In Jackson Lumber Co. v. Moseley, 193 Miss. 804, 11 So.2d 199 (1942), the contractor advised the owner by letter that he had made default in completing the construction contract and requested the owner to meet the payrolls.Summary of this case from Oden Const. Co. v. Helton
December 14, 1942.
The portion of contract price retained by owner under building contract providing for progress payments of 85 percent of value of labor and materials incorporated in the work and of materials stored at the site thereof on the first and fifteenth days of each month was retained for the mutual benefit and protection of the owner and surety on contractor's bond.
Where assignee of money due and to become due contractor under building contract subject to right of surety on contractor's bond to percentages of contract price retained by owner in making progress payments provided for by contract insisted that money advanced by owner at contractor's request to meet payrolls should be paid out of retained percentages and surety insisted that such payments be made out of unpaid earned progress payments and amount retained by owner never equaled retained percentages provided by contract, in the absence of proof to the contrary, it must be presumed such retained funds represented retained percentages and hence assignee was not entitled thereto.
Where a party to building contract announces his intention not to perform, the other party thereto may treat the contract as broken.
Where contractor notified owner of inability to complete performance of building contract unless owner should advance money to meet payrolls, owner could treat contract as legally "breached" by contractor and himself take charge of the job or advance the money for payrolls and deduct such advances from the contract price.
Where owner having been notified by contractor of the latter's inability to complete performance of building contract unless owner should advance money to meet payrolls made the requested advances with knowledge of a prior assignment of all money due or to become due contractor under the contract, owner was not liable to assignee for amount deducted from contract price on account of such advances, since notice of inability to complete performance constituted "breach" of the contract by contractor.
Where building contract was breached by contractor's inability to complete performance thereof without advancement by owner of funds to meet payrolls and payment by surety for materials used, surety on bond guaranteeing faithful performance of contract having paid for material and labor an amount in excess of portion of contract price retained by owner in making progress payments provided for in contract was entitled by right of "subrogation" to the funds thus retained by owner and paid into court upon completion and acceptance of the building.
APPEAL from chancery court of Hinds county, HON. V.J. STRICKER, Chancellor.
Lotterhos, Travis Dunn, of Jackson, for appellant.
Jackson Lumber Company claims that it held a valid assignment on all funds payable to Scott under the contract after June 18, 1941, other than the retainage, which assignment was not waived or modified, and that therefore the sum of $5,478.49 out of the amount paid into court, which was the amount payable to Scott other than the retainage after said date, must be applied on the note of Scott, with interest and attorney's fees, and on the balance of the payroll account, with interest, both of which were secured by the said assignment. Or, in other words, Moseley has with the consent of the surety consumed most of the retainage in aiding Scott to finance the final part of the work.
In the alternative, Jackson Lumber Company claims that if it should be held that Moseley made these payments to Scott after June 18, 1941, out of funds other than retainage, whereby the retainage fund was kept intact for Maryland Casualty Company, then that Moseley must be held liable to Jackson Lumber Company for the said sum of $5,478.49, because he thereby wrongfully ignored the valid assignment of the Jackson Lumber Company.
Maryland Casualty Company claims that by virtue of the assignment contained in the application for bond which Scott signed it had a superior right to the entire $11,592.94 payable to Scott under the contract after June 18, 1941.
Maryland Casualty Company further claims that it had a superior right to the retainage of $6,114.45 and that as a matter of law it must be presumed that the amounts which Moseley paid to Scott after June 18, 1941, were first paid out of funds other than retainage, whereby all of the money which has been paid into court is part of the retainage fund.
The assignment to Jackson Lumber Company was valid. There can be no doubt that from November 20, 1940, forward, Jackson Lumber Company held a valid assignment of all funds payable to Scott under the contract with the exception of the retainage. Moseley had knowledge of the assignment from the date of its execution and honored it until June 18, 1941. Jackson Lumber Company never waived its assignment nor agreed to any change or modification therein, but to the contrary specifically advised Moseley by letters that it retained all of its rights under the assignment. Therefore, Jackson Lumber Company is entitled to the assigned fund unless there was some occurrence which had the effect of destroying its fixed and vested interest in the fund assigned.
As to the claim of Maryland Casualty Company that it had a superior assignment of funds payable after June 18, 1941, there are two very definite answers.
