PRAIRIE STATE NAT BANK OF CHICAGO v. U S(1896)
The real contestants in the controversy below were the Prairie State National Bank and Charles A. Hitchcock, who respectively claimed the right to receive from the government [164 U.S. 227, 228] a balance in its hands of $11,850. This balance arose by the retention from time to time of 10 per cent. upon the estimated value of work done under a contract entered into on May 10, 1888, by the government with Charles Sundberg & Co., wherein they agreed, for the consideration of $118, 590, to erect a customhouse at Galveston, Tex. The right of the government to retain the reserved sums was founded upon the following provision in the contract:
While the respective claims were pending before the comptroller of the treasury, and at his request, the secretary of the treasury transmitted the same to the court of claims, under section 1063, Rev. St.
The bank bases its claim to the fund upon the following state of facts: On February 3, 1890, in consideration of advances made and to be made by the Prairie Bank, Sundberg & Co. gave to one Van Zandt, a representative of the bank, on order or power of attorney authorizing him to receive from the United States the final payment under the contract. The acting secretary of the treasury declined to recognize this nower of attorney, but expressed a willingness, on request of the contractors, to forward, when it became due, the check for the final payment to the address of Van Zandt. Being informed by the latter that this arrangement would [164 U.S. 227, 229] be satisfactory to the contractor and himself, the assistant secretary of the treasury gave direction to the disbursing agent of the building to send the final check, drawn to the order of the contractor, to the address of Van Zandt. Between February and May, 1890, upon the faith of the lien upon the final payment alleged to have been acquired by this arrangement, the bank advanced to Sundberg & Co. about $6,000, but, although it was claimed by the bank that the amount of the advances in question were, in large part, actually used in the performance of the contract of Sundberg & Co., the court of claims failed to find such to be the fact. It is true that the court, in one of its findings, gives 'a full and accurate statement of the checking, deposit, and loan accounts between the bank and Sundberg & Co. from January 24, 1890, to August 15, 1890'; but to whom the checks were made payable, or for what purpose they were issued, does not appear.
Hitchcock's claim to the fund was asserted upon the ground that in May, 1890, Sundberg & Co. defaulted in the performance of their contract, and that thereupon he, as surety, without any knowledge of the alleged rights of the bank, assumed the completion of the contract, with the consent of the contractors, and that he had disbursed therein about $15, 000 in excess of the current payments from the government. The bond which Hitchock executed as surety was made pursuant to the following provision contained in the contract between Sundberg & Co. and the government:
The court of claims held that Hitchcock was entitled to the fund (27 Ct. Cl. 185), and entered judgment accordingly. The Prairie Bank thereupon appealed, and a cross appeal was [164 U.S. 227, 230] taken by the United States, in order that it might be protected from a double liability in the event this court should hold that the Prairie Bank was entitled to any part of the fund.
Howard Henderson and A. B. Browne, for the bank.
George A. King, for Hitchcock.
Asst. Atty. Gen. Dodge, for the United States.
Mr. Justice WHITE, after stating the case, delivered the opinion of the court.
The question to be determined is which of the two contestants possesses a superior right to the fund. It is self-evident that, considering the agreements between Sundberg & Co. and the bank as an intended transfer pro tanto of the rights of the latter to the results of the contract with the United States, such transfer would be void, under section 3477, Rev. St. This position was not controverted in the discussion at bar, but it was asserted that as the bank had advanced money to complete the building, and thus to enable Sundberg & Co. to perform their contract obligations with the government, therefore the bank had an equitable lien upon the 10 per cent. retained by the government, paramount to any lien in favor of Hitchcock, whose lien, it was contended, only arose from the date of his advances made to execute the contract upon Sundberg's default.
Thus, the respective contentions are as follows: The Prairie Bank asserts an equitable lien in its favor, which it claims originated in February, 1890, and is therefore paramount to Hitchcock's lien, which, it is asserted, arose only at the date of his advances. The claim of Hitchcock, on the other hand, is that his equity arose at the time he entered into the contract of suretyship, and therefore his right is prior in date and paramount to that of the bank. [164 U.S. 227, 231] In considering these conflicting claims, it must be recognized at the outset that the terms of the original contract made by the United States with Sundberg were in no wise affected or changed by the agreements subsequently made between Sundberg and the Prairie Bank. Not to so consider would be admitting the application of section 3477, on the one hand, and then immediately proceeding to deny its effect, on the other. We shall, therefore, in examining the rights of the parties, proceed upon the hypothesis that the contract made by the United States remained in full force and effect, and that the rights, if any, of both parties to this controversy were subject to its terms.
