St. Paul Fire and Marine Insurance Co. v. United States

• Decision Date: 19 November 1962
• Docket Number: No. 16914.,16914.
• Citation: 309 F.2d 22
• Parties: ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Appellant, v. UNITED STATES of America for the Use of DAKOTA ELECTRIC SUPPLY COMPANY, a North Dakota Corporation, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

309 F.2d 22 (1962)

ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Appellant, v. UNITED STATES of America for the Use of DAKOTA ELECTRIC SUPPLY COMPANY, a North Dakota Corporation, Appellee.

No. 16914.

United States Court of Appeals Eighth Circuit.

October 18, 1962.

Rehearing Denied November 19, 1962.

Edmund T. Montgomery, Minneapolis, Minn., made argument for appellant and Richard H. McGee, of McGee, Van Sickle & Hankla, Minot, N. D., and Richards, Montgomery, Cobb & Bassford, Minneapolis, Minn., were with him on the brief.

Philip B. Vogel, Fargo, N. D., made argument for appellee and Myron H. Bright of Wattam, Vogel, Vogel, Bright & Peterson, Fargo, N. D., was with him on the brief.

Before VAN OOSTERHOUT and BLACKMUN, Circuit Judges, and HENLEY, District Judge.

BLACKMUN, Circuit Judge.

This Miller Act case arises out of dormitory construction at the United States Air Force base at Minot, North Dakota. Tried to the court, it resulted in a judgment for the plaintiff supplier and against the defendant surety. The latter has appealed.

The general contractor was Joseph A. Bass Company. Its electrical subcontractor (hereinafter called "Schroeder") was John M. Schroeder, Inc. The supplier, or use plaintiff, is Dakota Electric Supply Company. The defendant St. Paul Fire and Marine Insurance Company is the surety on the payment bond required of Bass by § 1(a) (2) of the Act, 40 U.S.C. § 270a(a) (2).

The basic facts are not in dispute and, indeed, the parties have stipulated here that, with stated exceptions, the findings made by the trial court are acceptable as facts relevant to the issues of this appeal:

(a) The prime contract was executed by the United States and Bass on April 6, 1959. Bass and Schroeder then entered into the subcontract for the electrical installation. The subcontract called for a performance bond by Schroeder; this requirement, however, was waived by Bass, as the subcontract permitted, and the bond was not furnished.

(b) The electrical equipment ordered by Schroeder from Dakota for the Bass job arrived at the site on various dates between June 17, 1959, and March 24, 1960. It commanded a total agreed price of $6,705.98.

(c) During 1959 Schroeder was also engaged in electrical work on several other government and public contracts and on ventures of a private nature. It ordered materials for those projects from Dakota and other suppliers. Schroeder maintained at the First National Bank of Grand Forks a single general control bank account in which it deposited all payments received by it in the operation of its entire business. From this general account it disbursed operating expenses, payments to creditors, and transfers to another account it maintained for payroll. Although Schroeder kept a separate record for each of the several projects on which it was engaged and for its general inventory items, it did not maintain a separate bank account for each project.

(d) On various dates from August 1959 to March 1960 Bass made progress payments to Schroeder for labor and materials furnished to its job. These totaled more than $30,000. Schroeder deposited these payments in its general bank account. Later Bass made some direct payments for labor and materials in order to complete Schroeder's portion of the job.

(e) During the same period receipts of more than a million dollars were deposited in the Schroeder bank account. The Bass payments were thus about 3% of the total deposits.

(f) During the same period Schroeder made payments to Dakota aggregating in excess of $72,000. These were specifically designated by Schroeder for Dakota invoices other and older than those for the Bass contract. This was in line with Schroeder's policy, followed since its organization, of paying a supplier's oldest invoices first. Because of intervening withdrawals for operating expenses, repayment of bank loans, and the like, the Bass payments deposited in Schroeder's general account cannot be traced through that account to specific payments made from it by Schroeder to Dakota.

(g) Bass did not know that its progress payments were not being applied to Dakota's invoices for the Bass job. Although its checks for these payments carried references to the job, Bass designated no specific application of the progress payments.

(h) By the end of February 1960 Schroeder was insolvent. A trustee in bankruptcy was subsequently appointed for it. Dakota turned over to this trustee $30,000 (included in the $72,000 figure mentioned above) which it had obtained from Schroeder in March after Dakota had learned of Schroeder's insolvency.

(i) After complying with the notice provisions of the Act, Dakota brought this suit in November 1960.

Dakota asserts that these facts add up to the classic situation which, when present in a Miller Act controversy, presents a case for recovery against the surety: Dakota supplied materials to a subcontractor engaged in the performance of a government contract; it did not receive payment for those materials; and it complied with the notice provisions of the Act.

