Court Opinion

ID: 9652926
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:35:19.898241+00
Date Added: 2024-06-11T18:12:55.179305
License: Public Domain

SIBLEY, Circuit Judge
(dissenting).
The amended claim of American Surety Company asserted a prior lien on the fund paid to the contractor’s trustee in bankruptcy by the United States. The objections of the materialmen asserted a prior lien in themselves and a right to be paid to the entire exclusion of the surety company; the fund being insufficient to pay all. The referee sustained the objections and ordered the materialmen to be paid first. This is the judgment which is to be affirmed. The surety company is at least a general creditor. The materialmen assert no priority under any provision of the Bankruptcy Act (11 USCA). They must and do assert a lien existing prior to bankruptcy. I see no basis for one without judicial legislation. The majority opinion concedes, and it is undoubtedly true, that without the aid of a statute furnishers of labor and material to a contractor are merely his general creditors. While the Roman law was otherwise, the English law gave them no special right or lien either at law or in equity against the property improved or against the sum to be paid to the contractor. South Fork Canal Co. v. Gordon, 6 Wall, at page 571, 18 L. Ed. *381894; Van Stone v. Stillwell, etc., Co., 142 U. S. 128, 12 S. Ct. 181, 35 L. Ed. 961; Prince v. Neal-Millard Co., 124 Ga. 884, 53 S. E. 761, 4 Ann. Cas. 615; 18 R. C. L., Mechanics’ Liens, § 1; 40 C. J., Mechanics’ Liens, § 3. The insolvency of their debtor does not create any equity in them. Withrow Lumber Co. v. Glasgow Inv. Co. (C. C. A.) 101 F. 863. Many American states have passed statutes giving a lien on varying conditions either against the property improved or against the money to be paid for the improvement. These statutes do not usually include public contracts, because the public property ought not to be sold on execution and because public officials ought not to be harassed by garnishments or their equivalent. The protection most commonly afforded to suppliers of labor and material for public work is to require the contractor to give a bond conditioned for their payment, This was done as respects public work performed for the United States by the Act of August 13, 1894, as amended (40 USCA § 270). Before that act materialmen had no special rights in the money to be paid to the contractor, unless by some provision of the contract. Lawrence v. United States (C. C.) 71 F. 228. I am unable to see that the statute gives them any right except to share with the United States in the penalty of the bond. At first laborers and materialmen shared on a footing of equality with the United States, but a later amendment has postponed them. Nowhere and at no time has the statute given them any right to control the money coming to the contractor or any lien upon it. By the consent of the United States and the contractor expressed in their contract, special rights may arise as to the disposition of the money. An agreement that some of it shall be withheld by the United States was dealt with in the leading case of Prairie State Bank v. United States, 164 U. S. 227, 17 S. Ct. 142, 41 L. Ed. 412, before the statute was ever passed. At page 233 of 164 U. S., 17 S. Ct. 142, 145, it was said: “A stipulation in a building contract for the retention, until the completion of the work, of a certain portion of the consideration, is as much for the indemnity of him who may be guarantor of the performance of the work, as for him for whom the work is to be performed, that it raises an equity in the surety in the fund to be created.” The surety’s equity was held to date back to the execution of the contract which *quired the retention, and thus .to be priol to the contesting bank’s later assignment! The surety was held to have an original right to he secured by the fund so set apart, and also a secondary equity to be subrogated to the right of the United States to retain it. In Henningsen v. United States Fidelity & Guaranty Co., 208 U. S. 404, 28 S. Ct. 389, 52 L. Ed. 547, which is mainly relied on in the majority opinion and in Belknap Hardware & Mfg. Co. v. Ohio River Co. (C. C. A.) 271 F. 144, it is not stated whether or not the contract required the retention by the United States of the unpaid money, but one would suppose there was such a requirement because it was declared that Prairie State Bank v. United States, supra, was in point, and that case went wholly upon the contractual segregation of the fund. The court in the Hen-ningsen Case speaks of subrogation, but does not say to whose right the .surety became subrogated, and the argument is sought to be made that since the contract was completed the United States no longer had any right when the surety