Prairie State Nat Bank of Chicago v. United States United States v. Hitchcock

Decision Date30 November 1896
Docket NumberNos. 10,16,s. 10
Citation164 U.S. 227,32 CtCL 614,41 L.Ed. 412,17 S.Ct. 142
CourtU.S. Supreme Court

The real contestants in the controversy below were the Prairie State National Bank and Charles A. Hitchcock, who respectively claimed the right to receive from the government a balance in its hands of $11,850. This balance arose by the retention from time to time of 10 per cent. upon the estimated value of work done under a contract entered into on May 10, 1888, by the government with Charles Sundberg & Co., wherein they agreed, for the consideration of $118,590, to erect a customhouse at Galveston, Tex. The right of the government to retain the reserved sums was founded upon the following provision in the contract:

'Payments to be made in the following manner, viz.: Ninety per cent. (nine-tenths) of the value of the work executed to the satisfaction of the party of the first part will be paid from time to time, as the work progresses, in monthly payments (the said value to be ascertained by the party of the first part), and ten per cent. (one-tenth) thereof will be retained until the completion of the entire work and the approval and the acceptance of the same by the party of the first part, which amount shall be forfeited by said party of the second part in the event of the nonfulfillment of this contract, subject however, to the discretion of the secretary of the treasury; it being expressly stipulated and agreed that said forfeiture shall not relieve the party of the second part from liability to the party of the first part for all damages sustained by reason of any breach of this contract.'

While the respective claims were pending before the comptroller of the treasury, and at his request, the secretary of the treasury transmitted the same to the court of claims, under section 1063, Rev. St.

The bank bases its claim to the fund upon the following state of facts: On February 3, 1890, in consideration of advances made and to be made by the Prairie Bank, Sundberg & Co. gave to one Van Zandt, a representative of the bank, on order or power of attorney authorizing him to receive from the United States the final payment under the contract. The acting secretary of the treasury declined to recognize this nower of attorney, but expressed a willingness, on request of the contractors, to forward, when it became due, the check for the final payment to the address of Van Zandt. Being informed by the latter that this arrangement would be satisfactory to the contractor and himself, the assistant secretary of the treasury gave direction to the disbursing agent of the building to send the final check, drawn to the order of the contractor, to the address of Van Zandt. Between February and May, 1890, upon the faith of the lien upon the final payment alleged to have been acquired by this arrangement, the bank advanced to Sundberg & Co. about $6,000, but, although it was claimed by the bank that the amount of the advances in question were, in large part, actually used in the performance of the contract of Sundberg & Co., the court of claims failed to find such to be the fact. It is true that the court, in one of its findings, gives 'a full and accurate statement of the checking, deposit, and loan accounts between the bank and Sundberg & Co. from January 24, 1890, to August 15, 1890'; but to whom the checks were made payable, or for what purpose they were issued, does not appear.

Hitchcock's claim to the fund was asserted upon the ground that in May, 1890, Sundberg & Co. defaulted in the performance of their contract, and that thereupon he, as surety, without any knowledge of the alleged rights of the bank, assumed the completion of the contract, with the consent of the contractors, and that he had disbursed therein about $15,000 in excess of the current payments from the government. The bond which Hitchock executed as surety was made pursuant to the following provision contained in the contract between Sundberg & Co. and the government:

'It is further covenanted and agreed between the parties to this contract that the party of the second part shall execute, with two or more good and sufficient sureties, a bond to the United States, in the sum of thirty thousand dollars ($30,000), conditioned for the faithful performance of this contract, and the agreements and covenants herein made by the said party of the second part.'

The court of claims held that Hitchcock was entitled to the fund (27 Ct. Cl. 185), and entered judgment accordingly. The Prairie Bank thereupon appealed, and a cross appeal was taken by the United States, in order that it might be protected from a double liability in the event this court should hold that the Prairie Bank was entitled to any part of the fund.

Howard Henderson and A. B. Browne, for the bank.

George A. King, for Hitchcock.

Asst. Atty. Gen. Dodge, for the United States.

