Aetna Cas. & Sur. Co. v. Harvard Trust Co.

• Decision Date: 11 April 1962
• Citation: 181 N.E.2d 673,344 Mass. 160
• Parties: The AETNA CASUALTY AND SURETY COMPANY v. HARVARD TRUST COMPANY et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 673

181 N.E.2d 673

344 Mass. 160

The AETNA CASUALTY AND SURETY COMPANY v. HARVARD TRUST COMPANY et al.

Supreme Judicial Court of Massachusetts, Middlesex.

Argued Jan. 5, 1962.

Decided April 11, 1962.

Edward O. Proctor, Boston (Elmer W. Beasley, Hartford, Conn., with him), for plaintiff.

Waldo Noyes, Boston (Sumner R. Andrews, Boston, with him), for defendants.

Before WILKINS, C. J., and SPALDING, WILLIAMS, CUTTER and KIRK, JJ.

CUTTER, Justice.

This is a bill in equity brought by the surety company (Aetna) against the trust company (Harvard) and D. C. Loveys Company (Loveys) to determine the priorities of Aetna and Harvard with respect to funds earned under six construction contracts. A master's report was confirmed. A Superior Court judge has reported the case without decision upon the amended pleadings, the master's report, and a short supplemental stipulation.

Loveys conducted a contracting business, largely with the United States and with municipalities. It required financing. In 1954, Loveys made 'an oral agreement with Harvard for a [$200,000] line of credit.' 'Loveys was to secure each * * * loan * * * by assigning to Harvard all the proceeds * * * from * * * contracts so financed * * * and, in addition * * * to secure each * * * loan by assignments of specific accounts receivable' represented by invoices for 'work already performed sent * * * by Loveys.' Loveys 'was to * * * disburse all * * * funds' so lent 'solely in the performance of * * * contracts financed * * * by Harvard, and to deliever * * * to Harvard promptly * * * all payments from * * * owners received by Loveys.' The oral agreement was 'renewed at the inception' of each contract.

From April 14, 1954, to June 13, 1957, 'Loveys entered into five contracts with the United States.' Aetna is surety on Miller Act performance and payment bonds (see 40 U.S.C. [1952] § 270a [40 U.S.C.A. § 270a]) on each of these contracts, which (so far as it may be a question of fact) the master found became a part of the respective contracts.

On July 1, 1955, Loveys also made a contract with the city of Cambridge to construct a school. ¹ Aetna is surety on performance and payment bonds on this contract. See G.L. c. 149, § 29 (as amended through St.1938, c. 361 ²).

Loveys delivered to Aetna (apparently with respect to each contract) a bond application purporting (in par. third) to assign to Aetna all tools, equipment, and materials for the contract at the work site or elsewhere, upon the condition, among others, that the 'assignment shall be in full force * * * as of the date hereof: (1) Should the * * * principal(s) fail to pay any premium * * * or should [it] * * * be unable to complete * * * any contract covered by a bond of this [c]ompany, or in the event that * * * [the] principal(s) * * * fail to comply with the terms * * * of any such contract * * * (3) If the principal(s) fail to pay bills incurred on the work, when they become due and payable * * *.' ³

The contracts with the United States ⁴ 'provided for partial payments to Loveys * * * as the work progressed * * * on estimates made * * * by * * * [the contracting] officer * * * [and] for the retention by the government of 10% of such estimated amounts until final * * * acceptance of all work' subject to provisos not now relevant. Loveys subcontracted part of the work under each prime contract by written subcontracts which provided for payments by Loveys on the twentieth of each month for work done during the preceding month.

Loveys notified Harvard of each contract and 'that Loveys would need financing therefor * * *.' As Loveys needed money, it obtained a loan, 'executing a so called 'nonpurpose collateral note' to Harvard to which was attached an assignment of book accounts and copies of Loveys' current invoices to the * * * [United States] or the [c]ity of Cambridge, upon which Harvard then * * * [made a loan to] Loveys by crediting Loveys' account in * * * Harvard with 80% of the invoiced amounts. * * * [A]s these invoices were paid by the * * * [United States] or the [c]ity * * *, Loveys deposited the checks in its account at Harvard and drew against them checks to Harvard in like amounts, generally in even dollars, which were credited on Loveys' note or notes held by Harvard; * * * [t]hese contracts as carried on Loveys' general ledger were stamped 'Assigned to * * * Harvard * * *' by stipulation of Harvard and with a rubber stamp supplied by Harvard.' When Loveys' notes to 'Harvard became due new notes would be made out and executed by Loveys, reduced by the * * * payments made, if any, and * * * any collateral assignments which had not been realized upon would be carried over to the new note.' No other 'writings, written assignments of contracts, or the future proceeds thereof, or documents were executed by * * * Loveys and Harvard in connection with the contracts * * * prior to February 10, 1958, unless the stamping of Loveys' ledger sheets * * * constitutes such an assignment.'

