Seaboard Surety Company, Appellant, v. Westwood Lake, Inc., et al., Appellees, 277 F.2d 397 (5th Cir. 1960)

Including the State Court proceedings against Westwood Lake, Inc., the owner, brought by American Cast Iron Pipe Co., a furnisher of material to the contractor, in which the receiver for the insolvent contractor intervened, there is quite a large record in this case. All, however, that is involved here is the correctness of a judgment entered in a suit brought by a surety, which had bonded a contractor, against an owner which had employed the contractor to work on the two projects covered by the bonds, one for $214,000, the other for $190,000, and also on other projects not so covered.

While the claim as made below was for a much larger amount, as pressed here it is: that the contractor had assigned to the surety all payments to become due him; that it had finished the two jobs the surety had bonded; that there were in balances due and unpaid to the contractor by the owner, on account of those jobs, sufficient moneys to pay the surety the $30,000 more or less that it had expended in payment of suppliers to the contractor on the two jobs; and that the surety was entitled to recover these sums from the owner out of balances due the contractor on these two jobs, either still in its hands or improperly diverted by it.

In addition to the owner, the suit made parties defendant the Mackle Company, alleged to be a co-contractor with Westwood, and the American Cast Iron Pipe Company, a furnisher of pipe to the contractor, to whom, as a lien claimant, Westwood had made large payments, some before and some after suit by it, on account of moneys due American by the contractor.

On motion, the suit was dismissed as to American, on the ground that no claim for recovery was stated against it, and, after the dismissal of American with leave to amend, Seaboard amended and did not rename American as a party and did not appeal from the order of dismissal. Before the end of the trial, the suit as to Mackle, Inc. was voluntarily dismissed by plaintiff.

Tried to the court without a jury, Westwood's defenses were: that there were no balances due the contractor in its hands; and that it had fully and correctly paid the contractor, or claimants through and under the contractor, who were entitled thereto, all moneys that it owed the contractor.

At the conclusion of the lengthy trial, the district judge filed findings of fact and conclusions of law¹  and a judgment dated Sept. 1, 1959 based thereon, that the plaintiff take nothing by its suit and that the defendants, The Mackle Co., Inc and Westwood Lake, Inc., go hence without day.

Thereafter, on September 24, 1959, plaintiff gave notice of appeal from the judgment in favor of the defendant, Westwood Lake, Inc. and also from the order entered February 26, 1958, dismissing its complaint with prejudice as to American Cast Iron Pipe Co., and American having moved to dismiss the appeal as to it, as untimely, all the matters at issue here were submitted on briefs and oral argument and are ready for disposition.

Disposing first of the motion of appellee, American Cast Iron Pipe Co., to dismiss the appeal, we think it sufficient to say that we are of the clear opinion that, for the reasons stated and the authorities cited by it in its brief²  in support of its motion to dismiss, appellant's position that the order dismissing its complaint as to American was not final but interlocutory and not appealable until a judgment was entered disposing of the whole case, is completely untenable.

We turn, then, to the real issue in the case, whether, as claimed by the appellant, the effect of the State Court judgment and, therefore of the judgment appealed from, was to divert to a creditor on another job, which was not bonded at all, unpaid contract balances due on the two construction contracts appellant had bonded as surety, and to which, the contractor having defaulted, it was entitled, and a palpable miscarriage of justice has resulted therefrom.

In support of its claim, the appellant Surety argues that the district judge erred in finding that it was bound by the result of the state court suit, in which the contractor, its principal, intervened, and in not concluding that the proof offered in this case did not require a result contrary to that reached in the state court.

The appellee, on its part, urges upon us that whether the result of the state court case was absolutely, or only prima facie, binding on the surety in the federal court, the result reached in the federal court was correct, and the judgment must stand since there was no evidence contrary to the determination of the state court, that it had paid to, or for the account of, the contractor all the balances in its hands due on the two contracts. In addition, it insists that there was no sufficient evidence that, as claimed by plaintiff-appellant, the result was unjust as to the surety for the reasons stated by it, that in making these payments to, or for the account of, the contractor, Westwood had diverted to other jobs not bonded by it monies due on the jobs Seaboard had bonded and to which it had preference right.

