Citizens' Bank of Guntersville v. Pearson

• Decision Date: 13 October 1927
• Docket Number: 8 Div. 869
• Citation: 217 Ala. 391,116 So. 350
• Court: Alabama Supreme Court
• Parties: CITIZENS' BANK OF GUNTERSVILLE v. PEARSON et al.

116 So. 350

217 Ala. 391

CITIZENS' BANK OF GUNTERSVILLE v. PEARSON et al.

8 Div. 869

Supreme Court of Alabama

October 13, 1927

Rehearing Granted Jan. 12, 1928

Further Rehearing Denied April 5, 1928

Appeal from Circuit Court, Marshall County; W.W. Haralson, Judge.

Bill in equity by the Citizens' Bank of Guntersville against L.C Pearson, the United States Fidelity & Guaranty Company, and others, and cross-bill by respondent United States Fidelity &amp Guaranty Company. From a decree denying relief, complainant appeals. Affirmed on rehearing.

Isbell & Scruggs, of Guntersville, for appellant.

Coleman Coleman, Spain & Stewart, of Birmingham, for appellees.

THOMAS J.

Only the Citizens' Bank of Guntersville appeals and assigns error. The real controversy is between the appellant and the surety company. Although the latter was made a respondent to the bill by the bank, it answered, and by cross-bill asserted its right to the fund, which was a portion of the contract money due by Marshall county to the road contractor.

It should be stated that L.C. Pearson contracted with the duly constituted authorities to build four miles of road under the direction of the state highway engineer in Marshall county. The surety company was the guarantor on the bond for the performance by Pearson of said construction contract.

The bank loaned Pearson money at the beginning of his contract, and J.B. Whitaker was the comaker of the notes evidencing the loans. When Pearson defaulted on his contract, the surety company took charge of the work, and completed the contract at its own expense, and was receiving the balance of funds due Pearson under the contract when the same was diverted or collected by the bank. The suit or the original complaint asserted a prior right to the fund, by reason of its loans to Pearson and its order from Pearson to the probate judge directing the latter to deliver monthly estimates to the bank, and on Pearson's formal assignment to Whitaker of the same, for the alleged benefit of the bank, and to further secure said payments of loans. The surety company relied upon an assignment antedating the bank's order and assignment; and also on the terms of the bond itself providing that the surety company may under certain conditions take charge of the work, and the fact that it did so take charge and completed the contract, and therefore should receive the balance of the fund on hand with the county as the contract price of said work. The appellee relied upon the equitable principle that a surety duly completing the contract of its principal, is subrogated to its principal's right to receive the payments under his contract, and a right execution thereof, which was the basis of the suretyship.

The surety company further claimed that, in violation of its rights, the bank, having knowledge thereof, collected $2,327.78 belonging to the surety company, and it sought, by the cross-bill, to compel the bank to account for and repay the same.

One of the evidences of debt given by Pearson and Whitaker to the bank was, in form, a chattel mortgage on a crusher, an engine, tram cars, and rails, which Pearson was using on that road construction, and the bank claimed that the surety company converted the same or some of said property, and should be held to pay therefor. As to this, the surety company insists that, in the beginning of the suretyship, Pearson executed a transfer and assignment of all equipment, including the crusher, engine, cars and rails to it, and that Pearson had duly surrendered said equipment to the surety company upon the latter's taking over the execution of the contract; that is to say, that its assignment prior to the bank's mortgage, and having gone into possession under the assignment before the bank's mortgage was ever recorded, and, without actual knowledge, subordinating its claim to that of the bank's, the surety company claimed a prior right to the equipment.

It follows from this the inquiries of fact are: (a) Whether the bank or the surety company had the better right to the fund. (b) If the surety company's rights were superior to the bank's, whether the latter was liable to the surety company for having collected the $2,327.78. (No appeal or assignment of error challenges the ruling as to said item of $2,327.78.) (c) Whether the surety company was liable to the bank for the conversion of the equipment on which the bank held the unrecorded chattel mortgage.