That Hitchcock, as surety on the original contract, was entitled to assert the equitable doctrine of subrogation, is elementary. That doctrine is derived from the civil law, and its requirements are, as stated in Insurance Co. v. Middleport, 124 U.S. 534 , 8 Sup. Ct. 625, '(1) that the person seeking its benefits must have paid a debt due to a third party, before he can be substituted to that party's rights; and (2) that in doing this he must not act as a mere volunteer, but on compulsion, to save himself from loss by reason of a superior lien or claim on the part of the person to whom he pays the debt, as in cases of sureties, prior mortgagees, etc. The right is never accorded in equity to one who is a mere volunteer in paying a debt of one person to another.' See authorities reviewed at pages 548 et seq., 124 U. S., and page 630, 8 Sup. Ct.
As said by Chancellor Johnson in Gladsen v. Brown, Speer, Eq. 37, 41, quoted and referred to approvingly in the opinion in Insurance Co. v. Middleport, just referred to: 'The doctrine of subrogation is a pure, unmixed equity, having its foundation in the principles of natural justice, and, from its very nature, never could have been intended for the relief of those who were in any condition in which they were at liberty to elect whether they would or would not be bound; and, as far as I have been able to learn its history, it never has been so applied. If one, with the perfect knowledge of the facts, will part with his money, or bind himself by his contract in a sufficient consideration, any rule of [164 U.S. 227, 232] law which would restore him his money or absolve him from his contract would subvert the rules of social order. It has been directed in its application exclusively to the relief of those that were already bound, who could not but choose to abide the penalty.'
Under the principles thus governing subrogation, it is clear that, while 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 davance by him.
A great deal of confusion has arisen in the case by treating Hitchcock as subrogated merely 'in the rights of Sundberg & Co.' in the fund, which, in effect, was saying that he was subrogated to no rights whatever. Hitchcock's right of subrogation, when it became capable of enforcement, was a right to resort to the securities and remedies which the creditor (the United States) was capable of asserting against its debtor, Sundberg & Co., had the security not satisfied the obligation of the contractors; an one of such remedies was the right, based upon the original contract, to appropriate the 10 per cent. retained in its hands. If the United States had been compelled to complete the work, its right to forfeit the 10 per cent., and apply the accumulations in reduction of the damage sustained, remained. The right of Hitchcock to subrogation, therefore, would clearly entitle him, when, as surety, he fulfilled the obligation of Sundberg & Co. to the government, to be substituted to the rights which the United [164 U.S. 227, 233] States might have asserted against the fund. It would hardly be claimed that, if the sureties had failed to avail themselves of the privilege of completing the work, they would not be entitled to a credit of the 10 per cent. reserved in reduction of the excess of cost to the government in completing the work beyond the sum actually paid to the contractor, irrespective of the source from which the contractor had obtained the material and labor which went into the building.
That 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, and that a disregard of such stipulation by the voluntary act of the creditor operates to release the sureties, is amply sustained by authority. Thus, in Calvert v. Dock Co. (1838) 2 Keen, 638, where a contractor had undertaken to perform certain work, and it was agreed that three-fourths of the work, as finished, should be paid for every two months, and the remaining one-fourth upon the completition of the whole work, it was held that the sureties for the due performance of the contract were released from their liability, by reason of payments exceeding three-fourths of the work done having been made to the contractor, without the consent of the sureties, before the completion of the whole work. To the argument that the extra advances really went into the work, and so inured to the benefit of the sureties, Lord Langdale, M. R., answered as follows (page 644):
In Navigation Co. v. Rolt (1859) 6 C. B. (N. S.) 550, upon a second appeal of the case, the exchequer chamber held that a plea by a surety to an action to recover from him the excess of cost in completing a ship after the contractor had made default, and also a stipulated sum by way of damages for delay, to the effect that the owner, without the consent of the surety, had allowed the builder to anticipate a greater portion of the last two installments specified in the contract, and thus materially and prejudicially alter the surety's position, was a prima facie answer to the action, and that the onus lay upon the plaintiffs to prove the allegations of their reply, that the advances were made with the knowledge and assent, and at the request, of the surety. It was argued on behalf of the plaintiffs, among other contentions, that, under the circumstances in the case, there was nothing to show that the defendant could be prejudiced in [164 U.S. 227, 235] his capacity of surety by any of the advances made by the plaintiffs, and therefore he was not discharged from his liability of surety. The appellate court declined to hear counsel for the plaintiffs. In announcing the opinion of the court affirming the judgment below, Pollock, C. B., said (page 604):
Polak v. Everett, 1 Q. B. Div. 669, was decided by the court of appeal in 1876. Brandt, at page 629 of his treatise on Suretyship, thus succinctly states the facts and ruling in the case:
The three judges of the queen's bench agreed upon the proposition that it was an established principle of equity that, where time was given by a creditor to the principal debtor without the assent of the surety, there was thereby a violation of rights which the surety acquired when he entered into the suretyship, and that no inquiry could be made into the question of whether the act of the creditor was for the benefit or to the prejudice of the surety. Lord Blackburn thought the same principle should govern in the case before the court, where the 'equitable right' which the surety acquired, when he entered into the suretyship, to have the book debts appropriated to reduce the principal debt, had been taken away from him by the act of the creditor in releasing the book debts to the person collecting them, He also (page 676) called attention to the fact that there was a distinction made in equity between those rights of a surety which he acquired at the time when he entered into the suretyship and those subsequently acquired, such as the benefit of new securities which might be received by the creditors subsequent to the making of the original contract, and he remarked that the question whether a dealing by the creditor with such new securities would operate to discharge the surety was quite a different question from that before the court.
