Logan Planing Mill Co. v. Fidelity and Casualty Co. of NY, Civ. A. No. 1058.

Citation212 F. Supp. 906
Decision Date20 December 1962
Docket NumberCiv. A. No. 1058.
CourtUnited States District Courts. 4th Circuit. Southern District of West Virginia
PartiesLOGAN PLANING MILL COMPANY, a corporation, Plaintiff, v. FIDELITY AND CASUALTY COMPANY OF NEW YORK, a corporation, et al., Defendants.

William G. Wilson, Logan, W. Va., for plaintiff, Logan Planing Mill Co.

Huddleston & Bolen, William C. Beatty, Huntington, W. Va., for defendant Fidelity & Casualty Co. of New York.

Harry G. Camper, U. S. Atty., and Frank Eaton, Asst. U. S. Atty., Huntington, W. Va., and Wallace E. Maloney, Washington, D. C., for United States.

R. A. Woodall, Hamlin, W. Va., for defendant Board of Education of Lincoln County.

HARRY E. WATKINS, District Judge.

This action was brought by plaintiff to quiet title to a fund of money ($12,285.44), held by the Board of Education of Lincoln County, West Virginia, which the United States claims by virtue of a tax lien. Plaintiff, Logan Planing Mill Company, and defendant, Fidelity and Casualty Company of New York, claim the fund by virtue of an assignment in trust prior in point of time to the assessment of the tax. Many legal questions and some factual questions have been raised, but this court finds that the assignment was valid and effective, and is superior to the tax lien.

R. V. Pauley Construction Company (hereinafter called "Contractor") was the low bidder on each of three school building contracts for Lincoln County, West Virginia. The contracts were for $36,919.39, $82,537.72 and $43,983.68, respectively, and in the total amount of $163,440.79. The awarding of the contracts required the Contractor to furnish a performance and payment bond for each job in the amount of the contract price.1 The Contractor's financial condition was such that it could not obtain a surety on the three bonds on its own credit. When it applied to defendant, Fidelity and Casualty Company of New York (hereinafter referred to as "Surety") for bonds, the Surety declined to enter into such an arrangement unless the Contractor had obtained some additional, independent, outside indemnitor which would pledge its credit and guarantee to indemnify the Surety against loss on any or all of the performance bonds. Other conditions were also imposed by the Surety, which required the Contractor to segregate the entire contract proceeds, when payable, and to designate a trustee or third party to hold such proceeds to assure the Surety and plaintiff, Logan Planing Mill (hereinafter referred to as "Planing Mill") as Indemnitor, that the contract proceeds would not be comingled with Contractor's funds and to insure that such proceeds were applied to payment of the labor and material costs on each of the three contracts. Accordingly, the Contractor made arrangements with Planing Mill, in early August, 1959, to pledge the latter's credit to the Surety as the Contractor's Indemnitor and for Dan Lassiter (who was acceptable to all parties as a reliable and independent third party) to act as assignee of the contracts' proceeds, to handle and pay out for labor and materials only, the contract proceeds which were to be delivered to him. This separate handling of the contract proceeds by Lassiter was a condition for Planing Mill's lending its credit as indemnitor. About August 17, 1959, the Board of Directors of Planing Mill authorized it to enter into these contractual arrangements and on August 19, 1959, it executed the three indemnity contracts. About the same time the Contractor executed and delivered bond application forms for the three bonds, although the application forms were not then dated. It was then understood by the parties that the Contractor would complete the details of the written assignment of contract proceeds to Dan Lassiter by procuring and delivering to the Board and to Dan Lassiter a proper written agreement. Such an assignment was prepared and executed by the Contractor as of September 2, 1959 (prepared at Contractor's request by its attorney) and a copy thereof was submitted to Planing Mill and approved by it on or about September 30, 1959, by a written memo thereon signed by W. W. Bryan for the Planing Mill and likewise approved and accepted by Dan Lassiter at the same time by his written memo on the same copy thereof, which was returned and kept by the Surety. The written assignment was, in general terms, a complete assignment of all the contract proceeds under each of the three contracts, and specified the contracts and the amount thereof. The terms of the alleged trust arrangement under which Dan Lassiter was to act were agreed to by the parties verbally and were established in the oral testimony of the witnesses. The execution of the bond application, the arrangement for indemnification by Planing Mill, the designation of Dan Lassiter as alleged trustee and arrangements for his handling and payment of the contract proceeds for labor and materials, and the execution of the assignment of September 2, 1959 (which assigned to Dan Lassiter specifically and by reference to each construction contract all of the contract proceeds) were all a part of the same original transaction, although some of the details, such as the making of the written assignment, were completed at a later date. The construction contracts and the performance and payment bonds were executed by the Board of Education (hereinafter referred to as "Board" or "Owner") and by the Contractor and Surety, on August 31, 1959, and were duly recorded on September 10, 1959. The amount of the performance bonds executed by Surety was exactly the same in each instance as the amount of the construction contract.

