General Acrylics v. U.S. Fidelity and Guaranty Co., 1

• Court: Arizona Court of Appeals
• Writing for the Court: JACOBSON; HAIRE, P. J., and EUBANK
• Citation: General Acrylics v. U.S. Fidelity and Guaranty Co., 623 P.2d 839, 128 Ariz. 50 (Ariz. App. 1980)
• Decision Date: 11 December 1980
• Docket Number: No. 1,CA-CIV,1
• Parties: GENERAL ACRYLICS, an Arizona Corporation, Defendant-Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, a corporation, Defendant-Appellee. 4700.

Page 839

623 P.2d 839

128 Ariz. 50

GENERAL ACRYLICS, an Arizona Corporation, Defendant-Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, a corporation, Defendant-Appellee.

No. 1 CA-CIV 4700.

Court of Appeals of Arizona, Division 1, Department B.

Dec. 11, 1980.

Rehearing Denied Jan. 16, 1981.

Review Denied Feb. 3, 1981.

Kanne & Bickart by Allen B. Bickart and Monbleau, Vermeire & Turley by Albert R. Vermeire, Phoenix, for defendant-appellant.

Moore, Jennings, Kepner, Scheffing & Hart by Curtis A. Jennings and John C. Rea, Phoenix, for defendant-appellee.

OPINION

JACOBSON, Judge.

This is a case of first impression in Arizona. It involves whether a surety or an unpaid subcontractor is entitled to funds remaining in the hands of the owner upon completion of a construction project performed under Arizona's Little Miller Act. The facts are not in dispute and this matter was disposed of in the trial court by way of summary judgment. On June 1, 1976, the Tuba City Unified School District No. 15 (Tuba City) entered into a contract with J. D. Slavens, dba Slavens Construction Company (Slavens), for the construction of locker rooms and an athletic field at the Tuba City High School. This contract was controlled by Arizona's "Little Miller Act," A.R.S. §§ 34-221, et seq., and required Slavens to furnish a performance bond to insure Slavens' full performance of the contract, and a payment bond to insure that all subcontractors, materialmen and laborers were paid. Accordingly, appellee, United States Fidelity & Guaranty Company (USF&G), as surety, executed and delivered performance and payment bonds in the amount of $443,000.00, the total amount of the construction contract, naming Tuba City as obligee.

In connection with this contract, Slavens entered into subcontracts with All American School Supply (All American) and with appellant, General Acrylics (Acrylics), to perform certain work under its general contract.

Although Slavens subsequently completed the construction contract and received the sum of $337,359.12 from Tuba City, it failed to pay several subcontractors and suppliers, including All American and Acrylics. At the time of completion of the contract, Tuba City still held the sum of.$106,228.94 owed Slavens.

A dispute then arose among Slavens, All American and Acrylics as to which one was entitled to all or part of the unpaid contract proceeds held by Tuba City. As a result of this dispute, Tuba City filed a complaint in interpleader in Coconino County Superior Court, interpleading the unpaid balance due on the contract.

In a separate action, All American filed a complaint against Acrylics, Slavens and USF&G, asserting a claim for the balance due under its subcontract to Slavens. Acrylics filed an answer in that action, asserting that Slavens owed it $78,000.00 plus costs and interest, but did not seek affirmative relief against USF&G on its claim.

By stipulation in the interpleader action, Tuba City was discharged from all further liability to the parties upon depositing the sum of $105,813.62 with the clerk of the court. The trial court subsequently determined that Slavens had no interest in this sum.

On this state of the record, All American moved for summary judgment against Slavens in its action on its claim of $194,000.00 plus interest, costs and attorneys fees. This summary judgment was granted. ¹

All American subsequently moved for summary judgment against USF&G as surety on Slavens' payment bond. This judgment likewise was granted, and USF&G paid All American the total amount of its judgment in the sum of $243,123.41.

On July 21, 1978, All American filed a satisfaction of judgment and an assignment of its judgment against Slavens to USF&G. This assignment transferred to USF&G all of All American's right, title and interest in its judgment against Slavens. At this time, over $200,000.00 remained on USF& G's bond for payment of legitimate claims under the Slavens/Tuba City contract.

Subsequently, Acrylics filed a cross-claim against Slavens in the All American action. At the time of oral argument, both parties agreed that this court could consider that Acrylics was successful in that cross-claim and obtained a judgment against Slavens.

