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FIDELITY & DEPOSIT CO. OF MARY. ants, and within federal court jurisdiction ben LAND V. CLAIBORNE PARISH

cause of diversity of citizenship. SCHOOL BOARD et al.

8. Subrogation Om 8-Surety of school building (District Court, W. D. Louisiana, Shreveport contractor, on payment to materialmen and Division. January 25, 1926.)

laborers, has right of action against school

board for wrongful conversion of funds, due No. 1528.

contractor, but paid another creditor. 1. Schools and school districts m81(2), 84.

Surety on school building contractor's bond, Contract to build schoolhouse and surety to have right of action against school board for

obliged to pay laborers and materialmen, held contract must be construed together with Act wrongful conversion of money, which it withLa. No. 224 of 1918 under which they were

held from contractor, but paid to bank having given.

claim against him not arising out of contract. 2. Principal and surety Cm 167—Provision in contract for school building for retention of

At Law. Action by the Fidelity & Depercentage of price until completion was for posit Company of Maryland against the benefit of surety as well as owner, and sure

Claiborne Parish School Board and others, ty might require compliance. Provision in contract for retention by

wherein defendants excepted to the jurisdicschool board of percentage of contract price tion. Exception overruled. until completion, while primarily for its pro- Cook & Cook, of Shreveport, La., and P. tection, was also for benefit of creditors of contractor and of surety, who was bound to them,

M. Milner, of New Orleans, La., for plaintiff. and surety had right to exact performance of

McClendon & Seals, of Homer, La., and contract in such respect,

Thigpen, Herold, Lee & Cousin, of Shreve3. Pleading mill,

port, La., for defendants. On plea to jurisdiction of court, allegationis of petition are to be treated as true.

DAWKINS, District Judge. Plaintiff, a

Maryland corporation, alleges that on March 4. Principal and surety C182_Surety, after

paying claims, has contractual right of action 26, 1923, it became the surety of one Ben F. against principal, distinguished from any Casey, for the faithful performance of a conright of subrogation or by assignment (Civ. tract with the school board of Claiborne parCode La. arts. 2161, 3052, 3053).

ish, La., for the erection of a school building Under Civ. Code La arts. 2161, 3052, 3053, for the stipulated price of $130,000, that the surety having paid claims has right of action against principal in his own right, as result of said contractor failed to pay certain furnishhis contractual relations, as distinguished from ers of materials for the completion of the any right by subrogation or assignment from work, and that plaintiff, as surety, was sued creditors.

and compelled to pay judgments in the ag5. Subrogation O8-Surety for contractor gregate of $10,202.54, and that it is addi

building schoolhouse has equitable lien and tionally liable upon other amounts which have right of subrogation on funds in hands of school board for claims of materialmen paid reimbursement from the said contractor, the

not been paid. In this proceeding it seeks by surety. Surety for school building contractor, pay

school board, the officers and members thereing claims of materialmen, has equitable lien of, and the Planters' Bank of Haynesville, and right of subrogation on funds due contrac. La., upon the ground that the balance tor from school board, even in absence of ex.

due by the school board to the contractor press statutory subrogation.

of $12,357.59, for the completion of said 6. Principal and surety @mw185-Surety's right work had been wrongfully, collusively, and

against principal for claims paid materialmen fraudulently diverted by the said defendants and laborers arises in assumpsit as for money paid.

to the payment of a personal debt of Casey Right of surety to recover of principal to the said bank, without it having any lien: building contractor money paid to discharge upon or right to said funds; that said buildclaims of materialmen and laborers arises in as, ing had been accepted by the school board, sumpsit as for money paid, and is unchanged although it had not recorded its acceptance, by any assignment of claims.

as required by the statute; that the claimants 7. Courts 312(1)-Action by nonresident paid by petitioner had served and recorded

surety against school building contractor held based on contractual obligation, not on assign their said claims according to law; that the ments of resident claimants, and within fed. balance due the contractor “was a sacred eral court jurisdiction on ground of diversity fund, pledged by the laws of this state to the of citizenship (Jud. Code, $ 24 [Comp. St. payment of laborers, subcontractors, and ma$ 991]).

