Court Opinion

ID: 9684915
Source: CourtListenerOpinion
Date Created: 2023-08-24 14:18:44.097747+00
Date Added: 2024-06-11T18:18:00.966063
License: Public Domain

Otis, Justice
(dissenting).
I respectfully dissent from the foregoing opinion because I believe it *417unduly restricts and narrows the rules we have heretofore adopted governing the respective rights of banks and sureties.
I am not impressed by the fact that the record does not expressly state that the contractor “promised” to use the May 17 bank loan for the payment of labor and material. The vice president handling the matter testified:
“Yes, the stipulation was that of course the loan would be repaid upon liquidation of the receivable involved and Mr. Spadaccini was told that the funds were to be used for the payment of bills in connection with the job involved.”
Clearly, by accepting the loan with the conditions thus imposed the contractor was bound to apply the proceeds to the uses specified, and to the extent they were used for that purpose I would hold that the bank is entitled to reimbursement from the municipalities for which the work was done. I concede, however, that the record does not support a finding that the loan of June 8, 1960, was impressed with these conditions.
I cannot agree that Farmers State Bank of Madelia, Inc. v. Burns, 212 Minn. 455, 4 N. W. (2d) 330, 5 N. W. (2d) 589, has no application to a consideration of the matter at hand. The fact that the contract in the Burns case permitted the municipality to withhold until completion only 10 percent of the proceeds is, in my opinion, a difference without a distinction. In that case, as in this, (1) the surety was subrogated to all of the contractor’s rights by the terms of the bond application; (2) the bank thereafter loaned money to the contractor when the project was already underway, at a time when the bank was under no obligation to do so; (3) the bank took an assignment of payments due the contractor from the municipality; (4) and one of the issues was whether the bank or the surety had a superior equity in the amounts due from the municipality to the contractor following the contractor’s insolvency.
Although the municipality in the Bums case wrongfully applied funds due the contractor to labor and material, nevertheless the bank and the surety both laid claim to the amounts earned by the contractor which in that case were diverted to satisfy his debts. There, speaking through Mr. *418Justice Olson, we quoted with approval the rule that (212 Minn. 462, 4 N. W. [2d] 334) —
“ ‘* * * Where the bond is furnished the surety must recognize the possible occurrence of what here did occur as one of the perils of its business. In other words one who becomes surety takes the risk that honest payment of unsecured debts may leave a deficiency which the surety must make good.’ * * *
“ ‘The surety in modern business should be, and usually is, quite able to care for itself. It selects those for whom it becomes surety. * * *’
“* * * [T]hose who write surety bonds are, generally speaking, regarded as underwriters of contracts of insurance. They are not favored by the law. They are experts in the business of appraising risks.”
We concluded by holding that the municipality was liable to the bank and that the surety which claimed priority “is not entitled to any remedy or relief.” 212 Minn. 466, 4 N. W. (2d) 336.
In my opinion, the result here is governed by the Burns rule and that which we adopted in New Amsterdam Cas. Co. v. Wurtz, 145 Minn. 438, 441, 177 N. W. 664, 665, where we stated:
“* * * [I]n advancing its money to the contractor for the purpose stated, it relieved [surety] from its obligation to pay them. If [surety] may now compel the bank to refund, it will be the gainer and the bank the loser in a double sense. If the bank must pay the amount advanced a second time, it will lose $4,500 and interest, and with this money [surety] will be able to satisfy unpaid claims for which it is responsible, and thereby be the gainer at the expense of the bank. A mere statement of the result that would follow if [surety’s] contention were sustained demonstrates its want of equity.
❖ * * * %
“The equities are clearly with the bank, and equity is of the essence of the doctrine of subrogation.”
Viewed in this light, the conclusion is to me inescapable that every cent loaned by the bank and applied on contracts where Fidelity & *419Casualty Company was the surety relieved the surety to that extent of the obligation it assumed, for a premium, to indemnify labor and materialmen.
Nor is it clear to me how the surety has been prejudiced by failure to notify it of the loan. The implication seems to be that the surety would thereby have been alerted to the contractor’s financial condition. However, it is common, if not standard practice, for small contractors to finance their operations in this manner. Were a subordination agreement necessary, clearly none would be forthcoming, since it is inconceivable that a surety would for any reason gratuitously consent to relinquish what security it had. Loans to a small contractor of the kind here made may well spell the difference between his ability to complete the contract and the necessity for his defaulting. To dry up these resources will benefit neither the bank, the municipality, labor and materialmen, or the surety.
I would therefore hold that to the extent the May 17 loan was applied to labor and material, the bank is entitled to priority.