In the first place, there was no default by Scott which would bring the assignment into effect under the terms of the application for bond. Neither Moseley nor Maryland Casualty Company declared a default, nor took over the contract for the completion of the job, nor in any manner acted as if they considered Scott in default. There is no support whatever for a claim in this litigation that Scott was in default.
Maryland Casualty Company v. Fowler (C.C.A. 1), 31 F.2d 881; Equitable Surety Co. v. Board of Commissioners (C.C.A. 5), 256 F. 773.
Another complete answer to the contention that Maryland Casualty Company was entitled to all of the funds under the alleged assignment is that the assignment to Jackson Lumber Company was served on Moseley on November 20, 1940, whereas notice of the alleged assignment to Maryland Casualty Company was not given to Moseley until January 28, 1941.
Under familiar rules of law the assignee who first gives notice to the holder of the fund has prior rights.
It cannot be presumed that Moseley made payments from progress funds.
The first payroll advanced by Moseley was expressly paid out of the retainage fund. This was stated by Moseley in his letter of June 23, 1941, after the payroll check had been paid to Scott on June 20th. Therefore, in all events, the amount of the first payroll, which was $1,605.69, came from the retained percentage. The total amount of the retained percentage was $6,114.45. Therefore, after this payment was made to Scott by Moseley on June 20th, the retainage fund was reduced to $4,508.76, which would be the only fund Maryland Casualty Company could claim. When we deduct this amount from the amount which has been paid into court, to-wit $5,491.66, we find that in all events, Jackson Lumber Company is entitled to the sum of $982.90, plus such part of the $300.00 held back by Moseley which was not consumed in completion of the work.
The Maryland Casualty Company cannot claim the retainage fund under its alleged assignment, because there was no default and because Jackson Lumber Company gave the first notice of its assignment, which would protect it against any harmful effect of the alleged assignment to the surety company. The only rights which the surety company can claim in the retainage funds in this case would accrue under the doctrine of equitable subrogation.
See U.S.F. G. Co. v. Marathon Lumber Co. et al., 119 Miss. 802, 81 So. 492; First National Bank v. Monroe County, supra; Canton Exchange Bank v. Yazoo County, supra; Mississippi Fire Ins. Co. v. Evans, 153 Miss. 635, 120 So. 738; Southern Surety Co. v. Greenville Bank, 154 Miss. 412, 122 So. 529; Davis Company v. D'Lo Guaranty Bank, 162 Miss. 829, 138 So. 802; Hartford Accident Indemnity Co. v. Hewes, 190 Miss. 225, 199 So. 93; National Surety Corp. v. Edwards House Co., 191 Miss. 884, 4 So.2d 340; Prairie State National Bank v. United States, 164 U.S. 227, 41 L.Ed. 412.
The equities are with Jackson Lumber Company and its rights as assignee must be protected.
Watkins Eager, of Jackson, for appellee, Maryland Casualty Company.
Appellant has no rights save as assignee of the contractor and the rights of assignee-appellant were limited to the rights of the contractor and were subject to the performance of the conditions by which the contractor was bound. The contractor being entitled to no monies whatsoever under and by virtue of the terms of the construction contract after June 18, 1941, appellant can recover nothing on its assignment.
Tyler Co. v. Laurel Equipment Co., 187 Miss. 590, 192 So. 573; Canton Exchange Bank v. Yazoo County, 144 Miss. 579, 109 So. 1; Malvezzi v. Gully, 189 Miss. 20, 193 So. 42, suggestion of error overruled 193 So. 926; Keaton v. Miller, 38 Miss. 630; Crichton v. Halliburton Moore, 154 Miss. 265, 122 So. 200; Bradbury v. McLendon, 119 Miss. 210, 80 So. 633; Stroud v. Loper, 190 Miss. 168, 198 So. 46; Maryland Casualty Co. v. Dulaney (C.C.A. 5) (Miss.), 23 F.2d 378; Golwitzer v. Hunnell, 201 Iowa 751, 206 N.W. 254; Johnson v. Vogel, 208 Iowa 44, 222 N.W. 864; Schmidt Bros. Const. Co. v. Raymond Y.M.C.A., 180 Iowa 1306, 163 N.W. 458; Ins. Co. v. Laird (Tex.), 18 S.W.2d 271; 6 C.J.S. 1062-1063, 1141, 1156-7; 17 C.J.S., "Contracts," pp. 834, 1097.
