Fireman's Fund Insurance Co. v. SEK Construction Co., 296-69

• Citation: 436 F.2d 1345
• Decision Date: 12 January 1971
• Docket Number: No. 296-69,297-69.,296-69
• Parties: FIREMAN'S FUND INSURANCE COMPANY, a corporation, Plaintiff, Appellant, v. S. E. K. CONSTRUCTION COMPANY, Inc., etc., et al., Defendants, and Centennial State Bank, a Kansas Banking Corporation, and Industrial State Bank of Kansas City, Kansas, Defendants, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

436 F.2d 1345 (1971)

FIREMAN'S FUND INSURANCE COMPANY, a corporation, Plaintiff, Appellant, v. S. E. K. CONSTRUCTION COMPANY, Inc., etc., et al., Defendants, and Centennial State Bank, a Kansas Banking Corporation, and Industrial State Bank of Kansas City, Kansas, Defendants, Appellees.

Nos. 296-69, 297-69.

United States Court of Appeals, Tenth Circuit.

January 12, 1971.

Clyde J. Watts, Oklahoma City, Okl., for appellant.

Arthur J. Doyle, Kansas City, Mo. (Jerome T. Wolf, Kansas City, Mo., on the brief), for Centennial State Bank, appellee.

Before PHILLIPS, HILL and HICKEY,^* Circuit Judges.

HILL, Circuit Judge.

Appellant Fireman's Fund, surety on two performance bonds naming S.E.K. Construction Company as principal, seeks to enjoin Centennial State Bank, to whom S.E.K. assigned Estimate 13 on an Oklahoma Highway project, from disposing of the warrant representing Estimate 13 until the equities of the case are litigated. In addition, the original injunction proceeding sought to prevent the banks from taking possession of S. E.K. equipment in which both banks had perfected security interests. A temporary restraining order was secured by Fireman's but they later dismissed that part of the injunction suit which restrained the banks' possession of the equipment.

At trial, the litigation focused on whether the surety or the assignee-bank was entitled to the proceeds of Estimate 13. The case, based on diversity jurisdiction, was tried to the court without a jury. After making extensive findings of fact, the court concluded that Centennial was entitled to the $17,467.38 of Estimate 13. To rectify the wrong suffered because of the wrongful injunction, which prohibited immediate possession of the equipment, the banks were awarded $8,701 for fair rental value and $1,116.55 for out-of-pocket expenses incurred;¹ and Industrial State Bank was granted $1,494.60 for expenses resulting from its aborted repossession attempt. Attorneys' fees of $4,000 were denied the banks. Fireman's appeals that portion of the judgment granting the proceeds of Estimate 13 to Centennial. The banks, inter alia, challenge the denial of attorneys' fees on cross-appeal.

The controversy, as it reaches us on appeal, directly concerns four corporations. Fireman's, the surety and original plaintiff, is a California insurance corporation duly authorized to transact surety business in Oklahoma. S.E.K. Construction Company, Inc., an original defendant, is a Kansas corporation which, in 1967, bid and received two contracts for highway construction in Osage and Comanche Counties, Oklahoma. Centennial is a Kansas banking corporation which commenced financing S.E.K. in 1966 and continued until just prior to this suit. In February, 1966, Centennial received and perfected a security interest in certain of S.E.K.'s automotive, road-building, and other construction equipment, including all after-acquired property of the same type. Industrial financed S.E.K. from October, 1966, until just prior to the date of the filing of this suit and had an installment note for $95,000 secured by a perfected security agreement covering other portions of S.E.K.'s equipment.

In August, 1967, S.E.K. received the two Oklahoma highway construction contracts. Performance and payment bonds covering the two projects were executed and delivered by Fireman's with S.E.K. as principal and the State of Oklahoma as obligee. In addition, Mr. and Mrs. Hugh O'Donnell and Mr. and Mrs. George O'Donnell executed and delivered to Fireman's a general indemnity agreement, naming the individual owners of S.E.K. as indemnitors.

In the fall of 1967, Centennial made a loan to S.E.K. which was secured by an assignment of the contract proceeds from the two jobs, and was indicated on renewal notes of loans thereafter made between Centennial and S.E.K. As construction work progressed, Fireman's on February 15, 1968, inquired of S.E.K.'s Vice-President as to the general financial status of the company. Hugh O'Donnell replied that they were in good shape as far as keeping their bills paid.

A month later, however, S.E.K. voluntarily disclosed to Fireman's that the contractor had $140,000 in outstanding bills, many of which were past due, but that temporary credit arrangements had been made with some of the creditors. After learning of this, and relying on Hugh O'Donnell's figures, Fireman's estimated that upon completion of both jobs, there would be a loss of $60,000 on the Osage job and a profit of $40,000 on the Comanche project. Thus, the net loss would equal $20,000 after payment of the outstanding $140,000.

