ST PAUL FIRE MARINE INSURANCE COMPANY v. JAMES BARNES CONSTRUCTION CO

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District Court of Appeal, First District, Division 3, California.

ST. PAUL FIRE & MARINE INSURANCE COMPANY, a corporation, Plaintiff and Respondent, v. JAMES 1. BARNES CONSTRUCTION CO., a co-partnership; Frederick Drompp, Lucille Drompp, Emily A. Studebaker, Doris B. Hillis, Marjorie E. Sparling, Clare B. Medland, Betty J. Muehlhausen, Virginia B. Kniesly J. B. Allen, as individuals and copartners In James 1. Barnes Construction Co., a co-partnership, Defendants and Appellants.

Civ. 20533.

Decided: December 10, 1962

Wallace & Wallace, by W. W. Wallace, Los Angeles, for appellants. Bohnert, Davis & McCarthy, San Francisco, for respondent.

Plaintiff, herein called St. Paul, had judgment against the defendants, herein called Barnes, based upon an assignment made by Stewart & Nuss, Inc., herein called Stewart. Barnes appeals. The relevant facts are: Barnes, as a general contractor, was awarded a contract for construction of the Fresno County General Hospital. Stewart was awarded a subcontract to do the excavation and earth work on the job, and was required to give a bond to guarantee payment of labor and materials. Stewart applied to St. Paul for such a bond. St. Paul included in its application form an assignment by Stewart to St. Paul of all of Stewart's assets, including sums to become due under Stewart's subcontract with Barnes. The assignment was to be effective in the event of Stewart's failure or inability to pay obligations which might constitute a charge under the bond. During the performance of its subcontract, but before completion, Stewart became unable to pay its obligations as they matured, and filed a voluntary petition in bankruptcy under Chapter 11, Title 11, U.S.Code. St. Paul gave prompt notice of its assignment and requested Bornes to withhold any sums due Stewart; Banes acknowledged receipt of the notice of assignment, and agreed to withhold. Stewart's petition in bankruptcy was filed January 13, 1958. After January 13, 1958 Stewart continued to work on the Barnes job, and acting under the supervision of the receiver in the bankruptcy proceedings finally completed the subcontract. Barnes paid Stewart and the receiver in bankruptcy the following sums: December 29, 1958, $30,317.77; May 20, 1959, $2,373; February 12, 1960, $1,785; February 12, 1960, $3,488.33. In the trial court St. Paul was awarded judgment against Barnes in the aggregate of these sums.

St. Paul rests its case upon the contention that the assignment made by Stewart was effective upon Stewart's inability to meet its obligations; that notice of the assignment was given to and acknowledged by Barnes, who promised to pay to St. Paul; and that Barnes is liable to St. Paul for all sums paid to Stewart after notice of the assignment.

As a general rule, the rights of an assignee cannot be defeated by a payment made by the debtor to the assignor after notice of the assignment. (Jones v. Martin, 41 Cal.2d 23, 27, 28, 256 P.2d 905.; Restatement, Contracts, § 170; Hall v Thurston, 76 Cal. 738, 741, 171 P. 285; A. Farnell Blair Co. v. Hollywood State Bank, 102 Cal.App.2d 418, 431, 227 P.2d 529.) This is the rule for which St. Paul contends on this appeal, and is the rule which guided the trial court in its decision.

On this appeal Barnes first contends that its subcontract with Stewart was not assignable. The contract did in fact contain a provision against assignment. In support of its position Barnes cites Parkinson v. Caldwell, 126 Cal.App.2d 548, 552, 272 P.2d 934, and cases cited therein. It is true that if a contract does contain a provision which prohibits assignment, the performance provisions of the contract are not then assignable without the written consent of the other contracting party. This does not mean, however, that the contract proceeds, or money to become due under the contract, may not be freely assigned. In Trubowitch v. Riverbank Canning Co., 30 Cal.2d 335, 339, 182 P.2d 182, 182, the court said: ‘It is established that a provision in a contract or a rule of law against assignment does not preclude the assignment of money due or to become due under the contract (Butler v. San Francisco Gas & Electric Co., 168 Cal. 32, 41, 141 P. 818; * * * (and cases cited).’ Finally, and of sufficient significance to preclude further argument on this point, Barnes consented and agreed to withhold sums due and to become due to Stewart for the account of St. Paul. Barnes cannot now contend, therefore, that money due Stewart under the subcontract was not assignable.