On or about July 21, 1941, the construction was completed and thereafter final inspection was had and a final estimate became due upon condition that all material bills had been paid; however, a large amount of material bills were unpaid and the surety was liable therefor and has since paid the same. Under these circumstances the surety became entitled to the final payment in the hands of the owner both by virtue of its assignment and by subrogation to the rights of the owner.
If the contractor was entitled to any portion of the final estimate, he had assigned the same to appellee, Maryland Casualty Company, and the rights of the surety as assignee were superior to the rights of appellant under its assignment.
Canton Exchange Bank v. Yazoo County, supra.
However, as a matter of fact, none of the final estimate or final payment of the contract price was due to the contractor or any of his assignees, in that it was never earned and in that it was payable solely upon condition that all material bills were paid. This appellee became subrogated to this owner's right to apply the same on material bills.
Canton Exchange Bank v. Yazoo County, supra; Maryland Casualty Co. v. Dulaney Lumber Co., supra; U.S.F. G. v. Marathon Lumber Co., 119 Miss. 802, 81 So. 492; Southern Surety Co. v. Greenville Bank, 154 Miss. 412, 122 So. 529; First National Bank v. Monroe County 131 Miss. 828, 95 So. 726; Mississippi Fire Ins. Co. v. Evans, 153 Miss. 635, 120 So. 738; Davis Co. v. D'Lo Guaranty Bank, 162 Miss. 829, 138 So. 802 (withdrawing opinion 133 So. 219); Prairie State Bank v. United States, 164 U.S. 227, 41 L.Ed. 412; Southern Surety v. Bank (Ind.), 176 N.E. 846; Central State Bank v. U.S.F. G. Co. (C.C.A. 5), 9 F.2d 326; U.S.F. G. Co. v. Bank of Brewton (D.C. Ala.), 4 F. Supp. 272.
The appellant here is estopped to take the position that the owner did not withhold 10 percent of the contract price until proof that all material bills were paid had been submitted.
Picard v. Shantz, 70 Miss. 381, 12 So. 544; D.L. Fair Co. v. Warrell, 147 Miss. 412, 112 So. 24; State ex rel. Rice v. Terry, 167 Miss. 558, 146 So. 140; Y. M.V.R. Co. v. Wade, 162 Miss. 699, 139 So. 403; Prairie State Bank v. United States, supra; Pratt Lumber Co. v. T.H. Gill Co. (D.C.N.C.), 278 F. 783; 50 C.J., "Principal and Surety," 165-166; 21 C.J., "Estoppel," 1202 to 1225.
There are no equities with the appellant.
Canton Exchange Bank v. Yazoo County, supra; Tyler Co. v. Laurel Equipment Co., supra; National Surety Co. v. Edwards House Co., supra; State v. Schlesinger, 151 N.E. 177.
We respectfully submit that the decree appealed from should be affirmed for the following reasons:
(1) The appellant assignee stepped into the shoes of the contractor. Its rights can rise no higher than those of the contractor. Since the contractor never complied with the conditions entitling it to any part of the 10 percent retainage, the appellant acquired no right to the benefit thereof and had no right to require the owner to resort thereto in the completion of the building.
(2) The owner had the right to complete the building and to make the necessary advances therefor, reimbursing himself out of any unexpended funds. In so doing the owner was having due regard to the rights of the contractor and his assignee, as well as the surety, in reducing the damages as much as possible.
(3) The owner, upon completion of the building, after receiving proof that all claims for labor and materials were paid, was under the duty to pay any balance to the assignee. But the owner had the right, first, to apply this sum to the payment of any unpaid material bills. Appellee is subrogated to this right.
(4) The surety did not contract to advance money to complete the building. Its sole duty was that of indemnifying the owner against loss. It owed no duty to Scott but was to be indemnified by Scott. All equities are with appellee.
Creekmore Creekmore, of Jackson, for appellee, Niles Moseley.
