Corn Construction Co. v. Aetna Cas. & Sur. Co. of Hartford, 6653

• Decision Date: 14 September 1961
• Docket Number: No. 6653,6654.,6653
• Citation: 295 F.2d 685
• Parties: CORN CONSTRUCTION COMPANY, Appellant, v. AETNA CASUALTY AND SURETY COMPANY OF HARTFORD, CONNECTICUT, an insurance company, Appellee. AETNA CASUALTY AND SURETY COMPANY OF HARTFORD, CONNECTICUT, Appellant, v. Lloyd FILES, Cordelia E. Files, A. O. Johnson, City of Grand Junction, Colorado, and Columbia Savings & Loan Association, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

295 F.2d 685 (1961)

CORN CONSTRUCTION COMPANY, Appellant, v. AETNA CASUALTY AND SURETY COMPANY OF HARTFORD, CONNECTICUT, an insurance company, Appellee.

AETNA CASUALTY AND SURETY COMPANY OF HARTFORD, CONNECTICUT, Appellant, v. Lloyd FILES, Cordelia E. Files, A. O. Johnson, City of Grand Junction, Colorado, and Columbia Savings & Loan Association, Appellees.

Nos. 6653, 6654.

United States Court of Appeals Tenth Circuit.

September 14, 1961.

COPYRIGHT MATERIAL OMITTED

Eugene H. Mast, Grand Junction, Colo., for appellant, Corn Const. Co.

H. Gayle Weller, Denver, Colo. (Fred M. Winner, Denver, Colo., and Elmer W. Beasley, Hartford, Conn., on the brief), for Aetna Casualty & Surety Co. of Hartford, Connecticut.

Harry S. Silverstein, Jr., Denver, Colo. (Gerald J. Ashby, Grand Junction, Colo., on the brief), for appellees, A. O. Johnson, Columbia Savings & Loan Association, and City of Grand Junction, Colorado.

Haynie, Golden & Mumby, Grand Junction, Colo., for appellees, Lloyd Files and Cordelia E. Files.

Before PICKETT, LEWIS and BREITENSTEIN, Circuit Judges.

BREITENSTEIN, Circuit Judge.

A Grand Junction, Colorado, housing project failed to fulfill the hopes of its developers and the resulting financial entanglements are the cause of this suit over which there is federal jurisdiction because of diversity of citizenship. The case was tried without a jury and none of the comprehensive findings of fact made by the court are contested.

No. 6653 is an appeal by Corn Construction Company (Corn) from a denial of its claim based on services rendered and materials furnished by it as a subcontractor to Western States Construction Company (Western) and asserted against a performance bond given by Western as principal and Aetna Casualty and Surety Company as surety to the City of Grand Junction (the City) to assure the construction of certain off-site subdivision improvements.¹ The court denied recovery on the ground that the bond was not intended to secure payment to those furnishing such labor and materials.

No. 6654 is an appeal by the surety from denial of its claim for either subrogation or exoneration and from the allowance of the claim of Columbia Savings & Loan Association (Columbia) against the surety in the amount paid by the City for work in connection with the off-site improvements after default of Western and failure of the surety to perform. The City assigned this claim to Columbia.

Orderly treatment of the issues requires that first consideration be given to the claim of the surety for either subrogation or exoneration and this necessitates a review of the uncontroverted facts.

Files and others owned land adjacent to the City. Saltz and others (the Saltz Group) were interested in purchasing, subdividing, and developing this land. Files petitioned the City for annexation and the City imposed as a condition precedent to annexation an agreement and performance bond assuring the construction, without cost to the City, of the off-site improvements.

Prior to annexation Files conveyed the land to Mesa Homes, a limited partnership organized by the Saltz Group, and took back a purchase money deed of trust which provided for subordination to construction loans and for partial releases upon payment to Files of $550 for each lot sold by the developers.

