Cove Irr. Dist. v. American Surety Co. of New York

• Decision Date: 15 September 1930
• Docket Number: No. 5861.,5861.
• Citation: 42 F.2d 957
• Parties: COVE IRR. DIST. v. AMERICAN SURETY CO. OF NEW YORK.
• Court: U.S. Court of Appeals — Ninth Circuit

42 F.2d 957 (1930)

COVE IRR. DIST. v. AMERICAN SURETY CO. OF NEW YORK.

No. 5861.

Circuit Court of Appeals, Ninth Circuit.

June 2, 1930.

Rehearing Denied August 26, 1930.

As Corrected September 15, 1930.

Brown, Wiggenhorn & Davis, of Billings, Mont., for appellant.

Sterling M. Wood and Robert E. Cooke, both of Billings, Mont., for appellee.

Before DIETRICH and WILBUR, Circuit Judges, and NETERER, District Judge.

DIETRICH, Circuit Judge.

On September 28, 1922, the appellant, Cove irrigation district, a Montana public corporation, entered into a contract with Schlueter Brothers, called the contractor, by the terms of which the contractor was to do the work and furnish the materials necessary for certain improvements in the appellant's irrigation system. The contract provided that, "in consideration of the contractor doing such work and furnishing such materials and paying for the labor performed and the materials furnished and used therefor," bonds of the district would be delivered to the contractor from time to time in payment for the work as it progressed. Pursuant to a requirement that the contractor furnish a surety bond in the sum of $100,000 "conditioned upon the faithful performance of the contract," such bond was furnished on October 7, 1922, with the contractor as principal and the appellee herein as surety. In the bond reference was made to the contract and a copy thereof was attached. The condition of the bond was that if the principal should indemnify the obligee against any loss or damage for its failure faithfully to perform the contract and to complete the work within the time specified, and should "pay the accounts contracted for materials furnished and labor performed under and by virtue of said contract," then the obligation should be null and void. The contractor not only defaulted in completion of the work, but failed to pay some of its obligations for labor and material employed and used in that part of the work which it did complete. Upon such defaults laborers and materialmen brought two suits in the state district court against the contractor and the surety upon the bond to recover for the labor and material thus furnished to the former, in which cases the plaintiffs, either in their own right or as assignees, sued upon all of such claims except one, namely, that of Dave C. Yegen, for $1,324.80. In each of the two actions the district court sustained a demurrer to the complaint and upon plaintiff's declination to plead further, final judgment was entered. No further proceedings were taken in what is referred to as the Frantz Case but in the Martin Case the plaintiff appealed to the Supreme Court of the state, where it was held that the plaintiff could recover against the contractor but not against the surety, appellee here. Martin v. American Surety Co., 74 Mont. 43, 238 P. 877.

Apparently construing the decision of the Supreme Court in the Martin Case as holding only that laborers and materialmen were not proper parties plaintiff, or, in other words, that they could not maintain an action in their own names upon the bond, the irrigation district brought this action to accomplish precisely what was attempted to be accomplished in the Martin and the Frantz Cases; that is to say, inasmuch as it is under no pecuniary obligation to such claimants and the claims were not lienable, the district prosecutes the action primarily upon behalf of the claimants, the amounts of whose several claims it expressly pleads and prays to recover.

Under the erroneous impression that all the claims, including that of Yegen, were involved in these state court cases, and entertaining the view that the judgments therein constituted res adjudicata, by our original opinion we affirmed the judgment of dismissal from which the appeal was taken, without considering any other question. 35 F. (2d) 933. Thereafter, in response to appellant's petition, we granted a rehearing without limitation, and the case has now again been resubmitted upon all questions.