Mellor, J., said (page 676) that the question was one of contract, 'and the surety is entitled not to be affected by anything done by the creditor, who has no right to consider whether it might be to the advantage of the surety or not. The surety is entitled to remain in the position in which he was at the time when the contract was entered into.'
Quain, J., said (page 677):
The judgment of the queen's bench was affirmed by the court of appeal ( Jessel, M. R.; Kelly, C. B.; Mellish, L. J.; and Denman, J.) without opinion, other than the statement that 'the court had no doubt that the view taken by the queen's bench division was correct, and affirmed the judgment for the same reasons.'
Holme v. Brunskill (1877) 3 Q. B. Div. 495, substantially reiterated the principle decided in the earlier cases. Cotton, L. J., with whom concurred Lord Justice Thesiger, said (page 505):
The rulings of this court have been equally emphatic in upholding the right of a surety to stand upon the agreement with reference to which he entered into his contract of suretyship, and to exact strict compliance with its stipulations. Thus, in the case of Miller v. Stewart, 9 Wheat. 680, Mr. Justice Story, in delivering the opinion of the court, said (page 702): [164 U.S. 227, 238] 'Nothing can be clearer, both upon principle and authority, than the doctrine that the liability of a surety is not to be extended by implication beyond the terms of his contract. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no further. It is not sufficient that he may sustain no injury by a change in the contract, or that it may even be for his benefit. He has a right to stand upon the very terms of his contract; and if he does not assent to any variations of it, and a variation is made, it is fatal.'
In Reese v. U. S., 9 Wall. 13, Mr. Justice Field, delivering the opinion of the court, said (page 21):
And the soundness of these opinions was recognized in Cross v. Allen, 141 U.S. 528, 537 , 12 S. Sup. Ct. 67, 71; it being held that in the case there before the court the rights of the surety were not altered by certain transactions of which complaint was made, but remained as before.
Finney v. Condon (1877) 86 Ill. 78, was a dispute over [164 U.S. 227, 239] a building contract. It was held that where, under the terms of a building contract, payments were to be made semimonthly, according to the estimates of an architect, of a certain proportion of the value of the work done, the surety was bound by the estimates, and could not defeat a recovery of damages sustained by reason of the contractor abandoning the completion of the erection of the dwelling houses provided for in the contract, upon the plea that payments in excess of the amount stipulated in the contract were made by the owner. The doctrine, however, enunciated in Calvert v. Dock Co ., and Navigation Co. v. Rolt, supra, was approved by the court in the opinion delivered by Mr. Justice Scott, who said (pages 80, 81):
Applying the principles, which are so clearly settled by the foregoing authorities, to the case at bar, it is manifest that if [164 U.S. 227, 240] the transaction in February, 1890, by which the Prairie Bank acquired its alleged lien on the fund, possessed the effect contended for by the bank, it would necessarily operate to alter and impair rights acquired by the surety under the original contract.
Sundberg & Co. could not transfer to the bank any greater rights in the fund than they themselves possessed. Their rights were subordinate to those of the United States and the sureties. Depending, therefore, solely upon rights claimed to have been derived in February, 1890, by express contract witn Sundberg & Co., it necessarily results that the equity, if any, acquired by the Prairie Bank in the 10 per cent. fund then in existence and thereafter to arise was subordinate to the equity which had in May, 1888, arisen in favor of the surety, Hitchcock. It follows that the court of claims did not err in holding that Hitchcock was entitled to the fund, and its judgment is therefore affirmed.