Barnes next argues that if St. Paul is permitted to recover on its assignment it will be unjustly enriched at the expense of Barnes. It is Barnes' position that its payment to Stewart operated to discharge any obligation owed by St. Paul to Barnes under the bond and hence, having received the benefit of this payment, St. Paul may not now collect on its assignment. This defense does not seem to have been urged upon the trial court, although scattered allegations in the answer, such as those contained in paragraph VI to the effect that St. Paul did none of the work and paid nothing whatever in connection with Stewart's subcontract might seem to raise this issue. For obvious reasons, however, this contention cannot prevail. St. Paul's cause of action rested entirely on the assignment contained in the bond application, and upon timely notice of its right to Barnes. Thereafter Barnes had every opportunity to protect itself by withholding sums due Stewart under the contract and, in fact, agreed in writing to do so. In its evidence Barnes did not explain why it failed to withhold payments due Stewart after receiving notice from St. Paul. The rule is elementary that after notice of a valid assignment, the debtor pays the assignor at its peril (6 C.J.S. Assignments § 98, p. 1154; H. D. Roosen Co. v. Pacific Radio Pub. Co., 123 Cal.App. 525, 534, 535, 11 P.2d 873). None of the cases in the law of assignments suggests that a debtor who has paid directly to an assignor after notice of the assignment is in any position to claim unjust enrichment as against the assignee.

There is a recognized exception to the general rule that after notice, the debtor pays the assignor at his peril. Thus, where an assignment of money due under an executory contract is subject to advances which are necessary to enable the assignor to perform the contract, and the debtor makes such advances, he will be protected. (Fricker v. Uddo & Taormina Co., 48 Cal.2d 696, 701, 312 P.2d 1085; Benton v. Hofmann Plastering Co., 207 A.C.A. 68, 77, 24 Cal.Rptr. 268; Peden Iron & Steel Co. v. McKnight, 60 Tex.Civ.App. 45, 128 S.W. 156, 159; Stansbery v. Medo-Land Dairy, 5 Wash.2d 328, 105 P.2d 86, 91; St. Mary's Bank v. Cianchette (N.D.Maine), 99 F. Supp. 994, 999–1000; 6 C.J.S. Assignments § 96, p. 1152.) Barnes here seeks to claim the benefit of this exception. In order to secure the benefits of this rule as a defense, however, it must be adequately pleaded. Here the defense is suggested by a single sentence in paragraph VII of the answer. Moreover, the burden of proof of such a defense would rest upon Barnes, and we find no evidence in the trial record which would justify the trial court in making an affirmative finding sustaining this defense. The record shows that the final payments made by Barnes, and the funds which are in dispute here, were all paid after Stewart had completed its subcontract. That Barnes did not raise this issue in the trial court seems manifest also from the fact that it was not touched upon in its opening brief or referred to at all until its closing brief, which contains the only citation of authority on this subject. It is too late, therefore, for Barnes to place any reliance upon this rule.

It is also contended that the evidence is insufficient to support the findings. We have examined the evidence and find no substance in this contention whatever. What Barnes really argues here is the effect of the evidence. For example, in finding No. 4 the trial court found the fact of the assignment. This is supported by the written assignment contained in the bond application. While Barnes places its own interpretation on the assignment, arguing that it was not effective, the evidence clearly directs a contrary conclusion. By its express terms the assignment was effective not only upon breach or delay by Stewart in the performance of its subcontract, but also upon Stewart's inability to pay its debts as they matured. Stewart's petition in bankruptcy alleged as a fact that it was unable to pay its debts as they matured, and hence the assignment became operative. Again, in finding No. 5, the trial court found that St. Paul gave notice of the assignment to Barnes, and Barnes contends this is unsupported in the record. It is difficult to understand how such an attack can be made upon this finding because the notices from St. Paul to Barnes were in writing, and Barnes twice acknowledged the assignment in writing and promised to withhold and pay to St. Paul. In finding No. 7 the trial court found that Stewart was financially unable to meet its obligations, and failed in fact to pay for certain labor and materials. Documentary evidence in the form of bills submitted to and paid by St. Paul fully support this finding. An attack is also made of findings 9 and 10 of the trial court where it was found that Stewart's subcontract was performed by Stewart and the receiver in bankruptcy, and that Barnes paid Stewart and the receiver after notice the sum of $37,964.10. No challenge to these findings can be sustained. At trial, Barnes admitted that some of these payments were made jointly to Stewart and the receiver, and the testimony of a witness established the fact that the receiver in bankruptcy took over the operations of Stewart. It is not disputed by anyone that Stewart completed its subcontract after it entered bankruptcy, and all parties agree, and the evidence shows, that the amount of money recited was paid by Barnes and not paid to St. Paul.

