Arrow Iron Works, Inc. v. Greene

• Decision Date: 29 November 1932
• Citation: 260 N.Y. 330,183 N.E. 515
• Parties: ARROW IRON WORKS, Inc., v. GREENE et al.
• Court: New York Court of Appeals Court of Appeals

260 N.Y. 330

183 N.E. 515

ARROW IRON WORKS, Inc.,

v.GREENE et al.

Court of Appeals of New York.

Nov. 29, 1932.

Action by the Arrow Iron Works, Inc., against Harry B. Greene, Bank of Yorktown, the National Surety Company, and others. From a judgment of the Appellate Division (235 App. Div. 712, 255 N. Y. S. 931), which affirmed a judgment of the Special Term (139 Misc. 265, 247 N. Y. S. 4), decreeing foreclosure of mechanics' liens, defendants Bank of Yorktown and the National Surety Company appeal.

Modified and affirmed.

Appeal from Supreme Court, Appellate Division, First department.

Richard J. Mackey and John Taylor Breen, both of New York City, for appellant Bank of Yorktown.

Michael M. Halfgott, of New York City, for appellant National Surety Company.

Jacob B. Lindner, of New York City, for respondent Arrow Iron Works, inc.

Emanuel M. Ostrow, of New York City, for respondent Fisher Company.

Talbot M. Malcolm, of New York City, for respondent Empire Brick & Supply Corporation.

Scott Scammell and John Hall Forbes, both of New York City, for respondent Richey, Browne & Donald.

George G. Lake and Emanuel Goodman, both of New York City, for respondents Pardi and others.

KELLOGG, J.

The defendant Harry B. Greene, on the 12th of April, 1928, entered into a contract with the state of New York, for the erection of certain buildings, at the agreed price of $118,700. On the 14th of May, 1929, Greene, having performed work and supplied material of the agreed value of $107,795.94, abandoned the contract. Greene had then been paid $94,541.55, or approximately 85 per cent. of the value of the work and materials furnished. This left unpaid, approximately, 15 per cent. of the amount already earned, or $16,254.39, which the state withheld as ‘retained percentages' to secure the completion of the contract. Greene had also furnished labor and materials, in excess of the contract requirements, of the agreed value of $1,837.04. The contractor, Greene, as principal, and the National Surety Company, as surety, had previously delivered their bond to the state for the faithful performance of the contract. On the default of the contractor, the National Surety Company took over the work and completed the same. At completion, there became payable by the state, for work done prior to abandonment, the sum of $18,091.43, consisting of the item of ‘retained percentages,’ $16,254.39, and the item of extras, $1,837.04. These items, since they were earned by the contractor before abandonment, may be termed ‘earned moneys.’ There also became due the sum $10,904.06, being the difference between the amount earned by the contractor, prior to abandonment, and the contract price of $118,700. This item may be termed ‘unearned moneys,’ since it became due, not through the efforts of the contractor, but through those of the surety company, which completed the work. There is thus held for distribution among creditors the sum of $28,995.49.

On the 27th day of April, 1929, the plaintiff filed in the proper offices a notice of lien against the moneys due or to grow due upon the contract, for work and materials furnished. The amount claimed to be due was the sum of $2,285. On May 15, 1929, the contractor applied to the Supreme Court, and procured an order discharging the lien, conditioned upon his depositing with the comptroller of the state the sum of $2,500. The sum named was deposited and no appeal from the order was taken. The proceeding was had in compliance with section 21 of the Lien Law (Consol. Laws, c. 33), which provides that a lien against moneys due from a contract made by the state for a public improvement may be discharged by the deposit of money with the state comptroller. The deposit must be ‘such a sum of money as is directed by a justice of the supreme court, which shall not be less than the amount claimed by the lienor, with interest thereon for the term of one year from the time of making such deposit, and such additional amount as the justice deems sufficient to cover all costs and expenses.’ The amount so deposited shall remain with the comptroller ‘until the lien is discharged’ as provided in subdivision 3 of the section, or certain other subdivisions named. The subdivision so numbered provides for a discharge by ‘satisfaction of a judgment rendered in an action to enforce the lien.’ Therefore, in order to make the deposit available in satisfaction of its lien, it was necessary for the plaintiff to institute an action to foreclose the lien, and for this purpose the present action was instituted. After a trial herein before the Special Term, the court found that the amount then due the plaintiff was $2,195, with interest amounting to $241.45, aggregating $2,436.45, and directed that this amount be paid by the state from the $2,500 deposit. It further adjudged that the plaintiff to recover as costs and disbursements the sum of $475.73, together with an extra allowance of $200, or in all $675.73. The judgment entered provides that, after exhausting the balance of the deposit, these costs be satisfied and paid from the ‘earned’ and ‘unearned’ moneys due upon the contract. We think that this was error.

