State, Ex Rel., v. Schlesinger
| Decision Date | 16 March 1926 |
| Docket Number | 19346 |
| Citation | 114 Ohio St. 323,151 N.E. 177 |
| Parties | The State, Ex Rel. The Southern Surety Co., v. Schlesinger, Dir. Of Highways And Pub. Works Of Ohio, Et Al. |
| Court | Ohio Supreme Court |
Suretyship - Public work completed by surety after abandonment by contractor - Surety subrogated to state's rights in fund remaining at forfeiture - Surety entitled to balance and priority over assignee of contractor - Balance assigned to secure loans to pay laborers and materialmen - Although surety obligated to pay such claims - And money loaned and claims paid before forfeiture declared.
A surety on the bond of a contractor for public work, who completes the work after abandonment by the contractor, is subrogated to all the rights of the state m the fund remaining at the time of declaration of forfeiture, and entitled to priority of payment of the balance of said fund as against the assignee of such contractor, to whom the balance of said fund had been assigned to secure loans received by him, the proceeds of which were used in making payment of the claims of laborers and materialmen, even though the surety on such bond was obligated to pay all claims of laborers and materialmen, and even though such money was loaned and such claims paid before declaration of forfeiture.
IN MANDAMUS.
This is an original action in this court in which the relator, the Southern Surety Company, seeks by the writ of mandamus to compel the state highway commissioner to issue vouchers payable to relator in the total sum $2,539.93, and to compel the auditor of state to deliver his warrant in favor of relator upon the treasurer of state for ______________
Subrogation 37 Cyc. pp. 414, 428. ______________ such sum. Relator is surety upon the bond of Walsh & McDaniel contractors, for the building of a certain highway for the sum of $47,391.95. Relator became surety upon the bond of said contractors in the penal sum of $24,521.45. The contractors entered upon performance and, as the work progressed, estimates were made and vouchers issued in the total sum of $45,598.18. During the performance of the work the contractors borrowed money from the Huntington National Bank of Columbus, from time to time, for which notes were given, and to secure the payment of such notes pledged as collateral security an assignment to the bank, dated September 17, 1923, of all moneys then due and thereafter to become due from the state of Ohio upon said contract. Notice of the pledge and assignment was given to the director of highways and to the auditor of state, and a like pledge was made on December 21, 1923, of all moneys due and payable by Licking and Knox counties on account of said contract, and proper notices given to the auditors of those counties. After the date of said pledges and assignments, all vouchers upon earned estimates were mailed to the contractors in care of said bank.
On October 20, 1923, the contractors borrowed the sum of $800 for which note was given payable in 15 days, and on November 10, 1923, a voucher was issued upon an earned estimate in the sum of $1,506.10, which was not delivered. The proceeds of the loan of $800, as well as all previous loans made by the bank to the contractors, were used in the payment of labor performed and materials used prior to November 2, 1923, in connection with the contract. The voucher in the sum of $1,506.10 was withheld because of the claims made by the relator herein, viz, that the contractor was unable to complete his contract, and that the surety company would be obliged to complete it. On November 20, 1923, the director of highways made a finding of abandonment on the part of the contractor and a demand upon the surety company to complete the contract.
At the time the aforesaid voucher was withheld, there remained in the fund only the sum of $2,539.93, and the surety company in completing the contract, was compelled to expend the sum of $7,082.74. The relator is a compensated surety, and the bond contains therein written a condition whereby the surety agreed to "pay all lawful claims of sub-contractors, materialmen and laborers for labor performed and materials furnished in carrying forward, performing or completing said contract, said principal and surety I agreeing and assenting that this undertaking shall be for the benefit of any materialman or laborer having a just claim."
The director of highways filed an interpleader, praying that the Huntington National Bank and the contractors be made parties defendant, and be required to set up their respective claims in relation to the payment of the balance of said fund, and asking that the court determine the respective claims of the parties. Thereupon the bank filed an answer and cross-petition setting up its note and collateral pledge, and prayed that said sum of $800 and interest be paid to it. The controversy relates only to the sum of $800, and interest.
Messrs. Atkinson, Smith & Hogan and Mr. Frank Cipriano, for relator.
Mr. C. C. Crabbe, attorney general, and Mr. J.C. Williamson, assistant attorney, for defendant.
