American States Ins. Co. v. Floyd I. Staub, Inc.

• Decision Date: 29 December 1977
• Docket Number: No. 1-576A82,1-576A82
• Citation: 370 N.E.2d 989,175 Ind.App. 244
• Parties: AMERICAN STATES INSURANCE COMPANY, Appellant (Defendant below), v. FLOYD I. STAUB, INC., Appellee (Plaintiff below).
• Court: Indiana Appellate Court

Page 989

370 N.E.2d 989

175 Ind.App. 244

AMERICAN STATES INSURANCE COMPANY, Appellant (Defendant below), v. FLOYD I. STAUB, INC., Appellee (Plaintiff below).

No. 1-576A82.

Court of Appeals of Indiana, First District.

Dec. 29, 1977.

Rehearing Denied Feb. 2, 1978.

Daniel F. Hewins, Iglehart, Hewins & Songer, Evansville, for appellant.

Howard P. Trockman, James F. Flynn, Trockman, Flynn & Probert, Evansville, for appellee.

LYBROOK, Judge.

Defendant-appellant American States Insurance Company (Surety) appeals from a judgment finding it liable under a construction bond to plaintiff-appellee Floyd I. Staub, Inc., (Staub, Inc.), a subcontractor on a sanitary sewer project for the City of Evansville.

We affirm.

In January, 1974, United Design and Construction Corporation entered into a contract with the City of Evansville for the installation of a sanitary sewer system for Mesker Zoo. In connection therewith, United Design as principal executed a bond with American States Insurance Company as surety, in the sum of $85,860.94 in which the City was the obligee. Floyd I. Staub, Inc. subcontracted with United Design to provide labor and equipment for excavation and hauling for the sewer project. The subcontractor began work in February, 1974, and completed work on about June 18, 1974. Its billing in the amount of $6,095.25 had not been paid by September of that year. Prior to September 26, 1974, an authorized officer or employee of Staub, Inc. notified the Board of Public Works that its statement for labor and materials had not been paid by United Design, though a written claim for direct payment was never filed with the Board against the City's fund pursuant to IC 1971, 5-16-5-1 et seq. (Burns Code Ed.).

Apparently the City was withholding contract funds from the general contractor pursuant to its contract. City was further requiring proof that all laborers and materialmen on the sewer project had been paid before it would release the retainage and pay the contractor's final billing.

Robert Staub, the principal officer and manager of the affairs of Staub, Inc., was told by a representative of United Design that there was not enough money in the City's fund to pay all of the subcontractors on the project. Robert Staub would not sign the contractor's waiver and release of lien against the City unless he was assured of full payment. On September 26, 1974, Robert Schu, for United Design, executed a note in the amount of $3500 which was given to Staub, Inc. along with a letter acknowledging that the note was secured by a certain parcel of land. The same day Gary Staub, brother of Robert Staub, and treasurer of Staub, Inc., in return for part payment and the said secured note, signed the waiver and release of lien ¹ which stated:

"In consideration of the release, the undersigned does hereby waive, release, and quit-claim in favor of the City of Evansville, Board of Public Works for work performed for the general contractor, United Design & Construction Corporation, it successors and assigns, all leins (sic) and all rights to leins (sic) that the undersigned, by virtue of the laws of the State of Indiana, or any other jurisdiction, has or may have now or hereafter have upon the following described project or any part thereof for the project referred to as the Mesker Zoo Sanitary Sewer Project located in Vanderburgh County, Indiana.

The undersigned does further warrant that he has not and will not assign his claim for payment nor his lein (sic) for or right to perfect a lein (sic) against said construction project, and he has the right to execute this waiver and release thereof.

This waiver and release of lein (sic) shall apply to all work done or material or equipment furnished or used upon or for the benefit of said construction project on or before the 26 day of Sept. 1974."

On September 18, 1974, United Design submitted its final billing in the amount of $37,388.26, which included an itemized list showing Staub, Inc.'s total statement of $6,095.25. On October 11, Robert Schu presented the City with executed checks made to the order of all the subcontractors as proof of payment along with the waiver forms. Immediately after receiving payment from the City the checks were mailed.

Staub, Inc. did not receive the $3500 balance of its account, and following the filing of bankruptcy proceedings by the contractor, it initiated this action against the Surety. The Surety had no knowledge of the arrangement between the prime contractor and subcontractor and did not give its consent to any such arrangement.

On March 24, 1975, the subcontractor filed its complaint on the surety bond to recover the value of labor and equipment furnished to the general contractor on the sewer project. The trial court found in favor of the subcontractor.