terial furnishers, to whom your petitioner Under Jud. Code, & 24 (Comp. St. $ 991) action by nonresident surety against school build

was directly liable as surety for Ben F. Casing contractor held based on contractual obli- ey"; that the said bank had loaned to Casey gation, not on assignments of resident claim- its money upon unsecured notes, and, to de

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11 F.(20) 404 feat petitioner's rights, he had directed the subrogee and assignee" of the several claims, school board to “pay to the Planters' Bank of with interest and costs. In the alternative, Haynesville, La., balance of funds on con- it prayed for judgment against all of said tract price and extra work due me on the defendants, including the school board, in the Haynesville grammar and high school build- sum of $12,642.59. ings, in the town of Haynesville, La."; and Alleged copies of the contract between th that the said sum of $12,642.59 was on April school board and Casey, the bond upon

which 3, 1924, paid to said bank pursuant to the plaintiff was surety, certificate of mortgages said illegal and fraudulent scheme of said de- showing recordation of attested accounts, asfendants to prefer it to the prejudice of signments, and subrogations by the several plaintiff. Petitioner further alleges as fol- claimants, were attached to and made part of lows:

the petition. "Petitioner shows and charges that the Defendants excepted upon the ground Claiborne parish school board and John S. that, plaintiff having sued upon assignments Patton, superintendent, knew of the exist of claims of persons who were not alleged ence of claims of the subcontractors and ma- to have been citizens of states other than terial furnishers against the balance due the Louisiana at the time of the transfer, this contractor, Ben F. Casey, on the contract for court was without jurisdiction under the first the building of the high school and their re- paragraph of section 24 of the Judicial Code corded liens against the building to an (Comp. St. 991). The matter now to be amount in excess of the balance in its hands, decided is the sufficiency of the plea. and that the money was legally due and payable for its own protection and the protection

Opinion. of your petitioner as surety for Ben F. Cas- The contract for the erection of the buildey, and yet the said Claiborne parish schooling in this case was executed, and the bond board and John S. Patton, superintendent, for its performance given, under Act No. 224 and John E. Gray, president, did unlawfully, of 1918, affecting buildings by the state, its illegally, in bad faith, pay over to the Plant- subdivisions and public boards. It requires ers' Bank of Haynesville on April 3, 1924, that contracts for more than $500 shall be by cheek No. 248, $12,642.59, balance due reduced to writing, and the contractor shall Ben F. Casey, with the result that the said furnish bond for not less than 50 per cent. claimants, not being paid, brought suit of the price to guarantee faithful performagainst Ben F. Casey and your petitioner, ance, and that "an additional obligation for and obtained judgments against your peti- the payment by the contractor and by all subtioner, which it has paid in the proceedings as contractors for all work done, labor performfollows: [Here follows a list of the claims ed, or materials furnished,

shall and judgments which plaintiff alleges it had exist “and no modifications, omissions, addipaid.]"

tions in or to the terms of the said contract, Plaintiff further alleges that, when it paid in the plans or specifications or in the mansaid claim, as it was legally bound to do, it ner and mode of payment shall in any manreceived from said claimants conventional as- ner affect the obligation of the surety.” The signments and full subrogations to all their contract and bond are required to be recordrights under said contract flowing from the ed in the mortgage office on the day the work timely recording and service of attested ac- begins and not later than 30 days thereafter. counts upon said school board, and that it Section 2 of the act reads as follows: had made demand upon the said defendants “Be it further enacted, etc., that any perfor the restoration of said funds and its re- son, firm or corporation, association of perimbursement for the outlay so made, but sons or partnership to whom any money shall without avail.

be due on account of having done any work, The prayer was for service upon all de- performed any labor on, or furnished any fendants and for judgment "setting aside material in the construction, erection, alteraand annulling the payment by the said Clai- tion or repair of any such building, road borne parish school board to the Planters' work or improvement, may file with the said Bank of Haynesville, La., of the $12,642.59, authority having the said work done, and remade by it on April 3, 1924, under the al- cord in the office of the recorder of mortgages leged and illegal assignment of December 31, for the parish in which the said work is be1923, of the balance due

ing done, any time after the maturity of his upon the high school building,

claim, a sworn statement of the amount due and that petitioner have judgment in solido him, and any payments made thereafter by against said parties in the sum paid by it “as said authority without deducting the amount

