Farmers State Bank of Madelia, Inc. v. Burns , 212 Minn. 455 ( 1942 )

Under any circumstances I would be grateful to my considerate associates for the leave they have given me to express this belated dissent. I am especially so now because my disagreement is persuasive and fundamental. That is the main reason why this expression of it is lengthy. Another and incidental reason is that in large part what I say was originally submitted in the vain hope that it would express the nearly unanimous view of the court.

The problem is important. It is one of those which will frequently recur and assuredly will never be settled until it is settled rightly.

Drawn across the trail of consideration is the distracting irrelevancy which is the subject matter of subdivision 4 of syllabus and opinion. Of course, the surety here is an insurer. But the case involves no question concerning interpretation of its bond. Neither is there denial that it is entitled to all conventional rights of a surety. So, jurors absent, comment about its not being "favored by the law" is just wide of the mark.

It is asserted by Mr. Justice Olson that the assignment from Burns to plaintiff "conclusively embodies the purpose and intent by both Burns and the bank [plaintiff] that further funds were to be made available in the performance of the Owatonna job."

That declaration is literally true and as deceptive as true. That is because it is only half the truth. The other and more important half is that the assignment did not impose upon the plaintiff, as assignee, any obligation to advance additional funds to Burns. That being so, plaintiff, as assignee of Burns, had the status and rights of a volunteer, nothing more. That is decisive, or should be, of this case.

Burns hoped for, and the bank made, further advances. What of it? The plain fact is that the bank was under no legal or contractual obligation to advance another cent to Burns to finance the Owatonna contract or any other.

There is not a single word in the assignment imposing any such obligation on the bank. Nor is there a word therein imposing upon Burns the obligation to use additional advancements, if any, in performing the Owatonna contract.

Burns was expressly (not impliedly) obligated to "pay all just claims for work and labor performed and material furnished * * * as they became due." With such primary obligation upon the contractor, the case should go to decision upon the rule of the St. Louis County case (Barrett Bros. Co. v. County of St. Louis, 165 Minn. 158, 206 N.W. 49). That rule is one of subrogation and is that the right of a building contractor's surety as subrogee takes effect as of the date of the suretyship. McArthur v. Martin, 23 Minn. 74 (78);² National Surety Co. v. Berggren, 126 Minn. 188, 148 N.W. 55.

As against both city and surety, plaintiff was a volunteer. It was under no obligation to lend money to Burns. In such cases, the surety is not a volunteer and has an equity which takes hold as of the date of the suretyship. But an assignee, such as plaintiff, whose advances to the contractor were made under no compulsion of law or contract, is a mere volunteer.³ Henningsen v. U.S. F. G. Co. 208 U.S. 404,28 S. Ct. 389, 52 L. ed. 547, followed in Barrett Bros. Co. v. St. Louis, supra.

Burns was in default, threatening early interruption, if not complete cessation, of his work. Seriously and continually he had breached his promise to pay labor, material, and equipment rental claims as they fell due. All else aside, the superior equity of the surety required that to be done which was done, that is, that those claims be paid out of the fund resulting from their joint contributions. (Only $33 of the city's money was not paid on such claims. That much, and no more, was paid either to Burns or for banking service.)

Another aid to orientation of approach is the rule that, save as he is helped by some equity of his own or hindered by the equity of another, the assignee of a nonnegotiable chose in action, such as plaintiff, occupies the "exact position" of the assignor. Brown v. Equitable L.A. Society, 75 Minn. 412,78 N.W. 103, 671, 79 N.W. 968. So, equities aside, plaintiff had no greater rights than Burns would have had if there had been no assignment. In default in respect to payment for material and labor, Burns could not have insisted that progress payments should not go to laborers and materialmen, who, as beneficiaries of the contract, were entitled to them. Inasmuch as he could not have done that, plaintiff, as his assignee, could not have done it.

As between plaintiff and surety, the question is one of priority. The fund involved was earned under the contract. Principal contributors to it were those who did the work and furnished the material essential to performance. Had the surety, on default of Burns, paid such claims, it would have been subrogated to the rights of the creditor laborers and materialmen. It would have stepped into their place as owner of the superior equity which by automatic relation had hold of the building fund from the date of the suretyship.