In no event may the Jackson Lumber Company recover against Moseley because Scott, in whose shoes Jackson Lumber Company now stands, could not recover for he did not perform. Not having performed the contract, nothing is due him nor his assignee. This is the situation as to Jackson Lumber Company and Moseley without regard to the rights, if any, to the retainage of Maryland Casualty Company.
But if it be said that the completion of the contract by Moseley advancing the payrolls after June 20, 1941, was a performance by the contractor Scott, then the $5,801.28 for payrolls is charged against his earnings under the contract and he has thereby been paid more than ninety percent of his contract price and the assignment of Jackson Lumber Company expressly excludes from its operation the retainage provided in the contract for the protection both of the owner and the surety on the contractor's bond.
The correctness of these propositions of law are abundantly sustained by authorities cited in brief of Maryland Casualty Company and we refrain from a repetition of such citations.
Argued orally by Fred Lotterhos, for appellant, and by W.H. Watkins, for appellee.
This is a contest between appellant lumber company, as assignee under a building contract, and Maryland Casualty Company, as surety on such contract, over a balance owing by Niles Moseley under the contract, which balance, under bill of interpleader, Moseley has paid into court. Appellant, by cross-bill, also seeks a personal decree against Moseley. The lower court awarded the money to the surety company and denied the personal decree, from which the lumber company appeals.
On October 3, 1940, Tom B. Scott, by written contract, agreed to construct for Moseley, according to designated drawings and specifications, an apartment house in the City of Jackson, Mississippi, furnishing all labor and materials, for $60,500, subject to additions and deductions as provided in the contract. The contract contains these provisions:
"Article 4 — Progress Payments: The owner shall make payments on account of the Contract as provided therein, as follows:
"On or about the first fifteenth day of each month eighty-five per cent of the value, based on the contract prices, of labor and materials incorporated in the work and of materials suitably stored at the site thereof up to the first and fifteenth day of that month, as estimated by the Architect, less the aggregate of previous payments; and upon substantial completion of the entire work, a sum sufficient to increase the total payments to ninety per cent of the contract price.
"Article 5. Acceptance and Final Payment: Final payment shall be due fifteen days after substantial completion of the work provided the work be then fully completed and the contract fully performed.
"Upon receipt of written notice that the work is ready for final inspection and acceptance, the Architect shall promptly make such inspection, and when he finds the work acceptable under the contract and the contract fully performed he shall promptly issue a final certificate, over his own signature, stating that the work provided for in this contract has been completed and is accepted by him under the terms and conditions thereof, and that the entire balance found to be due the contractor, and noted in said final certificate, is due and payable.
"Before issuance of final certificate the Contractor shall submit evidence satisfactory to the Architect that all payrolls, material bills, and other indebtedness connected with the work have been paid."
Maryland Casualty Company executed a bond guaranteeing the faithful performance of the contract by Scott, and to hold Moseley harmless from the contractor's failure to so perform and to "promptly make payment to all persons supplying labor or materials — " to the contractor, making the construction contract a part of the bond.
The application for the bond contains this provision: "In the event of claim or default under the bond (s) herein applied for, or in the event the undersigned shall fail to fulfill any of the obligations assumed under the said contract and bond (s) . . . all payments due or to become due under the contract covered by the bond (s) herein applied for, shall be paid to the Company — and this covenant shall operate as an assignment thereof and the residue, if any, after reimbursing the Company as aforesaid, shall be paid to the undersigned after all liability of the Company has ceased to exist under the said bond (s), and the Company shall at its option be subrogated to all rights, properties and interest of the undersigned in said contract — ."
On January 28, 1941, the surety company mailed to Moseley a copy of this application.
In the meantime, and on November 20th, 1940, Scott, to secure an existing indebtedness of five thousand dollars to Jackson Lumber Company, appellant, evidenced by a promissory note, and also to secure future advances, not to exceed five thousand dollars at any one time, for use by Moseley in the construction of the Moseley apartment house, assigned, by writing, to said lumber company "all sums of money due and to become due from Niles Moseley or his assigns to the assignor in connection with or in any manner growing or proceeding from said construction contract," and directed that all checks by Moseley should be made to the lumber company and Scott jointly and empowered the lumber company to endorse said checks in the name and on behalf of Scott, with the further provision "All amounts so paid and delivered to the assignees shall be considered as payment to the assignor." But "This assignment is made subject to the right of any bonding or surety company, that may be involved, to the retained percentage of monies to become due under and by virtue of the terms of said construction contract."