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of the claims so served on it, shall be at its · and, with respect to the payment of the price, own risk.”

it was provided : Said 'act further provides, in section 3, “Article 3. The owner agrees to pay the that any one having a claim on account of contractor in current funds for the performwork done or material furnished, shall file ance of the contract one hundred thirty thoua sworn statement thereof within 45 days aft- sand and no/100 ($130,000.00) dollars, suber the acceptance of the work by the official ject to additions and deductions as provided body, or the defaulting of the contractor, and in the general conditions of the contract and record it in the mortgage office, but that the to make payments on account thereof as prosaid delay shall not begin to run until “the vided therein as follows: On or about the said authorities shall record in the mortgage Ist day of each month eighty-five (85) per office of the parish in which the work was cent. of the value, proportionate to the done an acceptance of the work, or notice amount of the contract, labor and materials of the default;

provided further incorporated in the work and acceptable mathat nothing in this act shall be so construed terials on premises up to the 1st day of that as to deprive any person or claimant within month as estimated by the architect, less the the terms of this act of his right of action on aggregate of previous payments. On subthe board [bond?], which right shall accrue stantial completion of the entire work, a sum at any time after the maturity of his claim." sufficient to increase the total payments to

Section 4 provides that, if, at the expira- ninety-five per cent. of the contract price, tion of the 45 days, there are recorded claims, and forty-five days thereafter provided the the authorities shall file a proceeding citing work be fully completed and the contract all claimants, the contractor, surety, etc., in- fully performed, the balance due under the to court, and "said authorities shall assert contract.” whatever claims they have against any and The bond was given for the sum of $130,all of them in said petition, and require the 000, and the condition is that the contractor said claimants to assert whatever claims they shall faithfully perform the obligations of have against any and all of them, and all of his contract, “which contract is hereto annexsaid claims shall be tried in concursus.” Sec- ed and made a part hereof as fully as if writtion 5 subordinates the claim of the official ten at length herein, and shall pay all subbody to those of laborers and materialmen, contractors, workmen, laborers, mechanics, and gives any claimant the right to provoke and furnishers of material, employed by said the proceeding if the authorities do not. principal under said contract in conformity Section 6 declares that, if no objections are with Act No. 221 made "by any claimant to the solvency or and all laws amendatory thereof. sufficiency of the bond, the said authorities [1,2] The nature of building contracts, and shall, ten days after the service of judicial the variety of persons and interests ordinanotice on each claimant having recorded rily involved therein, are such that from time claims

of the concursus proceeding, immemorial it has been necessary to enact obtain from the clerk a certificate to that ef- special laws dealing therewith and defining fect, and the said certificate shall relieve the the rights and obligations of those concerned. said authorities of any personal liability, and If only the owner and the builder were to be the recorder of mortgages shall cancel all affected, there could be no more reason for claims recorded as aforesaid”; and, if objec- special provision covering this relation than tion is made to the bond, and it is found in- in any other ordinary case of contract, but sufficient or the surety not solvent, or if bond there are the owners of property, the conwas not exacted or timely recorded, "the said tractors, subcontractors, laborers, materialauthorities shall be in default and shall be lia- men, and at times mortgage creditors, and ble to the same extent as the surety would others to be considered and protected; hence, have been. The surety on the bond shall be under the stimulus of these varied interests, limited to such defenses as the principal on the Legislature is constantly amending, the bond.” (All italics by the author of this changing, and modifying such statutes to opinion.)

meet the requirements of the building public. In this case the allegation, in effect, is that It would seem that the first idea in all inthe contract was entered into, the bond given, stances is to protect those who furnish maand the whole recorded as required by law, terial and perform labor on such undertakunder the terms of which the contractor ings, in order to encourage building and imagreed to furnish the labor and materials and provement; and, secondly, to relieve the ownto erect the building for a lump price. It er and his property from any greater burden was stipulated that the bond should be given, than the sum promised under the contract.