ISSUES

I. Whether the surety on a contractor's bond is discharged from liability to an unpaid subcontractor who did not pursue direct payment of its account in full from funds retained by the project owner, the City.

II. Whether the surety on a contractor's bond is discharged from liability to an unpaid subcontractor who signed a "Waiver and Release of Lien" form thereby inducing the project owner to release final contract funds to the prime contractor.

III. Whether the surety on a contractor's bond is released from liability to an unpaid subcontractor who accepted a partial payment from the prime contractor in cash together with a promissory note purportedly secured by an interest in a parcel of land.

ISSUE I.

The Surety first contends that direct payment of the subcontractor's account was available from funds retained by the City, and that the subcontractor had a duty to protect the Surety by applying directly for payment from those funds. The trial court made no special findings concerning the availability of direct payments to the subcontractors from the City. We note, however, that even if alternate means of payment were available to the creditor, Staub, Inc., the corporation was under no obligation to affirmatively pursue such sources.

In Kimmel v. State ex rel. Anderson Banking Company (1920), 75 Ind.App. 168, 128 N.E. 708, the Indiana Supreme Court held that a creditor was under no obligation to collect on its judgment the amount that was due from the debtor, or to make any attempt to do so. The court held that had there been an execution issued and a levy made on the property of the debtor, then the creditor would be regarded as a trustee of the execution for the benefit of all persons interested, and the creditor would not be permitted to release the levy if such release would injure the surety. Id. at 177, 128 N.E. 708.

Similarly, a creditor who holds collateral security from the principal debtor is charged with a trust concerning the property for the benefit of the surety. Crim v. Fleming (1884), 101 Ind. 154; Southern Surety Co. v. Merchants' & Farmers' Bank (1931), 203 Ind. 173, 176 N.E. 846. In support of the doctrine that such a trust is not violated upon evidence that the creditor merely remained passive upon default of the debtor, the court in Crim wrote:

" 'In the absence of an express agreement to use diligence, or of such special circumstances as to render prompt action of the creditor an absolute duty, the mere inaction or passive delay, or omission of the creditor to enforce the collection of collateral securities held by him from the principal debtor, is not sufficient of itself to discharge or release a surety from his obligation to pay the debt upon default.' "

Crim, supra, 101 Ind. at 158 (quoting Colebrooke Collateral Securities, § 241). In Indiana National Bank of Indianapolis v. Goss, 208 F.2d 619 (7th Cir. 1953), the Seventh Circuit Court followed this doctrine, at page 622:

"The Indiana courts have definitely held that mere passiveness of the creditor in the collection of his debt from collateral securities held by him is not sufficient ground for discharging the surety or endorser. Philbrooks v. McEwen, 29 Ind. 347, Vance v. English, 78 Ind. 80, Hunter v. First National Bank, 172 Ind. 62, 87 N.E. 734, Brown v. Nichols, Shepard & Co., 123 Ind. 492, 24 N.E. 339, Wasson v. Hodshire, 108 Ind. 26, 8 N.E. 621."

In the case at bar, the funds of the City were not held by the creditor, Staub, Inc., upon an execution and levy, nor as collateral security. The creditor, Staub, Inc., could hold only such rights or interest in the City's funds as were granted by agreement between the parties. Owen County State Bank v. Guard (1940), 217 Ind. 75, 26 N.E.2d 395, 398. The evidence most favorable to Staub, Inc., the appellee, as in Owen, falls far short of showing a pledge by the City of the fund as collateral security. Gary Staub, the party who signed the waiver and release of lien form, testified that he understood that there was no way the City could pay the subcontractor directly. Staub, Inc. did not hold or obtain possession of the City's funds and there was no security agreement to establish a security interest in the fund.

Since Staub, Inc. did not hold the City's funds upon a levy or as a security interest it is not chargeable with a trust concerning them and it cannot be considered able to affirmatively act to release or surrender the funds as if they were securities which, under the general rule, would discharge the surety to the extent of value released. Crim, supra; Wasson v. Hodshire (1886), 108 Ind. 26, 8 N.E. 621.

Even had we not found that the funds of the City should not be considered collateral security, there was no duty imposed upon Staub, the creditor, by express agreement or by special circumstances, which would mandate an absolute duty to collect the City's funds. We hold that the mere inaction of Staub, Inc. to perfect a "lien" ² on the City's funds is not sufficient to discharge the surety from its liability to pay the debts incurred by the principal debtor.

ISSUE II.

The Surety next contends that it is discharged from liability on the...