Salt Lake City v. O'Connor

• Decision Date: 01 June 1926
• Docket Number: 4326
• Parties: SALT LAKE CITY v. O'CONNOR et al
• Court: Utah Supreme Court

249 P. 810

68 Utah 233

SALT LAKE CITY v. O'CONNOR et al

No. 4326

Supreme Court of Utah

June 1, 1926

Appeal from District Court, Third District, Salt Lake County Ephraim Hanson, Judge.

Action by Salt Lake City against John O'Connor and others. From an adverse judgment, defendant National Surety Company appeals.

Affirmed in part, and reversed and remanded with directions in part.

A. E Moreton, of Salt Lake City, for appellant.

Wm. H. Folland, City Atty., of Salt Lake City, for respondent city.

James Ingebretsen, of Salt Lake City, for respondent Utah Savings & Trust Co.

James Ingebretsen and Fisher Harris, both of Salt Lake City, for respondent Utah Lumber Co.

CHERRY, J. GIDEON, C. J., and THURMAN, FRICK, and STRAUP, JJ., concur.

OPINION

CHERRY, J.

This action arises out of a contract for certain public work in Salt Lake City, and involves the determination of certain claims of materialmen against the surety upon the bond of the contractor, and the distribution of the remainder due and unpaid upon the contract price. On October 23, 1922, John O'Connor (hereinafter called the contractor) entered into a contract with Salt Lake City for the construction of sewer extension 410, and pursuant to Comp. Laws Utah 1917, § 3753, executed and delivered a bond in the sum of $ 31,000, conditioned for the faithful performance of his contract and the prompt payment for all labor and materials used in the work. National Surety Company (hereinafter called the surety) was the sole surety on the bond. Utah Fire Clay Company and Utah Lumber Company (hereinafter called materialmen) furnished materials which were used in the work, and Utah Savings & Trust Company (hereinafter called the bank) lent money to the contractor, secured by an assignment of all sums to become due on the contract.

The work was completed on June 9, 1924, at which time there remained due and unpaid upon the contract from the city the total sum of $ 8,714.90, of which amount $ 7,400 was, under the contract, payable in certain bonds. The contractor had disappeared. There was due and unpaid to the materialmen the sums of $ 19,681.83 and $ 2,207.21, respectively, and to the bank, on account of money loaned, the sum of $ 3,000. Conflicting claims to the unpaid portion of the contract price were made, whereupon the city brought this action, impleading the claimants above named, and prayed that they be required to set forth their respective claims, and the same be determined; that the city be permitted to pay into court the said sum due on the contract and be discharged, etc. The liability of the surety to the unpaid materialmen arose out of the controversy and became a part of the action.

By appropriate pleadings the claims of the respective parties were asserted and issues joined thereon. Two main controversies arose. As between the surety and the materialmen it was alleged and proved that the contractor had paid to the materialmen the sums of $ 5,650.96 and $ 252.83, respectively, at divers dates in February and May, 1923, with funds derived from the proceeds of bonds paid and delivered to him on account of the contract in question, which payments were applied by said materialmen upon pre-existing debts, arising out of a prior and independent transaction, not secured by the bond involved in this action. The surety herein contended that the application of payments thus made could not be sustained, but that such payments must be applied in reduction of the claims of the materialmen for which it, the surety herein, was liable.

The other question involved the disposition of the remainder of the contract price, as between the bank, under its assignment, and the surety, who claimed an equitable, right thereto superior to the assignee. Both questions were decided by the trial court adversely to the surety, and judgments were entered in favor of the materialmen against the surety for the full amount of their claims, and in favor of the bank that it had a lien and claim upon the unpaid contract price, superior to any claim of the surety. The surety has appealed.

With respect to the question of the application of the payments made to the materialmen, it was undisputed that the respective debts upon which the payments were applied were for balances due for materials furnished to the contractor for use in a similar, but prior, contract with Salt Lake City for sewer extension 357, which work had been completed shortly before the work on the contract in question had begun. The bond in connection with the contract for sewer extension 357 was executed by a surety company other than the surety herein. It was represented that the recourse of the materialmen upon this bond had expired by lapse of time when the controversy arose with the surety herein. The payments in question were made shortly after the work on the first contract had been completed and the work on the second had begun. The fact that final payment of the amount due on the first contract was made to the contractor by the city on September 23, 1922, was proved at the trial, but it was not claimed that the materialmen knew of this fact at the time.

