Fidelity & Casualty Co. v. Livingston

I am unable to concur in the opinion of Mr. Justice McDONALD in this case. I am satisfied that the principle laid down and the authorities considered and cited in Board of County RoadCom'rs of Calhoun Co. v. Surety Co., 216 Mich. 528, settles the law in this State in accordance with the overwhelming weight of authority that the rights of the surety on bonds of the character here involved are superior to the rights of the assignee of the contractor who holds assignment of the amount due him or claimed to be due him. I think the infirmity in my Brother's opinion is in his assumption that the contractor, Livingston, at the time the order was issued could have compelled payment to him by the city. If at that time Livingston had insisted on payment, and it had appeared as this record discloses the fact to be, that he then owed the Cadillac Clay Company $6,481.44 and the United Fuel Supply Company $5,138.23 for material that went into the job, it is obvious to me *Page 380 that his claim for a present payment could not have been sustained. The city could not have been required to make a payment which in law would discharge the surety either entirely or pro tanto and in Sandusky Grain Co. v. Condensed Milk Co.,214 Mich. 306, we held that payments made to the contractor which did not reach the laborer or materialmen discharged the surety, at least pro tanto. Such payment would be a voluntary payment discharging the surety and could not be required of the city. The clause in the contract giving the materialmen the right to file an affidavit of their claim permitted the city to pay direct to them, but this did not deprive the materialmen of the benefit of the bond, and if they chose they could sue direct on the bond, and if the surety paid it would be subrogated. The city quite clearly recognized that materialmen and laborers must be paid before the contractor or his assignee had anything coming, and made only the limited and conditional acceptance quoted by my Brother. In the final analysis the case must be determined, I think, by the determination of the date at which the rights and equities of the parties attached. If the rights and equities of the surety attached on the execution of the bond or relate back to that date, they are superior to those of the assignee, because at the date of the assignment the contractor had nothing to assign. I think both as matter of contract and as matter of law the surety's equities attached on the date of the bond. The contractor, Livingston, applied to the surety company to become his surety on September 27, 1921, and in the application agreed: "That if the applicant shall fail to comply with the conditions of the contract for which the said bond is to be given, the applicant's title in and right of possession of the plant and materials concerned with the said contract shall immediately vest in the company, and the company shall besubrogated to all the rights *Page 381 and property of the applicant arising out of the said contract; and in such event the company shall have the right and the opportunity to assume the remainder of the said contract, and, at its option, to perform or to sublet the same." I shall not undertake a review of the authorities. A large number of them were cited by Justice CLARK in Board of CountyRoad Com'rs of Calhoun Co. v. Surety Co., supra. I think the Supreme Court of the United States settled the question inPrairie State Bank v. United States, 164 U.S. 227 (17 Sup. Ct. 142). In that case the bank and the surety company both claimed the fund. Mr. Justice White who wrote the opinion thus states the question before the court: "The question to be determined is which of the two contestants possesses a superior right to the fund." He then considers the question of subrogation and says: "Under the principles thus governing subrogation, it is clear whilst Hitchcock was entitled to subrogation, the bank was not. The former in making his payments discharged an obligation due by Sundberg for the performance of which he, Hitchcock, was bound under the obligation of his suretyship. The bank, on the contrary, was a mere volunteer, who lent money to Sundberg on the faith of a presumed agreement and of supposed rights acquired thereunder. The sole question, therefore, is whether the equitable lien, which the bank claims it has, without reference to the question of its subrogation, is paramount to the right of subrogation which unquestionably exists in favor of Hitchcock. In other words, the rights of the parties depend upon whether Hitchcock's subrogation must be considered as arising from and relating back to the date of the original contract, or as taking its origin solely from the date of the advance by him." And after an exhaustive review of the authorities concludes: "Sundberg Company could not transfer to the *Page 382 bank any greater rights in the fund than they themselves possessed. Their rights were subordinate to those of the United States and the sureties. Depending, therefore, solely upon rights claimed to have been derived in February, 1890, by express contract with Sundberg Company, it necessarily results that the equity, if any, acquired by the Prairie Bank in the ten per cent. fund then in existence and thereafter to arise was subordinate to the equity which had, in May, 1888, arisen in favor of the surety Hitchcock." This case has been many times cited by State courts and inHardaway v. Surety Co., 211 U.S. 552 (29 Sup. Ct. 202), andHenningsen v. Guaranty Co., 208 U.S. 404 (28 Sup. Ct. 389). In the last cited case the court quoted with approval the following language from the opinion of the circuit court of appeals: "Whatever equity, if any, the bank had to the fund in question, arose solely by reason of the loans it made to Henningsen. Henningsen's surety was, upon elementary principles, entitled to assert the equitable doctrine of subrogation; but it is equally clear that the bank was not, for it was a mere volunteer, and under no legal obligation to loan its money." But it is said the money was loaned to Livingston to be used on this job and was so used. I think the testimony is rather hazy on this claim, but, be that as it may, precisely the same claim was made and overruled in Wasco County v. Insurance Co.,88 Or. 465 (172 P. 126, L.R.A. 1918D, 732, Ann. Cas. 1918E, 656), upon which case Board of County Road Com'rs of CalhounCo. v. Surety Co., supra, is largely bottomed. The opinion in that case contains an exhaustive consideration of the cases, and decision rests on the rule, recognized almost universally, that the equities of the surety, having attached at the date of the bond, are superior to those of an assignee (who is at most a volunteer) of later date. It was there said: *Page 383 "When the bank loaned its money it knew that before Cromer entered upon the performance of his contract he had given a bond signed by a surety, and that the law required the county to reserve 25 per cent. of each monthly estimate. From the date of the contract of suretyship the bank was bound to know that the insurance company had an equity in the funds to be reserved; and when the bank loaned its money it did something that it was not obliged to do, and it must be deemed to have acted with a full knowledge of the right of the surety. The contractor and the bank could not create a lien in favor of the bank upon the reserved fund and make it paramount to a prior and then existing lien of the surety. First Nat. Bank v. SuretyCo., 52 C.C.A. 313, 114 Fed. 529, 532; Hardaway v. SuretyCo., 80 C.C.A. 283, 150 Fed. 465, 473, and affirmed in211 U.S. 552, 561 (29 Sup. Ct. 202); Title Guaranty Surety Co. v.Dutcher, 203 Fed. 167, 169; Illinois Surety Co. v. City ofGalion, 211 Fed. 161, 163; In re P. McGarry Son, 153 C.C.A. 326, 240 Fed. 400, 402; Columbia Digger Co. v. Sparks, 142 C. C. A. 304, 227 Fed. 780, 784; Stearns, Suretyship, § 482." Livingston, the contractor, used $3,667.44 to pay labor and materialmen's claims; the bank had $1,000, which it applied on its note. In my judgment it should respond for the thousand dollars but should not respond for the $3,667.44 simply because it passed through its hands. The decree is reversed and one here entered in accordance herewith, with costs to plaintiff. SHARPE, SNOW, STEERE, WIEST, and CLARK, JJ., concurred with FELLOWS, J. *Page 384