A copy of the contract was not served upon the Board by the Contractor as he agreed to do, but the Contractor did proceed with the contracts. The contracts provided that on the 20th of each calendar month, the Board was to pay 90% of all labor and materials incorporated in the project up to the first day of that month, and the final payment of the last 10% of contract proceeds was to be paid 30 days after substantial completion, provided the work was then fully completed and the contract fully performed. Progress payment checks were made by the Board, under all three contracts, to Contractor, which endorsed the same and delivered them to Lassiter from time to time, pursuant to the assignment, beginning about September 14, 1959, to and including March 15, 1960. Payments dated May 5, 1960, and June 14, 1960, on all jobs, totalling $11,919.00, were kept and retained by the Contractor and were never delivered to Lassiter. All other payments made were delivered to Lassiter and by him deposited in his special checking account in The National Bank of Logan, at Logan, West Virginia. This special bank account was opened by him on September 18, 1959, at which time he deposited with the bank a photo copy of the executed assignment of September 2, 1959, and this special account was entitled "R. V. Pauley Construction Company, Dan Lassiter, Agent." The sum of $20.53 still remains in this account.

The Contractor presented its requisition to the trustee for payroll requirements, and Lassiter then made payments for such labor to the Contractor, and the Contractor then issued its own checks to each employee on account of that labor. Payments for material bills (less 10%) were made directly by Lassiter to suppliers. Although the construction contracts called for 10% of the contract sum to be retained to cover any defect in construction or for payment of unpaid labor and material claims, nevertheless, all of the contract proceeds had been paid out except $200 each on the Barrett Bend and Midkiff jobs, while as of June 14, 1960, all but $11,885.44 had been paid on the Hart's High School job.

The Surety, through its Richard Gainer, communicated monthly with Lassiter to insure that bills for labor and materials were being paid on time as they accrued. In May, 1960, the Surety determined that the Contractor was in default in payment of material bills, and on June 20, 1960, when Gainer visited Lassiter's office, he found that $2,240.00 was due and unpaid by the Contractor to one supplier of material. He also found that all but $200.00 had been paid out by the Board on each of two jobs. Soon thereafter, numerous unpaid material bills for materials delivered to these jobs were presented to the Surety for payment, and payment was made by the Surety. The names of these suppliers, the dates of delivery, and dates of payment, are covered in a stipulation signed by the parties. Beginning October 21, 1960, when the first payment was made, through May 9, 1961, the Surety paid out a total of $26,156.20 on claims for the Contractor's unpaid material bills on these three contracts. On November 17, 1961, Planing Mill, by reason of its agreements to indemnify Surety and save that Company from loss by reason of the three bonds, made a payment of $7,500.00 to Surety as part payment against losses sustained by Surety under such bonds.

The assignment of September 2, 1959, was not initially served on or delivered to the Board. Dan Lynch, and Gainer for the Surety, called on J. O. Midkiff (the Board's Superintendent of Schools) on August 25, 1960, and requested him not to pay anything further to the Contractor and advised Midkiff of the assignment. A copy thereof was sent to the Board by Lassiter with the latter's forwarding letter of August 26, 1960. By letter dated September 9, 1960, Lynch wrote Midkiff to demand that the retained proceeds be delivered to the Surety to pay for material bills, etc., purchased on these jobs. After June 14, 1960, no further progress payments were made by the Board. At the time the Board filed its answer, it had $12,285.44 in its hands to be distributed as the court might direct. After the Board filed its answer in this case, stating that it held the sum of $12,285.44 for distribution by the court, it paid out the sum of $1,693.70 on March 13, 1961, without court order, and amended its...

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