Opinion
[No. 136, September Term, 1962.]
Decided February 5, 1963.
PARTIES — Action By Supplier Of Materials For County Road Work Upon Surety Bonds — Addition Of County As Obligee Under Bonds — County Held Nominal Party — Addition Did Not Set Up New Cause Of Action, To Which Surety Could Interpose Defense Of Limitations. The instant action was brought by an unpaid supplier of materials to a contractor doing road work under two contracts with Baltimore County, and was based, as against the appellant, upon the contractor's performance and labor and material bonds entered into by the appellant as surety, the contractor and the appellant being the defendants. When the surety moved for judgment on the ground that suit could be brought upon the bonds only in the name of Baltimore County, the obligee thereunder, the plaintiff was granted leave to amend by interlineation to bring in the County as a party plaintiff. The Court held that the amendment did not set up a new cause of action to which the surety could interpose the defense of limitations, as it sought to do, the amendment being one of form, not of substance, and permissible under Maryland Rule 320. Nor did it change the cause of action. It merely brought in the County as a nominal party, for the use and benefit of the plaintiff, and did not change the real parties in interest. The bonds expressly provided that an unpaid claimant who had contracted with the principal or a sub-contractor of the principal to furnish material or labor might sue "on this bond, in the name of the county, for the use and benefit of such claimant * * *". Although the statute under which the bonds were required, Code (1962 Supp.), Art. 90, sec. 11, confers upon each claimant the right to sue, it does not provide that suit must be in the name of the State or political subdivision. pp. 527-529
PRINCIPAL AND SURETY — Release Of Principal's Funds By Creditor — When This Operates To Discharge Surety, And When It Does Not. While it is generally true that a creditor cannot release funds of the principal properly applicable to the debt secured without releasing the surety, a surety cannot claim his discharge in every instance where the creditor voluntarily relinquishes property of the principal which he holds. The surety's right to discharge requires that the property be so placed that the creditor is bound to hold it in special trust to pay the particular debt for which the surety is liable. It is not enough that the creditor have in his possession the means of satisfying the debt, but he must have the right, conferred upon him either by law or by contract with the owner, to so apply the property. If the creditor holds funds of the principal arising out of some other transaction, he need not apply these funds to the debt for which the surety is liable, but he may pay the principal and proceed against the surety. The creditor's right of set-off against the principal is one that he may use or not, as he chooses. p. 530
PRINCIPAL AND SURETY — Action Upon Bonds For Materials Furnished For County Road Work — Creditor's Payments To Principal On Unrelated Matters Did Not Discharge Surety Under Circumstances Involved Here — No Extension Of Time For Payment — No Pro Tanto Release. In the suretyship case at bar a creditor who had not been paid for materials which it had supplied to the principal, for use in road work being done pursuant to two contracts with Baltimore County, brought suit against the principal, and against its surety under the contractor's performance and labor and material bonds, and it was held that the creditor's release of certain sums to the principal both prior and subsequently to the institution of suit, and certain other payments by way of settlement, did not bring about a discharge of the surety. The principal paid the creditor in full for materials supplied for four other road contracts which were not related to the present suit, and all of which were completed prior to the contracts in suit, and this Court found nothing improper in the application of these payments to the four prior contracts, which was in accordance with the usual business practice. Nor was there anything inequitable in the creditor's making of a loan to the principal without specifying the purposes to which the proceeds should be devoted, with respect to the principal's outstanding obligations, or in the creditor's employment of the principal as the subcontractor under wholly separate contracts and not withholding payments for services rendered under these latter contracts or requiring the application of those payments to the secured indebtedness here, all of which was known to the surety and in which it apparently acquiesced. These actions afforded an opportunity to the principal to recoup losses and to pay its debts for the benefit of all creditors, and did not prejudice the surety. The creditor was not bound to insist, as a condition to settling other matters with the principal, that the balance paid to the principal be applied to the liquidation of its debt on the contracts in suit, and here again the surety apparently acquiesced. While the principal proposed an extension of the time for payment, the creditor did not accept it; hence, there was no binding agreement and no release of the surety thereby. And while the County made payments to the principal on one of the contracts involved here after notice of the principal's default and the creditor's demand for payment, this did not operate as a release pro tanto of the surety as against the creditor; it was not contended that the creditor controlled, or could control, the County's action. pp. 529-532
J.E.B.