Mr. Justice WHITE, after stating the case, delivered the opinion of the court.

The question to be determined is which of the two contestants possesses a superior right to the fund. It is self-evident that, considering the agreements between Sundberg & Co. and the bank as an intended transfer pro tanto of the rights of the latter to the results of the contract with the United States, such transfer would be void, under section 3477, Rev. St. This position was not controverted in the discussion at bar, but it was asserted that as the bank had advanced money to complete the building, and thus to enable Sundberg & Co. to perform their contract obligations with the government, therefore the bank had an equitable lien upon the 10 per cent. retained by the government, paramount to any lien in favor of Hitchcock, whose lien, it was contended, only arose from the date of his advances made to execute the contract upon Sundberg's default.

Thus, the respective contentions are as follows: The Prairie Bank asserts an equitable lien in its favor, which it claims originated in February, 1890, and is therefore paramount to Hitchcock's lien, which, it is asserted, arose only at the date of his advances. The claim of Hitchcock, on the other hand, is that his equity arose at the time he entered into the contract of suretyship, and therefore his right is prior in date and paramount to that of the bank.

In considering these conflicting claims, it must be recognized at the outset that the terms of the original contract made by the United States with Sundberg were in no wise affected or changed by the agreements subsequently made between Sundberg and the Prairie Bank. Not to so consider would be admitting the application of section 3477, on the one hand, and then immediately proceeding to deny its effect, on the other. We shall, therefore, in examining the rights of the parties, proceed upon the hypothesis that the contract made by the United States remained in full force and effect, and that the rights, if any, of both parties to this controversy were subject to its terms.

That Hitchcock, as surety on the original contract, was entitled to assert the equitable doctrine of subrogation, is elementary. That doctrine is derived from the civil law, and its requirements are, as stated in Insurance Co. v. Middleport, 124 U. S. 534, 8 Sup. Ct. 625, '(1) that the person seeking its benefits must have paid a debt due to a third party, before he can be substituted to that party's rights; and (2) that in doing this he must not act as a mere volunteer, but on compulsion, to save himself from loss by reason of a superior lien or claim on the part of the person to whom he pays the debt, as in cases of sureties, prior mortgagees, etc. The right is never accorded in equity to one who is a mere volunteer in paying a debt of one person to another.' See authorities reviewed at pages 548 et seq., 124 U. S., and page 630, 8 Sup. Ct.

As said by Chancellor Johnson in Gladsen v. Brown, Speer, Eq. 37, 41, quoted and referred to approvingly in the opinion in Insurance Co. v. Middleport, just referred to: 'The doctrine of subrogation is a pure, unmixed equity, having its foundation in the principles of natural justice, and, from its very nature, never could have been intended for the relief of those who were in any condition in which they were at liberty to elect whether they would or would not be bound; and, as far as I have been able to learn its history, it never has been so applied. If one, with the perfect knowledge of the facts, will part with his money, or bind himself by his contract in a sufficient consideration, any rule of law which would restore him his money or absolve him from his contract would subvert the rules of social order. It has been directed in its application exclusively to the relief of those that were already bound, who could not but choose to abide the penalty.'

Under the principles thus governing subrogation, it is clear that, while Hitchcock was entitled to subrogation, the bank was not. The former, in making his payments, discharged an obligation due by Sundberg, for the performance of which he (Hitchcock) was bound under the obligation of his suretyship. The bank, on the contrary, was a mere volunteer, who lent money to Sundberg on the faith of a presumed agreement, and of supposed rights acquired thereunder. The sole question, therefore, is whether the equitable lien which the bank claims it has, without reference to the question of its subrogation, is paramount to the right of subrogation which unquestionably exists in favor of Hitchcock. In other words, the rights of the parties depend upon whether Hitchcock's subrogation must be considered as arising from, and relating back to the date of, the original contract, or as taking its origin solely from the date of the davance by him.

A great deal of confusion has arisen in the case by treating Hitchcock as subrogated merely 'in the rights of Sundberg & Co.' in the fund, which, in effect, was saying that he was subrogated to...

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