paid out its money, so that the subrogation spoken of must have been to some right of the laborers and materialmen, who therefore must have been held to have a lien. But the headnote in the United States Report states: “In such a case the surety is subrogated to the rights of the contractor, but the bank is not.” If that correctly states the ruling, the rights of the materialmen were not at all considered, and the ruling was that the surety, bound since the date of his contract, was subrogated to the right of the contractor to collect the bal-anee due on the completed contract, and the bank’s assignment of date later than the contract was inferior, and the bank, being a voluntary lender, had no possible right of subrogation. Such a subrogation would work whether the unpaid balance was retained under the contract as a security for the surety or not, for the contractor’s right to payment does not depend on such retention; and it would also seem that if it was so retained the surety would not need any subrogation because he had a direct and original right to be protected by the fund so set apart, it being a trust. Walker v. Brown, 165 U. S. 654,17 S. Ct. 453,41 L. Ed. 865; Glades County v. Detroit Fidelity & Surety Co. (C. C. A.) 57 F.(2d) 449, at page 452. The only way to arrive at a lien for the materialmen that I can see is to assume that money retained by requirement of. the contract is for the security of them also. This has not yet been authoritatively held, and because of the number of laborers and materialmen might prove embarrassing to government in settling up contracts. The *382contract ought clearly to indicate such a purpose. The present contract does not. It contains no requirement that suppliers of labor and material be paid. The only reference in the contract to paying them is a provision that additional security on the bond protecting them can be required if the surety furnished should become unacceptable. The contract, like the statute, contemplates only the bond to secure them. The bond, of course, is conditioned to be void if the contractor fully performs the contract and in addition pays promptly all persons supplying labor and materials. If the contractor fails to pay any of them, the surety must pay up to the penalty of his bond, but that is all. This it has done, and the bond and all its obligations are satisfied. The unpaid balances the contractor still owes, but the surety does not; and the contractor owes them because -of the several contracts of purchase, not because of his bond or his contract with the United States. This contract does provide for the retention-of 10 per cent, of the payments to be made to the contractor, but gives discretion to stop retentions after 50 per cent, of the work is satisfactorily done. 10 per cent, of the contract price is $1,524. Since the work was satisfactorily done, only half of that, $762, was required to be retained. A discretionary retention is admitted to give rise to no rights in the materialmen in Alfred Richards Brick Co. v. Rothwell, 18 App. D. C. 516. It follows that the trust fund is only $762, or at most $1,524. This court has held that money not required to be retained is free money in the hands of the contractor upon which there is no trust or lien even in favor of the surety. Kane, Trustee, v. First National Bank (C. C. A.) 56 F.(2d) 534, 85 A. L. R. 362. I find nothing in this contract to show that the reserved percentages were for the benefit of anybody but the United States and the surety, as held in Prairie State Bank v. United States, but if they were under trust also for the materialmen the trust covers at most $1,524, and not the whole $2,775.25, paid over by the United States.
In my opinion, under this Contract and under the federal statute the materialmen have no special rights or lien either on the percentages contracted to be retained or on the free balance, but must be held to have credited the general responsibility of the contractor and the bond taken for their protection. The surety has a direct right, and also a right by subrogation, in respect of the retained percentages. I do not consider that the indemnity agreement with the contractor contains an intelligible assignment of anything. The surety may be disentitled to have any relief by equitable subrogation until the materialmen are paid in full under principles asserted in Jenkins v. National Surety Co., 277 U. S. 258, 48 S. Ct. 445, 72 L. Ed. 874, and State of Mississippi for Use of Leflore County v. First National Bank (C. C. A.) 66 F.(2d) 9. But that does not prevent an assertion of its direct right to the security of the retained percentages, nor hinder its sharing with the materialmen, all as common creditors, in the bankrupt’s general estate. I do not think the judgment totally excluding the surety is correct.