National Sur. Corp. v. State Nat. Bank of Frankfort

• Decision Date: 22 May 1970
• Citation: 454 S.W.2d 354
• Parties: 7 UCC Rep.Serv. 1232 NATIONAL SURETY CORPORATION et al., Appellants, v. The STATE NATIONAL BANK OF FRANKFORT, Kentucky, Appellee. The STATE NATIONAL BANK OF FRANKFORT, Kentucky, Cross-Appellant, v. VEST & BARTELL, Cross-Appellees.
• Court: United States State Supreme Court — District of Kentucky

Page 354

454 S.W.2d 354

7 UCC Rep.Serv. 1232

NATIONAL SURETY CORPORATION et al., Appellants, v. The STATE NATIONAL BANK OF FRANKFORT, Kentucky, Appellee.

The STATE NATIONAL BANK OF FRANKFORT, Kentucky, Cross-Appellant, v. VEST & BARTELL, Cross-Appellees.

Court of Appeals of Kentucky.

May 22, 1970.

Ben B. Fowler, Dailey & Fowler, Frankfort, for National Surety Corp. and Vest and Bartell.

Allen Prewitt, Sr., Frankfort, for State National Bank of Frankfort.

OSBORNE, Judge.

At issue in this case is who, as between a surety company on a contractor's performance bond and a lending bank, is entitled to collect payments for work performed by a defaulting contractor? The facts of the case are as follows:

In March of 1966, Ronald Pulliam entered into a contract with the Whittenberg Engineering and Construction Company to perform electrical work in the construction of a dormitory on the campus of Morehead University. In October of 1966, the same parties entered into a similar contract in connection with the construction of a science building on the same campus.

In addition to these jobs, Pulliam had other contracts under way. It appears that Pulliam used the periodic payments from these jobs to meet weekly payrolls and bills from suppliers of materials. However, since income from the jobs did not always coincide in time with the payment of bills, he had an arrangement with the State National Bank of Frankfort to periodically borrow money in order to meet payrolls. On July 3, 1967, Pulliam made an assignment to the bank of all amounts due from the Whittenberg Engineering account. He also executed a financing statement in favor of the bank which was duly recorded in the Franklin County Court Clerk's office on July 3, 1967. The National Surety Corporation executed performance bonds for Pulliam upon both of the above-mentioned jobs. Sometime in September, 1967, Pulliam notified National Surety that because of financial difficulties he would be unable to complete the contracts and requested them to come in and take over the jobs. On September 13, National sent their agent, Mr. Meeker, to Pulliam's office for the purpose of taking over the contracts. When Mr. Meeker arrived in Pulliam's office, the following conversation took place:

'Meeker: 'Do you have the money for this week's payroll?'

Pulliam: 'I do not have the money, but I can borrow it from the Bank against checks from Whittenberg that are to go to the Bank.'

Meeker: 'That arrangement would be fine. Next week, we will have National's checks printed ready to take up the payroll.'

On the basis of this conversation, Pulliam secured a loan of $11,000 from the State National Bank in order to meet the week's payroll. Simultaneously, he executed an assignment of all funds due for work done to the National Surety Corporation. As a result, Whittenberg and the Commonwealth of Kentucky paid the funds over to National Surety Corporation. The bank instituted this action against National Surety for recovery of the funds.

After trial, judgment was entered in Franklin Circuit Court in favor of the bank against the appellant, National Surety Corporation, for the sum of $11,000, with interest at the rate of six percent from September 14, 1967, subject to a credit of $6475.59 which had previously been paid by Pulliam. We are of the opinion the judgment should be affirmed.

Many issues are discussed by the parties in their briefs which we do not believe to be germane to the question actually presented by this record. It is insisted by appellants that they are entitled as a matter of equity to be subrogated to all funds due from the prime contractor. They contend this right is inherent to one who executes a performance bond and the right arises at the time the bond is executed, and may be asserted even though no public notice is given by the filing of a financing statement or otherwise. Their support for this contention is found in Pearlman v. Reliance Insurance Co., 371 U.S. 132, 83 S.Ct. 232, 9 L.Ed.2d 190 and Prairie State Nat. Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412.

They further contend that the Uniform Commercial Code does not require the filing of a financing statement by a surety company that has executed a performance bond for a contractor. In support of this they cite Jacobs v. Northeastern Corp., 416 Pa. 417, 206 A.2d 49. We are not in disagreement with either of these positions. We recognize that the great weight of authority is to the effect that the bonding company is entitled to be subrogated to the rights of the contractor in proceeds of the contract as against one asserting claims for money loaned or advanced to the building contractor. Anno. 127 A.L.R. 974, 164 A.L.R. 782. This is true even where there is an assignment of the right to collect the funds by the contractor to the bank or other lending institution as there was in this case. See Anno. 76 A.L.R. 917, where the rule is stated thusly:

'It is generally held that a stipulation for the retention of a certain percentage of the consideration for the protection of materialmen, workmen, etc., is in part an indemnity for a surety who guarantees the performance of the contract by the contractor, and that it raises an equity in his favor in the fund thus created, or to be created, to the extent he suffers loss, which takes...