Opinion · Supreme Court of the United States

Henningsen v. United States Fidelity & Guaranty Co. of Baltimore

Henningsen v. United States Fid. & Guar. Co. of Balt., 208 U.S. 404 (1908)

Type: Opinion
Court: Supreme Court of the United States
Jurisdiction: Federal
Date: 1908-02-24
Topic: general

How later courts describe this case

noting that the government had “equitable obligations to see that the laborers and supply men were paid”
stating, prior to the enactment of the Bankruptcy Code, that the Government had an "equitable obligation []" to ensure the payment of laborers and suppliers on public construction projects

Citator

UpLaw has not yet analyzed Henningsen v. United States Fidelity & Guaranty Co. of Baltimore. The absence of a flag is not a finding that it is good law.

Cited by: 304 opinions

Headnotes

Federal Courts & Jurisdiction — Supreme Court Review of Circuit Court of Appeals Decisions An appeal lies from the judgment of a Circuit Court of Appeals to the Supreme Court where federal statutes form a necessary element of the decision below, even though diversity of citizenship is also alleged as a ground for the Circuit Court's jurisdiction. 208 U.S. at 409
Contracts Law — Subrogation A surety on a contractor's bond who, by reason of the contractor's default, is obligated to and does pay laborers and materialmen, is subrogated to the rights of the contractor and the United States, and its equity in funds due under the contract is superior to that of a bank that merely loaned money to the contractor secured by an assignment of amounts to become due. 208 U.S. at 412
Contracts Law — Subrogation — Equitable Priority A surety's equitable right of subrogation arises from its contractual obligation, entered into before the work commenced, to ensure the contractor's performance and payment obligations; the surety does not act as a volunteer when it pays laborers and materialmen pursuant to that obligation, and its equity relates back to the original contract, giving it priority over a lender whose equity arises only from a later loan. 208 U.S. at 411
Contracts Law — Subrogation — Priority over Assignee Lenders A bank that loans money to a government contractor secured by an assignment of amounts to become due under the contract is a mere volunteer under no legal obligation to make the loan, and is not entitled to subrogation; its equity, if any, arises solely from the loans and is subordinate to the surety's right of subrogation. 208 U.S. at 412

HENNINGSENv. U.S. FIDELITY GUARANTY CO.,208 U.S. 404(1908)

28 S.Ct. 389

HENNINGSENv. UNITED STATES FIDELITY AND GUARANTY COMPANY OF BALTIMORE,

MARYLAND.

APPEAL FROM THE CIRCUIT COURT OF APPEALS FOR THE NINTH CIRCUIT.

No. 78.

Argued December 16, 17, 1907.

Decided February 24, 1908.

Although diversity of citizenship is alleged in the bill, if the grounds of the suit and relief are also based on statutes of the United States, which, as in this case, are necessarily elements of the decision of the Circuit Court of Appeals, an appeal lies from the judgment of that court to this court. The equity of the surety on a bond given by a contractor under the act of August 13, 1894,28 Stat. 278, who by reason of the contractor's default has been obliged to pay material-men and laborers, is superior to that of a bank loaning money to the contractor, secured by assignments of amounts to become due. In such a case the surety is subrogated to the rights of the contractor, but the bank is not. 143 F. 810, affirmed.

R.M. HENNINGSEN and Edward W. Clive, as copartners, in May,

1903, contracted with the United States for the construction of

certain buildings at Fort Lawton, in the State of Washington, and

entered into a bond with the United States Fidelity and Guaranty

Company of Baltimore (hereinafter called the Guaranty Company) as

surety in the penal sum of $11,625 for the faithful performance

of the contract, and to "promptly make full payments to all

persons supplying labor or materials in the prosecution of the

work provided for in said contract." The buildings were

constructed in accordance with the terms of the contract, but the

contractors failed to pay certain just and lawful claims for

labor and materials, amounting in the aggregate to $15,409.04.

