Derby v. United States Fidelity & Guaranty Co.

Mb. Justice Bubnett

delivered the opinion of the court.

1-4. It is stated by the complaint and although formally denied on information and belief by the bank, it is not contested that the company entered upon and completed the three contracts after the default of Rogers. It first will be necessary to settle the matter of priority between the company and the bank. The former was the surety of Rogers, undertaking in each instance not only that he would perform all the obligations of the contract but also that he should promptly make payments to all persons supplying him with labor or materials for any portion of the work required. The bank did not occupy the position of surety. It loaned money to Rogers and became only his general creditor. There is no proof that the cash which the bank advanced went into the Fair Grounds building and even if there were, its payment is not covered by the statutory bond. It is provided in substance by Chapter 27, Laws of 1913, p. 59, that the contractor in instances like those described in these proceedings

“shall be required before commencing such work, to execute the usual penal bond with good and sufficient sureties, with the additional obligations that such contractor or contractors shall promptly make payments to all persons supplying him or them labor or materials for any prosecution of the work provided for in such contracts.”

The agreement between the state and Rogers stipulated in each instance for the retention of 20 per cent of the contract price until the entire completion of the work, the other 80 per cent to be paid proportionately at different stages of its progress. It was the manifest right of the surety to fulfill the contract on the *42 default of its principal. Whatever right it had to the fund reserved under the contract is coeval with the execution of the bond and the signing of the building agreement, both instruments being part of the same transaction. The bank knew that the contract was with the state. The law imputes to it a knowledge of the bond containing the statutory condition. As a matter of law it was charged with notice of the right of the surety to take up and perform the contract in place of Rogers on his default and be subrogated to all the rights of the state as against him including the application of the reserved percentages to cover the consequences of his failure. This position is fortified by the plea of the company proved by the documents signed by Rogers as part of the transaction whereby he transferred to it as his surety all money of every sort payable to him under the contract. That assignment was only declaratory of the right the law gave to the surety. This is further strengthened by the allegation which the bank admits to the effect that the assignment to it of the money took place shortly after the execution of the Fair Grounds contract; while the proof shows that the assignment to the company was made as part of the execution of the contract. It is not a question as between two different assignees of the same chose in action each ignorant of the other’s claim to it where it might be contended that the one first giving notice to the person owing the debt that it had been transferred would be entitled to collect it. By operation of law notice was imparted to the bank of what is required by the statute and what it might have learned in fact by inquiry of the officers of the state, namely, that a bond had been given with the consequence arising from the situation that the surety making good the default *43 would succeed to all the rights of the contractor and be subrogated to the remedies of the state to work out its reimbursement, all in preference to one holding a demand against the contractor for money loaned to him. Within the terms of this admitted allegation of the writing set forth in the answer of the bank it was evidently contemplated by it and Rogers that the bank should receive the money due to him and not to his surety as the contract was fulfilled by him and not by the company.

5. There was no privity of contract between the bank and the state as there was between the surety and the state. The bank had no right like the company to step in and finish the work with the resulting right of subrogation. A leading cash under a statute like ours is Henningsen v. United States Fidelity & Guaranty Co., 208 U. S. 404 (52 L. Ed. 547, 28 Sup. Ct. Rep. 389). As in the present instance a bank had loaned money to a contractor and he assigned to it the money coming to him under his agreement; but he afterwards defaulted and his surety was compelled to finish his job. Mr. Justice Brewer discusses all the features of the case and concludes the matter by approval of the following language of the Circuit Court of Appeals:

“Whatever equity, if any, the bank had to the fund in question arose solely by reason of the loans it made to Henningsen. Henningsen’s surety was, upon elementary principles, entitled to assert the equitable doctrine of subrogation. But it is equally clear that the bank was not for it was a mere volunteer and under no legal obligation to loan its money. ’ ’

6, 7. The following authorities are to the same effect: Title, Guaranty & Surety Co. v. Dutcher, 203 Fed. 167; Illinois Surety Co. v. City of Galion, 211 Fed. 161; In re Scofield Co., 215 Fed. 45 (131 C. C. A. 353); In re *44 P. McGarry & Son, 240 Fed. 400. In Wehrung v. Denham, 42 Or. 386, 392 (71 Pac. 133), this court held that retained payments constitute a fund for the protection of the surety. It is plain, therefore, that on account of the elementary right of the surety to enter upon and perform the contract in which its principal has made default it is entitled to all the benefits coming to him under the contract and to be subrogated to all the rights of the state respecting the reserved percentages as a lever with which to enforce performance, all to the exclusion of the bank which occupies only the position of general creditor. This same principle also postpones the trustee who takes nothing his bankrupt could not take.

