Town of River Junction v. Maryland Casualty Co.

• Decision Date: 20 May 1940
• Docket Number: No. 9259.,9259.
• Citation: 110 F.2d 278
• Parties: TOWN OF RIVER JUNCTION et al. v. MARYLAND CASUALTY CO.
• Court: U.S. Court of Appeals — Fifth Circuit

110 F.2d 278 (1940)

TOWN OF RIVER JUNCTION et al. v. MARYLAND CASUALTY CO.

No. 9259.

Circuit Court of Appeals, Fifth Circuit.

March 1, 1940.

Writ of Certiorari Denied May 20, 1940.

C. L. Waller, of Tallahassee, Fla., and H. M. Taylor, of Quincy, Fla., for appellants.

Francis M. Holt, of Jacksonville, Fla., for appellee.

Before SIBLEY, HUTCHESON, and HOLMES, Circuit Judges.

Writ of Certiorari Denied May 20, 1940. See 60 S.Ct. 1077, 84 L.Ed. ___.

SIBLEY, Circuit Judge.

The Town of River Junction was building a sewerage system with aid from the Public Works Administration; Gadsden County State Bank was lending the contractor money to pay his labor and material bills; and Maryland Casualty Company was surety on the contractor's bond. Towards the end of the job the contractor got from the Bank $4,000, $400, and $400 on an assignment to it dated June 28, 1937, of his "June estimate check" and used the money to pay for labor and materials. The June check was not promptly issued, and on Aug. 18 the contractor defaulted and the surety was called in and completed the job at an outlay of about $2,000. The Town thereafter paid the Bank its claim with interest, $5,105. The surety, in order to exonerate itself against outstanding material bills against the contractor, brought a petition against the Town, the Bank, the contractor and thirty-six materialmen, praying that the money in the Town's hands, about $10,700, which included $8,200 retained percentages under the building contract, be applied to the material bills, and the $5,105 paid the Bank be restored and likewise applied. The Town and the Bank answered separately defending the payment to the Bank, but on motion these defenses were stricken. On a motion for summary judgment, the surety's obligations to the thirty-six materialmen were disposed of, and they having been paid by the surety a decree was rendered in favor of the surety against the Town for $15,810. While no judgment was given against the Bank, it stands to lose the $5,105, for in receiving payment from the Town it gave an indemnifying bond. The main question is whether the payment to the Bank was good as against the surety.

The controlling ruling is that striking the answers. Under the Rules of Civil Procedure the facts alleged must be taken as true. If no motion is made for a more definite statement, general averments must be taken at their face value. By Rule 9(b) (c), 28 U.S.C.A. following section 723c, averments of fraud and mistake only must be particularized, but the occurrence of conditions precedent need not be. Though not identical the two answers agree in substance, and are as follows:

The construction contract exhibited in the petition is admitted. It provides for a partial payment to the contractor within the first fifteen days of each calendar month for work done the preceding month on a certified estimate, ninety percent to be paid over and ten percent retained until final completion. By the 20th of the month the contractor is to pay all labor and ninety percent of the cost of materials, tools and expendible equipment delivered the preceding calendar month, and such payment is a condition precedent to receiving the next partial payment. The application by the contractor to the surety for the bond is also exhibited, though the answers say it was unknown to the defendants. In it the contractor, besides agreeing to indemnify the surety against all loss, assigns to the surety "as of the date hereof" all tools, equipment and material to be used on the job; and "in the event of claim or default under the bond all payments due or to become due under the contract" shall be made to the surety.