After this conveyance to Mesa Homes, Western, a corporation having as its officers various members of the Saltz Group, made a contract with the City whereby Western undertook at its own cost to construct the off-site improvements. This contract was supported by the required performance bond in the sum of $157,200 executed by Western as principal and Aetna as surety. The City was the sole obligee named in the bond and the condition of the bond was the construction of the off-site improvements provided for in the contract between Western and the City. The bond was issued on an application containing an indemnification agreement signed by Western, Mesa Homes, and the Saltz Group individually.

Prior to the agreement between Western and the City, Western and Mesa Homes contracted with Columbia for construction loans to cover the cost of homes to be built in the subdivision. This agreement stated that it was contingent upon Western furnishing a surety bond guaranteeing completion and payment of the off-site improvements required by the City and by the Veterans Administration and the Federal Housing Administration. The agreement recognized title in Mesa Homes and the existence of the Files' trust deed. The agreement is silent as to the manner of disbursement of the construction loans and as to the disposition of the proceeds from lot sales.

Western made a contract with Corn for the construction of the off-site improvements at an estimated cost of $157,200. Nothing was said in that contract as to the time or manner of payment to Corn. As the project developed and properties were sold, Columbia paid the on-site construction costs directly to those furnishing the labor and materials and also paid Corn for the off-site improvements.

Evidently, by virtue of some understanding which is not disclosed in the record, Columbia allocated $950 of the sale price of each lot to the payment of the off-site improvements, and paid to Corn from such sources over $76,000. In the spring of 1956 Corn refused to continue unless certain payments on account were made. The completion of the off-site improvements was necessary not only to satisfy the City but also to make the properties eligible for loan insurance by the Veterans Administration and the Federal Housing Administration.

Columbia informed the surety of the situation and proposed that the surety advance funds for the off-site improvements and offered to reimburse the surety at the rate of $950 for each lot sold. The surety rejected this offer stating it was looking to its indemnitors to fulfill their obligations and that its investigation showed that Western was capable of fulfilling its contract with the City. From then on the situation deteriorated. Corn, asserting that $29,253.13 was due it from Western, stopped work on the off-site improvements. The City made demand on the surety for satisfaction of the performance bond. Western and Mesa Homes either ran out of money or refused to put more money into the project. Columbia, which was faced with a substantial loss, made arrangements with Mesa Homes for the conveyance of the unsold lots to Johnson, an officer of Columbia, under a trust agreement whereby Columbia advanced additional funds. Sales were to be made by Johnson, and the sale proceeds were to be used to repay Columbia and to pay for the off-site improvements with any remaining balance to go to Mesa Homes.

After the default of Western and the demand of the City on the surety for performance additional progress was made on the off-site improvements. By arrangements between the City and the surety, Corn did further work for which it was paid $27,124 by the City and the City was reimbursed by the surety. This is the sum which the surety seeks to recover from Files, Johnson and Columbia. The City was not reimbursed for an additional $9,886.86 which it spent on the off-site improvements for the subdivision. The City assigned its claim for this amount against the surety to Columbia. The trial court gave Columbia a $9,886.86 judgment against the surety. In addition Columbia spent about $9,700 of its own funds for off-site improvements and in its counterclaim demanded this amount from the surety. The claim was denied and no appeal has been taken from that denial.

At the time of trial the off-site improvements called for by the contract between Western and the City had not been completed and part of the subdivision remained undeveloped and unsold.

Western, Mesa Homes, and the members of the Saltz Group were named in the complaint as parties defendant but no service was made on them.

The surety claims both subrogation and exoneration. As to subrogation the theory is that the parties by their agreements and their course of conduct created an equitable lien, enforceable by the City, against the land or the proceeds from the sale of the land and that the surety is subrogated to the rights of its obligee, the City, to enforce such lien. Exoneration is claimed on the ground that others are primarily liable for the discharge of the obligation undertaken by the surety.

The surety has never performed in full its obligation to the City under the performance bond. The rule that subrogation occurs only after full performance² has been relaxed in instances where the court has grounds other than subrogation for the exercise of equitable jurisdiction³ and where there is no disturbance of the rights of creditors.⁴ As that situation prevails we must consider subrogation.

As a subrogee of the City the surety obtains only the rights of the City. The only right of the City was to have the...