8. We pass, therefore, to the question of whether the company has shown a right to retain the moneys in question. That it finished the works is not disputed. That it was liable to liquidate the unpaid claims against Rogers for material and labor is nominated in the bond it gave. When he abandoned the work the company took his place and having finished the undertakings it was entitled to settle its accounts and its liability under the contracts and bonds with the State of Oregon through its constitutional auditor, the Secretary of State. Under the provisions of Chapter 314, Laws 1913, that officer is required

“to examine and determine the claim of all persons, firms or corporations against the state, in cases where provisions for the payment thereof shall have been made by law, * # and to draw a warrant upon the treasury for the same”; provided, “that no claim be allowed and no warrant drawn until services have actually been rendered, or goods, wares, merchandise or other articles have actually been delivered to and received by the state or its duly authorized agent.”

*45 9-12. The very essence of the complaint and of the answer of the bank is that the company has collected money from the state on these contracts and that is conceded. When the company had finished the work and applied to the Secretary of State for settlement he had a right to inquire not only whether the surety had finished the work but also whether it had complied with the terms of its bond and had caused payment to be made to persons supplying its principal with labor and material for which they had not received compensation. It is presumed that official duty has been regularly performed. In the absence of any other showing, therefore, we must assume that the auditing officer of the state inquired and found that the labor and materials had been furnished and used in the construction of these several state buildings and that the surety perforce had paid for them. Under the pleadings, therefore, a prima facie case appears in favor of the company to the effect that it is rightly in possession of the money which it received in the settlement of its accounts with the state for lawfully it could not have obtained it otherwise. In addition to this the testimony of workmen actually engaged on the jobs shows that materials described in the bills rendered to the company by various tradesmen and laborers were actually employed in the construction of the buildings. The only attack upon this oral testimony is by way of cross-examination and the utmost shown thereby is that some of the witnesses who claim to have shipped materials to the contractor for the firms they represent could not say of their own knowledge that they actually saw the shipments delivered on the ground or that the identical material went into the construction of the buildings. This is only negative in value and does not impeach in any way the *46 prima facie case made on the pleadings that the Secretary of State ascertained in his official capacity that the materials and labor had been furnished and paid for by the company. It is true as pointed out in effect in such cases as State v. Brown, 10 Or. 215, Shattuck v. Kincaid, 31 Or. 379 (49 Pac. 758) , and Gibson v. Kay, 68 Or. 589 (137 Pac. 864), and other like cases, that the decision of an auditing officer is only prima facie correct and that it may be disputed; but where, as in this instance, nothing appears to controvert the decision of the auditor it must control the decision of the issue preseited. It is not enough to cast doubts upon the oral testimony by mere cross-examination. If the plaintiff and the bank would overturn the accounting had with the Secretary of State, supported as it is by competent testimony given at the hearing of this case, they must show that the account is erroneous and specify wherein it is at fault.

The conclusion of the whole matter is that by virtue of its relation of suretyship to the original contractor the company is entitled to precedence over the bank which occupies the position of a general creditor and the trustee in bankruptcy who takes only what Rogers would have taken had the different enterprises been carried forward to completion under his management; and further, that there is nothing here to dispute the prima facie correctness of the audit of the state’s officer when it settled with the company.

The decree of the Circuit Court is reversed .and the suit is dismissed with costs and disbursements in favor of the company and against the plaintiff and the bank. Reversed. Suit Dismissed.

Mr. Chiee Justice McBride and Mr. Justice Benson concur. Mr. Justice Harris.concurs in the result.