After such default the Guaranty Company instituted a suit in the

United States Circuit Court for the District of Washington, in

which it made the contractors and all persons to whom they were

indebted for labor and materials defendants, confessing its own

liability to the full amount of the bond. A decree was entered,

adjudging the

Page 405

company liable to such creditors of the contractors in the full

sum of the bond, $11,625, and awarding payment to such creditors

pro rata. It also adjudged that upon such payment the liability

of the company upon the bond should be discharged. On March 16,

1904, pending the performance of the contract, the contractor, or

rather Henningsen alone, for Clive had ceased to have any

connection with the performance of the contract, made a written

assignment of all payments which were then due, or might

thereafter become due on account of the contract, to R.R.

Spencer, in trust for the National Bank of Commerce of Seattle,

to secure payment of a loan made by the bank to the contractors,

October 10, 1903, of $3,500, and also subsequent loans, and at

the same time gave as further security an order addressed to the

United States quartermaster, requesting him to deliver to said

Spencer all checks of the Government on account of said contract.

The moneys so loaned were paid directly by the bank to Henningsen

and handled and disbursed by him, without any supervision or

control upon the part of the bank or Spencer. This suit was

commenced by the Guaranty Company by a bill in the Circuit Court

of the United States for the District of Washington to restrain

the appellants from collecting or accepting the balance due on

the contract from the United States. It appeared at the time of

the commencement of the suit that there was in the hands of the

quartermaster, due upon the contract, the sum of $13,066, which

he was about to pay to Spencer under the assignment and order. On

June 17, 1904, an arrangement was made between the parties, by

which the sum of $8,024.21 was paid to certain creditors, and the

balance, $5,041.79, was applied in conditional payment of the

indebtedness of the contractors to the bank, with a stipulation

that if it should be finally determined that the Guaranty Company

was entitled to receive it then the bank should pay it to the

Guaranty Company. This suit proceeded to a decree in favor of the

Guaranty Company for $5,041.79, which decree was affirmed by the

Circuit Court of Appeals. (February 12, 1906; 143 F. 810;

Page 406

74 C. C.A. 484.) The bond of the Guaranty Company was given under

the requirements of the act of Congress of August 13, 1894, c.

280 (28 Stat. 278), which reads:

"That hereafter any person or persons entering into a formal

contract with the United States for the construction of any

public building, or the prosecution and completion of any public

work, or for repairs upon any public building or public work,

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

and materials in the prosecution of the work provided for in such

contract; and any person or persons making application therefor,

and furnishing affidavit to the department under the direction of

which said work is being, or has been, prosecuted, that labor or

materials for the prosecution of such work has been supplied by

him or them, and payment for which has not been made, shall be

furnished with a certified copy of said contract and bond, upon

which said person or persons supplying such labor and materials

shall have a right of action, and shall be authorized to bring

suit in the name of the United States for his or their use and

benefit against said contractor and sureties and to prosecute the

same to final judgment and execution:Provided, That such

action and prosecution shall involve the United States in no

expense."

Mr. George E. de Steigner, with whomMr. W.W. Wilshirewas on the brief, for appellants:

The contract, so far as the United States is concerned, had been fully performed, so that there was no right of the Government to which the surety company could be subrogated; the creditors furnishing labor and material had no lien upon the fund, and therefore there was no right in their favor to which the surety company could be subrogated; therefore the War Department was entitled to pay it to the contractors or to their assignee, the bank, and either the contractors or the bankPage 407was entitled to receive it. Therefore the Circuit Court of Appeals was in error in stating that "the real question in the case is one of priority of equities as between the bank and the surety company." The real question is whether the surety company had any equity whatsoever.

It must recover, if at all, on the strength of its own right. This right must be something more than the general right of a creditor to be paid. It must be something in the nature of a lien, legal or equitable, upon the particular fund.PrairieState Bankv.United States,164 U.S. 227;First NationalBankv.City Trust Company, 114 F. 529;GreenvilleSavings Bankv.Lawrence, 76 F. 545;Lawrencev.United States, 71 F. 228;Reidv.Pauly, 121 F. 652;Richard Brick Companyv.Rothwell,18 App.D.C. 516.

