Grover v. Bd. of Educ. of Franklin Tp.

• Decision Date: 19 March 1928
• Citation: 141 A. 81
• Parties: GROVER et al. v. BOARD OF EDUCATION OF FRANKLIN TP. et al.
• Court: New Jersey Court of Chancery

141 A. 81

GROVER et al.

v. BOARD OF EDUCATION OF FRANKLIN TP. et al.

Court of Chancery of New Jersey.

March 19, 1928.

(Syllabus by the Court.)

Suit by John B. Grover and others against the Board of Education of the Township of Franklin and others to enforce a lien claim on a fund due a contractor. Decree for claimant.

Louis Gerber and James J. McGoogan. both of Trenton, for complainants.

John F. Reger, of Somerville, for defendant Metropolitan Casualty Ins. Co., etc.

BUCHANAN, Vice Chancellor. Defendant Stout contracted with defendant board of education to build a public schoolhouse at Middlebush for $72,185. He gave bond to the board in this sum, with defendant Metropolitan Casualty Insurance Company as surety thereon, for the faithful performance of the work and the payment of all subcontractors, materialmen, and laborers, substantially in accordance with the provisions of chapter 75, P. L. 1918, p. 203.

Complainants furnished the lumber and mason materials for the price of $6,890.53. On October 20, 1926, they filed notice of lien claim for this amount, and thereafter filed their bill in this cause against the contractor and the board to enforce such lien claim, under section 8 of the Muncipal Lien Act (Rev. 1918 [P. L. 1918, p. 1045]).

One or two subsequent lien claimants later applied, and were made parties to this suit—also the defendant insurance company.

Stout abandoned the contract about November 15th, and the insurance company, as surety, took it over. The board of education had still in its hands over $50,000 of the contract price. On December 20th the insurance company contracted with Perth Amboy Construction Company to finish the job for some $53,000—the latter to use, and the insurance company to pay for, the materials theretofore delivered on the job, including complainants' lumber, etc.

About September 27th the board had made a payment of $10,494.04 to Stout on account of the contract, and, on September 28th, Stout had paid to complainants, out of the funds so received, $8,000. Stout was already indebted to complainants to the amount of $30,000 on open account, in addition to the indebtedness on this Middlebush school job, and complainants applied this payment of $8,000 on account of that prior indebtedness. About October 30th the board paid another sum of over $10,000 to Stout on account of this contract, out of which Stout paid $6,000 to complainants, who applied it also to the open account.

The contract was duly completed and accepted. The other lien claimants have been paid. The fund in the hands of the board should be paid to the insurance company, less the claim of complainant for the $6,890.53, if that claim be valid.

The insurance company contends that the complainants' Hen claim must be deemed to have been paid out of the moneys received from Stout in September, inasmuch as complainants knew that Stout was making this payment out of moneys received by Stout from the board on account of the very building contract for which the insurance company was surety. (The insurance company's contract was one of guaranty in the nature of suretyship. The insurance company will hereinafter be called the surety company.)

Admittedly, the question is of novel impression in New Jersey. It has been considered in a number of cases cited by the defendant surety company, decided in some of the Western States, and it seems that the weight in number of those decisions is to the effect that complainants, under the circumstances of this case, were equitably bound to apply the September payment to the debt due on the school building, since they knew that the payment came from moneys received on the school building contract, although in the absence of such knowledge complainants would not have been under such duty.

The difficulty in the way of accepting these adjudications as authoritative is that they assume, without proving, that such an equity exists in favor of the surety.

As between debtor and creditor, it is the debtor's legal right to direct that any payment he makes shall be applied to whichever of two or more debts he chooses. Equally it is the creditor's legal right to select the application, if the debtor fails to do so at the time of payment. Terhune v. Colton, 12 N. J. Eq. 232, at page 237; affirmed 12 N. J. Eq. 312, at page 320. These two rules of law are well established, not only in New Jersey, but generally. See tit. "Payment," 30 Cyc. 1228 et seq.; 21 R C. L. 88 et seq.

It is also well established that these two principles are equally the law, as a general rule, notwithstanding that there be a surety for one of the debts. Like all rules, there are some exceptions to it, but, as a general rule, a surety has no right to insist that a debtor shall pay the debt guaranteed by the surety instead of an unsecured debt; nor has he a right, where the debtor makes a payment to a creditor without direction as to which debt is to be credited, to insist that the creditor apply the payment to the secured debt instead of the unsecured debt. 30 Cyc. 1234; 21 R. C. L. 108; 32 Cyc. 170, tit. "Principal and Surety"; 28 C. J. 1005, tit. "Guaranty"; Pingrey, Suretyship and Guaranty, § 97; Stearns, Suretyship (3d Ed.) § 06, p. 134; Wilcox v. Fairhaven Bank, 89 Mass. (7 Allen) 270, at page 274.

This general rule is quite logical. A surety is a contingent creditor. If and when he pays the debt which he has guaranteed, he becomes a creditor, and stands in the shoes of the creditor whom he paid; but he has no greater rights, and there is no reason why he should have. As between two ordinary creditors, neither one has a greater right than the other to insist on his debt being paid; a debtor has a right recognized in equity as well as at law to prefer a creditor, except to the extent that bankruptcy statutes interfere. So assuredly a contingent creditor would have no greater right than an actual creditor.

As has been said, there are exceptions to this general rule. They are variously stated in the different opinions and texts, but it is conceived that they are not susceptible of classification under any principles other than this, that, where circumstances exist such as give rise to superior equities in favor of the surety, the legal rights of the debtor and creditor, above stated, will be subordinated to such rights of the surety. In other words, they are not legal exceptions to a legal rule, but cases where equitable rights arise to override legal rights.

For instance, it is said by some of the authorities that, where the money which is paid to the creditor is the very money for the payment of which a surety is surety, the surety has the right to insist that the payment shall be applied to that debt instead of to another indebtedness, and Merchants' Ins. Co. v. Herber, 68 Minn. 420, 71 N. W. 624, is cited. In that case, Herber was an agent of the insurance company, and, under his contract, was to collect premiums, which were the property of the insurance company, and remit them to the company. A surety gave bond for the faithful performance by the agent of his duties.

The first month, the moneys collected by the agent and remitted to the company, were by the agreement of both applied to the discharge of a prior indebtedness of the agent to the company, on which the surety was not liable. The next month's collections were applied to the indebtedness due the first month, and so on, leaving an unpaid balance at the end of the agency, although in fact the agent had remitted to the company all the moneys he had collected during the term for which the surety was liable. The court determined, and rightly so, that the surety was not liable for the unpaid balance due to the company from the agent. The court says that the surety was equitably entitled, so far as his liability was concerned, to have the remittances by the agent applied so as to extinguish the surety's liability. It would seem, however, that no equitable principles were really involved. The surety was discharged on pure legal principles. The agent had in fact done that which the surety had bound himself that the agent should do; namely, to remit to the company all moneys of the company collected by him during the year of his agency.

It seems to be upon this so-called principle of the surety's right to direct the application of the payment of the very money for the payment of which he is...