On November 20, 1940, Moseley acknowledged receipt of notice of the assignment.
Scott proceeded with the construction. The lumber company had advanced to him to June 14, 1941, payrolls aggregating $23,138.99, all of which had been repaid except $733.99, which was advanced on that date, and $1100 had been paid on the note. However, to that date Moseley had made progress payments to the contractor and appellant jointly aggregating $49,755.41, appellant permitting Scott to receive and use from such progress payments $27,350.41.
On June 18, 1941, Scott wrote Moseley "I have made default in completing contract for the construction of apartment house on North State Street. I will be unable to meet the payrolls due Saturday and request you to do so. Upon the advancement of future payrolls, I will superintend the completion of the contract and co-operate with you to the fullest extent." Moseley immediately notified the surety and lumber company of receipt of this letter. The net result of the correspondence was that the lumber company and the surety agreed to the foregoing arrangement, the lumber company insisting that Moseley advance the payrolls from retained percentages and the surety that he advance them from the earned progress payments. The work proceeded to completion under that arrangement. The lumber company made no further advances to Scott. On the date of that letter from Scott all materials had been purchased and had either been installed or were on the ground. However, there were unpaid claims for such materials aggregating $18,084.54. Moseley thereafter paid out $5,801.28 for payrolls to complete the job. The completed work was accepted July 18, 1941. The total cost thereof, after adjusting additions and deductions, turned out to be $61,144.55. Moseley gave due notice by publication to laborers and materialmen as the statute requires. Claims for materials to the amount of $18,084.54 were filed, including one of appellant for $5,523.55, all of which the surety paid.
The payments Moseley had made to June 18, plus the amount he thereafter made for payrolls, left in his hands an unpaid balance of $5,791.66 of the total cost of the job, subject to some further slight adjustments, about which there is no controversy here.
Aside from whether the contractor has the legal right to assign the retained percentages, without the consent of the owner and the surety, the assignment in this case expressly excepted the retained percentages. The question, therefore, which determines the right of the assignee or the surety to this fund is whether it is composed of unpaid earned progress, or installment payments, or of retained percentages; if the former, it is the property of the assignee lumber company; if the latter, it belongs to the surety. First National Bank v. Monroe County, 131 Miss. 828, 95 So. 726, 727; Canton Exchange Bank v. Yazoo County, 144 Miss. 579, 109 So. 1. There is no clear, specific proof as to the nature of the fund; no proof of a method of bookkeeping, or charges and credits, or other handling, by the owner under which he set up separate funds, or entities. He simply retained the money to secure fulfillment of the contract, which is the purpose of retained percentages. The balance retained by Moseley, after advancing payrolls to complete the contract, is less than fifteen percent of the amount which had been paid the contractor on June 18th and less than ten percent of the total cost. In other words, the amount retained never equaled the required retained percentage, whether considered as fifteen percent before, or ten percent after, substantial completion of the work, as required by the construction contract. Again, the required retainage is for the mutual benefit and protection of the owner and the surety. Mississippi Fire Ins. Co. v. Evans, 153 Miss. 635, 120 So. 738; Southern Surety Co. v. Merchants' Farmers' Bank, 203 Ind. 173, 176 N.E. 846, 179 N.E. 327; Prairie State Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412; United States F. G. Co. v. Marathon Lumber Co., 119 Miss. 802, 81 So. 492; Pratt Lumber Co. v. T.H. Gill Co. (D.C.N.C.), 278 F. 783; Pickard v. Shantz, 70 Miss. 381, 12 So. 544; American Bank Trust Co. v. Langston, 180 Ark. 643, 22 S.W.2d 381; Annotation, 76 A.L.R. 917, and 9 Am. Jur., page 73, Sec. 115. If the owner, without consent of the surety, pays out the retainage he is liable to the surety pro tanto, therefor in some jurisdictions. Central State Bank v. United States F. G. Co. (5 Cir.), 9 F.2d 326; United States F. G. Co. v. Bank of Brewton (D.C. Ala.), 4 F. Supp. 272; Prairie State Nat. Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412. See Pratt Lumber Co. and Pickard cases, supra. We may reasonably assume, in the absence of proof to the contrary, that the owner would not run the risk of making himself liable to the surety by paying out the retainage over its protest.