As to the superior right to the fund, it will be noted that Pearson contracted with the county for building the New Hope and Guntersville road; that the contract included the plans and specifications, and the latter, by appropriate reference, included the bond that was given by appellee for the due prosecution and execution of the contract. This was but one transaction; and said undertakings, when duly executed, are considered together, or are necessarily and materially related to the other. First Nat. Bank v. Fidelity & Deposit Co., 145 Ala. 335, 40 So. 415, 5 L.R.A. (N.S.) 418, 117 Am.St.Rep. 45, 8 Ann.Cas. 241.

The surety has the right to stand upon the agreement, with reference to which it entered into the contract of suretyship, and to exact compliance with the stipulations thereof; that is to say, that parties, not under disability, within the law, may prescribe obligations and limitations of contracts by which they will be bound, and their words employed, if unambiguous, will be given their ordinary and accepted meaning, the contrary not being indicated by the context. Fite v. Pearson, 215 Ala. 521, 111 So. 15.

It follows that the bank and the surety company rely upon the contract for the establishment of their respective rights to the fund, proceeding, as it did, out of the contract relations of the several parties to the common end with the state and county authorities.

There was evidence showing that Pearson was a substantial contractor, not wholly dependent upon the bank for the potential existence of his ability to prosecute the work of construction, and notwithstanding the fact that shortly after commencing the work he borrowed moneys in question from the bank. The fact that Whitaker was a comaker with Pearson on said obligations to the bank may afford the basis for an inference that the loans by the bank were at the instigation of, or upon the credit of, Whitaker, or that the latter was in some wise interested in the contractor or his undertaking with the authorities.

However this may be in fact, the bank took an order (February 18, 1920) by Pearson to the probate judge of the county to "deliver to the Citizens' Bank *** any warrants that may become due *** for work on roads" in the county, and effective without further notice; and that, after the surety company had taken charge of, and was completing, the construction contract work, Pearson executed to Whitaker an assignment of his rights under his contract with the county.

The bank must rest its claim upon the order to the probate judge of February 18, 1920, and the assignment of November 20th to the comaker on the bank notes an assignment for its benefit, coupled with the alleged equity of the bank that the money loaned Pearson was expended in the prosecution of the work per contract in the initial conduct thereof. And we have stated that the surety company rests its claim to the fund on the assignment executed by Pearson at the inception of the suretyship, the express terms and conditions of the bond, which, by adoption, became an inherent part of the contract out of which the fund arises, and upon the principle of subrogation whereby a surety who is compelled to complete his principal's undertaking becomes entitled to receive the payment of the contract price in full when the same is executed by the surety.

On September 12, 1919, at the inception of Pearson's contract, and when the surety company signed the bond, Pearson agreed with it as follows:

"In further consideration of the execution of the said bond, I do hereby agree, as of this date, that the United States Fidelity & Guaranty Company shall, as surety, be subrogated to all my rights, privileges, and properties as principal and otherwise in said contract, and I do hereby assign, transfer, and convey to said company all the deferred payments, retained percentages, and any and all moneys and properties that may be due and payable to me at the time of such breach or default, or that may thereafter become due and payable to me on account of said contract, or on account of extra work or materials supplied in connection therewith, hereby agreeing that all such moneys and the proceeds of such payments and properties shall be the sole property of the United States Fidelity & Guaranty Company, and to be by it credited upon any loan, cost, damage, charge, and expense sustained or incurred by it as above under its bond of suretyship." (Italics supplied.)

Thus Pearson assigned to the surety company the right to the fund in question "as of this date," which was September 12, 1919, before he gave an order to the probate judge to deliver his vouchers for estimates to the bank, or before he formally assigned to Whitaker, for the benefit of the bank any interest in the contract or the proceeds thereof.

The surety company's bond was an inherent part of the contract, material to the conduct or construction of the work, and the production of the fund. It was stipulated:

"Provided, further, that upon the failure of the said L.C. Pearson to promptly and efficiently prosecute said work, in any respect, in accordance with the contract, the above bound United States Fidelity & Guaranty Company, as sureties, shall take charge of said work and complete the construction at their own expense, pursuant to its terms, receiving,

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