‘Subdivision 4 of section 21 of the Lien Law provides for the discharge of a lien by the deposit of a sufficient sum of money. In such case the sum deposited is a substitute for the fund to which the lien attached until the deposit was made. A valid lien on the primary fund must, therefore, be established to justify payment out of the deposit.’ Milliken Bros. v. City of New York, 201 N. Y. 65, 74,94 N. E. 196, 199, Ann. Cas. 1912A, 905. In order to effectuate a discharge, the amount ordered deposited must be fixed at a sum, ‘which shall not be less than the amount claimed by the lienor,’ with interest for one year, ‘and such additional amount as the justice deems sufficient to cover all costs and expenses.’ These ‘costs and expenses' are clearly those of an action to foreclose the lien, a proceeding through which alone the deposit may become available to the lienor. The purpose of the provision is to free the moneys remaining payable from the claim of the lienor, so that thereafter the state may safely make payments to the contractor or other lienors, as it may be advised. This result would not be achieved if, after the making of the deposit, the lienor might recover from the general fund the costs and disbursements of a foreclosure action which the deposit was not sufficient to satisfy. The reason that the present plaintiff must suffer rests in the fact that the order of discharge provided for an insufficient deposit, and from that order the plaintiff took no appeal. We think that the plaintiff may have no other relief than the payment to it of the sum deposited; that neither the ‘earned’ nor ‘unearned’ items, due upon the contract, are subject to any claim by the plaintiff.

The National Surety Company, after the abandonment of performance by the contractor, completed the work at a cost to it of $10,617.85. The item of ‘unearned moneys,’ which became due under the contract through its completion by the surety company, was $10,904.06. Even though interest upon the claim of the surety company may bring that claim to a figure in excess of the item of ‘unearned moneys,’ the company makes no claim to any portion of the item of ‘earned moneys,’ including ‘retained percentages,’ remaining unpaid at the time of the abandonment. Its claim, as stated in its brief, is merely this: ‘The ‘unearned moneys' in the contract should have been applied first to the payment to the surety of its cost of completion with interest.’ It has been held, indeed, that a surety, which completes a contract, is entitled to be reimbursed for the expense thereof, not only from the ‘unearned moneys' of the contract, but from the ‘retained percentages' as well. Lacy v. Maryland Casualty Co. (C. C. A.) 32 F.(2d) 48, 51;Prairie State Nat. Bank v. United States, 164 U. S. 227, 17 S. Ct. 142, 41 L. Ed. 412. In the first of these cases it was said: ‘The question arises whether this superior equity of the surety extends to the current estimates payable under the contract or merely to the retained percentage. We think that it extends to both.’ Again, it is said: ‘Upon his performance of this contract, equity subrogates him to all rights of the obligee as against the principal. Now the obligee, upon default of the principal, is without doubt entitled to apply all moneys unpaid towards the performance of the contract, ignoring any assignments by the principal; and it necessarily follows that the surety upon performing the contract, being subrogated to the rights of the obligee, is entitled to the moneys unpaid so far as necessary to reimburse his loss.’

The logic of the quoted statements is not easy of escape. Perhaps it may justly be said that the doctrine of subrogation is purely equitable; that it is not equitable that a surety should have a prior lien upon retained percentages, over and above all lienors and assignees whose labor, material, and money created the fund; that, therefore, the surety may have no part in that fund. On the other hand, it is clearly equitable that a surety, which is alone responsible, through its completion of a contract, for the fact that the balance of the contract price accruing after abandonment does become payable, should first be reimbursed for its expenses out of the fund so arising. We hold that the National Surety Company is first entitled, above all other lienors, to the ‘unearned moneys,’ and that such moneys, amounting to $10,904.06, should be applied toward the extinguishment of its claim. Whether it would otherwise become entitled to reimbursement from the retained percentages we do not now decide.

The payment of the item of ‘unearned moneys' to the National Surety Company will leave for distribution among other claimants none other than the item of ‘earned moneys,’ consisting of the ‘retained percentages' and the sum due...