The decision in each case was founded upon the fact, either that the contractors had failed to perform their contract and the sureties had completed the performance thereof for the Government, or that the contract provided for the retention of a portion of the contract price until laborers and materialmen were paid. In the present case, neither of these facts is found. The original contractors finished the work for the Government; and the contract contained no stipulation for retaining any part of the amount due for the payment of laborers and material-men. There is, therefore, no default of which the Government can take advantage. So far as it is concerned, the contract has been fully performed.United Statesv.Rundle, 100 F. 400;United Statesv.National Surety Co., 92 F. 549.

There was no right or equity left in the United States to which the complainant could be subrogated.Lilesv.Rogers,113 N.C. 197.

The laborers and material-men never had any right to the fund. Aside from some statutory or contract provision, laborers or material-men have no claim, legal or equitable, either against the property improved, or the contract price.Lawrencev.United States, 71 F. 228;Canal Co. v.Gordon,Page 4086 Wall. 561, 571;Withrow Lumber Co. v.Glasgow InvestmentCo., 101 F. 863-868;Mechanics' Bankv.Winant, 1 N.Y.S. 659-660;Randolphv.New York, 53 How. Pr. 68; Phillips on Mechanics' Liens, § 1; 20 Am. Eng. Enc. Law (2d ed.), 269, 293.

Of course, in no case is there such a claim in the case of public property. 20 Am. Eng. Enc. Law (2d ed.), 295.

The complainant cannot be subrogated to any rights of the Government, because the contract had been fully performed and the Government had lost all interest in the retention of the fund; and the complainant cannot be subrogated to the rights of the laborers or material-men, because the fund was not retained for their benefit and they have no interest therein to which the right of subrogation can attach.Mr. James B. Murphy, with whomMr. Harold Preston, Mr.Carroll B. GravesandMr. Edward B. Palmerwere on the brief, for appellees:

The assignment made by Henningsen to Spencer is void under Rev. Stat., §§ 3477, 3737, as against the rights of third persons.Greenville Savings Bank et al. v.Lawrence, 76 F. 545;United Statesv.Gillis,95 U.S. 407;Spawfordv.Kirk,97 U.S. 484.

The appellant bank occupies no better position than a general creditor. It was under no obligation to lend this money, and there is no proof that any part of it was used on the contract in question. The money was passed to the credit of Henningsen, and checked out to whom and for what no one seems to know, and as far as this fund is concerned the bank is a stranger and a mere volunteer.Emmertv.Thompson, 52 N.W. 31; Sheldon on Subrogation, § 240;AEtna Life Ins. Co. v.Middleport,124 U.S. 534.

On the other hand, this appellee, by admitting its liability and paying the full penalty of its bond into court, comes into court with clean hands. It did equity and to all intents and purposes occupies the same position in a court of equity as aPage 409surety who had finished a contract or had already paid the contractors' bills. That is, it is entitled to assert the doctrine of subrogation and has a prior equity in this fund. The doctrine of subrogation does not depend on a lien.AEtna LifeIns. Co. v.Middleport,124 U.S. 534;Matthewsv.FidelityTrust Co., 52 F. 687;Memphis Little Rock R.R. Co. v.Dow,120 U.S. 287;Emmertv.Thompson, 52 N.W. 31;Prairie State Bankv.United States,164 U.S. 227;FirstNational Bankv.City Trust Co., 114 F. 529.

The appellants' contention that appellee is not entitled to assert the right of subrogation is not well founded. They insist that there "must be something in the nature of a lien." Such is not the law. This doctrine is a creation of equity to see that substantial justice is done by one who in good conscience ought to do it.AEtna Life Ins. Co. v.Middleport,124 U.S. 534;Memphis Little Rock R.R. Co. v.Dow,120 U.S. 287;Emmertv.Thompson, 52 N.W. 31;Prairie State Bankv.UnitedStates,164 U.S. 227, and cases cited.

MR. JUSTICE BREWER, after making the foregoing statement, delivered the opinion of the court.