That was but recognized by the city. It did just what equity required. Notwithstanding, the decision requires the city to pay again to plaintiff, as volunteer and general creditor of Burns, whose equity, in point of time and substance, is subordinate to the legal claims of laborers and materialmen and the surety's equity.

We need not consider whether the covenants of Burns to pay for labor and material and of the city to make progress payments were dependent upon or independent of each other. (See Gilloley v. Sampson, 203 Minn. 233, 281 N.W. 3, wherein was involved no right of a surety.) Assuming that the covenants were independent as to performance, the decisive fact remains that, in seeing to the payment of laborers and materialmen, the city but complied with the plain equity of the situation in discharging a contractual obligation of Burns, the performance of which had been guaranteed by the surety. So I see nothing of law or equity to compel a second payment to plaintiff. The latter's legal and equitable status is inferior to that of the laborers and materialmen paid by the city, and also that of the surety.

Even though the promises of Burns to pay for labor and material and of the city to make progress payments are assumed to be independent one of the other, Burns was in default whenever he failed to pay such claims as they became due. As against such claims, the city, having notice of the default of Burns, was under plain duty not to divert any of the building fund (consisting of the earnings of Burns) to such extraneous purposes as the payment of a general creditor of Burns claiming under an assignment.

That precisely was the issue in Joint School Dist. v. Bailey-Marsh Co. 181 Wis. 202, 194 N.W. 171. There, while the contractor was in default in respect to furnishing material, the plaintiff had paid to a bank a $5,000 order given by the contractor against the building fund. Because of its diversion of that much of the fund from the purpose to which in equity it was devoted, the city, although it was allowed judgment against the defaulting contractor for the full amount of its claim, on appeal had its judgment against the contractor's surety reduced in the amount of the $5,000 so diverted from the purpose to which the surety had the equitable right to have it devoted, that is, performance of the contract. That decision was compelled because, as the court said (181 Wis. 211):

"It is well settled that whenever a creditor [whose claim has been underwritten by a surety] has a right and opportunity to apply property of the principal to the satisfaction or security of his debt, he owes to the surety a duty to do so, and release or waiver of that right to the prejudice of the surety and without his consent will discharge the surety, at least protanto. * * * the plaintiff had no right, by the acceptance and payment of the order [in favor of a general creditor of the contractor] * * * to divert any part of the contract fund to the payment of a general obligation of the company [contractor] without the consent of the surety. It is immaterial that all or some part of the money loaned by the bank to the company [contractor] upon its note was used by the company for paying off the claims of laborers or materialmen."⁴

Nothing further by way of either reason or authority seems needed to support the thesis that in the case of a public building contract, with a performance bond collateral thereto, or, as here, part thereof, the earnings of the contractor constitute a fund in which the surety has plain equitable rights. Those equities are superior to the rights of a general creditor of the contractor. It follows that, in this case, when the city, on the contractor's default therein, paid labor and material claims out of the building fund, it was doing precisely what equity demanded. Hence it ought not to be compelled by judgment to duplicate the payment.

It is futile to attempt reconciliation of the Waseca case,77 Minn. 92, 79 N.W. 649, with the St. Louis County case. (The latter was not brought to the attention of the trial judge.) In the Waseca case (where the contractor was in default under his obligation to pay for labor and material and the county, as obligee, was notified thereof by the surety), the reasoning was, in main part, that, "while it is the law that a creditor or an obligee upon a bond must deal fairly with a surety, he cannot be held to have dealt unfairly if he has simply complied with the terms of his contract, and has been powerless to do otherwise. The defendant board had no authority under the statute to enforce the contractor's duty towards the laborers and materialmen by withholding payment on the estimates, and consequently it neglected no duty it owed to plaintiff surety."

