Fidelity & Deposit Co. v. Union State Bank

• Decision Date: 26 August 1927
• Citation: 21 F.2d 102
• Parties: FIDELITY & DEPOSIT CO. OF MARYLAND v. UNION STATE BANK OF MINNEAPOLIS et al.
• Court: U.S. District Court — District of Minnesota

21 F.2d 102 (1927)

FIDELITY & DEPOSIT CO. OF MARYLAND v. UNION STATE BANK OF MINNEAPOLIS et al.

District Court, D. Minnesota, Fourth Division.

August 26, 1927.

Daniel F. Foley and Joseph J. Granbeck, both of Minneapolis, Minn., for plaintiff.

Paul J. Thompson and H. V. Mercer, both of Minneapolis, Minn., for defendants.

JOHN B. SANBORN, District Judge.

On June 1, 1922, Arthur Evenson and Hjalmar Utterberg, copartners as Evenson & Utterberg, entered into a contract with the Independent School District of Virginia to construct the Lincoln School at Virginia, Minn., for $123,500, to furnish and pay for the necessary labor and material, and to complete the building by January 1, 1923. On June 5, 1922, they furnished, with the plaintiff as surety, the requisite statutory bond for the performance of the work and the payment of all claims for labor and material. In their application to the plaintiff for the bond, they agreed "to assign, transfer, and set over, and does or do hereby assign, transfer, and set over, to the company, such assignment to become effective as of the date of said contract bond, but only in event of any such abandonment, forfeiture, or breach as aforesaid, * * * any and all percentages retained on account of said contract, and any and all sums that may be due under said contract at the time of such abandonment, forfeiture, or breach, or that thereafter may became due." The application was not filed with the school district, nor did it have notice thereof until October 22, 1923. Under the terms of the contract, the contractors were to be paid upon architect's certificates in periods of not less than 15 days, in amounts equal to 85 per cent. of the value of the work and materials incorporated in the building, less amounts previously paid; final payment to be made within 30 days after completion and acceptance of the work. The last work was performed by the contractors about October 23, 1923, and final payment was made on that date, except for $4.18 paid October 28, 1924.

Mr. Sullivan was attorney and adjuster for the plaintiff. In September, 1923, he was notified that Evenson & Utterberg had requested that the plaintiff enter into some arrangement whereby the percentages retained by the school district might be used in the execution of their contract. About the same time, he learned that bills for labor and material remained unpaid. He, for the plaintiff, approved certain orders upon the school district, signed by Evenson & Utterberg, for payments to materialmen, and on September 20th notified the school district to that effect. On September 26th the school district advised him that payments would be made only to the contractors.

On October 4th Mr. Kelly, the architect of the school district, notified Mr. Sullivan that on the following Tuesday the building would be in such condition that nearly the full contract price could be paid to Evenson & Utterberg; that the balance due them was $18,225; that "there is outstanding to our knowledge $13,785, and we would like to know whether it would be satisfactory to you if we would issue to Evenson & Utterberg a certificate." October 5, 1923, Mr. Sullivan replied: "As I understand it, the contract has not been entirely completed, and for that reason the school board will require the consent of this company, as surety, to making the final payment. This company hereby consents to making the payment indicated in your letter of October 4th, upon the express condition, however, that the check for said amount drawn to the order of the contractors be delivered to me."

On October 13th the school district sent to Mr. Sullivan four checks, on four Virginia banks, aggregating $14,923.34, payable to "Evenson & Utterberg." About two days after the checks were received, Evenson called on Mr. Sullivan and was informed that he was holding the checks; that, under instructions which he had received from the plaintiff, he was required to see that the proceeds were used for paying for materials furnished for the Lincoln School; that if Evenson & Utterberg would deliver checks to him for unpaid bills, he would deliver the school district checks to them, which were to be deposited to their account for the purpose of meeting the checks given to Mr. Sullivan for materialmen. Evenson said he would have the checks sent over. On Saturday, October 20th, both Mr. Evenson and Mr. Utterberg called at his office and delivered six checks for the amount of material bills, which checks were drawn on the Union State Bank of Minneapolis, one of the defendants, and signed "Evenson & Utterberg, Inc., by Hjalmer Utterberg, Secretary and Treasurer." The total of these checks was $10,550.41. Mr. Sullivan mailed them to the respective payees.

When Mr. Utterberg delivered these checks to Mr. Sullivan, Sullivan gave him the four checks of the school district. Utterberg said he would go to the bank and deposit them. He did go to the bank, the checks were indorsed, "Evenson & Utterberg, Inc., by H. Utterberg, Sec. & Treas., Arthur Evenson, Pres.," and were deposited to the account of Evenson & Utterberg. This was on a Saturday. On Monday, October 22d, Mr. Sullivan was advised by Utterberg that the bank had applied $11,023.53 of this deposit to the payment of a note given by Evenson & Utterberg to the bank. The school district was immediately notified to stop payment of the four checks by Mr. Sullivan, and was also notified of the assignment of retained percentages contained in the application. The four banks upon which the checks were drawn were directed by Evenson & Utterberg to stop payment. Payment was not stopped, and the checks were actually paid by the banks on which they were drawn October 24th.

On Tuesday, October 23d, Mr. Foley, attorney for the plaintiff, and Mr. Sullivan talked to Mr. Struthers, the cashier of the bank. They informed him that the plaintiff was surety on the bond of Evenson & Utterberg; that the checks of the school district had been given to it to cover claims for labor and material furnished on the Lincoln School; that the plaintiff claimed the proceeds of the checks, or so much thereof as would be necessary to pay claims for labor and material; that the school district checks which had been deposited by Evenson & Utterberg had been delivered to them by the plaintiff for the purpose of meeting checks payable to materialmen. No figures were given to Mr. Struthers as to the total amount of unpaid bills or the total amount of checks issued by Evenson & Utterberg, but he was advised that an attempt had been made to stop the payment of the checks of the school district, and that these checks represented retained percentages and constituted money of the plaintiff for the purpose of paying claims. Mr. Struthers said he had the money and was going to keep it; that Evenson & Utterberg had been promising for some time to pay the note out of money to be received from the school district on the contract.

It appears that Mr. Sullivan had no knowledge of the note held by the bank at the time he delivered the school district checks to Evenson & Utterberg, and that the bank had no knowledge of the arrangement between Evenson & Utterberg and Mr. Sullivan until October 23d, although it did know that the checks deposited represented payments under the contract for the construction of the Lincoln School. Two of the checks given by Evenson & Utterberg to Mr. Sullivan for materialmen were paid, aggregating $1,462. The others were not paid. Evenson & Utterberg were insolvent. The plaintiff was subsequently obliged to pay, and did pay, labor and material bills aggregating $15,178.12. The plaintiff received the final payment from the school district of $3,004.18, and was actually out $12,173.94.

It further appears that there was a copartnership of Evenson & Utterberg and a corporation known as Evenson & Utterberg, Inc. The note which the bank held was signed "Evenson & Utterberg, Inc.," and was indorsed by Mr. Evenson and Mr. Utterberg. It permitted the application of deposits to the payment of the note, whether due or not. All moneys deposited in the bank, whether payable to Evenson & Utterberg or Evenson & Utterberg, Inc., were deposited in the one account. The proceeds of loans made by Evenson & Utterberg, Inc., were credited to the same account. The names "Evenson & Utterberg" and "Evenson & Utterberg, Inc.," appear to have been used indiscriminately. Checks were honored upon the account, whether they were signed by the firm or by the corporation. The plaintiff itself made no distinction between the firm and the corporation,...