One of these questions is presented by the broad contention of appellee that it was never under any obligation at all touching unpaid claims of subcontractors, materialmen, and laborers. Independently, and apart from the Martin decision, we would have litthe difficulty in holding the contention without merit. It is said that the contract between the district and the original contractor does not impose any obligation upon the latter. Such an obligation it was unnecessary to express, for it inheres in and inevitably arises out of the relation necessarily implied. Without it the conception of such claims, if valid, is impossible, and to have fully expressed it in the contract would have added nothing. Appropriately the contract recognized it, for it is therein provided that "in consideration of the contractor doing such work and furnishing said materials and paying for the labor performed and the materials furnished and used therefor, and paying said District the said sum of Sixty Thousand Dollars said District will deliver to said contractor its coupon bonds of the par value of Two Hundred Seventy-nine Thousand Dollars. Said bonds are to be delivered in payment of said work as it progresses," etc. The performance of its agreements in purchasing materials and employing labor for the project was thus not only made a condition of the payment of the contract price, but it was put on the same footing with the doing of the work; that is, as one of the "considerations" of the contract. Manifestly both parties intended an obligation on the contractor's part to pay such claims, and the intent could hardly be made clearer by the use of more express terms of agreement. That, in harmony with such intent, the latter agreed that claims for labor and material would be paid is not open to controversy. It expressly bound itself to the district in the sum of $100,000 and agreed to pay the same if the contractor did not "indemnify the obligee (District) against any loss or damage arising by reason of the failure of the principal (contractor) to faithfully perform said contract and to complete the same within the time limited in said contract," and did not "pay the accounts contracted for materials furnished and labor performed under and by virtue of said contract." The obligation is thus expressed in language too clear for construction. It is a part of a contract the full consideration for which appellee received. It is not forbidden by any law, nor was it against public policy. At most, the appellee can only say that there was no statute imposing upon the district the duty to require it, and that, being a public corporation and hence not subject to the lien laws, it would need no such protection against direct loss.

But it does not follow that for such reasons the provision is void. The universal trend of modern legislation is toward protection of those who contribute labor and materials in construction work, either by making the claims lienable or by requiring bonds. That such legislation is in furtherance of a sound public policy would scarcely be denied, and surely there is no less reason for protection to one who contributes to the construction of a public building than to one who makes a like contribution to a private enterprise. Where, as here, for traditional reasons which we need not stop to consider, municipal property is exempt from liens, the natural means for affording such protection is by bond, and we see no substantial reason for holding that such requirement is ultra vires; it is supported by both moral and material considerations. Of such a bond attending a contract for the construction of a public schoolhouse, the Supreme Court of Missouri in St. Louis Public Schools v. Woods, 77 Mo. 197, said:

"The board of public schools certainly has the power to build school houses. It has the right to make contracts with contractors for the erection of school buildings. And as germane to these powers, I think it has the right like any other proprietor, to exact conditions from its contractors, which shall tend to secure and pay off the material men and laborers, who unquestionably contribute most to the erection of such buildings. Viewed from the narrow standpoint of private economy, this must be the cheapest way to erect such costly and commodious structures. Otherwise as the statutes furnish no security to material men or laborers in the mechanics' lien law, as against the board, on account of its being a municipal corporation, they will be compelled to add something to the materials and labor going into the school buildings, on the well known principle which prevails throughout the business world, that high prices and high interest always attend bad security. In a wider sense, I think, the bond is germane to the corporate objects of the school board. I think the law is not inclined to deny the board, even if it is a municipal corporation, the satisfaction and ease of conscience which the private citizen is naturally supposed to experience, when he reflects that the structure he dwells in has been entirely paid for, from the mason who laid the foundation to the artist who frescoed the ceilings. * * * The object and purpose of the bond being entirely within the powers of the board, and the board being constituted the trustee of an express trust in the bond, the right to sue on it ought not to be questioned."

Of like effect is the decision by the same court in City of St. Louis v. Von Phul, 133 Mo. 561, 34 S. W. 843, 54 Am. St. Rep. 695.

In Builders' Lumber & Supply Co. v. Chicago Bonding & Surety Co., 166 N. W. 320, 321, in discussing a similar contract provision, the Supreme Court of Wisconsin said:

"If that was not deliberately intended for the benefit of third parties — for the benefit of materialmen and laborers — why was it inserted? It was already provided that the contractor should furnish the material and labor for the construction of the work. It was...