National Surety Co. v. County Board of Education

• Decision Date: 19 October 1926
• Docket Number: No. 2491.,2491.
• Citation: 15 F.2d 993
• Parties: NATIONAL SURETY CO. v. COUNTY BOARD OF EDUCATION OF McDOWELL COUNTY et al.
• Court: U.S. Court of Appeals — Fourth Circuit

15 F.2d 993 (1926)

NATIONAL SURETY CO. v. COUNTY BOARD OF EDUCATION OF McDOWELL COUNTY et al.

No. 2491.

Circuit Court of Appeals, Fourth Circuit.

October 19, 1926.

Mark W. Brown, of Asheville, N. C., for plaintiff in error and cross-defendant in error.

J. W. Pless, of Marion, N. C. (Pless, Winborne & Pless and Hudgins, Watson & Washburn, all of Marion, N. C., on the brief), for defendants in error and cross-plaintiffs in error.

Before WADDILL and PARKER, Circuit Judges, and SOPER, District Judge.

PARKER, Circuit Judge.

This cause, although instituted as an action at law, is in reality a suit in equity. Its purpose is to establish an equitable lien and to enforce rights arising thereunder, and the only relief appropriate under the pleadings is equitable relief. On motion of the parties, or by the court ex mero motu, it might have been transferred to the equity docket in the District Court. Act March 3, 1915, 38 Stat. 956; Liberty Oil Co. v. Condon Nat. Bk., 260 U. S. 235, 43 S. Ct. 118, 67 L. Ed. 232. This was not in fact done, but the proceedings had were in conformity with the practice in equity. There was a reference to the standing master, and his findings of fact were adopted by the court, and final judgment was entered thereon. The case, it is true, was brought here by writ of error; but we are authorized to treat this as an appeal. Act Feb. 13, 1925, 43 Stat. 941 (Comp. St. § 1649b). We do not think that the mere failure to transfer the case to the equity docket should defeat the right of the parties to a review here as upon an appeal. We shall accordingly treat that as done which should have been done, and shall proceed to pass upon the case just as though such order had been entered. Liberty Oil Co. v. Condon Nat. Bk., supra.

The National Surety Company was complainant in the court below and will be so designated here. The board of education and the superintendent of public instruction of McDowell county, N. C., were defendants. In effect the purpose of the suit was to establish an equitable lien upon funds in the hands of defendants and to recover of defendants for payments made by them from the funds in derogation of the rights of complainant. The material facts, briefly stated, were as follows:

On February 5, 1923, the defendants entered into a contract with W. V. Henry & Co., contractors, for the erection of two school buildings. The contract provided that payment should be made in monthy installments of 85 per cent. of the work done and materials furnished, as the work progressed, and that the remaining 15 per cent. should be retained by defendants until 30 days after the completion and acceptance of the buildings. It also provided that the contractors should furnish a bond in the sum of $30,000, to guarantee full performance of the contract and payment of all bills for labor and materials. On February 12, 1923, complainant executed such a bond, as surety for the contractors, which was duly delivered to defendants.

In the application for the bond, the contractors assigned to complainant "all the deferred payments and retained percentages, and any and all moneys and properties that may be due and payable to the undersigned (the contractors) at the time of any breach or default in said contract, * * * to be by it credited upon any loss, costs, damage, charge, and expense sustained or incurred by it under said bond." On July 21, 1923, complainant gave defendants notice of this assignment, and furnished them with a photostatic copy thereof. At that time, defendants had in hand all of the percentage retained under the contract, amounting to $6,708.60, and $915.40 in addition thereto, which had not been paid to the contractors.

Some time after receipt of the notice of the assignment to complainant, defendants paid $700 to the contractors and $3,951.30 to a bank upon their order. This order was signed July 19, 1923, but was not delivered to or paid by defendants until August 25th. Thereafter defendants paid out, on claims for labor or materials which had been furnished to the contractors, the sum of $2,441.17, leaving a balance in hand of $494.49, for which they consent that decree be entered for complainant.

The contractors failed in September 1923, and complainant finished the work under the contracts, and, in a suit instituted in December of that year by laborers and materialmen to recover on the bond which it had executed, was required to pay the sum of $10,372.84. The claims for labor and material paid by defendants were not brought into that suit, although it was properly instituted under the North Carolina statute, providing that the liability under a bond given to guarantee the performance of a contract to erect a public building and pay for labor and materials therein used shall be established in a single action, to which all persons entitled to recover shall be made parties. Public Laws of North Carolina, Session 1923, c. 100.

On these facts, the standing master was of opinion that the defendants were liable for the amount of the retained percentage. The District Judge, while approving the findings of fact, evidently thought that they justified the recovery of no more than the amount paid to the bank. In this court complainant contends for the entire amount which defendants had on hand at the time of notice of the assignment. Defendants deny that complainant is entitled to anything, except the balance of $494.49, now on hand.

We agree with the standing master that complainant is entitled to a decree for the entire amount of the percentage required to be retained. Complainant's loss under the bond exceeds this amount, and it is well settled that in cases such as this the surety has an equitable lien on the funds required by the contract to be retained from payments to the contractor, to the extent necessary to reimburse the surety for loss sustained under the bond. This right of the surety in the funds retained is well expressed by the Supreme Court of North Carolina in Commercial Casualty Ins. Co. v. Durham County, 190 N. C. 58, 128 S. E. 469, where it is said:

"The contract provision that 85 per cent. of the value of labor and material used during the previous month, as estimated by the architect, shall be paid by the owner to the contractor at the dates specified during the progress of the work, creates in the 15 per cent. reserved balance an equity in which the surety has a substantial right. While the owner also has an equity in this reserved balance, he has no right, without the consent of the surety, to waive it, or to exceed the provisions of the contract in making payments to the contractor. The retained balance is well calculated to induce the contractor to complete the building, and it is valuable security against loss when a breach occurs."

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