Court Opinion

ID: 9776756
Source: CourtListenerOpinion
Date Created: 2023-08-29 19:43:59.886116+00
Date Added: 2024-06-11T07:32:42.295941
License: Public Domain

DIES, Chief Justice.
The City of Houston (hereafter “City”) and J. W. Construction Company (hereafter “Contractor”) in April and May of 1965 entered into two contracts for the construction of storm sewers. Pursuant to Art. 5160, Vernon’s Ann.Civ.St., performance and payment bonds executed by Aetna Insurance Company, as surety, were made a part of such contracts. On May 18, 1965 and on July 13, 1965, Contractor assigned to the Deer Park Bank any and all payments due it under these contracts. These were filed for record on July 14, 1965. On July 23, 1965, Contractor abandoned performance of these contracts. At this time, not only was the work not completed, but Contractor had unpaid obligations to suppliers of labor and materials. On demand by City, Aetna completed Contractor’s obligations and paid all claims of all suppliers of labor and materials who had perfected their claims in compliance with Art. 5160, V.A.C.S. In discharge of such obligations, Aetna spent $254,154.83.
Until abandonment by Contractor, City had paid estimates of $50,089.17 to Bank as assignee. After default by Contractor, City withheld all further payments until the contracts were completed by Aetna, at which time City paid Aetna $136,481.07. At the time of default, Contractor was indebted to Bank in the amount of $61,845.-41, representing the unpaid balances of promissory notes to Bank.
Suit was brought by Bank against Aetna, City and Contractor. Contractor wholly made default and judgment was rendered *306against him for the unpaid balance of his promissory notes. The controversy between Bank and Aetna and City was submitted to the court upon stipulated facts, whereupon the trial court rendered judgment for Aetna and City, from which Bank perfects this appeal.
Bank’s points of error follow: (1) The court erred in concluding as a matter of law that, under the terms of the construction contracts and by operation of Art. 5160 § E, no further proceeds of the contracts were due or became due to Contractor because he abandoned performance and defaulted and the costs of completion were not paid by him. (2) The court erred in concluding that, as assignee of Contractor, Bank had no greater right in or to the contracts than does its assignor, Contractor. (3) The court erred in concluding that Aetna had an independent right as surety to require the contract retainages to be applied to contract obligations. (4) The court erred in concluding the Aetna, after discharge of Contractor’s obligations, became subrogated to the rights of City to apply the contract balances to the completion of the projects and payment of bills. (5) The court erred in concluding that City properly paid the balances of the contracts to Aetna. (6) The court erred in concluding that Bank is not entitled as a matter of law to recover the amounts prayed for.
We overrule all these points of error and affirm the judgment of the trial court.
Art. 5160, § E, V.A.C.S. is as follows:
“E. In the event any contractor, who shall have furnished the bonds provided in this Statute, shall abandon performance of his contract or the awarding authority shall lawfully terminate his right to proceed with performance thereof because of a default or defaults on his part, no further proceeds of the contract shall be payable to him unless and until all costs of completion of the work shall have been paid by him. Any balance remaining shall be payable to him or his surety as their interest may appear, as may be established by agreement or judgment of a court of competent jurisdiction.”
The costs of completion by Aetna exceeded the unpaid balance on the contracts by a total of $117,673.76. Manifestly, Contractor had nothing to assign Bank. Bank can stand in no better shoes than its assignor, Contract. Travelers Indemnity Co. v. Snyder National Bank, 361 S.W.2d 926, 929 (Tex.Civ.App., Eastland, 1962, error ref. n.r.e.). Contractor “could not have recovered because when he defaulted no money was due him. The bank stood in the shoes of [Contractor] under their assignment.” See also Kaker v. Giles, 269 S.W. 151, 153 (Tex.Civ.App., Fort Worth, 1924, dism.).
“While it is true that a debt having a potential existence may be the subject of an assignment, still such assignment is ineffectual in so far as the potential debtor is concerned until such potential debt becomes an actual debt.” Alfalfa Lumber Co. v. City of Brady, 149 S.W. 204, 205 (Tex.Civ.App., Austin, 1912, no writ).