The wording of the chancellor's opinion indicates he considered the fund retained percentage. We think that is correct and so find. Having thus held, it follows that the assignee is not entitled to the fund. But there yet remains the question of the right of the surety thereto. In this connection it is said the contractor did not legally breach the contract, and that, therefore, the surety has no right to this money. We think the contractor did breach the contract. This was a three-way arrangement, consisting of the building contract, including the plans and specifications, the bond and the application therefor, with the mutually interdependent obligations and rights therein contained. The contract obligated the contractor not only to go forward and complete the structure but also to pay for all materials and labor therefor. By his letter he notified the owner he was unable to complete the job and could not pay for the labor. We think the owner had the right to conclude that the contractor had failed to fulfill the contract. It is said in 9 Am.Jur., page 49, Sec. 69, "In accordance with the rule adopted in a majority of jurisdictions with respect to contracts generally, where a party to a building or construction contract announces his intention not to perform, the other party thereto may treat the contract as broken — ." Golwitzer v. Hunnell, 201 Iowa 751, 206 N.W. 254; Johnson v. Vogel, 208 Iowa 44, 222 N.W. 864; Schmidt Bros. Construction Co. v. Raymond Y.M.C.A., 180 Iowa 1306, 163 N.W. 458; Brady v. Oliver, 125 Tenn. 595, 147 S.W. 1135, 41 L.R.A. (N.S.) 60, Ann. Cas. 1913C, page 385, note; and Ann. Cas. 1918D, 630, subhead b, and page 632, subhead c.
This being true the owner had the right to take charge of the job or to advance the payrolls under the arrangement hereinbefore set out and deduct such advances from the contract price. By way of illustration, it was said in Tyler Co. v. Laurel Equipment Co., 187 Miss. 590, 192 So. 573, at page 575, "An owner contracts with a builder for what is commonly called a lock and key job in the building of a residence, the gross contract price to be $3,000 on completion; but the contract provides also that the owner shall pay or advance the weekly payroll of the carpenters and laborers employed in the work during its progress. There the owner would be entitled to deduct the payments so made by him, as against an assignee of the contractor, although the latter had attempted to assign the entire gross contract sum of $3,000." In the Golwitzer and Johnson v. Vogel cases, supra, the contractor had refused to proceed with the work but the contract made no provision for the owner to take charge thereof. See also United States F. G. Co. v. Marathon Lumber Co., 119 Miss. 802, 81 So. 492; Note in Ann. Cas. 1918D, supra, and especially the case of Spicer v. Snyder, 58 Hun. 605, 12 N.Y.S. 744, page 631 of said note, where the owner, under subsequent oral agreement, advanced the payrolls, as was done in this case.
The application provides that if the contractor "fail to fulfill any of the obligations assumed under the said contract," the surety, at its option, shall be "subrogated to all rights, properties and interest" of the contractor in said contract. The construction contract also provides that before the final payment is due by the owner the architect shall inspect and accept the work and find that it has been completed and that the contract has been "fully performed" and that the entire balance under the contract is due and payable, and so certify to the owner, and that "before issuance of the final certificate the contractor shall submit evidence satisfactory to the architect that all payrolls, material bills, and other indebtedness connected with the work have been paid." No such certificate was, nor could rightfully have been, furnished. The contractor is not entitled to this fund. The surety, having paid more than the amount thereof as a result of the default of the contractor, is entitled thereto by right of subrogation. Canton Exchange Bank v. Yazoo County, supra; Maryland Casualty Co. v. Dulaney Lumber Co. (5 Cir.), 23 F.2d 378; Prairie State Bank v. United States, United States F. G. Co. v. Marathon Lumber Co., both supra; Title Guaranty Surety Co. v. First National Bank, 94 Wn. 55, 162 P. 23; State v. Schlesinger, 114 Ohio 323, 151 N.E. 177, 179, 45 A.L.R. 371; Note, 76 A.L.R. 917.
It also follows that appellant is not entitled to a decree for any amount against Moseley. The chancellor so held and the cause is, therefore, affirmed.
McGehee, J., took no part in this decision.