Hartford Accident & Indemnity Co. v. Coggin

• Citation: 78 F.2d 471
• Decision Date: 19 June 1935
• Docket Number: No. 3858.,3858.
• Parties: HARTFORD ACCIDENT & INDEMNITY CO. v. COGGIN.
• Court: U.S. Court of Appeals — Fourth Circuit

78 F.2d 471 (1935)

HARTFORD ACCIDENT & INDEMNITY CO. v. COGGIN.^*

No. 3858.

Circuit Court of Appeals, Fourth Circuit.

June 19, 1935.

A. J. Fletcher, of Raleigh, N. C., and C. H. Gover, of Charlotte, N. C. (Ruark & Ruark, of Raleigh, N. C., on the brief), for appellant.

Lee Overman Gregory, of Salisbury, N. C., for appellee.

Before PARKER and SOPER, Circuit Judges, and MEEKINS, District Judge.

SOPER, Circuit Judge.

The trustee in bankruptcy of W. E. Graham, a road contractor, brought suit in equity against Hartford Accident & Indemnity Company, a Connecticut corporation, the surety on certain bonds given by the contractor in connection with contracts between him and the State Highway Commissions of North and South Carolina. The court was asked to declare null and void certain transfers of personal property and choses in action from the contractor to the surety, contained in the applications for the bonds, and to direct the surety to pay to the trustee the value of the items involved. The application contracts were made more than four months before the institution of bankruptcy proceedings, but possession of the personal property was transferred by the contractor to the surety, after the contractor's default, within that period, and with knowledge on the part of the surety of the contractor's insolvent condition at that time. In addition, the surety received from the State Highway Commission of North Carolina two payments of money on account of deferred payments and retained percentages due the contractor for work done under the contracts prior to his default. These two payments, one made within the four months' period, and one after the adjudication in bankruptcy, were received while the surety through subcontractors was engaged, in accordance with the terms of the bonds, in completing the road construction after the contractor's default.

The District Judge held that the surety was entitled to retain the moneys received by it on account of current estimates and retained percentages, since it was subrogated to the rights of the State Highway Commission under the contract, and since the cost of completion of the work exceeded the amounts received; but that the surety must account for and pay over to the trustee the value of the personal property as of the time the surety received it, because in the court's opinion the transfers thereof, set out in the application agreements, were chattel mortgages invalid as to the trustee unless recorded under the registration laws of North Carolina; and since only one of the agreements was recorded, and that one within the four months' period, the transfers amounted to preferences under the bankruptcy statute, void as to the trustee in bankruptcy.

It was found by the District Judge that the value of the tools, plant, and equipment on March 29, 1929, when the surety took possession, was $20,036.75, and that the value of the material was $1,386.80, or $22,575.10 in all (including the cash sum of $151.55 received from the State Highway Commission of South Carolina). The same property items had been valued by the special master in the case at $7,250.80. The court decreed that the surety should pay the larger sum to the trustee with interest and the costs of the proceeding. From this decree the surety appealed.

The trustee in bankruptcy also appealed from the decree because it denied the trustee's right of recovery in two respects: (1) It denied recovery for 17 mules, valued by the trustee at $1,700, and delivered by the contractor to the surety on March 29, 1929, on the ground that 16 of them had been subsequently taken away from the surety by other claimants. (1 mule seems to have been overlooked.) (2) It denied the trustee's claim for the recovery of $1,276.98 collected by the surety from the State Highway Commission of North Carolina on June 28, 1929 (1½ months after bankruptcy), on account of work done by the bankrupt on one of the projects prior to his default; and also denied recovery for $4,317.75 collected by the surety from the same Commission on April 5, 1929, for work done by the contractor on another project prior to default. The trustee's position is that the amount due by the surety as fixed by the decree of the District Court should be increased by the addition of the aggregate of the three items above mentioned to the sum of $29,869.83.