A motion is made to dismiss on the ground that the jurisdiction of the Circuit Court was invoked solely on the ground of the diversity of citizenship of the parties, and hence the decree of the Circuit Court of Appeals was final. The motion must be overruled. Diversity of citizenship was, it is true, alleged in the bills, but grounds of suit and relief were also based on the statutes of the United States, as from the discussion of the merits will be seen. Those statutes entered as elements into the decision of the Circuit Court of Appeals, and were necessary elements.Howardv.United States,184 U.S. 676;Warnerv.Searle Hereth Co.,191 U.S. 195,205.

Passing to the merits of the case, the question turns upon the respective equities of the parties. Appellants concede that the bank was not by the making of the loans to Henningsen entitled to subrogation to the rights, if any, of the UnitedPage 410States or the laborers or material-men, and also that if the Guaranty Company is entitled to subrogation to any right of the United States Government arising through the building contract, the bank can make no claim by reason of the assignment.

Henningsen, for we may leave Clive out of consideration, entered into a contract with the United States to construct buildings. The Guaranty Company was surety on that contract. Its stipulation was not merely that the contractor should construct the buildings, but that he should pay promptly and in full all persons supplying labor and material in the prosecution of the work contracted for. He did not make this payment, and the Guaranty Company, as surety, was compelled to and did make the payment. Is its equity superior to that of one who simply loaned money to the contractor to be by him used as he saw fit, either in the performance of his building contract or in any other way? We think it is. It paid the laborers and material-men and thus released the contractor from his obligations to them, and to the same extent released the Government from all equitable obligations to see that the laborers and supply men were paid. It did this not as a volunteer but by reason of contract obligations entered into before the commencement of the work.Prairie StateBankv.United States,164 U.S. 227, is in point. In that case Sundberg Co., in 1888, contracted with the Government to build a custom-house at Galveston. Hitchcock was surety on that contract. On February 3, 1890, in consideration of advances made and to be made by the Prairie Bank, Sundberg Co. gave a power of attorney to a representative of the bank to receive from the United States the final payment under the contract. In May, 1890, Sundberg Co. defaulted in the performance of this contract and Hitchcock, as surety, without any knowledge of the alleged rights of the bank, assumed the completion of the contract and disbursed therein about $15,000 in excess of the current payments from the Government. In a contest between Hitchcock and the Prairie Bank it was held that Hitchcock had the superior equity, and the judgment of the Court of Claims in his favorPage 411for the amount still due from the Government was affirmed. The bank loaned to Sundberg Co. about $6,000 prior to the time that they defaulted in the performance of their contract and prior to any action by Hitchcock in completing the contract or in paying out money, so that the bank actually parted with $6,000 of its money before Hitchcock parted with any of his. It was held that Hitchcock's equity commenced with his obligation in 1888 to see that Sundberg Co. duly performed their contract with the Government. Mr. Justice WHITE, delivering the opinion of the court, reviewed the authorities at length and discussed the question fully. He said (p. 232):

"Under the principles thus governing subrogation, it is clear whilst Hitchcock was entitled to subrogation, the bank was not. The former in making his payments discharged an obligation due by Sundberg, for the performance of which he, Hitchcock, was bound under the obligation of his suretyship. The bank, on the contrary, was a mere volunteer, who lent money to Sundberg on the faith of a presumed agreement and of supposed rights acquired thereunder. The sole question, therefore, is whether the equitable lien, which the bank claims it has, without reference to the question of its subrogation, is paramount to the right of subrogation which unquestionably exists in favor of Hitchcock. In other words, the rights of the parties depend upon whether Hitchcock's subrogation must be considered as arising from and relating back to the date of the original contract or as taking its origin solely from the date of the advance by him."

It seems unnecessary to again review the authorities. It is sufficient to say that we agree with the views of the Circuit Court of Appeals, expressed in its opinion, in the present case:

"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.Prairie State BankPage 412v.United States,164 U.S. 227;Insurance Companyv.Middleport,124 U.S. 534; Sheldon on Subrogation, § 240." See alsoUnited States Fidelity Co. v.Kenyon,240 U.S. 349,356,357.

The decree of the Circuit Court of Appeals isAffirmed.