Decided February 5, 1963.
Appeal from the Circuit Court for Baltimore County (TURNBULL, J.).
Action by Frank P. Dyer and Alexius A. Dyer, partners trading as the A.A. Dyer Company, against the Mays Construction Company, a contractor performing road work for Baltimore County, and the Glens Falls Insurance Company, the surety under the contractor's bonds, to recover for materials furnished to the contractor by the plaintiff for which it had not been paid. By amendment Baltimore County, Maryland, was joined as a plaintiff. From a judgment against both defendants and for the plaintiff (Dyer) for $52,129.94, with interest, the defendant-surety appeals.
Affirmed, with costs.
The cause was argued before BRUNE, C.J., and HENDERSON, HAMMOND, HORNEY and SYBERT, JJ.
Richard C. Murray, with whom were Smith Harrison on the brief, for the appellant.
Nolan P. Chipman and A. Frederick Taylor, with whom were Paul Martin and Martin Taylor on the brief, for the appellees.
This appeal is from a judgment for $52,129.94, with interest, rendered by the court without a jury in an action brought by the Dyer partnership (herein referred to as Dyer) against Mays Construction Company (herein referred to as Mays), as principal and the appellant as surety. The theory of the action was that Mays had a contract for road work with Baltimore County, known as the Liberty Manor contract, and another contract known as Belle Farms contract; that Glens Falls entered into contractor's performance and labor and material bonds, as surety, covering each contract; that Dyer furnished stone and other materials to Mays on both jobs and billed him for $52,129.94, which Mays failed to pay.
The case was tried on its merits under general issue pleas, but Glens Falls moved for judgment at the conclusion of the plaintiff's case on the ground that suit could only be brought on the bonds in the name of Baltimore County, Maryland. Dyer was granted leave to amend by interlineation and did so. Glens Falls moved to dismiss, on the ground that this brought in a new party plaintiff, but the court overruled the motion. The correctness of that ruling is the first point presented. If the amendment set up a new cause of action the appellant could interpose the defense of limitations, which it sought to do. Cf. Cline v. Fountain, Etc. Company, 214 Md. 251; Rule 203.
We find no error. The amendment was one of form and not of substance, permissible under Rule 320. It merely brought in the county as a nominal party, for the use and benefit of Dyer, and did not change the real parties in interest. Cf. LeStrange v. State, Use of Roche, 58 Md. 26, 39 and State v. Gaver, 115 Md. 250, 256. See also B. O.R.R. v. State, Use of Allison, 62 Md. 479, 481 and Mayor C.C. of Balto. v. Yost, 121 Md. 366, 375. Under the labor and material bonds furnished to the county it was expressly provided that every claimant i.e. those contracting with the principal, Mays, or a sub-contractor of Mays, furnishing material or labor for which he was unpaid, might sue "on this bond, in the name of the county, for the use and benefit of such claimant * * *." For a discussion of the Maryland practice in regard to use plaintiffs see Accident Co. v. Net Twine Co., 150 Md. 40, 43.
The bonds in the instant case were required by Code (1962 Suppl.) Art. 90, § 11, incorporating Chapter 10, Acts of 1959, and undertook to provide the statutory coverage. It may be noted that although the statute confers the right to sue on each claimant, it does not provide that suit must be in the name of the State or political subdivision. It expressly provides that the obligee named in the bond shall not be liable for the payment of any costs or expenses of any such suit. It has been held under a similar statute that suit need not be brought in the name of the political subdivision, the nominal party, but may be brought in the name of a claimant, in his own right and not as a class suit. Aetna Cas. Surety Co. v. Henslee, 260 S.W. 414 (Ark.). See also the cases collected in a note, 77 A.L.R. 21 and 206. Whether the statute had the effect of changing the existing practice is a question we need not decide. We think the addition of the obligee, as a nominal party, was not such a change of parties as to constitute a new suit. Nor did it change the cause of action. Cf. Smith v. Potomac Edison Co., 165 F. Supp. 681, discussing the Maryland authorities, and Cline v. Fountain, Etc., Company, supra.
