Lacy v. Maryland Casualty Co.

• Citation: 32 F.2d 48
• Decision Date: 09 April 1929
• Docket Number: No. 2783,2784.,2783
• Parties: LACY v. MARYLAND CASUALTY CO. MURCHISON NAT. BANK v. SAME.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

32 F.2d 48 (1929)

LACY v. MARYLAND CASUALTY CO.

MURCHISON NAT. BANK v. SAME.

Nos. 2783, 2784.

Circuit Court of Appeals, Fourth Circuit.

April 9, 1929.

E. K. Bryan, of Wilmington, N. C. (Bryan & Campbell, of Wilmington, N. C., on the brief), for appellants.

J. O. Carr, of Wilmington, N. C. (Rountree & Carr, of Wilmington, N. C., on the brief), for appellee.

Before PARKER and NORTHCOTT, Circuit Judges, and COLEMAN, District Judge.

PARKER, Circuit Judge.

The appeals in the above-entitled cases were taken from decrees awarding to the Maryland Casualty Company all of the funds due by the North Carolina highway commission on account of certain road contracts. The other claimants were the Murchison National Bank, which held assignments from the contractor, and the administratrix of H. D. Lacy, who claimed a one-half interest in the profits realized from one of the contracts. For convenience we shall discuss the cases together.

The facts are as follows: One C. W. Lacy was awarded a number of contracts by the North Carolina highway commission for the construction of roads in Eastern North Carolina. Among these was contract No. 151 covering a road project in Hyde county and contract No. 378 covering a project in Pender county. The contracts were in the usual form, providing for progress payments on estimates of work accomplished, with retention by the commission of 15 per cent. of the amount of the estimates until the completion of the entire work. The casualty company executed a bond in the case of each contract guaranteeing its performance by the contractor, having previously obtained from him an application in which he agreed to indemnify the company against loss, and which contained, among other provisions, the following, which are the ones pertinent to the controversy here involved, viz.:

"Second. * * * And for the better protection of the said company the undersigned do, as of the date hereof, hereby assign, transfer and convey to it, the said Maryland Casualty Company, all our right, title and interest in and to all the tools, plant and equipment and materials of every nature and description that we may now or hereafter have upon said work, or in, on or about the site thereof, including as well materials purchased for or chargeable to said contract which may be in process of construction, on storage elsewhere, or in transportation to said site; hereby assigning and conveying also all our rights in and to all sub-contracts, which have been or may hereafter be entered into, and the materials embraced therein, and authorizing and empowering said company, its authorized agents or attorneys, to enter upon and take possession of said tools, plant, equipment, materials and sub-contracts, and enforce, use and enjoy such possession upon the following conditions, viz.: This assignment shall be in full force and effect as of the date hereof, should the undersigned fail or be unable to complete the said work in accordance with the terms of the contract covered by said bond, or in event of any default on the part of the undersigned under the said contract. In event of claim or default under the bond herein applied for all payments specified in the above mentioned contract to be withheld by the obligee until the completion of the work, shall as soon as the work is completed, 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, and the company shall at its option be subrogated to all the rights, properties and interest of the undersigned in said contract or contracts. (Italics ours.)

* * * * * * * *

"Eighth. That these covenants and also all collateral security, if any, at any time deposited with the company concerning the said bond or any other former or subsequent bonds executed for us or at our instance, shall, at the option of the company, be available in its behalf and for its benefit as well concerning the bond or undertaking hereby applied for, as also concerning all other former or subsequent bonds and undertakings executed for us or for others at our request."

On May 24, 1923, Lacy had become insolvent and was unable to obtain funds to carry on the work on contracts 151 and 378. Thereupon he entered into a contract with the casualty company under which the latter agreed to advance the money necessary to complete the contracts, taking as security his road working equipment and certain corporate stock. This contract further provided that the money to be advanced by the casualty company thereunder should be under the joint control of Lacy and the company and should not be paid out except upon the counter signature of its representative, and that all moneys which might be received from the highway commission, "including current estimates and retained percentages," should be deposited in the same fund and disbursed in like manner. The highway commission was promptly advised of the making of this contract and was notified to make no further payments on the road contracts except upon the order of the casualty company.