A careful examination of the findings made in the state court and in the district court below convinces us: that the surety has not established its right to the equity it asserts, to have the owner pay again the moneys it has already paid the contractor, this time, however, to the surety who had guaranteed the owner against loss from having to pay twice and who has profited by the payment to American of the amounts admittedly due by the surety to it. We hold, therefore, that, under the evidence as a whole, the district judge was right in his conclusion of law No. 4: "Since there are no longer any contract balances owing from defendant, Westwood Lake, Inc., to Constructors, Plaintiff's assignor, Plaintiff cannot prevail in this suit."

In Town of River Junction v. Maryland Casualty Co., reported in 5 Cir., 110 F.2d 278 and 5 Cir., 133 F.2d 57, 59, this court dealt with a situation somewhat similar to that prevailing here. There a contractor, with a clause in its bond similar to that in the bond here, which had assigned to the surety, under certain conditions, retained payments, borrowed money from a bank and the bank used the money in part to pay creditors of the contractor. The surety sued the Town and the Bank for a balance claimed to be due it as assignee of the contractor. The district court gave the surety a judgment and Town and Bank appealed. This court, one judge dissenting, reversed the judgment and remanded the cause for trial anew. On the new trial the Town and the Bank sought to show that the money had been expended for claims which the Surety was bound to pay and for which, if they had not been paid by the bank, the surety would be liable. The district judge, deciding this issue against Town and Bank, gave judgment for the surety, they appealed, and this court, holding that the decision was in part clearly erroneous, said:

"* * * The surety was bound to see that all labor and material claims were paid, and to carry the job to completion. The claims of laborers and materialmen were a charge or incumbrance on the money due the contractor by the town, and against the surety's own bond * * * The surety has gotten its obligations discharged by the money furnished by the bank, with the co-operation of the town. The surety has no moral or equitable right to have the bank pay back or the town to pay again. The surety has chosen an equitable forum. In the original complaint, he asserts his claim against the bank for $5,105.77 paid it by the town thus: `that in equity and good conscience the said Gadsen County State Bank now holds said sum of money in trust for the benefit of your orator.' We think equity and good conscience entirely the other way. Whether or not the bank could actively enforce a subrogation against the surety of the claims its money paid, it can at least prevent a recovery in equity by the surety." (Emphasis supplied.)

Here the surety admits that it owed, but did not pay, American $20,000, and that the payment to American by Westwood discharged that obligation. The situation standing thus with Westwood, the owner, having under a judgment in the state court, entered after a full trial, paid out all the monies that it owed the contractor, it would be unjust for the surety to recover against it without a clear and strong showing that the payments made by Westwood to the contractor were induced by fraud or other overreaching, or were palpably wrong.

There could be no argument about this if the judgment, which directed Westwood to pay out the balances due it to the contractor, was absolutely binding on the surety, and appellee insists that, on this record with the judgment being prima facie binding on the surety, appellant stands no better here because it did not in this suit offer any evidence which established, with the clarity and certainty required, that there was fraud or wrongdoing in connection with the State Court trial or the payments ordered and made in that suit, or that the result thereof was in any respect contrary to right and equity.

This court has had occasion to write several times on the question of the effect of judgments in suits upon sureties who, though not parties to, had knowledge of, them.

