Maryland Casualty Co. v. Dulaney Lumber Co., 23 F.2d 378 (5th Cir. 1928)

*379 *380 Wm. H. Watkins, of Jackson, Miss. (Geo. F. Cushwa, of Baltimore, Md., and Watkins, Watkins & Eager, of Jackson, Miss., on the brief), for Maryland Casualty Co.

J. Ed. Franklin, of Ruleville, Miss., J. W. Cutrer and Edward W. Smith, both of Clarksville, Miss., and Percy Bell, of Greenville, Miss., for Dulaney Lumber Co., Pidgeon-Thomas Iron Co., Gulf Refining Co., and Bank of Ruleville.

Before WALKER, BRYAN, and FOSTER, Circuit Judges.

BRYAN, Circuit Judge (after stating the facts as above).

The bank appeals, and insists that its equity is superior to that of the surety. The surety appeals from the decree in favor of the Dulaney Lumber Company, which it contends should be reduced by the amount the contractor received upon sales of the empty cement sacks in question. The surety also appeals from the decree in so far as it was in favor of the Gulf Refining Company and the Pidgeon-Thomas Iron Company, but it is made to appear that their claims have been settled, and therefore the appeal as to them is dismissed.

The bank's appeal will be considered first. The surety stood in contractual relation to the construction of the highway. The law required the contractor to give bond with surety to insure both the completion of the work and the payment of valid claims for labor and material. The bond thus became an essential part of the contract. The law also required the highway department to retain 15 per cent. of the contract price until the highway was completed. Notice, therefore, was imputed to the bank of the fact that there was a surety, and of its rights and obligations under the contract. Derby v. United States Fidelity & Guaranty Co., 87 Or. 34, 169 P. 500. The rights of the surety related back to the date of the bond. Labbe v. Bernard, 196 Mass. 551, 82 N.E. 688, 14 L. R. A. (N. S.) 457. Where performance of the contract results in a loss, it is the settled general rule in the federal courts that the right of a surety under its bond to the retained percentage is superior to the right of a bank, which advances money under an assignment from the contractor taken subsequently, or without notice to the surety. Prairie State Nat. Bank v. United States, 164 U.S. 227, 17 S. Ct. 142, 41 L. Ed. 412; Henningsen v. U. S. Fidelity & Guaranty Co., 208 U.S. 404, 28 S. Ct. 389, 52 L. Ed. 547. That rule has recently been approved in Mississippi. Canton Exchange Bank v. Yazoo County, 144 Miss. 579, 109 So. 1.

We are of opinion, also, that the bank is not entitled to recover of the surety the amount of the current estimate paid to the contractor, and applied by him and the surety in discharge of bills for labor and material. At the time that payment was made, the surety had no knowledge of the bank's assignment; and it is not clear from the testimony that the assignment had not been rendered inoperative by payment of the loan for the security of which it was given. The bank's second assignment had not then been secured. But, aside from these considerations, the bank did not become entitled, under either assignment, to any funds except such as were payable to the contractor. Labor and material claims were superior to any claim held by the bank. The surety did not appropriate the current estimate in question to its own use, but merely insisted upon a *381 proper application of it. If that estimate had remained in the hands of the highway department, the claims of laborers and materialmen, under the public policy that has been established by law in Mississippi, would have been superior to the claim of the bank. The latter could acquire no higher rights than the contractor had. It could not acquire anything of value under the assignment, unless the contract resulted in a profit. The case of First National Bank v. Monroe County, 131 Miss. 828, 95 So. 726, is not inconsistent with the views here expressed. It is true that the equity of a bank, which had taken an assignment from a contractor, was held superior to the equity of the surety. But the surety completed the contract at a profit, and the question of superior equity in the event of loss was not involved.

The bank is not entitled to any relief against the surety by reason of the assignments procured by the contractor of labor and material claims. The law gave no lien on account of these claims, and they were in reality paid by the contractor with his own funds, and thus discharged. If the bank advanced any money, it was to the contractor, and not to the claimants. Under these circumstances, no right to be reimbursed is shown. Union Trust Co. v. Southern Sawmills & Lumber Co. (C. C. A.) 166 F. 193.

As to the surety's appeal on the Dulaney Lumber Company's claim, we are of opinion that the District Judge should have allowed as a deduction the amount received by the contractor from the sale of cement sacks that were not consumed in the work. If the sacks had been consumed in the work, the claim for the full amount would doubtless have been good; but the surety was liable only on such claims as were based on labor and material actually furnished and consumed on the highway.

The decree is affirmed on the bank's appeal, and reversed on the surety's appeal, and the cause is remanded, with directions for further proceedings not inconsistent with this opinion.