Illinois Surety Co. v. Mitchell

• Decision Date: 26 October 1917
• Parties: ILLINOIS SURETY CO. v. MITCHELL ET AL.
• Court: Kentucky Court of Appeals

197 S.W. 844

177 Ky. 367

ILLINOIS SURETY CO. v. MITCHELL ET AL.

Court of Appeals of Kentucky.

October 26, 1917

Appeal from Circuit Court, Henderson County.

Suits by G. T. Mitchell and others against Harold A. Keith, wherein attachments were issued and served on the Board of Drainage Commissioners of Henderson County as garnishee; the Illinois Surety Company intervening. From a judgment dismissing its intervening petition, the surety company appeals. Judgment reversed, and action remanded, with instructions.

A. J Hopkins, of Chicago, Ill., and Yeaman & Yeaman, of Henderson for appellant.

Dorsey & Dorsey, of Henderson, for appellees.

MILLER J.

In April 1914 Harold A. Keith contracted with the board of drainage commissioners of Henderson county to construct a ditch known as the "Double Dam System." Keith was to be paid 13 cents per cubic yard for earth removed, and the work was to be completed on or before January 1, 1915. The contract further provided that Keith was to be paid in monthly installments of 80 per cent. of the contract price of the work done, as certified by the engineer in charge, the first estimate to be made 30 days after work had begun. The remaining 20 per cent. of the contract price was to be paid when the work was completed and accepted by the engineer. To insure the performance of his contract, Keith executed his bond to the board on April 13, 1914, in the sum of $9,234 with the appellant, the Illinois Surety Company, as surety thereon for the faithful performance of the contract. One of the conditions of the bond, and the one material in the consideration of this case, reads as follows:

"If the said principal shall fail to comply with any of the conditions of said contract to such an extent that the same shall be forfeited, or so declared by those authorized so to do, then said surety shall have the right and privilege to assume the performance of said contract and to sublet or complete same, whichever said surety may elect to do, and in any such event or events, said surety shall be subrogated to all the rights and properties of said principal arising out of said contract, and to any and all moneys and properties at that time due and payable, including deferred payments, and to all payments that may thereafter become due and payable to the said principal under and by virtue of said contract." Keith began the work under his contract and continued it until March 6, 1915, when he abandoned the work and left the state. On the same day--March 6, 1915--the Illinois Surety Company took charge of the work, and has since completed it. The board of drainage commissioners paid Keith 80 per cent. of the contract price of the work he had performed, and retained 20 per cent. thereof, as provided by the contract. The retained 20 per cent. amounted to $1,903.25. In March, 1915, the appellee Mitchell and six other creditors filed suits against Keith, and caused attachments to issue and be served upon the board of drainage commissioners, as garnishee, upon the ground that Keith was a nonresident of Kentucky. In completing the contract the Illinois Surety Company expended the sum of $13,582.96, and at the time of the trial in the circuit court it had paid out $12,714.14; the difference between these two sums being the retained percentage due certain subcontractors, which will be paid to them by the Illinois Surety Company on its final settlement with the board of drainage commissioners. The net loss to the Illinois Surety Company after charging it with the $1,903.25 retained percentage due Keith will be $2,959.68; and if it does not receive that sum its net loss will be $4,862.93.

The several attachment suits having been ordered heard together, the Illinois Surety Company intervened and claimed the $1,903.25 retained percentage due upon the work completed by Keith before his departure, under the second clause of the contract above quoted. The circuit court sustained a demurrer to the company's intervening petition; and, that company having declined to further plead, the court adjudged that the Illinois Surety Company was entitled to no part of the $1,903.25 remaining in the hands of the board of drainage commissioners, and dismissed its intervening petition. The judgment further sustained the grounds of attachment in the several suits by the creditors and subjected the $1,903.25 retained percentage to the satisfaction of their judgments. The Illinois Surety Company appeals.

It will be observed that this is a contest between Keith's surety on the one hand, and his attaching creditors on the other, who are claiming the same fund. Furthermore, it is not to be overlooked that Mitchell and the other attaching creditors, who are now appellees, did not proceed as subcontractors to enforce liens under the statute, but sued as general creditors and obtained whatever liens they may now have by virtue of their attachments which are subsequent in time to the rights of the surety company. In their relation, therefore, to each other with respect to their conflicting claims upon the retained percentage, the surety company and Mitchell stand as contending assignees; and the question is: Which has the superior claim?