That is wrong in two respects. First, the obligee is not "powerless to do otherwise" than pay contractor or his assignee, ignoring the former's default. He may usually, if not always, when payment is due and there is default, see to it that his money is used to pay overdue claims for labor and material. (In the instant case, the city did not refuse to make the progress payments. It made them, but, with coöperation of the contractor, saw to it that the money went in discharge of outstanding claims for labor and material.) Second, the Waseca decision inadvertently ignored the priority of the surety's equity over that of any mere general creditor or volunteer assignee of the contractor.⁵ Insofar, therefore, as that decision runs counter to the St. Louis County case, it should be overruled. It's error plain and fundamental; there is nothing in the doctrine of stare decisis to require us to perpetuate it.

At the time of decision in the Waseca case (1899), the rights of parties, beneficiaries of a contract but not parties thereto, were limited by the rule of Jefferson v. Asch,53 Minn. 446, 55 N.W. 604, 25 L.R.A. 257, 39 A.S.R. 618. That rule has been much modified. (La Mourea v. Rhude, 209 Minn. 53,295 N.W. 304; Restatement, Contracts, §§ 133-147.) Now, either donee or creditor beneficiary is entitled to a cause of action on the contract upon default in performance. So, when the money of the city went to laborers and materialmen, the payment was to those entitled thereto under contract and bond. The evolution of law, in belated recognition of beneficiaries of a contract, has come since the Waseca case was decided. It illustrates the fact that the common law is not a matured, rigid, and inert mass. It is rather a live and growing organism, self-adapting to new problems and new truths. While avowing respect for precedent, it owes no allegiance either to ancient error or any concept invalidated by progress.

There can be no claim that by unilateral act of the promisor, such as an assignment, the right of the beneficiary can be defeated. Restatement, Contracts, §§ 142, 143. For example, the right of the beneficiary of a single-premium life insurance policy, wherein no right of revocation has been reserved, cannot be defeated by the unilateral act of either insurer or insured. The right of the beneficiary, fixed by the contract and matured by death of the insured, would take precedence over any assignment made by the latter during his lifetime. So, the rights of laborers and materialmen to payment as due were in no wise affected by Burns's assignment to plaintiff. In this case the equitable rights of the surety coöperated with the legal rights of the laborers and materialmen to make proper, if not compulsory, the payments to the latter.

In result, this decision allows a stranger assignee, coming into the matter as a mere volunteer, to displace the prior equity of surety and defeat the legal rights of the creditor beneficiaries of the contract. For that anomalous result no reasonable justification is assigned, and in my judgment none is possible. Their almost daily regurgitation of the contents of precedent should enable judges to detect and eject the poison of error. That of the Waseca case is so plain and substantial as to explain the reticence of Mr. Justice Olson in respect to the citation of supporting authority.

I think there should be a reversal as against the plaintiff. I cannot agree that the decision for plaintiff, without more, disposes of the case as against the intervener. If as to the intervener the result is correct, it is for reasons other than those so scantily mentioned in the opinion.

² In that case the rule was stated thus: "The right of subrogation and the equitable assignment relate to the date of the suretyship, as against the principal and those claiming under him."

³ In contrast is New Amsterdam Cas. Co. v. Wurtz, 145 Minn. 438,177 N.W. 664, 665. It was held that the assignee of a contractor who made loans to the latter (the proceeds of which went into the work), under an affirmative contractual obligation to make such advances, was not a volunteer. In that connection, this quotation was made from Wasco Co. v. New England Equitable Ins. Co. 88 Or. 465, 476, 172 P. 126, L.R.A. 1918D, 732, Ann. Cas. 1918E, 656: "the contractor can neither supplant this equity [the surety's] nor strip it of its priority by borrowing money from some person not obliged to lend and assigning the funds to secure the loan."

⁴ That conclusion was based as to authority upon Henningsen v. U.S. F. G. Co. 208 U.S. 404, 28 S. Ct. 389,52 L. ed. 547, the rule of which we endeavored to interpret and apply in the St. Louis County case.

⁵ "The decisions * * * recognize the right of a surety to have a payment made from funds in which it has an equity applied to the debt for which it is surety, and where the amount paid * * * is the identical sum * * * for the security of which the surety has bound himself, the surety is equitably entitled to have the money * * * given in satisfaction of the debt applied thereto." 21 R.C.L. 1128.