Southern Surety Co. v. Klein

• Decision Date: 02 December 1925
• Docket Number: (No. 2559.)
• Citation: 278 S.W. 527
• Parties: SOUTHERN SURETY CO. v. KLEIN.<SMALL><SUP>*</SUP></SMALL>
• Court: Texas Court of Appeals

278 S.W. 527

SOUTHERN SURETY CO. v. KLEIN.^*

(No. 2559.)

Court of Civil Appeals of Texas. Amarillo.

December 2, 1925.

Rehearing Denied January 6, 1926.

Appeal from District Court, Potter County; Henry S. Bishop, Judge.

Action by J. B. Klein against the Southern Surety Company. Judgment for plaintiff, and defendant appeals. Affirmed.

Jno. T. Suggs, of Denison, and Stone & Guleke, of Amarillo, for appellant.

Lumpkin & Trulove, of Amarillo, and Shirk, Danner & Mills, of Oklahoma City, Okl., for appellee.

RANDOLPH, J.

This suit was instituted by Klein, as plaintiff, against the Southern Surety Company, as defendant, to recover on a bond given by V. E. Ware, contractor, to the city of Amarillo, which bond was signed by appellant as surety. The city of Amarillo was made a party defendant by cross-action of the surety company. On the closing of the testimony, the defendant surety company announced that it would not further prosecute its cross-action against the city of Amarillo, and such city was thereupon dismissed from the case. No question arises upon this dismissal and none involving the liability of the city is presented here. The case between Klein and the surety company was prosecuted to judgment which was rendered by the court in favor of Klein and against the surety company, and from that judgment appeal is taken by the surety company to this court.

The city of Amarillo and V. E. Ware entered into a contract, whereby Ware obligated himself to erect for the city an auditorium building for the contractual consideration of $224,502.02, subject to additions and deductions on account of alterations. The contract between the city and Ware provided for semimonthly payments on architect's certificates or estimates of 85 per cent. of work done, and provided, also, for a retained 15 per cent. until the completion and acceptance of the improvements, said 15 per cent. to be retained by the city as additional security to the bond provided for in the contract. Final payment was to be made to Ware within 6 days after the building was completed upon certificate of the architect that all work, upon which payment was to become due, had been done to his satisfaction. It is also provided that, if required before such final payment is made, the contractor should give good and sufficient evidence that the premises are free from all liens and claims chargeable to the contractor, and, further providing, that, if there should be any such liens or claims, the city shall have the right to retain, out of any payment then due, sums sufficient to indemnify it.

The bond provided for in the contract was duly executed and delivered to the city by Ware, signing as principal, and appellant as surety, and was in the sum of $112,500. This bond was conditioned:

That Ware, "his heirs, executors and administrators shall well and truly and faithfully perform all the terms, provisions, conditions and stipulations of a certain contract, etc."

Ware and Klein entered into a contract on May 8, 1922, whereby Klein agreed to furnish the structural steel required for the erection of the building and out of that contract so made, and the performance thereof by Klein, Klein's cause of action, which he is asserting on the bond, arose.

The contract between Ware and Klein provides for the retention of the title and possession in the materials furnished until final payment for same, in Klein. Disposing of this retention of title as provided for, we at this time call attention to the fact that the building here under contract was a public building and such attempt to retain title or to reserve a lien is not permitted by law. The right of Klein, in the absence of the right to fix a lien, only extended to his right, after due notice, to have the city withhold the payment of such an amount as would have indemnified him for his loss.

The trial court submitted only one issue to the jury for their determination, whether or not Klein's material went into the building, and refused to submit for their consideration five specially requested issues of the defendant.

The error alleged and presented in appellant's first proposition No. 1 is that the liability of a surety on a public contractor's bond is discharged by a materialman giving an extension of time to the contractor, if such contractor, in the interim, becomes insolvent and the surety thereby loses its right of indemnification from the contractor, the principal on such bond.

The evidence establishes the following facts: The auditorium was completed and accepted and Ware was paid for it by the city on April 14, 1923. The debt of Klein was then due, but it seems that Klein was trying to get his money from Ware and failing in this, he took from Ware what is denominated a trade acceptance dated September 9, 1923, payable to Klein October 9, 1923, which trade acceptance was never credited on Klein's books and was never paid. Klein testifies that he had never notified the city of the particular terms of his contract with Ware, but that the city knew that he was furnishing the material to Ware; that he had never notified the surety company of Ware's default on his payment, because Ware "kept on promising he was going to take care of it `to-morrow' and stalled us along from day to day." During the period between April 14, 1923, and October 9, 1923, Ware became insolvent, and was later adjudged bankrupt.

Under these facts, did the trial court err in refusing to give defendant's requested special issue No. 1, which is as follows:

"Did Klein extend the time of payment to Ware for any sum that you find Ware owed Klein (if you find that Ware owed Klein any sum)? (a) Did Ware become insolvent subsequent to April 14, 1923, the date on which the city made final payment to Ware? (b) Did the surety company suffer injury by reason of such insolvency? And, if so, (c) to what extent in dollars and cents?"

Whatever the rule may be in other states and as held by the Supreme Court of the United States, it is well settled in Texas that the rules determining the rights of uncompensated sureties are applicable to the determination of the rights of compensated sureties. Lonergan v. San Antonio Trust Co., 101 Tex. 77, 104 S. W. 1061, 106 S. W. 876, 22 L. R. A. (N. S.) 364, 129 Am. St. Rep. 803; Hess & Skinner Engineering Co. v. Turney, 110 Tex. 148, 153, 216 S. W. 621, 622.

In applying the common rules, common to both classes of sureties, Judge Greenwood in the Hess Case, supra, quotes from Guaranty Co. v. Pressed Brick Co., 191 U. S. 425, 24 S. Ct. 144, 48 L. Ed. 242, with approval, as follows:

"The guarantor is ignorant of the parties with whom his principal may contract, the amount, the nature, and the value of the materials required, as well as the time when payment for them will become due. These particulars it would probably be impossible even for the principal to furnish, and it is to be assumed that the surety contracts with knowledge of this fact. Not knowing when or by whom these materials will be supplied, or when the bills for them will mature, it can make no difference to him whether they were originally purchased on a credit of 60 days, or whether, after the materials are furnished, the time for payment is extended 60 days, and a note given for the amount maturing at that time."

So far as the record discloses, there was never a binding agreement for a definite extension for a valuable consideration executed by Ware to Klein. There was no new consideration paid by Ware for this extension shown by the record; hence such agreement was not binding upon Klein and he was not estopped from proceeding against Ware at the demand of the surety company.

A mere gratuitous indulgence by a creditor to the principal will not discharge the surety, but a valid binding agreement of extension of the time of payment, for a valuable consideration, made without the knowledge of the surety, operates to release him. Lane & Saylor v. Scott & Culver, 57 Tex. 369, 370; Gardner v. Watson, 76 Tex. 25, 32, 13 S. W. 39. Hence the extension of time shown in the record and as evidenced by the trade acceptance, not being based upon any new or valuable consideration, it was not binding on Klein; it was only a gratuitous extension.

But we do not concede that there was any change in the contract between the city and Ware, in any event. There was a change in the time of payment, between Ware and Klein. When Klein gave Ware the extension of time, as stated by Judge Greenwood in the Hess Case, supra:

"There never was any change in the contract guaranteed by this surety company. Such contract was silent as to the terms on which the material for the construction of the bridge was to be purchased. The bond, in effect, authorized the contractor to make his own terms, and we see no good reason why it should be held that this did not include authority, while acting in good faith, to change such terms."

In this case the contract between the city and Ware was silent as...