First National Bank of Chisholm v. O'Neil

• Citation: 223 N.W. 298,176 Minn. 258
• Decision Date: 25 January 1929
• Docket Number: 26,965
• Parties: FIRST NATIONAL BANK OF CHISHOLM v. R. S. O'NEIL AND ANOTHER
• Court: Minnesota Supreme Court

223 N.W. 298

176 Minn. 258

FIRST NATIONAL BANK OF CHISHOLM v. R. S. O'NEIL AND ANOTHER

No. 26,965

Supreme Court of Minnesota

January 25, 1929

Plaintiff, the assignee of all moneys earned under a contract made by defendant O'Neil with the state for the construction of a trunk highway, brought an action in the district court for St. Louis county to recover of O'Neil and the surety on his bond $28,892.81, representing the amount it had advanced to O'Neil over and above the amount received from the state. There were findings that plaintiff was entitled to judgment against O'Neil for the full amount claimed and, as against the surety, for a balance of $11,442.68 due from the state. The surety was held not liable for the amount plaintiff had advanced to O'Neil. From an order, Hughes, J. denying its motion for a new trial plaintiff appealed. Affirmed.

SYLLABUS

Advances by bank to pay labor and material not recoverable on statutory bond of contractor.

A bank which, by agreement with the contractor, advances money to pay checks for labor and material used in the construction of a highway is not subrogated to the rights of the laborers and materialmen whose claims were paid, nor entitled to recover such advances on the contractor's bond.

Highways, 29 C.J. § 353 p. 613 n. 79.

Subrogation, 37 Cyc. p. 468 n. 72.

See note in 45 A.L.R. 379; 7 R.C.L. Supp. 867.

Austin & Wangensteen, for appellant.

Abbott, MacPherran, Dancer, Gilbert & Doan, John J. Fee, and W. Braxton Dew, for respondent Aetna Casualty & Surety Company.

OPINION

TAYLOR, C.

On June 29, 1925, defendant O'Neil entered into a contract with the state through the commissioner of highways to construct a section of trunk highway No. 34, and on the same date O'Neil as principal and defendant corporation as surety executed to the state the bond required by statute to secure the performance of the contract. To secure the surety against loss, O'Neil, in his application for the bond, assigned and transferred to the surety all property and equipment used or to be used in performing the contract, and stipulated that in case of any default on his part the surety should have the right to take possession thereof and should be subrogated to all his rights under the contract and to the money to be earned thereunder.

O'Neil made an agreement with plaintiff under which plaintiff agreed to and did advance the money needed to enable O'Neil to perform the contract, and O'Neil executed his promissory notes for such advances and assigned to plaintiff all moneys earned or to be earned under the contract. Pursuant to the agreement O'Neil turned over to and deposited with plaintiff all moneys received from the state, and made all payments for labor and material by checks drawn on plaintiff, each check specifying the item in payment of which it was issued. Plaintiff paid the checks as they were presented. It was orally agreed between plaintiff and O'Neil that plaintiff should be subrogated to all the rights and remedies of the payees of the checks paid by plaintiff. Some payees presented their checks to plaintiff and received their money directly from plaintiff; others presented their checks to other banks which paid them and collected them from plaintiff through the usual banking channels. In presenting their checks for payment the payees indorsed them in the usual manner, but none of the payees made any assignment to plaintiff of their claim for labor or material. Neither defendant surety nor the payees of the checks had any notice or knowledge of the agreement between plaintiff and O'Neil nor that plaintiff was advancing funds to O'Neil. So far as they knew, O'Neil was paying his bills as they became due.

At the completion of the contract plaintiff had advanced the sum of $28,892.81 over and above the amount received from the state, but there was a balance of $11,442.68 still due from the state. Plaintiff brought suit and asked for judgment against both O'Neil and defendant surety for the balance of $28,892.81 advanced by it, and that it be awarded the amount still due from the state to apply thereon. The court held that plaintiff was entitled to judgment against O'Neil for the full amount claimed and was entitled to the balance due from the state as against defendant surety; but further held that defendant surety was not liable to plaintiff for the money which plaintiff had advanced to O'Neil. Whether the surety is liable for those advances is the question presented.

The bond obligated the surety to pay all claims for labor and material, but did not obligate it to pay claims for money loaned or advanced to the contractor. Plaintiff argues that the money advanced paid the claims of laborers and materialmen, and that plaintiff ought to be subrogated to the rights of those whose claims its money paid. This claim, which does not appear to have been previously passed upon by this court, has been before other courts many times; and it seems to be thoroughly settled that the claim is not tenable. U.S. v. Rundle (C.C.A.) 107 F. 227, 52 L.R.A. 505, U.S. v. D.L. Taylor Co. (D.C.) 268 F. 635, 645, et seq.; Carr Hdw. Co. v. Chicago B. & S. Co. 190 Iowa 1320, 181 N.W. 680; Cadenasso v. Antonelle, 127 Cal. 382, 59 P 765; New Amsterdam Cas. Co. v. State, 147 Md. 554, 128 A. 641; Rockwell Bros. & Co. v. Keatley, 51 Okl. 783, 152 P. 449; Murchison Nat. Bank v. Clark, 192 N.C. 403, 135 S.E. 123; Title G. & S. Co. v. State, 61 Ind.App. 268, 109 N.E. 237, 111 N.E. 19; Fulghum v. State, 94 Fla. 274, 114 So. 367; People v. Southern Surety Co. 76 Colo. 141, 230 P. 397; U.S.F. & G. Co. v. Henderson Co. (Tex. Civ. App.) 253 S.W. 835 (opinion on rehearing); Maryland Cas. Co. v. Philbrick & Nicholson, Inc. 147 Wash. 277, 266 P. 142; State ex rel. Hagquist v. U.S. F. & G. Co. 125 Or. 13, 265 P. 775; State ex rel. Southern Surety Co. v. Schlesinger, 114 Ohio St. 323, 151 N.E. 177, 45 A.L.R. 371.

In U.S. v. Rundle (C.C.A.) 107 F. 227, 229, 52 L.R.A. 505, the circuit court of appeals of the ninth circuit said:

"The agreement was wholly between the contractor and the bank. The laborers and the material men were not parties to it. They took their checks and their orders to the bank as directed and were there paid. The checks and orders were indorsed as evidences of payment, and for no other purpose, and the bank retained them as vouchers. In this...