Alfred Richards Brick Co. v. Rothwell

Mr. Chief Justice Alvet

delivered the opinion of the Court:

Though the testimony taken was quite voluminous, a very small part of it is contained in the record before us. We have only a few extracts from the testimony of the many witnesses that were examined, but such parts- as have been incorporated are supposed to be sufficient to enable us to pass' upon the questions raised by the exceptions. It is manifest, however, that we cannot review the auditor’s findings, so far as they depend upon conclusions deducible from, the evidence produced before him, and not contained in the record before us. We can, however, seeing the general nature and character of the claims, and the relation of the several parties to the funds for distribution, determine and declare the principles that must control in making distribution of the funds in controversy.

1. Of the several questions presented, the first and most leading of them is that which relates to the claims of the parties who furnished labor and materials in the construction of the life-saving stations, and, consequently, the rights of the sureties on the bonds given the government to secure the faithful performance of the contracts by the contractors for the work. This question is dependent upon the terms of the act of Congress of August 13, 18-94 ( 28 Stat. 218 ), and the bonds of the contractors taken in pursuance thereof.

By the act of Congress just referred to, it is provided that all persons entering into any 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 thereof, “ 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 m’ake payments to all persons supplying him or them labor and materials in the prosecution of the work provided for in such contract; ” and the statute further provides, that any person so furnishing labor and materials, and having an unpaid claim therefor, shall, upon application, as the statute directs, be furnished *536 with, copies of suck contract and bond, and kave a right to sue and recover tkereon, in tke name of tke United States, for kis or tkeir use, against suck contractor and sureties. Tke bonds of tke contractors in this case, given for tke faithful execution of tke work on tke life-saving stations, contain tke condition prescribed by tke statute. And tke question is, what is tke effect of tke provision of tke statute and tke condition of tke bonds executed as tke statute requires, in respect to claims for labor and materials ?

There is no mechanic’s lien law tkat applies to or tkat can be enforced against buildings erected for tke government. But tke statute just recited makes provision tkat is intended practically to serve tke same beneficent purpose of a mechanic’s lien law. It creates no lien, it is true, against tke building erected, but it makes provision for securing tke payment of tke contractors of all claims for labor and materials furnished in tke erection of tke buildings, or, in default of payment by tke contractors, tkat tke bond and sureties tkereon shall be liable to suck claimants. As was said by tke Circuit Court of Appeals of tke United States, in tke case of United States, to the use of Foundry Company v. National Surety Company, 92 Fed. Rep. 549, “ Tke bond which is provided for by tke act, was intended to perform a double function; in tke first place to secure tke government for tke faithful performance of all obligations which tke contractor might assume towards it, and, in tke second place, to protect third persons from whom tke contractor obtains materials and labor. Viewed in its latter aspect., tke bond, by virtue of tke operation of tke statute, contains an agreement between tke obligors therein and suck third parties, tkat they shall be paid for whatever labor and materials they may supply, and enable tke principal in tke bond to execute kis contract with tke United States. Tke two agreements which tke bond contains, one for tke benefit of tke government, aud tke one for tke benefit of third persons, are as distinct as if they were contained in separate instruments. * * * Tke act bears every evidence tkat it was intended to provide a security for laborers and material- *537 men on which they could rely confidently for protection, unless they see fit by their own dealings with the contractor, to relinquish the benefit of the security.” There is, therefore, by necessary implication, an equitable lien and preference secured in favor of the parties who furnish labor and materials in the execution of the contract, in the application or distribution of the contract price remaining to be paid; and where the government, as in the present instance, holds in its hands any part of the money contracted to be paid for the work, and there remain unpaid claims for labor and materials supplied, it holds such fund as quasi trustee for the benefit of those entitled to receive it under the condition in the bond; that is to say, the laborers and materialmen remaining unpaid. This right to preference being the result of the operation of the statute and the condition of the bond, it is the clear right, upon the plainest principles of justice, of the sureties in the bond to invoke a court of equity to enforce the preference and equitable lien for their protection. In construing this act of Congress of 13th August, 1894, this 'court said, in the case of Marble Company v. Burgdorf, 13 App. D. C. 506, 519: “ The practical effect of the statute is to confer a special lien in favor of such persons (parties furnishing labor and materials) and to substitute the bond, in the place of the public building, as the thing upon which that lien is charged.” That is to say, the bond is liable rather than the bnilding upon which labor and materials are used in construction; and if the sureties should pay claims for such labor and materials for which they may be responsible on the bond, they have a right, upon well-settled principles, of substitution to such claims as against the contract price of the work remaining due to the contractor. And having such right of substitution, the sureties have a right to interpose to prevent the diversion or misapplication of the fund, and to require it to be paid out to the parties entitled to receive it in the first instance by virtue of the lien and preference given by operation of the statute.”