The answers next say that the partial payment of ninety percent to which the contractor was entitled at the end of each thirty day period was free of any trust or lien; and the surety's right to control it did not, under the contract with it, arise unless or until the contractor was in default. On June 28, 1937, when the contractor had not defaulted in his contract, and after the progress payment for the work done in the thirty day period from May 28 to June 28 had already been earned and had accrued to the contractor, but could not be paid because the engineer in charge had not made the estimate and because (the Town states) there had occurred a delay in its securing funds to pay the contractor, he went to the Bank and borrowed $4,000, $400, and $400 and used it all to pay his payrolls and material bills, for all of which the surety was liable and of which it obtained the benefit. As security the contractor executed to the Bank an order addressed to the Mayor "Will you kindly send our June Sewer Estimate cheque direct to the Gadsden County State Bank for our account when the same is ready to be paid", and on the same sheet an assignment: "For value received we hereby sell, transfer, and assign the above described cheque, or any amount thereof required to pay the sum of $4,000 and interest on same and for such further sums that the Gadsden County State Bank may advance to us for payment of labor and material." The Town was duly notified of said assignment, and acquiesced in it, neither the Town nor the Bank knowing of any assignment to the surety. The amount due to be paid on the June estimate was more than enough to pay the claims of the Bank, and it was through no fault of the Bank that the June estimate was not seasonably made and paid. The Town paid the Bank on advice that it had the better right, after the contractor had defaulted on or about Aug. 18, 1937.

These then are the facts before us. We are bound to take it that on July 26, when the Bank advanced its last payroll money, the contractor had not failed in any obligation. The scheme of the building contract is that at the end of each calendar month (the 25th or 28th seems to have been taken as the date) there should be an estimate made of labor and material put into the work during that month, and by the 15th day of the next month ninety percent thereof should be paid the contractor; and by the 20th he should use the money to pay all his labor and ninety percent of his material bills for the month estimated. If he should fail to do this he would not be entitled to draw the next payment. The arrangement is of vital practical importance. The ten percent retained each month has, since the decision in Prairie State Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412, been established to be an agreed security to be held by the owner for the protection of himself and the surety, just as though the contractor had pledged so many Liberty Bonds. This is but an application of the general principle that a surety has a beneficial interest in all collateral pledged to the creditor by the principal debtor. 50 C.J., Prin. & Surety, §§ 381, 384. In these retained percentages the contractor can give no one a right superior to that of the surety, for the surety's right dates from the making of the contract which pledged them.

Just as clearly the monthly progress payments are agreed to go to the contractor to be used by him in financing the work, so long as he is in no default. The surety agrees to this as a party to the building contract. This also appears in the private application for the bond, for while he stipulates therein for an immediate though secret assignment of equipment and materials on the site, he contracts for no right in these progress payments unless or until the contractor defaults or a claim is made against the surety under the bond. Until then it is the contractor's right to have and is his duty to administer these payments. This court held in Kane v. First National Bank, 5 Cir., 56 F.2d 534, 85 A.L.R. 362, on a review of the authorities, that there was no trust attached to them and that a check issued for one could be negotiated as commercial paper though the taker knew its source. The matter was again gone over in Third National Bank of Miami v. Detroit Fidelity & Surety Co., 5 Cir., 65 F.2d 548, and it was held that a bank could take assignments from materialmen and laborers it paid and succeed to their rights against the bond. We recognize, however, that a bank acquires no subrogation to claims for labor or material by the mere application of its money to them, because a voluntary lender is never subrogated, as was held in Prairie State Bank v. United States, supra. We think also that there is probably an implied obligation on the contractor, especially if he be insolvent, not to divert money from the job, which may be enforced by the surety in equity. But that is immaterial here, for the money was not by its assignment diverted, for the proceeds of the assignment were used for a faithful furtherance of the job and for the protection of the surety.

Can the contractor arrange with his bank for cash needed for payrolls by assigning a particular progress payment already earned, to save the work from stopping till payment shall be made? Will the assignment, notified to and acquiesced in by the owner, hold good against the surety if the contractor defaults in a later month? If the answer is No, banks cannot safely lend. Laborers must wait or quit. Contractors must more often fail, and sureties be more often called in, with added delay and expense to the work. The whole matter of public contracts will be seriously affected. If the answer is Yes, the work and the workers will be facilitated and no one injured. The surety cannot object on the ground that the contractor might divert the money, for he has agreed to trust the contractor until he defaults. In the present case the surety got the full benefit of the arrangement, and if his permission had been asked in advance we cannot doubt it would have been given.

It is the assignment of the June estimate that gives the Bank standing. The meaning of the whole instrument is that the entire June payment is to go to the Bank, which is to take out what it may advance and account...