State for Use of Farmers State Bank of Parkston v. Kuipers Const. Co.
| Decision Date | 13 October 1971 |
| Docket Number | No. 10756,10756 |
| Parties | STATE of South Dakota For the Use of FARMERS STATE BANK OF PARKSTON, Plaintiff, v. KUIPERS CONSTRUCTION COMPANY, a South Dakota Corporation, Defendant, Hartford Accident and Indemnity Co., a Connecticut Corporation, Defendant and Appellant, and United States of America, Intervenor and Respondent. |
| Court | South Dakota Supreme Court |
Woods, Fuller, Shultz & Smith, and F. M. Smith, Sioux Falls, for defendant and appellant.
William F. Clayton, U.S. Atty., David R. Gienapp, Asst. U.S. Atty., Sioux Falls, for intervenor and respondent.
WOLLMAN, Judge (on reassignment).
The question raised in this appeal is whether one who lends money to a contractor who uses the funds to complete a public improvement contract is entitled to recover on the contractor's performance bond required under the provisions of SDCL 5--21.
In May of 1962 Kuipers Construction Company (Kuipers) opened a checking account in the Farmers State Bank of Parkston, South Dakota (Bank) and established a line of credit with the bank. Thereafter the bank made a number of loans to Kuipers, the proceeds of which were used in connection with Kuipers' construction activities. There was no requirement by the bank that Kuipers use the proceeds of the loans for certain purposes or on certain projects and the bank exercised no supervision over the use of the loan proceeds by Kuipers.
On October 22, 1962, Kuipers entered into a construction contract with the State of South Dakota through the State Board of Regents for the construction of a science building at the institution then known as South Dakota State College located in Brookings, South Dakota.
On October 26, 1962 Kuipers, as principal, and Hartford Accident and Indemnity Company (Hartford) as surety, executed a performance and payment bond to the State of South Dakota, as obligee, in the amount of the contract.
Kuipers started working on the science building soon after the contract and bond were executed. On or about July 23, 1964, the Small Business Administration (SBA), an agency of the United States government, made a participation loan to Kuipers in the amount of $75,000, SBA participating therein to the extent of 75% ($56,250), and the bank participating to the extent of 25% ($18,750).
The evidence reveals that the original loan application submitted to SBA by the bank and Kuipers in the fall of 1963 was held in abeyance pending receipt by Kuipers of evidence that it could secure bonds for future jobs. Hartford furnished Kuipers a letter in July of 1964 to the effect that Hartford would consider for a period of one year applications by Kuipers for bid, performance and payment bonds on individual contracts in specific amounts to be approved in advance, subject to certain asset requirements and bank account control. 1
The SBA loan was secured by all of the assets of Kuipers available for the purpose of collateral. The proceeds of the SBA loan were not designated for use on the science building project and there was no requirement by SBA that the money be used on that project. Neither the bank nor SBA exercised any supervision over Kuipers' use of the proceeds of the SBA loan. 2 The proceeds were deposited by Kuipers in its checking account in the bank and were mingled with funds then deposited in the account and thereafter deposited therein from other sources.
Kuipers had a balance in the checking account of $5,918.98 on July 23, 1964. On July 24, 1964 the $75,000 SBA loan was deposited in the account together with an additional deposit of $11,907.94 from other sources making a total balance in the account as of the close of business on July 24, 1964 of $92,826.92.
After July 24, 1964 Kuipers issued checks drawn on the bank account in the total sum of $48,357.36 in payment of expenses and bills incurred in the performance of its contract for the construction of the science building.
Kuipers defaulted on the contract and Hartford completed construction of the science building, making payment of all expenses of labor and material incurred in connection therewith as required under the terms of the performance bond.
The bank brought suit against Kuipers for recovery on two promissory notes in the total amount of $51,807.82 and against Hartford for recovery of that sum under the terms of the performance bond. The United States of America was permitted to intervene in the action and its complaint sought recovery from Kuipers and Hartford in the sum of $56,278.56, which was alleged to be the balance due on the SBA loan.