The appellant's chief contention on the merits is that the conduct of Dyer in releasing over $54,000 to Mays prior to suit and in releasing over $94,000, to Mays subsequent to the institution of suit, as well as certain other payments by way of settlement, discharged the surety. The factual background is rather complicated. Dyer agreed to supply to Mays the materials used to perform the two contracts with the county in which Mays was the general contractor involved in the instant case. It is conceded that Dyer supplied materials on both jobs, and that, despite repeated demands, at the conclusion of the work $52,129.94 remained unpaid. Notice of default was given to and demand for payment was made upon the surety, and suit was filed on April 28, 1961. Mays had four other road contracts with the county, three of which were bonded by Glens Falls and one by the Maryland Casualty Company. Dyer furnished materials on these contracts also. These contracts were all completed prior to the contracts in suit. Mays paid Dyer in full for the materials supplied on them, and paid for certain other materials supplied for some private entrance jobs.
In May and June of 1960, at a time when Mays owed Dyer roughly $40,000 on the contracts in question, a new series of transactions began. Dyer bid on and was awarded some seventeen contracts for road construction for the county. He employed Mays as a subcontractor or superintendent. The trial court found as a fact that these contracts were "separate, distinct and independent" of the contracts sued upon. Dyer was bonded upon each of them, and obligated to pay the subcontractor. In June 1960, Mays was having financial difficulties and Dyer loaned him $15,000, evidenced by a demand note and chattel mortgage. After suit was filed Dyer and Mays entered into an agreement adjusting various claims and cross-claims on other contracts including one with the State Roads Commission, and as a result of the settlement, Dyer paid Mays $13,000. There was testimony that Glens Falls was fully aware of all these transactions.
We see no sinister significance in the fact that payments received by Dyer from Mays were applied to the four other contracts on which Mays was the general contractor and Dyer the supplier. The testimony is undisputed that these contracts were completed before the contracts in suit were completed, and in the absence of any direction it would seem natural, and in accordance with the usual business practice as the Chancellor found, that the payments should be so applied. Since Glens Falls was the surety on three of these contracts, it can hardly complain of that application as to them. Dyer was under no duty to forego a loan to Mays, or to specify the purposes to which the proceeds should be devoted, as regards Mays' outstanding obligations. Apparently, most of it was used to meet payrolls or other pressing needs.
In regard to the contracts on which Dyer was the general contractor and Mays the subcontractor, payments made by Dyer to Mays were only those required by the terms of those contracts and the bonds securing them. The appellant seems to contend that although these were wholly separate contracts, Dyer owed a duty, to the surety on the two contracts here involved, to withhold payments to Mays, or to require the application of those payments to Mays' indebtedness on the contracts it had secured.
It is generally true that a creditor cannot release funds of the principal, properly applicable to the debt secured, without releasing the surety. But as stated in Stearns on Suretyship (5th ed.) Sec. 6.51: "A surety cannot claim his discharge in every instance where the creditor voluntarily relinquishes property of the principal which he holds. His right to discharge requires that the property be so placed that the creditor is bound to hold it in special trust to pay the particular debt for which the surety is liable. It is not enough that the creditor have in his possession the means of satisfying the debt but he must have the right, conferred upon him either by law or by contract with the owner, to so apply the property.
"If the creditor holds funds of the principal arising out of some other transaction, he need not apply these funds to the debt for which the surety is liable, but may pay the principal and proceed against the surety. The creditor's right of set-off against the principal is one that he may use or not, as he chooses."