• of 1914,

11 F.(20) 404 In other words, if the contractor underbids the end that the funds remaining due might what it will actually cost to erect a building, be paid to those entitled to receive them. Acthe fault is his own, and he must bear the cording to the allegations of the petition, it loss. On the other hand, by complying with did not do this, but, in violation of its equithe statute, the owner may escape the con- table and moral duty to see that those whose tingency of personal liability or the involv- labor and materials had contributed to the ment of his property beyond the amount construction of the building were satisfied, stipulated by exacting bond with surety, both chose to pay those funds to an outsider on for the performance of the work according the order of the contractor. The effect of to contract and for the payment of claims this was to divert the money provided for against the property.

the performance of the contract to a purThe statute in this case, which deals alone pose other than that for which it was intendwith public bodies, makes the surety liable ed and for which the owner agreed to pay it, for the performance of both these obliga- without the consent of the surety, and in viotions, and gives rise to two separate causes lation of a stipulation of the contract upon of action by two distinct classes of persons the faith of which the latter bound itself. If for their enforcement. Each may pursue his it could do this as to a part of the price, respective rights, independently of the other, I can see no reason why it might not have except, when laborers and materialmen prop- done so as to the whole, and thereby have erly file and record their claims, the owner is compelled the surety to pay the entire cost required to provoke, and any claimant may of the building, without affording it the proprovoke, a proceeding in concursus in which tection provided by the contract. There can the rights of all parties are concurrently de- be little doubt that one of the inducements termined. It is true that in a sense the bond for becoming surety was the condition under is a separate undertaking, but, under the which payments were to be made, and which statute and stipulations of the two contracts, gave reasonable assurance that the money in effect making each a part and parcel of agreed to be furnished by the owner would the other, I think they should be construed be devoted to paying for the building. On together. In this situation there exist mut- the other hand, if the allegations of the peual benefits and obligations to be enforced tition are to be treated as true, which must according to the fair intendment of the law be done for the purpose of the plea in this and the understanding of the parties. The case, the owner not only failed to live up contractor is bound to erect and deliver the to this requirement, but collusively and building according to specifications, free fraudulently conspired with the contractor from all claims or incumbrances, and the and others to violate its obligation in that reowner is bound to pay the price as stipu- spect. lated. The surety guarantees the perform- The Louisiana Code, articles 3052 and ance of the former, and has the right to ex- 3053, with respect to the rights of sureties, aet payment by the latter. The provision for provides as follows: the retention of a percentage of the price

“3052. • The surety who has paid until final completion of the work, while pri- the debt, has his remedy against the princimarily for the protection of the owner, is pal debtor, whether the surety has been givalso for the benefit of claimants and of the en with or without the knowledge of the surety who is bound to them. It has the debtor. right to exact that the contract in this re- "This remedy takes place both for the spect be carried out. Of course it cannot principal and interest, and for the costs be relieved, as between itself and the laborers which the surety may have been sentenced to or materialmen, by the failure of the owner pay; but with regard to the costs, the remedy to pay the price; yet the latter must account of the surety begins only from the day he has to the contractor, and, when the surety does given notice to the principal debtor, that a that which the owner bound itself to do-i. suit was commenced against him." e., furnishes the money to pay the claimants “3053.

With regard to that rem-it would seem that it could require the pay- edy, the surety has the same right of action ment, for its reimbursement, of funds due and the same privilege of subrogation, which under the contract, as for money paid in dis- the law grants to codebtors in solido." charge of the owner's obligation.