In the meantime, on March 13, 1968, a $10,000 note had become due and Centennial requested and S.E.K. agreed to endorse on Progressive Estimate 11 for the Osage job, its assignment to Centennial of the $21,937.29 due thereunder. This endorsement was made pursuant to S.E.K.'s 1967 assignment of contract proceeds to Centennial. The procedure was to be that Centennial would satisfy the $10,000 overdue note and deposit the remainder of the warrant in S.E.K.'s account. But on March 21, Fireman's filed suit in federal court and procured from the court a restraining order prohibiting Centennial from cashing the warrant. Late that same day, Fireman's agent erroneously advised Centennial by telegram that the court order prohibited "any further activity on S.E. K.'s accounts, including the cashing or clearing of checks of S.E.K."

As of March 21, S.E.K. had in excess of $15,000 in its Centennial account. However, following what it understood as a court directive, Centennial dishonored checks presented for payment on S.E.K.'s account. Although the checks were marked "Refer to Maker" and not "I.S.F.", the dishonoring of those drafts created multiple problems for S.E.K. and temporarily damaged the latter's credit arrangements.

On March 26, representatives and lawyers from S.E.K., Fireman's and Centennial met to attempt to resolve S. E.K.'s financial problems and the difficulties between Centennial and Fireman's ensuing from the erroneous telegram. As a result of that meeting, on March 27, Fireman's filed a motion to dismiss their suit in federal court. The Order recites in part: "This dismissal is without prejudice to plaintiff re-filing the same if it appears at any time hereafter that S.E.K. Construction Company is in default under the terms and conditions of the bonds and indemnity agreements involved herein."

The agreement upon which the foregoing Order of Dismissal was based recites in pertinent part, "that S.E.K. is not now and has not been in default on these contracts and that the Fund Fireman's was in error in so advising of the defaults. If any notices of claims or claims were filed on the bonds, these will be transmitted to S.E.K. for it to handle and no action will be taken by the Fund on any claims and on or under any bonds on these projects unless and until S.E.K. has failed to satisfy any claim(s) within a reasonable time after receipt of written notice by the Fund to S.E.K. of a formal claim being filed with the Fund."

After the dismissal, S.E.K. made application to Centennial for an additional $40,000 loan. Centennial agreed to explore the possibilities, upon the understanding that they would have the right of offset on S.E.K.'s accounts and S.E.K. would agree to joint control of its accounts with Centennial.

On April 11, 1968, S.E.K.'s loan request was tabled. On April 16, Centennial rejected the additional loan request and called other loans which had an outstanding balance of $58,000; S.E. K.'s Superintendent assigned, by endorsement, Estimate 13 for $17,467.38 to Centennial; and S.E.K.'s remaining bank balance of $25,423.06 was charged to offset, in part, their indebtedness to Centennial. Industrial also called the loans it had made to S.E.K., and so notified them.

During the forenoon of April 25, 1968, Centennial made formal demand upon the Comptroller of the Oklahoma Highway Department for the $17,467.38 warrant assigned to it. However, at the request of Fireman's attorney, the Comptroller withheld delivery. During the afternoon of April 25, Fireman's paid $50,000 to Riffe Petroleum Company for the account of S.E.K., without notice to the latter. On the following day, Fireman's filed this action.

On appeal, Fireman's sets forth five propositions upon which they urge reversal. We will consider each independently except when arguments under several propositions coalesce. The first contention asserts that when a surety is placed in jeopardy by the acts or omissions of its principal, a court of equity has jurisdiction to prevent a threatened wrong by requiring the state to withhold payment of contract funds to an assignee bank, until it can be ascertained whether the surety is really in jeopardy of sustaining a loss under its performance and payment bond. This right of action is said to lie upon a bill quia timet.

We perceive several objections to the case proceeding on the stated equitable ground. "No principle in equity is more familiar, or more firmly established, than that a surety, after the debt for which he is liable has become due, without paying or being called on to pay it, may file a bill in equity in the nature of a bill quia timet to compel the principal to exonerate him from liability by its payment, provided no rights of the creditor are prejudiced thereby." 50 Am.Jur. Suretyship § 225. The doctrine is not premised on mere fear of loss or liability prior to an obligation's maturity. Rather, only after the obligation becomes payable, the surety, before he pays it, may maintain a suit in equity against the debtor in the nature of a bill quia timet to compel the latter to pay the debt or perform the obligation, provided the creditor could enforce payment or performance but neglects or refuses to do it.²

The cases in Oklahoma on the common law doctrine of quia timet, as applied to a surety case, are scarce, if existent. Neither litigant cites any Oklahoma...