Messrs. Arnold, Wright & Harlor, for the Huntington National Bank.
Sections 2365-1 and 2365-2, General Code, require that the surety bond shall contain "an additional obligation for the payment by the contractor, and by all subcontractors, for all labor performed or materials furnished in the construction, erection, alteration or repair of such building, works or improvements." The condition in the bond fully complies with the statutory requirement. The bank loaned money in good faith to the contractor upon a pledge of the amount due and to become due under the contract, and the money was used by the contractor in paying for labor and materials which entered into the contract. Upon these facts it must be determined whether the bank is entitled to priority of Payment of its claim of $800 and interest.
It is the claim of the surety that it stands in the position of the state, and that it is,subrogated to all rights which the state would have had if the state had forfeited the contract and proceeded to complete the work. The surety further contends, that the contractor could not make a valid assignment of the funds to the bank as collateral security for a loan, even though the money so loaned was used to pay claims which the surety would otherwise have been compelled to pay under the law and its contract and its bond, if the effect of such deprives the surety of its right to stand in the position of the state.
This question has never heretofore been before this court. It is claimed that the case of Amick v. Woodworth, 58 Ohio St. 86, 50 N. E., 437, sustains the contention of the bank, but that case is wholly dissimilar, and, when carefully examined, does not support the contentions of the bank in the instant case. The case of Caraway v. Robinson, 85 Ohio St. 485, 98 N. E., 1121, involved the principle of offset between a creditor of a decedent estate and a debt claimed by the estate, and is also without value. The only other Ohio Supreme Court case cited by the bank is that of W. E. Wright Co. v. Parshall, 101 Ohio St. 517, 130 N. E., 942. That case does declare that the doctrine of subrogation will not be applied to prefer one creditor over another, where an inequitable result will be accomplished thereby. In the instant case it must be apparent that the equities are equal. In that case the laborers and materialmen had perfected liens prior to the forfeiture, as they had a right to do in cases of contracts by municipalities, and in addition to that fact, the laborers and materialmen were entitled to be paid by the surety. The difference between that case and the instant case is that the bank was not a laborer or materialman, but merely a volunteer lender of money. In the absence of any direct authority among the former decisions of this court, we must turn to the Supreme Court of the United States and the courts of last resort of the states.
The case of Prairie State Bank v. United States, 164 U.S. 227, 17 S. Ct., 142, 41 L.Ed. 412, clearly states the right of the surety to subrogation, and that case differs from the instant case only in the fact that the surety was not liable in that case to pay the claims of laborers and materialmen. The Supreme Court of the United States reaffirmed this doctrine upon similar facts in the case of Henningsen v. United States Fidelity & Guaranty Co., 208 U.S. 404, 28 S. Ct., 389, 52 L. Ed., 547.
Other cases more directly in point, because the surety for the contractor in those cases was obliged either by statute or by the contract to pay the claims of laborers and materialmen, are as follows: People's National Bank v. Corse, 133 Tenn. 720, 182 S. W.9 917; First Nat. Bank of Seattle v. City Trust, Safe Deposit & Surety Co., 52 C.C.A. 313, 114 F. 529; Am. Bonding Co. v. Central Trust Co., 153 C.C.A. 326, 240 F. 400; Wasco County v. New Eng. Equit. Ins. Co., 88 Or. 465, 172 P. 126, L.R.A., 1918D, 732, Ann.Cas., 1918E, 656; Derby v. United States Fid. & Guaranty Co., 87 Or. 34, 169 P. 500; First Nat. Bank v. Pesha, 99 Neb. 785, 157 N. W., 924; Neodesha Nat. Bank v. Russell, 109 Kan. 562, 200 P.9 281; Massachusetts Bonding & Ins. Co. v. Ripley County Bank, 208 Mo. App., 560, 237 S. W., 182.
The foregoing cases declare that the surety is subrogated, to the extent necessary to protect it from loss, to all the rights which the state might have asserted by virtue of Section 1209, General Code, against the funds in its hands, and that such right attaches at the time the contract is made, and is one of the valuable rights which accrue to the surety by reason of its obligation of suretyship, and is not defeated by an assignment of the fund to secure a loan of money by a bank. They further establish the...
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