The judgment is affirmed.

I dissent. The assignment, by all of its terms, including the very beginning, ‘For the better protection of the Company,’ is an assignment for security, both in substance and in form, not an absolute assignment.1 Therefore, in order for the surety to have judgment against the assignor's debtor, the assignee must allege and prove loss. In the matter of the particular subcontract, the assignee has shown no loss, with the possible exception of two relatively small payments which surety made to materialmen on claims which were not presented to Barnes. Considering this contract by itself, since the surety guaranteed it, I believe that surety cannot complaint that it was fully performed by its principal and paid for by Barnes, the anticipatory debtor of Stewart & Nuss, who was an anticipatory creditor of the surety. For breach of such an obligation, the measure of damages is the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom. (Civ.Code, § 3300.)

Surety argues, however, that if it had been allowed to present the evidence, it could have shown that it lost on other bonds which it had executed for Stewart & Nuss, and that it was prevented from doing so by objection made to the evidence by counsel for appellants. Surety, plaintiff, had not pleaded loss of any kind, but treated the assignment as absolute. Appellants objected upon the valid ground that there was no hint of losses on other bonds in the complaint. Counsel for plaintiff stated that the evidence was offered only by way of rebuttal of the defense of inequity (unjust enrichment), and reserved any further offer. No further offer was made at any time. It seems to me that both in pleading and in proof plaintiff failed to show that the payments by Barnes to Stewart & Nuss caused any loss to plaintiff. I believe that the judgment should be reversed.

If the case were tried again, it might be that Barnes would be able to show that the payments to Stewart & Nuss were necessary in order to prevent loss to plaintiff, the surety, for although the payments were made after the work had been completed and, therefore, the rule in the case of Fricker v. Uddo & Taormina Co., 48 Cal.2d 696, 312 P.2d 1085, in itself may not apply, it takes but one reasonable step beyond that case to hold that payment by the anticipatory debtor, Barnes, of obligations which the surety otherwise would have to pay, discharged, pro tanto, liability of Barnes for payments made after notice of the assignment.

I would reverse the judgment.

FOOTNOTES

1.  The relevant parts of the assignment are: ‘[Principal] agrees with the Company. * * * For the better protection of the Company, to assign, transfer and convey, and does hereby assign, transfer and convey to the Company, to be effective as of the date hereof, but only in the event of any breach, delay, or default on the part of the undersigned in the performance of the contract covered by said bond or bonds, failure or inability of the undersigned to promptly pay, satisfy and discharge any and all obligations which might constitute possible claim under the bond or bonds, or breach of any of the terms of this agreement, * * * (c) all earned estimates, deferred payments and retained percentages and any and all other monies or properties that may be due and payable or that hereafter may become due and payable to the undersigned on account of said contract or any other contract of the undersigned on which the Company is or may become surety, or on account of extra work or materials supplied in connection therewith, and any and all other monies or properties of the undersigned, and in the event of any breach, delay or default on the part of the undersigned in the performance of the contract covered by said bond or bonds, failure or inability of the undersigned to promptly pay, satisfy and discharge any and all obligations which might constitute possible claim under the bond or bonds, or breach of any of the terms of this agreement, the undersigned hereby * * * agrees that all monies and the proceeds of payments and properties hereby assigned shall be the sole property of the Company, and to be by it credited upon any loss, cost, damage and expense sustained or incurred by it under the said bond or bonds and any other bond or bonds heretofore or hereafter executed at the request of the undersigned.’

SALSMAN, Justice.

DRAPER, P. J., concurs.