As indicating the commingling or overlapping of the two transactions, however, it was shown that the contractor paid out on the last contract about $ 19,000 before receiving any payment on account thereof from the city. These advance payments were made by checks upon the contractor's general bank account, in which were deposited money from various sources, including payments received on account of the first contract. The trial court found as facts that the materialmen, at the time the payments were made, had no knowledge of the source of the money paid to them, and that the contractor directed that the payments be applied upon the pre-existing indebtedness, to which it applied. These findings are assailed by appellant as being insufficiently supported by the evidence. There were circumstances testified to tending to indicate that the materialmen ought to have known or did know the source of the money paid them, but their positive evidence to the contrary, and other circumstances in the matter, furnish a sufficient basis for the finding of the trial court. There was satisfactory evidence that the contractor directed the application of payments as made. The findings must therefore stand.

The question is thus reduced to whether, in such circumstances, the application of payments so made by the parties is valid as against the surety on the bond, or whether the surety, when sued upon the bond, may require that such payments be applied on the particular indebtedness for which it is liable. There is a conflict of law upon the subject.

The appellant surety insists upon its legal right to have the payments applied in reduction of the indebtedness for which it is liable, upon the grounds that it has a special equity in the proceeds of the contract secured by its bond, and that, if not so applied, the net effect is to hold it liable for indebtedness not included in its contract. The authorities cited and relied on by appellant are: (1892) Crane Co. v. Keck, 35 Neb. 683, 53 N.W. 606; (1896) Young v. Swan, 100 Iowa 323, 69 N.W. 566; (1897) Merchants' Ins. Co. v. Herber, 68 Minn. 420, 71 N.W. 624; (1898) United States v. Am. Bonding & T. Co., 89 F. 925, 32 C.C.A. 420; (1904) Crane Co. v. P. H. & P. Co., 36 Wash. 95, 78 P. 460; (1904) First Nat. Bank v. Nat. Surety Co., 130 F. 401, 64 C.C.A. 601, 66 L. R. A. 777; (1914) Columbia Digger Co. v. Rector (D. C.) 215 F. 618; (1915) Columbia Digger Co. v. Sparks, 227 F. 780, 142 C.C.A. 304; (1916) Sioux City F. & M. Co. v. Merten, 174 Iowa 332, 156 N.W. 367, L. R. A. 1916D, 1247; (1921) Alexander Lbr. Co. v. Aetna Acc. & L. Co., 296 Ill. 500, 129 N.E. 871.

Most of these cases are distinguishable from the case under review. Considerations and factors not present in the case at bar entered into numerous of the cases cited, and obviously controlled the decisions. Thus in Young v. Swan, supra, First National Bank v. Nat. Surety Co., supra, and Merchants' Ins. Co. v. Herber, supra, the moneys paid did not belong to the debtor at all, but were trust funds to which the debtor had no title. The last case is expressly so distinguished by a later case in the same court (Standard Oil Co. v. Day, 161 Minn. 281, 201 N.W. 410, 41 A. L. R. 1291), which holds to the contrary, where the money paid belongs to the contractor.

In United States v. Am. Bonding & T. Co., supra, the creditor had misrepresented the indebtedness of the debtor to him to induce the surety to give the bond, and afterwards took notes for the secured debt and extended the time of payment. The court, applying the rule of strict construction relating to the liability of sureties, discharged the surety. In Crane Co. v. P. H. & P. Co., supra, the creditor had knowledge of the source of the money paid. In a later case the same court (Sturtevant Co. v. F. & D. Co., 92 Wash. 52, 158 P. 740, L. R. A. 1917C, 630) decided that knowledge or the lack of it, as the case may be, by the creditor, of the source of the money paid, determines the question. In Columbia Digger Co. v. Rector, supra, the first application had been made in the interest of the surety, and was afterwards sought to be changed to his detriment, besides the creditor had knowledge of the source of the money paid. The court held that the first application discharged the surety pro tanto, and that the surety had the equitable right to have the installments of the contract price applied to materials used in the contract work where the materialmen received payments with knowledge of their source.

In Columbia Digger Co. v. Sparks, supra, a federal case arising in Washington, a decision of two judges out of three based...