The principle we have stated seems to have been applied by the auditor in the distribution of the funds arising from *538 the life-saving stations, though, as it appears, with a departure in some particulars. The rights of the claimants for labor and materials, and the consequent rights of the sureties on the bonds of the contractors being fixed, those rights could not be displaced or derogated from by the power of attorney to Eiley, or the subsequent agreement by creditors, to which the claimants for labor and materials supplied to the lifesaving stations were not parties, either in favor of Eiley himself, or other creditors than those signing the agreement, or those represented by those who did sign it. The power of attorney to Eiley was wholly inoperative as against such creditors of Baldwin & Peake.

2. The creditors of the firm of Baldwin & Peake, who furnished labor and materials for the construction of the sehoolhouses erected in the District of Columbia, stand on quite a different footing from those furnishing labor and materials for the life-saving stations. The funds arising under the contracts for the sehoolhouses were paid over to Eiley, who received them under the power of attorney made to him, and the agreement made between the sehoolhouse creditors. As in the case of contracts for the erection of buildings for the United States, there is no mechanic’s lien law that can be enforced against the public buildings erected for the municipal government of the District, and there is no such statutory provision applicable to building contracts made by the District government as that contained in the act of Congress of August 13, 1894. The contracts for the building of the sehoolhouses in the District contain the following clause:

“ Contractors will pay the workmen who shall be employed by them upon the work under their contract punctually, in cash current, and not in what is denominated store or pay orders, and will, from time to time, and as often as may be required by the commissioners, furnish satisfactory evidence that all persons who have done work or furnished materials have been paid as herein required; and if such evidence is not furnished, such sum or sums as may be necessary for such payments may, m the discretion of the com *539 missioners, be retained until such claims shall be fully satisfied.”

This provision of the contract, however, does not create an enforceable lien or preference in the distribution of the fund remaining in the hands of the commissioners in favor of the parties furnishing labor and materials for the building. It only invests the commissioners with power to be exercised in their discretion, to require the contractors to discharge unpaid claims for work and materials furnished, by withholding the amount of such claims until they were satisfied by the contractors. The provision of the contract was manifestly intended to avoid trouble and delay in the prosecution of the work, and the possible attachment by workmen and materialmen, and, at the same time, to require justice to be done to the claimants by the contractors. But no lien was given for such claims. As said by this court, in the case of Brick Co. v. District of Columbia, 1 App. D. C. 351, in construing a similar clause of the contract in that case: “ There is nothing in this clause of the contract that constitutes the municipal corporation a trustee for those who might deal with and trust the contractors with the municipality.” In other words, there was no lien or preference thereby created.

3. It is claimed by the appellants in these appeals that a considerable amount of money paid on account of the contracts for the erection of the school buildings in Washington city, and to which they would have been entitled, was wrongfully applied and expended in the construction of the lifesaving stations, and especially that at Hog Island; and that, by reason of that fact, they are entitled to reimbursement from the funds arising from the construction of the lifesaving stations, to the extent of such expenditures, particularly the station at Hog Island; and that, consequently, there should be a curtailment of the funds received on the contracts for those stations, to the extent of the expenditures so made, and the amount thereof added to the funds received on the contracts for the school buildings. But manifestly this contention cannot be maintained upon any principle of law or equity.