Restatement, Security, Sec. 143 states the rule: "Where the creditor is indebted to a principal whose duty to the creditor is secured by the obligation of a surety, payment by the creditor of his indebtedness to the principal before or after maturity of the principal's duty does not discharge the surety." The comments indicate that this rule is derived from the bank cases. Many such cases are collected in a note in 70 A.L.R. 339, but there appears to be a split of authority. In McShane v. Howard Bank, 73 Md. 135, 157, Judge McSherry, for this Court, discussed the situation where a bank holds a promissory note on which there is a surety, and also funds on general deposit. He said: "The right of the bank to apply the credits of the customer to the satisfaction of such a note is rather in the nature of a set-off or of an application of payments, neither of which, in the absence of express agreement or appropriation, will be required by the law to be so made as to benefit the surety." The holding in the case was that the surety on a fidelity bond covering the cashier was not released by the payment of salary to the cashier after knowledge of his defalcations, although the bank might have exercised a right of set off. To the same effect, see Museum of Fine Arts v. American Bonding Co., 97 N.E. 633 (Mass.) and Glens Falls Indemnity Co. v. Basich Bros. Constr. Co., 165 F.2d 649 (C.A. 9th). Cf. Bounds v. Nuttle, 181 Md. 400, 408, and Dickerson Lumber Co. v. Herson, 230 Md. 487.
We see nothing inequitable in the conduct of Dyer in advancing money to Mays or in employing him and paying him for services rendered as subcontractor, all of which was made known to the surety, and in which it apparently acquiesced. Indeed, these actions afforded Mays an opportunity to recoup losses and to pay his debts for the benefit of all creditors. We see no prejudice to Glens Falls through Dyer's conduct, in the sense of a destruction of subrogation rights, as in Noma Electric Corp. v. Fidelity Dep. Co., 201 Md. 407. Nor is this a case of misapplication of funds dedicated to a particular purpose as in U.S. v. Johnson, Smathers Rollins, 67 F.2d 121, 123 (C.C.A. 4th). In the absence of a duty on the part of the creditor to apply unallocated funds so as to exonerate a particular surety, we see no reason to hold the surety in the instant case released. For a discussion of the principles involved, see State Bank of Wheatland v. Turpen, 34 P.2d 1 (Wyo.) and 10 Appleman, Insurance, § 5996. Nor do we think that Dyer was bound to insist, as a condition to the settlement of other matters with Mays, that Mays apply the balance paid to him to the liquidation of Mays' debt on the contracts in suit. Such insistence might well have prevented consummation of the settlement, without any advantage to Glens Falls. Here again there was apparent acquiescence on the part of the surety.
The appellant contends that it is released upon the further ground that Dyer agreed to extend the time for payment by Mays. The short answer is that Mays made such a proposal but the uncontradicted evidence is that Dyer did not accept it. Hence there was no binding agreement and no release. It is clear that mere forebearance to sue, or lack of diligence, will not suffice. See Berman v. Elm Loan Asso., 114 Md. 191, 195, and cases cited.
Finally, the appellant argues for a release pro tanto on the ground that the county admitted, in response to an interrogatory, that it paid $13,979.67 to Mays, on the Belle Farm contract, after it had notice of Mays' default and demand for payment by Dyer. As a matter of fact, the county was originally joined as a party defendant, and it was argued that it might be liable for an improper payment to Mays, but the county was let out on motion to dismiss, and there was no appeal taken from that action by any of the other parties. If we assume, without deciding, that the surety was prejudiced by the county's action, and might have been released pro tanto in a direct suit by the county, cf. City of Wauwatosa v. Volpano, 272 N.W. 459 (Wis.), it does not follow that the supplier, Dyer, would be barred from recovery of that sum from the surety. No doubt Dyer would have been glad to receive that sum from the county, and reduce its claim pro tanto. It is not contended that Dyer controlled, or could control, the county's action. He denied any knowledge of what payments Mays was receiving from the county, and any effort to direct the allocation of any of the progress payments.
Since we conclude that the appellant established no valid defense on the merits we need not pass on the appellee's contention that the court erred in admitting evidence to support a claim of set-off, in the absence of a special plea under Rule 314.
Judgment affirmed, with costs.