After the execution of this contract, Lacy continued for several months to prosecute the work under the contracts in his own name but with the funds furnished by the casualty company. Finally, however, the company took over the contracts and completed performance in its own name. No formal notice of default under any of the contracts was ever given to the company by the highway commission. On contract 151, which was nearly completed when taken over, a profit of something over $10,000 was realized. On project 378, however, a loss was sustained amounting to $139,000, and on all of the contracts taken together the loss far exceeded the profits.

The claim of the casualty company arises out of the furnishing of funds for the completion of the contracts, its contention being that as surety it is entitled to priority over all other assignees and to treat all of the contracts as one contract and apply the profits realized on No. 151 against the losses sustained on the others. The claim of the Murchison National Bank is based upon assignments executed to it by Lacy on March 31, 1923, in which he assigned all moneys then due or thereafter to become due on contracts 151 and 378. On the strength of these assignments, the bank loaned him money to pay for labor and material, and under them it claims the May estimates on both contracts, amounting to $1,543.39 and $6,631.92, respectively. It appears that the highway commission was promptly notified of the assignments, and in acknowledging receipt of the notice the auditor of the commission advised that it would "be governed accordingly."

The claim of the administratrix of H. D. Lacy relates only to contract 151. The parties have stipulated, and the judge below has found as a fact, that after the execution of that contract C. W. Lacy, the contractor, agreed with his brother H. D. Lacy to pay him $50 per week as salary for services on the project covered thereby, and upon its completion to give him one-half of the profits of the contract as additional compensation. One-half of the profits amounted to $5,337.40 and the administratrix of H. D. Lacy claims this under the agreement.

The District Judge denied the claims both of the bank and of the administratrix and held that the casualty company had a prior claim on all of the funds due by the highway commission on both contracts. We think, however, that different principles are applicable in the case of the funds derived from contract 151, on which a profit was realized, from those which apply in the case of the funds due on the other contract, and shall accordingly discuss them separately.

So far as the funds due under contract No. 378 are concerned, we think that there can be no question that the decree of the court below was correct. For reasons which we shall discuss later on, we do not think that the assignment contained in the application for bond covered anything but the percentages required to be retained under the contract; but we are satisfied that the rights of the casualty company in the funds due under the contract were not limited to what was conferred by the application. Exchange State Bank v. Federal Surety Co. (C. C. A. 8th) 28 F.(2d) 485. The rule is well settled that, independently of assignment, the surety on a contractor's bond, who completes the contract on default of the principal, is subrogated to the rights of the obligee, and, to the extent necessary to reimburse himself, has an equity in the funds due the contractor, which is superior to that of a mere assignee. Prairie State National Bank v. U. S., 164 U. S. 227, 17 S. Ct. 142, 41 L. Ed. 412; Henningsen v. United States Fidelity & Guaranty Co., 208 U. S. 404, 28 S. Ct. 389, 52 L. Ed. 547; First Nat. Bank v. City Trust Co. (C. C. A. 9th) 114 F. 529; State ex rel. Southern Surety Co. v. Schlesinger, 114 Ohio St. 323, 151 N. E. 177, 45 A. L. R. 371 and note beginning at page 379; Labbe v. Bernard, 196 Mass. 551, 82 N. E. 688, 14 L. R. A. (N. S.) 457, and note; 21 R. C. L. 1113, 1114.

The question arises whether this superior equity of the surety extends to the current estimates payable under the contract or merely to the retained percentage. We think that it extends to both. The equity arises because of the obligation of the surety to perform the contract of the principal. Upon his performance of this contract, equity subrogates him to all rights of the obligee as against the principal. Now the obligee, upon default of the principal, is without doubt entitled to apply all moneys unpaid towards the performance of the contract, ignoring any assignments by the principal; and it necessarily follows that the surety upon performing the contract, being subrogated to the rights of the obligee, is entitled to the moneys unpaid so far as...