Court Opinion

ID: 8797425
Source: CourtListenerOpinion
Date Created: 2022-11-26 14:16:40.842815+00
Date Added: 2024-06-11T17:03:42.760992
License: Public Domain

RUDKIN, District Judge
(dissenting). Reduced to its simplest form, the question before the court is this: A firm of contractors enters into a contract with a municipal corporation for the improvement of one of its streets, and executes the customary statutory bond, conditioned for the payment of claims for labor and material. A material-man furnishes material to the contractors, a part of which is used in this street improvement, and a part is otherwise used or disposed of. The contractors make payments from time to time to the materialman, without any designation or application of the payments so made, and the materialman, without notice or knowledge of the source from which the contractors received their money, applies the payments on account of the material which was not used in the street improvement. I say without notice or knowledge of the source from which the money came, because notice is neither alleged in the answer, nor found by the court, and the pleadings and findings must support the judgment. Under these facts the court holds that payments thus made and applied by the creditor must now he reapplied on account of material used in the street improvement and secured by the bond.
From this conclusion I feel constrained to dissent. If the material-man had notice or knowledge that the money received from the contractors came from the city contract, there would be some equity and justice in requiring it to- apply the payments on the account secured by the bond; and some of the authorities so hold, notably the Supreme Court of the state of Washington, as appears from the case of Crane Co. v. Pacific Heat & Power Co., 36 Wash. 95, 78 Pac. 460, cited in the majority opinion. If the case stopped here, I might acquiesce in the judgment, although I do not concede that the ruling is supported by the weight of authority. In People v. Power, cited in the majority opinion, the statute was the same, the bond was the same, and the facts were the same, yet the court upheld the right of the creditor to apply the payments as he chose, for reasons which I deem unanswer*786able. In the Bankers’ Surety Case, from the Fourth Circuit, the law was the same, and the facts were even stronger in favor of the surety than here, for there the employe, who was seeking to recover on the bond, himself drew the money which he applied on a pre-existing debt, and therefore had full knowledge of the fact that the money came from the government contract. The fact that the court in that case was content to rest its decision on an elementary principle of law does not detract from the weight of the authority, unless that principle was misapplied. There is a direct analogy between an action on a bond of this kind and a mechanic’s lien case, the bond taking the place of the lien, and the surety taking the place of the owner. And if the surety has a right to insist that money paid by the city shall be applied on claims secured by the bond, the owner of a building has an equal or even greater right to insist that money paid by him shall be applied on claims for which his property is liable; but the rule of law is otherwise: -
“Where the lien claimant- at the time of receiving a payment from the owner or the contractor has other claims against the person by whom such payment is made, the effect of the payment - upon the lien depends upon whether the payment was applied to the lienable claim, and the application of such payments is governed by the general rules on the subject. If the debtor applies the payment, his application governs; but if he does not do so, the creditor may apply the payment on whichever debt he chooses, and if he applies it to a debt other than the one for which the lien is claimed, as he is entitled to do, the payment does not discharge or reduce the lien.” 27 Cyc. 294, and cases cited.
But, whatever the rule may be, where the creditor has notice of the source from which the payments came, the rule is well settled that in the absence of such notice he may apply the payments as he chooses, and his application will govern. Such should be the law. The contractor is not required to pay over the money received from the city' to laborers or materialmen by either the statute or the conditions of the bond. ' He is left at liberty to conduct his own business in his own way. The money received on the contract is his to apply or spend as he chooses. It was conceded on the argument that the contractors might have applied the money received from the city in- payment of their private debts, other than the secured debt, and that the sureties could not complain. It was likewise conceded that, if tire contractors owed the plaintiff in error the unsecured debt only, they might pay that debt, and the plaintiff in error might accept the payment with full knowledge of the fact that the money was received from the city contract. But because the plaintiff in error drappened.'to hold two claims, instead of one, it is ‘denied that privilege. '
The decision of the majority exhibits a tender regard for the rights of sureties, but a woeful disregard for the obligation of private contracts. It places restraints on the free use and exchange of money which have not heretofore received judicial sanction. In that respect it stands unsupported and alone. In Crane Co. v. Pacific Heat & Power Co-., supra, the answer alleged that at the time of the application of the payments the creditor knew that the money came from the board of directors of the school district on account of the school *787contract, which was secured by the bond there in suit. True, the opinion seems to attach no importance to that averment; but the ruling of the court was explained in Hughes & Co. v. Flint, 61 Wash. 460, 112 Pac. 633, where the same principle was involved. In the latter case, speaking through Mr. Justice Chadwick, the court said:
“In Crane Co. v. Pacific Heat & Power Co., 36 Wash. 95 [78 Pac. 460], it was held that the answer of a surety, alleging that plaintiff had received and credited money paid on a particular contract, lemming Us source, to other accounts, stated a defense; and, further, that Knowing the source of the payment the materialman could not apply payments under the general rule to the prejudice of a surety on the contractor’s bond. In principle that case is like unto this. The right to apply the payments to the older or other accounts was denied, because the lien claimant had notice that the money was paid on the contract which the surety company had underwritten. The owner of land, who lets a contract for the erection of a building upon it, is an Involuntary debtor, made so by the terms of a statute; and where he has made a payment on his contract, and the amount thereof has passed to the material-man having notice of the contract, and the source of the payment, or the payment being made by check bearing words which import an equity in the drawer, so as to exempt it from the provisions of the Negotiable Instruments Act, equity and fair dealing demand that the owner should not be made to pay his debt over again.”
It. will thus be seen that the creditor is only denied the right to apply payments where he has actual notice oí the source from which the money came. It is apparent from the opinion in United States v. American Bonding & Trust Co., 89 Fed. 925, 32 C. C. A. 420, also, that the creditor had notice that the money came from the government contract. Besides, there were many equities in that case in favor of the surety that are not found in this record, and, as already stated, in a later case from the same court, a different conclusion was reached under facts similar to those presented in the case at bar. Under the decision of the majority, if a materialman furnishes material to a contractor who is constructing different buildings subject to the lien laws of the state, or different public works secured by bond as in this case, he must, before accepting a payment, inquire where his debtor received the money. This would ordinarily be deemed an impertinence at best, but even the impertinence will not avail; for, under the ruling of the majority, all payments must be applied- on the secured claims under an inexorable rule of law.
I think I have shown that the decision of the majority is not in harmony with the decisions of the Supreme Court of the state; but, even if it were, the question here involved is one of general law, which must be decided the same way by this court in every case, whether the question arises in an action on a bond given under the federal statute dr under the statute of one of the states. In my opinion the special findings disclose no defense to the action, and the judgment should be reversed.