Although Acrylics alleged that it had completed its work under its subcontract with Slavens on July 15, 1977, Acrylics made no claim against the USF&G's payment bond until March 1, 1979, when it filed an action against USF&G in Maricopa County Superior Court. Again, at the time of oral argument, both parties agreed that this court could consider in determining this matter that Acrylics was unsuccessful in its action against USF&G, its claim on the payment bond being barred for failure to make a claim within one year of the completion of the subcontract. See A.R.S. § 34-223(C).

In the interpleader action, USF&G, as the assignee and subrogee of All American, moved for summary judgment, claiming it was entitled to all the sums interpleaded by Tuba City. Acrylics also moved for summary judgment in that action, claiming that it, as an unpaid subcontractor, was entitled, as against USF&G as a surety, to have its claim first paid out of this fund. The trial court granted judgment in favor of USF&G and Acrylics has appealed.

It is Acrylics' position on appeal that, based upon equitable principles, a surety under a payment bond executed solely for the protection of claimants supplying labor and materials to the contractor is not entitled to be subrogated to earned, but unpaid, contract proceeds until all laborers and materialmen have been paid. From this premise, it argues that since it remains an unpaid subcontractor, it has first priority under an equitable lien theory on the interpleaded proceeds. On the other hand, USF&G contends that under Arizona's Little Miller Act, where sufficient funds remain under a payment bond to pay all claims of subcontractors, laborers and materialmen, the sole remedy of this class of creditors is an action on that bond. The argument continues that the failure to make a timely claim on the bond precludes Acrylics from asserting a claim on the earned but unpaid proceeds under the contract as against it, as an assignee and subrogee of a timely claimant. Both parties agree that they have been unable to find any authority directly in point.

The problem is not without difficulty and for this reason background legal principles are worth identifying. We start with the proposition that public buildings and public works are not subject to the same mechanic lien laws that govern private construction. Webb v. Crane Co., 52 Ariz. 299, 80 P.2d 698 (1938). Therefore, persons supplying labor or materials on such public works are unable to look to the sale of the fruits of their labor or materials to obtain remuneration in the event they are not paid. For this reason, Congress and the various state legislatures have enacted legislation requiring that in lieu of such lien rights, contractors dealing with the federal or state government must provide bonds as security for both the performance of the contract and the payment of laborers and materialmen on the project. ²

The federal act is referred to as the Miller Act (40 U.S.C.A. 270a). The Arizona Legislature has enacted its own "Little Miller Act" in A.R.S. § 34-221 et seq. A.R.S. § 34-222 of this Act provides in part:

A. ... (B)efore any contract is executed with any person for the construction, alteration, or repair of any public building, a public work or improvement ... he shall furnish to the agent entering into such contract, the following bonds which shall become binding upon the award of the contract to such person, who, for purposes of this article means "contractor":

A payment bond in an amount equal to the full contract amount solely for the protection of claimants supplying labor or materials to the contractor or his subcontractor in the prosecution of the work provided for in such contract.

However, the right to be paid from the payment bond is not without limitation. A.R.S. § 34-223(C), provides that no suit on the bond shall be commenced "after the expiration of one year from the date on which the last of the labor was performed or materials were supplied ...."

From this federal and state legislation various legal rights have been established vis a vis the government, the contractor the subcontractors, laborers and materialmen, the bonding surety and general creditors of the defaulting contractor or subcontractor. These rights, as among the various classes, are important because normally, as is the case here, some funds remain in the hands of the governmental body either as the result of retainage (see A.R.S. § 34-221(A)(3)), or as the result of monies being earned, but unpaid. ³

As to these types of funds, one of the rights of the surety is that of equitable subrogation. ⁴ This right arises out of the equitable doctrine that when one, pursuant to a legal obligation and not as a volunteer, fulfills the duty of another he is entitled to assert the rights of that other against third parties. National Shawmut Bank of Boston v. New Amsterdam Cas. Co., 411 F.2d 843 (5th Cir. 1969). As this case points out, the surety may acquire various rights of subrogation:

When, on default of the contractor ... (the surety) pays all the bills on the job to date and completes the job, it stands in the shoes of the contractor insofar as there are receivables due it; in the shoes of laborers and materialmen who have been paid by the surety who may have had liens; and, not least, in the shoes of the government, for whom the job was completed.

411 F.2d at 845.

The "lien" of the laborer and materialman referred to in the quotation needs further explanation. As previously indicated, this class of persons does not have "lien" rights comparable to those in the private sector. However, numerous cases have held that the government is under an equitable obligation to apply funds in...