In a suit arising in Florida, Lake County for Use and Benefit of Baxley v. Massachusetts Bonding & Insurance Co., 5 Cir., 75 F.2d 6, 7, this court went fully into the effect of a judgment against the contractor on a construction bond in a suit, to which the surety was not a party. There it was argued that the judgment which was obtained against the principal was "in the absence of a showing of collusion or fraud in its obtaining, conclusive against the surety". It was also argued that if the judgment was not conclusive, it was at least prima facie evidence requiring a verdict for him unless rebutted by clear proof, and that it, together with the positive testimony of the plaintiff Baxley and the other supporting evidence, clearly made an issue for the jury. In support of his claim that the judgment was at least prima facie evidence, many cases were cited. This court, reversing the case, on the plaintiff's appeal, for errors in the trial, stated at page 8:

"In view of another trial, we think it proper to say, upon the point appellant makes as to the effect of his judgment against Hardee, that while the authorities are apparently in dispute, we think the true statement of the law is this: Where it appears that the judgment against the defendant was obtained in a suit of which the surety had full knowledge, and which it had full opportunity to defend, the judgment therein is not only evidence, but conclusive evidence, against every defense except that of fraud and collusion in obtaining it. (authorities) Where it is not made to appear that the surety knew of and had opportunity to defend the suit, then the judgment is prima facie evidence that the surety is liable, sufficient to support a verdict unless it is rebutted by proof on the part of the surety that it was obtained through fraud or collusion, or that the loss or liability created by the judgment arose from acts other than those indemnified against under the conditions of the bond."

Tried again, it came back on the appeal of the same plaintiff, under the style of Lake County, for Use of Baxley v. Massachusetts Bonding and Insurance Co., 5 Cir., 84 F.2d 115, 117. The court below, in submitting the issue to the jury, charged that the prior judgment was not absolutely binding on the defendant but it would prima facie fix the amount of the indebtedness, and appellant complained that he should have charged that the introduction of the judgment cast upon defendant the burden of overthrowing it. We disagreed with this, saying:

"The burden was upon plaintiff throughout to establish his right to recover. (authorities)"

"The judgment against Hardee did not operate as an estoppel against defendant. It was evidence, sufficient indeed for recovery if no evidence was introduced by defendant. When, however, defendant offered evidence, the judgment was like all the other evidence to be considered by the jury upon the question whether plaintiff had made out his case."

In a later case, United States v. Maryland Casualty Co., 5 Cir., 204 F.2d 912, this court, stating that the effect of the prior judgment was a matter of substance, and the law of the state controlled, held that, since in Alabama a judgment against the principal is not binding on the surety at all except under certain conditions, those conditions not appearing, the judgment was not binding at all.

Here appellant in effect concedes, and, if not, the authorities³  compel the conclusion, that the judgment is at least prima facie binding on the surety.

We are of the clear opinion that, if treated as no more than this, considering, the record as a whole, the attitudes of the parties, and particularly that, if Westwood, the owner, is wrongfully cast in judgment, it will be made to pay the same sums twice, there must be a very clear showing, that the state court proceeding against the contractor wrought an injustice on the surety; and that this record cannot be read as making any such showing. It is entirely true, indeed there is specific evidence, that, in running these various jobs, the accounting system was confused and inaccurate, and, generally speaking, all the jobs were in effect treated as one, payments being made from and in respect to each of them indiscriminately. In addition, there is specific and positive evidence that, while, in the state court, the receiver for the contractor for a time undertook to claim that American Cast Iron was seeking payment out of monies due on one job for pipe furnished to another, it was established that payments had been made indiscriminately, all the jobs being treated as one, and that, while the evidence showed that at a certain time there was a great deal more money left in one of the jobs than in another, this was due to the fact that the funds had been resorted to indiscriminately and no precise allocation made. The fact, then, of which the appellant tries to make so much, that at one time there was $103,000 still due on the jobs that it had bonded, and only about $15,000 due on the Miller Heights job, and that of the large sums due to American, a great part of them arose out of the Miller Heights job, is, under the court's findings, of no significance because there is other evidence in the record showing, or tending to show, that this result had been brought about by drawing from the Miller Heights job to pay monies due on the other jobs. In short, the records are in such a jumbled and confused state that it cannot be said that the district court erred in holding that the surety had failed to make good its claim, that monies due on the jobs it had bonded had been, to the surety's prejudice, diverted from those jobs to others.

The judgment appealed from is affirmed.