*540 In the first place, the money that ivas paid on the contracts for the building the schoolhouses in Washington city, whether to Baldwin & Peake directly, or to Biley, their agent, was paid in performance of the contracts as the money became due thereon, and the money so paid at once became the money of Baldwin & Peake, the contractors, and they could apply it as they deemed proper.

Moreover, all the present appellants, except William Garthe, were active in procuring the money due for the erection of the District schoolhotises to be paid over to Biley, the agent of the contractors; and whatever portion of that money, if any, that may have been applied in the construction of the Hog Island life-saving station, or any of the other stations, the evidence wholly fails to show, and this was the finding of the auditor. There is no evidence in the record to trace and identify the money, if any, derived from the schoolhouse contracts, that was applied to the construction of either or any of the life-saving stations; and this of itself would be a sufficient answer to the contention of the appellants.

There seems to be some confusion as to the grounds upon which the appellants claim to derive benefit from the funds derived from the contracts for the life-saving stations. In the exceptions taken to the auditor’s report, among the many specifications of alleged error, it is alleged “ that the funds from said four stations were created entirely, or nearly so, by funds received from the schoolhouses in Washington city by Biley, as attorney and trustee, and used by him in completing the said stations, and, therefore, the schoolhouse funds must be followed and restored. That the schoolhouse creditors are entitled to subrogation to the rights of those who received schoolhouse money from Biley, for labor and materials, contributed towards completing the four life-saving stations, and, in any event, must have a first lien on thes funds from those stations.”

As we have said, the fact here alleged is denied, and there is no evidence of its existence. But if it were true that any part of the money received on the contracts for the building of the schoolhouses had been applied, either by the con *541 tractors themselves, or by their agent Riley, in the completion of the life-saving' stations, the principle of substitution or subrogation could have no application to such case. There is no foundation whatever shown for the application of such doctrine. As held by all the authorities, it is only in cases where the person advancing the money to pay the debt of a third party stands in the situation of a surety, or is compelled to pay it to protect his own rights, that a court of equity will substitute him in the place of the creditor, as matter of course, without any agreement to that effect. But, in other cases, the demand of a creditor, which is paid with the money of a third person, and without any agreement that the security shall be assigned or kept on foot for the benefit of such third person, is absolutely extinguished. Sanford v. McLean, 3 Paige, 116 . The doctrine is very fully and clearly expounded in the opinion of Mr. Justice Miller of the Supreme Court, in the case of Ætna Life Ins. Co. v. Middle port, 124 U. S. 534, 550 . In the present case, the money that was paid over by the government to the receivers was paid as the money of the contractors, earned and due according to the terms of the contracts, and not as money to which third parties were entitled by way of substitution for money voluntarily advanced for the completion of the contracts. There is no place, therefore, for the application of the doctrine of substitution, even if it were shown that money paid on the schoolhouse contracts had been applied to the contractors, or their agent, in the completion of the life-saving stations. The most that the exceptants and appellants could claim, with any apparent reason, is, that all the funds, derived under the several contracts, as well those for the construction of the life-saving stations as those for the construction of the schoolhouses, should be distributed as a whole and pari passu among all the creditors of Baldwin & Peake. But this, as we have shown, cannot be done.