This prompts us to make at this point some general observations before setting forth additional facts which the surety claims are significant:

1. Comments which appear in the authorities to the effect that a surety is a favorite of the law and that his contract is to be strictly construed (see, for example, State ex rel. North Dakota Workmen's Compensation Fund v. Padgett, 1926, 54 N.D. 211, 209 N.W. 388, 392) have usually been held not to apply to compensated surety companies. American Cas. Co. of Reading, Pa. v. Brezina Constr. Co., 8 Cir., 1961, 295 F.2d 603, 607, footnote 6; Massachusetts Bonding & Ins. Co. v. Feutz, 8 Cir., 1950, 182 F.2d 752, 756; 72 C.J.S. Principal and Surety § 102; 50 Am.Jur., Suretyship, §§ 32, 318.

2. Although there is diversity of citizenship between Dakota and the surety here, this is not a diversity case. The amount in controversy is less than the statutory minimum prescribed by 28 U.S.C. § 1332(a). The action, instead, is instituted under § 2(b) of the Miller Act, 40 U.S.C. § 270b(b), which authorizes suit in federal court irrespective of the amount in controversy, and it is based on the payment bond required by § 1(a) (2) of that Act. The situation therefore is not one where state law necessarily governs.¹ R. P. Farnsworth & Co. v. Electrical Supply Co., 5 Cir., 1940, 112 F.2d 150, 154, cert. den. 311 U.S. 700, 61 S.Ct. 139, 85 L.Ed. 454. Compare United States for Use of Carroll v. Beck, 6 Cir., 1945, 151 F.2d 964, 966, and First Camden Nat'l Bank & Trust Co. v. Aetna Cas. & Sur. Co., 3 Cir., 1942, 132 F.2d 114, 116, cert. den. 319 U.S. 749, 63 S.Ct 1157, 87 L.Ed. 1704.

3. The Miller Act has for its purpose the protection of those who supply labor or materials for use in government construction. It is to be liberally construed. It is designed to give the supplier the same protection he would ordinarily receive under state lien laws. The bond protection it prescribes is in lieu of those liens. United States for Benefit and on Behalf of Sherman v. Carter, 1957, 353 U.S. 210, 216-217, 77 S.Ct. 793, 1 L.Ed.2d 776; Continental Cas. Co. v. United States for Use and Benefit of Robertson Lumber Co., 8 Cir., 1962, 305 F.2d 794, 797 (petition for certiorari pending); United States for Use and Benefit of Hopper Bros. Quarries v. Peerless Cas. Co., 8 Cir., 1958, 255 F.2d 137, 143, cert. den. 358 U.S. 831, 79 S.Ct. 51, 3 L.Ed.2d 69. It has even been said that the Act was not designed to protect general contractors. St. Paul-Mercury Indem. Co. v. United States for Use of Jones, 10 Cir., 1956, 238 F.2d 917, 921.

4. Where, as here, there are outstanding two or more matured and similar obligations of a debtor to one creditor and a payment by that debtor to the creditor, the question of proper application of that payment arises. This fact situation and its variations have provoked widespread litigation and have resulted in claimed conflict in the cases. It is perhaps not incorrect to say, however, that the law today shapes up generally as follows:

(i) The payment is applied as the debtor intends and so manifests to the creditor before or at the time of the payment.

(ii) If the debtor fails so to indicate, the payment is applied as the creditor, within a reasonable time, determines.

(iii) If neither the debtor nor the creditor seasonably so indicates, the payment is applied as a just regard to its effect upon the debtor, the creditor, and third persons makes it desirable that it should be applied. This usually results in its application to the oldest unsecured account.

(iv) If the debtor is under a duty to a third person to devote funds paid by him to the discharge of a particular debt, the payment must be so applied if the creditor knows or has reason to know of that duty. This is so despite the debtor\'s contrary direction.

This rule of freedom of application rests upon the concept that the money which the debtor is utilizing to make the payment is his own and is free for use as he pleases. The noted exception, phrased in terms of duty, rests on equitable considerations. Examples which the cases recognize without much conflict are where the surety itself makes a payment to the debtor or where money which comes to the creditor from the debtor is the same money for the payment of which the surety is bound and the creditor knows the source of that fund.

These rules² are outlined in detail, and with illustrations, in the Restatement of the Law of Contracts, §§ 387, 388 and 394, and are noted in such general compendia as 70 C.J.S. Payment §§ 50-80; 72 C.J.S. Principal and Surety § 144; and 40 Am.Jur., Payment, §§ 108-150, and in the notes at 21 A.L.R. 704 and 57 A.L.R.2d 855, and at 41 A.L.R. 1297, 130 A.L.R. 198 and 166 A.L.R. 641. Representative cases are cited in these works. We mention the following only as illustrative: Herrman v. Daffin, Mo.App.1957, 302 S.W.2d 313, 315-316; Maryland Cas. Co. v. City of South...