Loveys' drawings from its checking account at Harvard 'were not confined to the purposes of the contracts against which the loans were given' but 'Loveys drew from this account * * * for all purposes.' Harvard 'exercised no control over this account or the purposes for which Loveys withdrew funds'; nor did Harvard 'attempt to ascertain whether Loveys used the proceeds of any loan' for a particular contract. Prior to February 10, 1958, Harvard 'gave no notice to Aetna of its loans * * * nor did it' notify the contracting and disbursing officers of the United States or of Cambridge. Harvard's representative knew that some United States contracts 'were required to be covered by bonds but did not know which ones.' He 'made no inquiry' whether bonds were required and was not familiar with the notice requirements of the Assignment of Claims Act, but was familiar with the Massachusetts requirements of payment bonds on municipal contracts. He first learned of the Federal notice requirements from Aetna's counsel on February 3, 1958.

'Harvard acted in good faith in its dealings with Loveys and without actual knowledge * * * of the execution by Loveys' of the bond applications already mentioned. Aetna knew as early as September, 1955, that Loveys were being financed by Harvard.

On November 30, 1956, 'Loveys had paid * * * all its indebtedness to Harvard.' Thereafter, Harvard lent Loveys a cumulative total of $981,000 under its credit arrangement. Harvard's last advance was $49,000 on August 8, 1957. From December 1, 1956, to February 28, 1958, Loveys expended substantially more than $981,000 on these contracts.

From September 10, 1956, as money became payable under the contracts with the United States, to and including January 20, 1958, the sum of $433,269.96 was received by Harvard under its assignments, without notice to Aetna. Under one contract (Westover) $35,013.56 was paid to Harvard on February 6, 1958, and under another (Quonset) $4,900 was paid on February 11, 1958. Of these aggregate payments of $473,183.52, those beginning on April 30, 1957 ($438,023.52, including those made on February 6 and 11, 1958), were made during a period when Loveys (as is described below) was not paying promptly invoices of its subcontractors and suppliers.

As of April, 1957, Loveys was more than a month in arrears in meeting substantial aggregate invoices from its subcontractors on three contracts, all for work and materials furnished prior to the invoices. On November 27, 1957, Loveys became 'admittedly unable' to complete the contracts without assistance from Aetna and so advised Aetna. In addition to various difficulties such as hurricanes, strikes, and change orders, Loveys had 'diverted contract moneys from * * * [these] contracts * * * to pay * * * costs on contracts not bonded by Aetna and for other purposes.' Such diversion of contract money caused Loveys' failure to pay its subcontractors and materialmen promptly. No party 'claimed * * * that the contract moneys earned were not sufficient to pay all completion costs.' On February 3, 1958, Aetna first notified Harvard that it claimed to be Loveys' assignee.

On February 10, 1958, Loveys assigned to Harvard (apparently in purported compliance with the Assignment of Claims Act; see fn. 4, supra) all proceeds then remaining due and to become due under two contracts with the United States (Beverly and Westover) and the Federal agencies concerned, after notice from Harvard, accepted the assignments and paid to Harvard $4,858 and $108,995.01. These sums were paid by Harvard to Aetna under a stipulation on February 26, 1958, that 'if Aetna would assist Loveys * * * by financing the * * * [contracts], Aetna would be permitted to receive the payments thereafter made * * * on * * * [the] contracts' without prejudice to the 'rights of Harvard and Aetna to assert their * * * claims with respect to these and all other payments.'

Aetna in completing the contracts (except that with Combridge on which it made no payment) properly paid, in accordance with its bonds, $317,659.03 from its own funds. This aggregate sum was in addition to $4,858 and $108,995.01 received by Harvard from the United States and paid by Harvard to Aetna under the stipulation. Aetna has stipulated that, prior to February 3, 1958, Aetna 'took no steps to examine Loveys' financial condition, its progress on the contracts with the * * * [United States], or to protect its rights.'

Aetna seeks to recover from Harvard $317,659.03, the amount which Aetna spent in completing the contracts, above the $113,853.01 received by Aetna under the stipulation of February 26, 1958. This latter sum Aetna desires to retain. In order to recover the former sum, Aetna seeks to reach both the $433,269.96 received from Loveys by Harvard before February 3, 1958, and also the $39,913.56 received by Harvard on February 6 and 11, 1958. Harvard seeks to recover from Aetna $49,122.44, the balance due to Harvard on...