4. Another exception taken to the auditor’s report is to the preferential allowance of commission to Riley out of the funds received and disbursed by him,— and to be paid out of fund's in the hands of the receivers — the commission *542 amounting to the sum of $2,334-72,— as compensation for services rendered under the power of attorney. In the exception, it is objected that no compensation should have been allowed to Riley to be paid out of the funds in the hands of the receivers, other than regular commissions to him as one of the permanent receivers. As reasons' for this exception, it is alleged in the exception filed, that Riley had no fund in his hands upon which he could have a lien at the time the original bill was filed; that he was not entitled to any lien for compensation; that he had no equitable or legal right to preference, if entitled to any compensation at all, as attorney in fact; that if he had any claim for such compensation it was only as general creditor of Baldwin & Peake; but that the evidence shows that he was entitled to no compensation whatever, as such attorney for Baldwin & Peake.

This allowance to Riley as commission for services under the power of attorney, in addition to the commission!, allowed him as one of the permanent receivers, is given the same preference as is given to the allowance of costs and expenses of the litigation and to the commissions allowed to the receivers appointed by the court. In this, we think, there was manifest error. It is very clear that Baldwin & Peake had no power to affect or displace the liens of the claimants for labor and materials furnished for the construction of the lifesaving stations; and it is equally certain,that the power of attorney created no lien or preference for commission superior to the claims of those who furnished labor and materials for the construction of the school buildings in the city of Washington. The attorney, Riley, simply stood in the place of and represented the contractors in what he did under the power held by him; and he acquired no superior rights to compensation to any other employee of the contractors. The power of attorney contains no provision for commission or compensation to the agent appointed thereby; and Riley does not testify himself that there was any definite agreement that he was to receive compensation, and Peake is explicit in testifying that it was understood and agreed that he was not to receive compensation; but that his services were *543 to be rendered in tbe interest of tbe creditors,— he, Biley, being one of the most considerable in amount. On the meagre evidence contained in the record we will not determine that he is not entitled to any compensation at all; but we do hold and .determine that if compensation be allowed, it can only be as a general creditor of Baldwin & Peake. All the money that he received and disbursed was received on account of the contracts for the building of the schoolhouses, according to the auditor’s report, and no part of it from the lifesaving stations.

5. Another preferential allowance made by the auditor, and distributed to in schedules B and C from the funds arising from the life-saving station contracts, is the claim of William Witthaft for money paid as indorser of notes made by Peake and discounted in bank, the proceeds of which are claimed to have been applied in the construction of the lifesaving stations. The preference given to this claim over the general creditors is founded upon the testimony of Peake, one of the contractors. In his testimony, given upon two occasions, in relating the circumstances under which the notes were made and indorsed, and how the matter was subsequently treated,he says: “This was the renewal of two notes we had gotten discounted at the National Capital Bank. We needed money very badly in the prosecution of the work on the life-saving stations, and on two different occasions I got him (Witthaft) to indorse notes for me, and when they came due we had not the money and the two notes were merged into one, with the understanding that when I got the money from the life-saving stations he was to be paid.” That at the time the original note was indorsed by Witthaft, “ one station was completed, and another was very nearly completed, and another one about half completed; ” and at that time about $8,000 or $10,000 had been paid to the subcontractors on the work. That these facts were all explained to Mr. Witthaft before his indorsements were obtained. I told him that just as soon as we got the money from the lifesaving stations we would take up this note; I told him that frequently; I told him so before his indorsement of the note. *544 I also told the president of the bank that we had a great deal of money coming from the life-saving stations, out of which I would certainly pay off this note. The money was expended on the life-saving stations; it was all sent down there to be paid by the foreman.” On further examination he says: “ I explained how far we were advanced with the work, how soon I expected it to be done, and when I expected the money, and made him (Witthaft) a positive promise to give him the money out of the money received. I did not promise to pay it out of the first money that I should get from any source; but out of this particular fund derived from the lifesaving stations.”