That the contract constituted a valid equitable assignment of the retained percentage, for the protection of the surety, and superior to the claims of the subsequent attaching creditors, there can be no doubt. Maize v. Bowman, 93 Ky. 205, 19 S.W. 589, 14 Ky. Law Rep. 121, 17 L.R.A. 81; Holt v. Thurman, 111 Ky. 84, 63 S.W. 280, 23 Ky. Law Rep. 92, 98 Am.St.Rep. 399; Thomp son's Ex'r v. Stiltz, 96 S.W. 884, 29 Ky. Law Rep. 1076; Lexington Brewing Co. v. Hamon, 155 Ky. 711, 160 S.W. 264; Moulder-Holcomb Co. v. Glasgow Cooperage Co., 173 Ky. 519, 191 S.W. 275.

While the precise question as to the superiority of these claims has never been before this court, many cases directly in point have been decided in other jurisdictions; and in every instance to which our attention has been called, with a possible single exception, the claim of the surety has prevailed. These decisions rest upon the equitable doctrine of subrogation, which is derived, and the term itself borrowed, from the Roman civil law. It is the substitution of a new for an old creditor, or, in its more general sense, the act of putting by a transfer one person in the place of another, or a thing in the place of another thing. By the transfer the substituted or new creditor is subrogated to all the rights of the original creditor. The right of subrogation rests not upon contract, but upon the principles of natural justice. In Gadsden v. Brown, Speer's Eq. (S. C.) 37, Chancellor Johnson said "the doctrine of subrogation is a pure, unmixed equity, having its foundation in the principles of natural justice"; and this remark has been at least twice cited with approval by the Supreme Court of the United States. Ætna Life Ins. Co. v. Middleport, 124 U.S. 547, 8 S.Ct. 625, 31 L.Ed. 537; Prairie State National Bank v. United States, 164 U.S. 231, 17 S.Ct. 142, 41 L.Ed. 412. This statement of the doctrine was substantially adopted by this court in Ft. Jefferson Improvement Co. v. Dupoyster, 112 Ky. 801, 66 S.W. 1048, 24 Ky. Law Rep. 1199, 2 L.R.A. (N. S.) 263.

There are, however, two definite limitations to the doctrine as above broadly stated: First, a surety is not entitled to subrogation until he has paid the debt; and, secondly, a volunteer is not so entitled. A comprehensive classification of the cases in which the doctrine of subrogation may be applied is difficult; but in Wilkins v. Gibson, 113 Ga. 31, 38 S.E. 374, 84 Am.St.Rep. 204, it was said that a subrogation will arise only in cases (1) where the party claiming it has advanced money to pay a debt, which in the event of default by the debtor he would be bound to pay; or (2) where he had some interest to protect; or (3) where he advanced money under an agreement, expressed or implied, made either with the debtor or the creditor that he should be subrogated to the rights and remedies of the creditor. In the case of In re Fowble (D. C.) 213 F. 680, it was further said that a materialman cannot claim by subrogation because he has not paid a debt due to a third person. He must claim under the statute if he wishes to preserve his lien; otherwise, he is a general creditor. In Stehle v. United Surety Co., 107 Md. 470, 68 A. 600, the United Surety Company became surety for Jones who had contracted to build a railroad for the Maryland Electric Railways Company. Stehle, a subcontractor under Jones, caused an attachment to be served upon the Maryland Electric Railways Company as garnishee. In the Stehle Case, as in this case, the contractor's bond provided that in case the contractor abandoned the work, his surety should have the right to complete it and receive the deferred payments; and all other money payable under the contract to the contractor should be paid to the surety in the same manner as they would have been paid to the principal if he had duly performed the contract. Jones abandoned the work, leaving the sum of $439.57 owing to him from the Maryland Railways Company. The surety completed the work according to Jones' contract at a loss, and claimed the $439.57 retained in the hands of the railway company. In the Stehle Case Jones' written application for the bond contained this provision:

"And I do further agree in the event of any breach or default on my part of the provisions of the contract hereinbefore mentioned, that the United Surety Company, as surety upon the aforesaid bond, shall be subrogated to all my rights and properties as principal in said contract, and that deferred payments, and any and all moneys and properties that may be due and payable to me at the time of such breach or

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