In re Allied Products Co., 9286

• Decision Date: 08 April 1943
• Docket Number: No. 9286,9301.,9286
• Citation: 134 F.2d 725
• Parties: In re ALLIED PRODUCTS CO. BARNETT v. MARYLAND CASUALTY CO. CONTINENTAL CASUALTY CO. v. BARNETT.
• Court: U.S. Court of Appeals — Sixth Circuit

134 F.2d 725 (1943)

In re ALLIED PRODUCTS CO.

BARNETT v. MARYLAND CASUALTY CO.

CONTINENTAL CASUALTY CO. v. BARNETT.

Nos. 9286, 9301.

Circuit Court of Appeals, Sixth Circuit.

April 8, 1943.

Trafton M. Dye, of Cleveland, Ohio (Trafton M. Dye and Fackler & Dye, all of Cleveland, Ohio, on the brief), for Barnett.

Francis J. Amer, of Cleveland, Ohio (Clare M. Vrooman, Francis J. Amer, and Garfield, Daoust, Baldwin & Vrooman, all of Cleveland, Ohio, on the brief), for Maryland Casualty Co.

H. Frank VanLill, of Cleveland, Ohio (H. Frank VanLill and Orgill, Maschke, Wickham, Duffy & Loux, all of Cleveland, Ohio, on the brief), for Continental Casualty Co.

Before HICKS, MARTIN, and McALLISTER, Circuit Judges.

MARTIN, Circuit Judge.

One opinion will suffice for disposition of these two separate appeals, arising from the bankruptcy proceedings in the matter of the Allied Products Company, bankrupt.

In No. 9286, the trustee in bankruptcy has appealed from an order of the District Court reversing, on certificate for review, the ruling of the Referee in Bankruptcy and sustaining the application of the Maryland Casualty Company for an order authorizing payment to it, by the Board of County Commissioners of Summit County, Ohio, of certain amounts due the bankrupt under two road contracts between the bankrupt and the county board.

In No. 9301, the Continental Casualty Company has appealed from an order of the District Court sustaining, on certificate for review, the Referee's denial of its claim to certain amounts due the bankrupt under two road contracts between the bankrupt and the State of West Virginia.

No. 9286

The appeal of the trustee in bankruptcy will be first considered. The Maryland Casualty Company became surety on performance bonds covering two road-paving contracts between the bankrupt and the commissioners of Summit County, Ohio, entered into respectively on March 31, 1939, and May 25, 1939. The bankrupt fully performed these contracts to the satisfaction of the commissioners, who made payments to the bankrupt as the work progressed to the extent that only $1,136.20, due the bankrupt on the first contract, and $3,052.14 on the second contract were unpaid at the date of bankruptcy. These sums comprise the stakes in controversy. From a subsequent contract between the bankrupt and the City of Cleveland, Ohio, and two subsequent contracts between the bankrupt and the United States Government, the performance of which was guaranteed by the Maryland Casualty Company, the surety, in consequence of the default in performance by the bankrupt, sustained and paid losses totaling $11,761.91.

It is not controverted that, until default in performance, the bankrupt had the right to collect and use, as it pleased, all amounts due and payable to it under the contracts. The first default by the bankrupt, under any of the contracts, occurred with respect to its contract with the City of Cleveland. This default happened after the bankrupt had fully performed its obligations under the Summit County contracts and after the sums here in controversy had become due the bankrupt.

The issue presented is whether the appellee, Maryland Casualty Company, has a prior claim over general creditors to these unpaid balances owing to the bankrupt by the Summit County Commissioners, in consequence of a clause contained in the applications originally made by the bankrupt to the appellee for suretyship on its required contractor's bond to the commissioners. This critical clause reads as follows: "In the event of claim or default under the bond(s) herein applied for, or in the event the undersigned shall fail to fulfill any of the obligations assumed under the said contract and bond(s), or in the event of claim or default in connection with any other former or subsequent bonds executed for us or at our instance and request all payments due or to become due under the contract covered by the bond(s) herein applied for, shall be paid to the company — and this covenant shall operate as an assignment thereof and the residue, if any, after reimbursing the company as aforesaid, shall be paid to the undersigned after all liability of the company has ceased to exist under the said bond(s) and the company shall at its option be subrogated to all rights, properties and interest of the undersigned in said contract, or contracts."

(1) Relying upon Southern Surety Co. v. Town of Greeneville, 6 Cir., 261 F. 929, 931, the appellant trustee contends that the right of the appellee surety company to the funds in controversy ceased when the liability of the latter, as surety on the bonds, to the Summit County Commissioners terminated on October 23, 1939, upon full performance by the bankrupt of its undertakings under the two road contracts. The point is not well taken.

The opinion of this court, cited by appellant, does not support its position for the reason that, in the application of the contractor for a surety bond in the Southern Surety case, it was covenanted, with respect to the assignment to the surety of funds due or to become due by the obligee to the contractor, that, "in the event (the surety) company be released from liability on account of said bond and suffer no loss thereunder, then this assignment shall become at once null and void." The applications for the surety bonds in the instant case contain no similar provision.

It should be noted, moreover, that, in the earlier case decided by this court, the assignment was limited to a single contract, while here, the assignments expressly extend to all of the bonds upon which the appellant should become surety for the bankrupt's performance.

Lacy v. Maryland Casualty Co., 4 Cir., 32 F.2d 48, presented an issue interesting in its similarity to the proposition propounded here. In that case the contractor, in his application to the surety, assigned to the surety the retained percentage under the contract, not only for any loss sustained on the bond covering the particular project, but also for loss sustained upon any other bond executed by the surety for the contractor. It was held that the retained percentage remaining after reimbursement of the surety for the expense of completing the contract after the contractor had defaulted could be applied by the surety company toward its losses on other contracts, upon which it had become surety for the contractor, not under the equitable principle of subrogation, but as assignee; and that the assignment to the surety had priority in bankruptcy over subsequent assignments to creditors. The Southern Surety case, supra, was distinguished upon like grounds to those upon which it has been differentiated here.

(2) The next question and the real issue in the case is whether, under Ohio law, a present assignment of funds, which may accrue and be ascertained in the future upon the happening of a specified event (in this case, default upon another contract), is valid and entitled to priority over the claims of subsequently attaching creditors of the assignor who became creditors without notice of the...