The auditor and the court below in allowing preference to this claim over the claims of the general creditors of the firm of Baldwin & Peake, appear to have acted upon the principle that, according to the testimony of Peake,' there was an equitable assignment of so much of the fund that might thereafter become due and be received on the contracts for the construction of the life-saving stations as would be sufficient to pay off the notes indorsed by Witthaft. If such a contract of assignment was in a proper legal sense made, it could only be, of course, in subordination to the 'lien and preference secured to parties furnishing labor and materials to the construction of the life-saving stations. But, we think, there was clear error fin supposing that any such equitable assignment was shown to exist. The funds were not really in existence at the time when the notes were made and indorsed, and when they subsequently came into existence they were subject to the superior claims for labor and materials supplied, and those claims might exhaust the entire funds. The promise relied on did not profess to give the promisee control of the fund, or any particular part of it; it was only a personal promise that some part of the funds, when received, should be applied to the taking up the notes: As said by the .Supreme Court, in the case of Christmas v. Rus sell, 14 Wall. 69 , 84: “An agreement to pay out of a particular fund, however clear in its terms, is not an equitable assignment; a covenant in the most solemn form has no *545 greater effect. The phraseology employed is'not material, provided the intent to transfer is manifested. Such an intent and its execution are indispensable. The assignor must not retain any control over the fund — any authority to collect, or any power of revocation. If he do, it is fatal to the claim of the assignee. The transfer must be of such a character that the fundholder can safely pay, and is compellable to do so, though forbidden by the assignor. Where the transfer is of the character described, the fundholder is bound from the time of notice.” It is upon this principle that a bill of exchange or check is not an equitable assignment pro tanto of the funds of the drawer in the hands of the drawee. The same principle has been enunciated and applied by this court, in the case of Bank v. Trust Company, 17 App. D. C. 112. See also the cases of Dillon v. Barnard, 21 Wall. 430, 439 , and Trist v. Child, 21 Wall. 441 .

6. There are other claims made subject to the general exceptions to the auditor’s report, and which are involved in these appeals. The claim of John N. Hart is one of these, which was allowed a preference over general creditors and distributed to in schedule C. The claim is against the fund arising from the contract for the construction of the Hog Island life-saving station, and which appears to have been allowed by stipulation and under an order of court from which there was no appeal taken. We can perceive no available objection to the preference given to this claim in the distribution of the fund distributed in schedule C. It was clearly properly allowed.

The claim of I. Woodhouse for materials furnished to the life-saving stations at Caffey’s Inlet, False Cape, and Dam Neck, allowed as a preferred claim and distributed to in schedule B, would seem to be subject to no valid objection.. We think the claim was properly allowed. •

It follows from what we have said that the order of the' court below overruling all the exceptions to the auditor’s report, distributing the several funds, must be reversed, and the cause be remanded for a restatement of accounts in accordance with the foregoing opinion.

*546 There were motions filed to dismiss two of the appeals, numbers 1082 and 1083, upon several grounds. But it being afterwards discovered that there was error as to the matter of fact upon which the motions were founded, the motions were abandoned, except as to the one ground for the motion, founded upon the allegation that the appeal bonds were approved by one of the justices of the Supreme Court of the District without notice having been first given to the appellees to show cause against the approval. But, we think, this ground is not sufficient for the dismissal of the appeal. We cannot say that the approval of the bond without such notice is a nullity; at most it would be but an irregularity. This court is required, by the act of Congress, of July 30, 1894, to make rules “to regulate all matters relating to appeals, whether in the court below or in said Court of Appeals.” The subject is regulated by rule X of this court, and by that xule such notice is not required to be given as a prerequisite to the approval of the bond by the justice below. While such notice may be proper in particular cases, in the discretion of the justice called upon to approve the bond, it is not a condition precedent, the non-observance of which mil nullify the bond. The matter cannot be controlled to the extent of nullifying the bond after approval, because of the non-compliance with a rule of the court below, requiring notice to be given to the appellees to show cause against the approval of the bond proposed for approval.

The motions to dismiss must, therefore, be overruled.

Drder appealed from reversed, and cause remanded for further proceedings, in accordance with the foregoing opinion.