[4] The provision of the law referred to in [3] In addition, as above pointed out, the article 3053, as to the surety's right of aclaw itself required the owner, upon the filing tion, is found in the third paragraph of artiand recording of attested accounts by claim- cle 2161 of the Code, dealing with legal subants, to provoke a concursus proceeding to rogation, which reads:

“3. Codebtor. For the benefit of him subrogation must be considered as arising who, being bound with others,

for from and relating back to the date of the the payment of the debt, had an interest in original contract, or as taking its origin soledischarging it."

ly from the date of the advance by him. Of course, in cases of suretyship on bonds “A great deal of confusion has arisen in of this character, the principal debtor is the the case by treating Hitchcock as subrogated contractor, and the right of action and legal merely 'in the rights of Sundberg & Co.' in subrogation mentioned by the Code is as the fund, which, in effect, was saying that he against him, but the provision quoted serves was subrogated to no rights whatever. to demonstrate that the surety is given such Hitchcock's right of subrogation, when it beaction in his own right and as a result of his came capable of enforcement, was a right to contractual relation, as distinguished from resort to the securities and remedies which the any right conventionally transferred from creditor (the United States) was capable of the creditor whom he has paid. It is true he asserting against its debtor Sundberg & Co., is legally subrogated to all of the liens, priv- had the security not satisfied the obligation ileges, and other incidents of the claims of of the contractors, and one of such remedies the creditors, but this is a legal consequence was the right based upon the original conwhich cannot affect the individual cause of tract to appropriate the 10 per cent. retained action which the law itself grants. Neither in its hands. If the United States had been do I think that conventional assignments and compelled to complete the work, its right to subrogation can destroy or affect the status forfeit the 10 per cent. and apply the accuthus enjoyed. They give no greater rights mulations in reduction of the damage sustainthan the law itself affords.

ed remained. The right of Hitchcock to sub[5] Even in the absence of express statutory rogation, therefore, would clearly entitle him subrogation, in circumstances like the pres- when, as surety, he fulfilled the obligation of ent, the surety has an equitable lien and right Sundberg & Co. to the government, to be of subrogation upon the balance of the funds substituted to the rights which the United in the hands of the owner, which entitles it States might have asserted against the fund. to be paid in preference to persons in no wise It would hardly be claimed that, if the sure connected with the original contract, and ties had failed to avail themselves of the privthis right relates back to the formation of the ilege of completing the work, they would not contract and execution of the bond.

be entitled to a credit of the 10 per cent. reIn dealing with a somewhat similar situa- served in reduction of the excess of cost to tion, in the case of Prairie Bank v. U. S. (U. the government in completing the work beS. v. Hitchcock), 17 S. Ct. 144, 164 U. S. yond the sum actually paid to the contractor, 232, 41 L. Ed. 412, the Supreme Court had irrespective of the source from which the confor determination the relative rights of a

tractor had obtained the material and labor surety upon the bond of a contractor for the which went into the building. erection of a government building, and a "That a stipulation in a building contract bank which had loaned money to the contrac- for the retention, until the completion of the tor, and, in discussing the matter, that court, work, of a certain portion of the considerathrough Justice White, said:

tion, is as much for the indemnity of him "Under the principles thus governing who may be guarantor of the performance of subrogation, it is clear whilst Hitchcock was the work as for him for whom the work is to entitled to subrogation, the bank was not be performed, that it raises an equity in the The former in making his payments discharg- surety in the fund to be created, and that a ed an obligation due by Sundberg for the disregard of such stipulation by the volunperformance of which he (Hitchcock) was tary act of the creditor operates to release the bound under the obligation of his suretyship. sureties, is amply sustained by authority. The bank, on the contrary, was a mere volun- Thus in Calvert v. London Dock Co., 2 Keen, teer, who lent money to Sundberg on the 638 (1838), where a contractor had underfaith of a presumed agreement and of sup- taken to perform certain work, and it was posed rights acquired thereunder. The sole agreed that three-fourths of the work, as finquestion, therefore, is whether the equitable ished, should be paid for every two months, lien, which the bank claims it has, without and the remaining one-fourth upon complereference to the question of its subrogation, tion of the whole work, it was held that the is paramount to the right of subrogation sureties for the due performance of the conwhich unquestionably exists in favor of tract were released from their liability by Hitchcock. In other words, the rights of the reason of payments exceeding three-fourths parties depend upon whether Hitchcock's of the work done having been made to the

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