American Surety Co of New York v. Westinghouse Electric Mfg Co

Decision Date11 November 1935
Docket NumberNo. 12,12
Citation56 S.Ct. 9,80 L.Ed. 105,296 U.S. 133
CourtU.S. Supreme Court

Messrs. Hugh H. Obear, of Washington, D.C., and Francis B. Carter and Francis B. Carter, Jr., both of Pensacola, Fla., for plaintiff.

Messrs. Edward H. Cushman, of Philadelphia, Pa., William Fisher, W. H. Watson, and S. Pasco, all of Pensacola, Fla., for respondents.

Mr. Justice CARDOZO delivered the opinion of the Court.

A contract for drilling a well at the Naval Air Station at Pensacola, Fla., was made in November, 1930, between Melton J. Gray and the United States government. It was drawn in the standard form. Payments were to be made in accordance with approved estimates during the progress of the work, but the contracting officer was required to retain 10 per cent. of the estimated amount 'until final completion and acceptance of all work covered by the contract.' The percentage might be reduced in stated contingencies. A bond was to be given for the protection of the government and of persons supplying labor and materials. If, thereafter, a surety upon the bond became unacceptable, the contractor was to furnish such additional security as might be required to protect the interests concerned.

The total contract price was $13,133.36. The bond which was executed by the contractor and by the petitioner as surety was in the penal sum of $3,940. The condition was that the principal, i.e., the contractor, should perform the contract in all its terms, and in addition should 'promptly make payment to all persons supplying the principal with labor and materials in the prosecution of the work.' The additional obligation thus incurred is one exacted by statute. Act of August 13, 1894, c. 280, 28 Stat. 278, Act of February 24, 1905, c. 778, 33 Stat. 811, Act of March 3, 1911, c. 231, § 291, 36 Stat. 1167, 40 U.S.C. § 270 (40 USCA § 270). Laborers and materialmen, together with the government, are obligees or beneficiaries of a bond so given (Equitable Surety Co. v. United States, 234 U.S. 448, 34 S.Ct. 803, 58 L.Ed. 1394; Illinois Surety Co. v. John Davis Co., 244 U.S. 376, 37 S.Ct. 614, 61 L.Ed. 1206; Brogan v. National Surety Co., 246 U.S. 257, 38 S.Ct. 250, 62 L.Ed. 703, L.R.A. 1918D, 776), though the claims, if any, of the government are to have priority of payment. 40 U.S.C. § 270 (40 USCA § 270).

The contractor finished the work required by the contract, but did not make payment to all persons supplying him with labor and materials. Demand was made upon the surety, which paid into court $3,940, the full amount of the penalty, for distribution among the respondents in proportion to their interests. The payment did not satisfy what was owing to them for labor and materials furnished for the well. Thereupon conflicting claims arose to the 10 per cent. retained by the government in accordance with the contract. On the one hand, the surety laid claim to this reserved percentage ($2,724.23) by right of subrogation, and also and with greater emphasis by force of a covenant of indemnity received from the principal at the beginning of the work. On the other hand, the reserved percentage was claimed by the re- spondents on the ground that the effect of the statute, the contract, and the bond, when read together, was to make the equity of the surety subordinate to theirs. Out of this equity there grew, as they contended, a right or an interest which, even if not a lien in the strict and proper sense, brought kindred consequences along with it. At least a court of equity would not come to the aid of one whose equity was subordinate until claims superior in equity had been satisfied in full.

By this time Gray was a bankrupt, and a trustee in bankruptcy was in charge of his affairs. The government turned over the fund to the trustee, who held it to abide the order of the court. No claim to any part of it was put forward by the general creditors or by the trustee in their behalf. The controversy was solely between the materialmen on the one side and the surety on the other. Indeed, there is nothing to show that any other creditors than these existed. The District Court, confirming a report of a referee, gave priority to the materialmen and made a decree accordingly. The Court of Appeals for the Fifth Circuit affirmed, one judge dissenting. 75 F.(2d) 377. A writ of certiorari brings the case here.

The materialmen were creditors of the contractor; their standing as such being unchallenged in the record or in argument. The contractor was under a legal duty at the time of his insolvency to pay their claims in full. This obligation would have been his apart from any bond; the debtor-creditor relation subsisting independently. As to materialmen in that relation, the statute and the bond did not add to the extent of the contractor's obligation, though they made it definite and certain. What their effect would be when applied to materialmen, not creditors of the contractor is a question not before us. The obligation of the surety, however, unlike that of the contractor, was created solely by the bond and is limited thereby and by the equities growing out of the suretyship relation. In any suit upon the bond, at least against the surety, the nominated penalty was to be the limit of recovery. Upon payment of that penalty it was to be 'relieved,' in the words of the statute, 'from further liability.' 40 U.S.C. § 270 (40 USCA § 270).

Liability to pay was ended, but equities growing out of the suretyship relation survived in undiminished force. Acquittance under the bond did not leave the surety at liberty to prove against the assets of the insolvent principal on equal terms with the materialmen, still less to go ahead of them. The settled principles of the law of suretyship forbid that competition. Jankins v. National Surety Co., 277 U.S. 258, 266, 48 S.Ct. 445, 72 L.Ed. 874. A surety who has undertaken to pay the creditors of the principal, though not beyond a stated limit, may not share in the assets of the principal by reason of such payment until the debts thus partially protected have been satisfied in full. This is the rule where the right to a dividend has its basis in the principle of equitable subrogation. 'A surety liable only for part of the debt does not become subrogated to collateral or to remedies available to the creditor unless he pays the whole debt or it is otherwise satisfied.' United States v. National Surety Co., 254 U.S. 73, 76, 41 S.Ct. 29, 30, 65 L.Ed. 143. 1 If the holding were different, the surety would reduce the protection of the bond to the extent of its dividend in the assets of the debtor. Jenkins v. National Surety Co., supra. The rule is the same, and for like reasons, where the basis of the claim is the debtor's promise to indemnify, if the debtor is insolvent when the promise is enforced. Jenkins v. National Surety Co., supra, 277 U.S. 258, at pages 266, 267, 48 S.Ct. 445, 447, 72 L.Ed. 874. Cf. Springfield National Bank v. American Surety Co. of New York (C....

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