate that Freeman was at the time financially shaky and is now insolvent. What has happened allows Electric to collect its old debt out of the moneys paid on this contract, and to leave the charges for material furnished for it outstanding against the bond. This is to the prejudice of the principal and the surety on the bond, and of other beneficiaries of the bond, and if sanctioned might cause great injustice. In a recent case involving a similar bond we said: "We think also that there is probably an implied obligation on the contractor, especially if he be insolvent, not to divert money from the job, which may be enforced by the surety in equity." Town of River Junction v. Maryland Casualty Co., 5 Cir., 110 F.2d 278, 281. Such an obligation was enforced by a reapplication of payments in Columbia Digger Co. v. Sparks, 9 Cir., 227 F. 780, and in United States v. Johnson, Smathers & Rollin, 4 Cir., 67 F.2d 121, 122...