It is important to note at this point that it is stipulated and agreed that the surety has expended in excess of all sums received by it from all sources in the completion of the road contracts, in expenses, cost of completion, and in payment of bills for labor and material incurred by the contractor, a very substantial sum for which the contractor is liable to the surety; and that the amounts paid by it on each project greatly exceed as to each the amount received therefrom as retained percentages or otherwise. Evidence offered on behalf of the surety shows that the amount of its loss, after giving credit for all amounts received by way of current estimates, final estimates, and materials on all of the contracts, amounted to the aggregate sum of $47,555.80. From a comparison of this loss with the amount claimed by the trustee, to wit, $29,869.23, it is obvious that the crucial questions in the case are whether the surety was justified in taking possession on March 29, 1929, of the property (including the mules) valued at $24,275.10, and in receiving from the State Highway Commission $4,317.75 on April 5, 1929, and $1,276.98 on June 28, 1929. The application contract expressly provided that the contractor would perform all the conditions of the bond, and would at all times save harmless and indemnify the surety from all loss and expense which the surety might at any time sustain by reason of the execution of the bond, and would place the surety in funds to meet every such loss and expense, and that in any accounting between them, the surety would be entitled to charge for all disbursements made by it in good faith in regard to the subject-matter of the contract. The surety filed a claim in bankruptcy for losses suffered by it in performing the obligations of its bonds in a sum in excess of that herein claimed by the trustee. It follows that if the transactions, whereby the surety secured possession of the personal property and of the moneys mentioned, were free from the taint of unlawful preference and fraud, the trustee may not recover in this suit, for the surety would be entitled under section 68 of the Bankruptcy Act (11 US CA § 108) to offset its greater claim against the claim of the trustee and thus defeat any recovery on his part.

Five road projects in North Carolina and two in South Carolina were awarded to the contractor. In connection with each of them, he executed a written application or contract with the surety, in consideration of which, and of certain premiums paid, the surety executed its bonds in the aggregate sum of $222,584 to the two Highway Commissions respectively, guaranteeing performance of the contracts for road construction. The contractor entered upon the work and completed two of the projects in North Carolina and two in South Carolina in the year 1928; but he got into financial difficulties in regard to the remaining three contracts in North Carolina, and on March 29, 1929, delivered possession of the plant and materials to the surety. On April 2, 1929, he gave formal written notice to the Highway Commission of his default on the North Carolina projects, and on April 3, 1929, the Highway Commission notified the surety of the default and demanded that it arrange for the completion of the projects. The surety took possession of the equipment located upon the projects, the transfers being evidenced by written orders signed by the contractor; and the surety thereupon undertook the completion of the projects, awarding contracts therefor to certain subcontractors. Pursuant to these contracts and as part consideration therefor, the surety made a written transfer of all its right, title, and interest in the machinery and equipment located upon the projects, possession of which it had theretofore obtained. On May 17, 1929, creditors of the contractor filed an involuntary petition in bankruptcy against him, and he was adjudicated a bankrupt on June 14, 1929.

We shall consider first the transfer of possession by the contractor to the surety of the plant, equipment, and material. It is stipulated that the surety took possession of the equipment located upon the project with the consent of the contractor, under and by virtue of the application contracts, and the contracts with the State Highway Commission. The application contracts were executed on October 2, 1928, and although the District Court found as a fact that the contractor was even then insolvent, there was no finding that the surety had knowledge of this fact. Indeed the evidence tends strongly to show the contrary, for on that date the surety executed three bonds in the aggregate sum of $91,100, guaranteeing the performance of road contracts by the contractor. These bonds were in addition to others previously executed in the aggregate sum of $131,474. It is not reasonable to suppose that the surety would have entered into additional obligations with the knowledge that the contractor was financially unable to perform his promises.

Each of the application contracts contains a conveyance whereby the contractor as of the date thereof assigns, transfers, and conveys to the surety, all his right, title, and interest in the tools, plant, equipment, and materials that he may then or thereafter have upon the work, authorizing and empowering the surety and its agents to enter upon and take possession thereof, upon a condition in the words following: "This assignment shall be in full force and effect, as of the date hereof, should the undersigned fail or be unable to complete the said work in accordance with the terms of the contract covered by...