U.S. Fidelity & Guaranty Co. v. R.S. Armstrong & Bro.

• Decision Date: 02 June 1932
• Docket Number: 6 Div. 870,871.
• Citation: 225 Ala. 276,142 So. 576
• Parties: UNITED STATES FIDELITY & GUARANTY CO. v. R. S. ARMSTRONG & BRO. (SOUTHERN BANK & TRUST CO., INTERVENER.
• Court: Alabama Supreme Court

142 So. 576

225 Ala. 276

UNITED STATES FIDELITY & GUARANTY CO. v. R. S. ARMSTRONG & BRO. (SOUTHERN BANK & TRUST CO., INTERVENER.

6 Div. 870, 871.

Supreme Court of Alabama

June 2, 1932

Rehearing Denied June 23, 1932.

Appeal from Circuit Court, Jefferson County; C. B. Smith, Judge.

Suit on contractor's bond by R. S. Armstrong & Bro. against the United States Fidelity & Guaranty Company, and intervention by the Southern Bank & Trust Company. From a judgment for plaintiff and intervener, defendant appeals.

Affirmed.

Stokely Scrivner, Dominick & Smith, of Birmingham, for appellant.

Harsh Harsh & Hare, of Birmingham, for appellee Armstrong.

Cabaniss & Johnston and L. D. Gardner, Jr., all of Birmingham, for appellee bank.

BOULDIN J.

The action is against the surety on a contractor's bond for the construction of public improvements under contract with a municipality. Gen. Acts 1927, p. 37.

On September 21, 1927, J. A. Taylor entered into a contract with the city of Birmingham for the construction of sanitary sewers, known as the Collegeville project. Appellant, United States Fidelity & Guaranty Company, became surety on his bond.

Taylor applied to a Birmingham bank, now Southern Bank & Trust Company, to finance him in the execution of the contract. Accordingly, on September 29th, the bank took an assignment in writing of all his rights and interest under the contract empowering the bank to collect and receipt for each estimate accruing to him. Thereupon the bank made loans to Taylor from time to time for such purpose.

The method of business was to make these loans due and payable on the dates the estimates and payments thereon were to be made by the city. The city, on notice of such assignment, did not approve the assignment as empowering the assignee to receive direct payment, but made the estimates and checks therefor payable to the contractor. But from time to time the bank's messenger accompanied Taylor to receive the check, and in each instance the check went to the bank; whereupon the amount was credited on Taylor's indebtedness, and new notes taken to cover the balance and new loans made for further operations.

In making loans, Taylor was required to furnish the bank with pay rolls and bills for material, but the proceeds were deposited to Taylor's checking account. The bank did not supervise the drawing of checks, and it appears some checks were drawn for salary, office expenses, and payments on equipment, items for which the surety was not liable on the bond, but stated generally to have been in aid of the execution of this contract.

The estimates did not meet the loans made from time to time by the bank. Taylor's debt to the bank grew until on August 25, 1928, he was indebted, speaking in round numbers, about $36,000. The bank called in the local representative of the surety company, and went over the situation with him. Not willing to go on advancing upon the security in hand, the bank arranged to pay materialmen's bills direct and take assignments of same. The surety company was advised of this course of business. No objection was interposed. In this way Taylor was enabled to complete the performance of the contract, the final estimate was made and received by the bank.

The bank had taken assignments of claims for labor, material, and supplies aggregating near $65,000. Meantime, it had also made further loans to Taylor of some $19,000. The moneys received on estimates were applied from time to time to the payment first of the loans, leaving unpaid assigned claims aggregating $54,686.55. The bank, as intervener, sued for this sum. Pending the suit, the contractor died, and the debt was reduced by proceeds of life insurance policies held by the bank as collateral, and judgment rendered for the intervener for the balance of $15,478.86.

Speaking broadly, the surety company insists that it is entitled to have the moneys received on estimates applied to these assigned materialmen's claims, or at least a sum sufficient to cover the balance due thereon.

One inquiry is: What was the effect of the original assignment by the contractor to the bank of his interest in the proceeds accruing from performance of the contract?

By general rules of law, future earnings under an existing construction contract have such potential existence as to become assignable, like other choses in action, as security for debt. In the absence of statute, the refusal of the city to recognize the assignment would in no way defeat the claim of the assignee as against the assignor. Citizens' Bank of Guntersville v. Pearson, 217 Ala. 391, 116 So. 350; American Trust & Savings Bank v. O'Barr, 12 Ala. App. 546, 67 So. 794; Broadwell v. Imms, 14 Ala. App. 437, 70 So. 294; First Nat. Bank of Gadsden v. Murphree, 218 Ala. 221, 118 So. 404; Wellborn v. Buck, 114 Ala. 277, 21 So. 786; Southern Ry. Co. v. Stonewall Ins. Co., 177 Ala. 327, 58 So. 313, Ann. Cas. 1915A, 987; United States Fid. & Guar. Co. v. First Nat. Bank of Lincoln (Ala. Sup.) 140 So. 755.

It seems indisputable that the contractor could and did make a valid assignment to the bank of his future estimates as security for money advanced, and it was the right of the bank to receive the moneys as they accrued and apply the same to the payment of the debts for which they were pledged, unless the surety has a superior equity in such funds.

This brings us to consider what are the equities of the surety under the facts stated and to be stated.

At the time of executing the bond, and as part of the same transaction, the contractor entered into an indemnity agreement subrogating the surety to all the rights of the principal in case of default on his part as contractor, including an assignment of all arrearages, retained percentage, and sums thereafter payable by way of reimbursement of the surety for his outlays upon default of the principal.

This same form of indemnity agreement and other terms of the contract are set out and considered in Citizens' Bank of Guntersville v. Pearson, supra.

In that case the contractor defaulted, and the surety took over the completion of the contract. The Citizens' Bank had loaned money to the contractor and taken an assignment as security. There were certain funds still due and unpaid from the county upon the completion of the contract. The question was the superiority of the respective claims of the surety and the bank to these funds.

The decision is rested upon the general equitable principles of subrogation, whereby a surety, forced to pay the debt of the principal, is subrogated to the security held by him; and the conditional assignment in the indemnity clause treated, as for such funds, a contractual recognition of the equitable right of subrogation.

Held, this equitable right of subrogation upon the happening of the events entitling the surety to assert it grew out of the contract of suretyship, and related back to the date when such relation was entered into.

The claim of the surety under the assignment and the general law of subrogation was held superior to that of the bank.

Like principles were...