The trial court held that the SBA loan proceeds expended for labor performed and materials furnished under the contract on the science building project were payable under the performance bond. The court found that from the total of $48,357.36 traceable from Kuipers' account in the bank to the science building project there should be deducted the sum of $17,826.92 representing funds on deposit in the account from sources other than the SBA loan. The court awarded judgment in favor of SBA against Hartford for the balance of $30,530.44. The court denied the claims of the bank on the ground that they involved loans whose proceeds were part of an indistinguishable line of credit that had been given to Kuipers over the years and could not be traced to the science building project. No findings or conclusions were made concerning the liability of Kuipers to the bank and SBA and no judgment was entered against Kuipers.
The contract between Kuipers and the State stated that:
'The Contractor shall perform everything required to be performed and shall provide and furnish all of the plant, labor, materials, necessary tools, expendable equipment, and all utility and transportation services required to perform and complete in a workmanlike manner and ready for operation all the work required for the General Construction of a Science Building * * *
'The Contractor shall submit evidence satisfactory to the State Engineer that all claims of unpaid payrolls, material bills and other indebtedness connected with the work have been satisfied, prior to approval of the final payment.'
The performance and payment bond executed by Kuipers and Hartford provided in part:
'* * * which contract is herein referred to and made a part hereof as fully and to the same extent as if the same were entirely written herein * * *
'NOW THEREFORE, If the above principal shall in all respects comply with the terms and conditions of said contract, and his (their or its) obligations thereunder, including the specifications therein referred to and made a part thereof, and such alteration as may be made in such specifications, as herein or therein provided for, then this obligation to be void, or otherwise to be and remain in full force, effect and virtue.
'AND the further condition of this Bond is that in the event said Principal shall fall to pay all just claims and demands on the part of any employee, persons, firms or corporations for labor and materials furnished for or used in connection with the prosecution of the work under said contract, or pay all taxes which may accrue to the State of South Dakota under the provisions of the 'Use Tax Act of 1939', and Chapter 479 of the South Dakota 1957 Session Laws, then this Bond and the Sureties thereon shall be responsible to such persons, firms or corporations, and the State of South Dakota for the full payment of the full value of such labor and materials so furnished, including the payment of South Dakota Use Tax.'
The bond was executed in compliance with the provisions of SDCL 5--21--1, which provides that:
'Whenever any contract is entered into for the construction of public improvement or the furnishing of any material or labor therefor, the contractor shall be required, before commencing such work, to furnish surety in an amount not less than the contract price, for the faithful performance of such contract, with the additional obligation that such contractor shall promptly pay all persons supplying him with labor or material in the prosecution of the work provided for in such contract.'
SDCL 5--21--5 permits any person who has not been paid for labor or material furnished or used in the construction of any public improvement to intervene and be made a party to any action instituted by the public corporation on the surety. SDCL 5--21--6 provides that if no suit is brought by the public corporation within six months from the completion and final settlement of a public improvement contract, a person who has supplied the contractor with labor or material used in the prosecution of the work shall be authorized to bring suit in the name of the public corporation for his use and benefit against the contractor and the surety, with the condition that:
'* * * where suit is instituted by any such person on the surety of the contractor, it shall not be commenced until six months after the complete performance of such contract and final settlement thereof but must be commenced within one year thereafter; provided, further, that where suit is so instituted by any such person, only one action shall be brought, and any person may file his claim in such action and be made a party thereto within one year from the completion of the work under such contract, and not later * * *'.
Hartford contends that SBA's claim must fail because SBA could not qualify as a statutory beneficiary under the performance bond and because the claim for money loaned to Kuipers was not a just claim under the bond.
This court held in State of South Dakota for Use of Farmers State Bank v. Ed Cox & Son, 81 S.D. 165, 132 N.W.2d 282, that money loaned to a contractor for the specific purpose of paying claims incurred in carrying out the provisions of a contract with the State Highway Department was within the coverage of the contractor's performance bond. The statute involved in the Cox case, SDCL 31--23--1, required the contractor to furnish...
To continue reading
Request your trial