Gulf Coast Factors, Inc. v. Hamilton Supply Corp., 389 S.W.2d 341, 346 (Tex.Civ.App., Houston, 1965, no writ), quoting from 6 Amer.Jur.2d, Assignments § 102, holds:
“ ‘On the other hand, the general rule is that an assignee of a non-negotiable chose in action acquires no greater right than was possessed by his assignor, and simply stands in the shoes of the latter.’ ”
Appellant argues that the 1957 amendment to Art. 260-1 must be construed together with Art. 5160, § E. Art. 260-1 was repealed by the Uniform Commercial Code, effective June 30, 1966, which in turn was repealed by the Business and Commerce Code, effective September 1, 1967. This 1957 amendment redefined an account or account receivable to include any sum of money accruing to a contractor *307for labor performed or material furnished. Art. 260-1, § 6 provides:
“Whenever any person, firm or corporation shall in good faith take a protected assignment of any account or accounts, which shall not have been satisfied, cancelled or released by the assign- or, all creditors of, and all subsequent assignees, purchasers and transferees of or from the assignor shall be conclusively deemed to have received notice of such assignment, dating from the time of the filing for record of the notice of assignment hereinabove provided; and after such filing for record, no purchaser from the assignor, no creditor of any kind of the assignor, and no prior or subsequent assignee or transferee of the assignor, holding an assignment not protected, or holding an assignment under a notice of assignment subsequently filed for record, shall in any event have, or be deemed to have acquired, any right in the account or accounts so assigned or in the proceeds thereof, or in any obligation substituted therefor, superior to the rights therein of the assignee named in such prior protected assignment.”
Appellant cites Transamerica Insurance Co. v. Texas Warrant Co., 405 S.W.2d 66 (Tex.Civ.App., Austin, 1966, error ref. n.r. e.) and University State Bank v. Gifford-Hill Con. Corp., 431 S.W.2d 561 (Tex.Civ.App., Fort Worth, 1968, error ref. n.r.e.). In Transamerica, contractor defaulted in the payment of labor and material bills on a contract dated March 18, 1963. The surety ultimately lost $23,530.22. Prior to the March, 1963 contract, as an inducement to the surety to execute the bonds, the contractor executed and delivered to the surety an indemnity agreement assigning the contract monies. Thereafter, on August 16, 1963, the contractor also assigned most of the amount “due” him on the contract to the Texas Warrant Company which complied with Art. 260-1. On August 28, 1963, this assignment was recorded. Contractor executed another assignment to its surety on August 30, 1963, by which it again assigned all then existing accounts due or to become due. Here surety company complied with Art. 260-1. On August 30, 1963, contractor wrote State (the obli-gor) to pay all remaining contract monies to its surety. However, State, on September 10, 1963, paid Texas Warrant Company. The court held the State was correct because the subrogation rights of the contractor’s surety were inferior to the holder of its assignment under Art. 260-1, saying, “It appears that the amended Act shows that the intent of the Legislature was to encourage interim financing by eliminating the preference held by the surety companies under the 1955 amendment.” (405 S. W.2d at 68) The court does not discuss Art. 5160, § E.
University State Bank discusses the requirements of a protected assignment as provided by Art. 260-1; but again there is no discussion of Art. 5160, § E, nor are the facts there similar -to ours.
So we get back to trying to reconcile the Legislature’s intent in Art. 5160, § E and Art. 260-1. We cannot escape the plain language of Art. 5160, § E stating that when contractor defaulted, he was entitled to no further proceeds under the contract until all costs of the work were paid. In this case, by this time, there was no more owed by City, so an assignment — even prior — to Bank under Art. 260-1 was an assignment of nothing. The retainages of $9,467.40 (which City retained in accordance with the contracts) occupy the same status. After the requirements of Art. 5160, § E had been satisfied, Bank would have a protected assignment under Art. 260-1 on any money remaining. Here there was none and to give Bank the preference to these monies — as it here seeks— would be simply to repeal Art. 5160, § E, which this court has no authority to do.
In National Surety Corporation v. United States, 133 F.Supp. 381, 383, 132 Ct.Cl. 724 (1955), we find:
“We reiterate our former opinion that the equity of the surety company is supe*308rior to the rights of the bank acquired under an assignment, whether the surety’s rights are derived from the discharge of its liability on a performance bond or on a payment bond. In Prairie State Nat. Bank [v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412], the surety had discharged its liability on a performance bond, and in Henningsen [v. United States Fidelity & G. Co,, 208 U.S. 404, 28 S.Ct. 389, 52 L.Ed. 547], its liability on a payment bond.
“No one seems to deny that the rights of a surety on a performance bond are superior to the rights of a bank as the contractor’s assignee. This is because, as held in the Prairie State Nat. Bank case, the surety is subrogated to the rights of the United States, and the United States had the right to use the money in its hands to complete the contract on the default of the contractor. Hence, the surety having completed the contract, it was entitled to the money. It was entitled to it as against the bank because its rights of subrogation arose at the time it executed the bond, which was prior to the assignment to the bank.”
In United States v. Commonwealth of Pa., Dept. of Highways, 349 F.Supp. 1370, 1379 (E.D.Penna.1972), the court said:
“National had subrogation rights on each of the six contracts on which it was the surety on the labor and material bonds. The equitable doctrine of subro-gation is derived from the civil law, and applies to persons, such are sureties, who have paid a debt due to a third party for which another was primarily answerable, and who pays the debt not as a volunteer but because he is secondarily liable for the debt.”
Judgment AFFIRMED.