COLUMBIA DIGGER CO. v. SPARKS et al., 227 F. 780

GILBERT, Circuit Judge (after stating the facts as above). In determining the nature of the obligation of the sureties upon the bond the court below followed the decision of the Supreme Court of Washington in Crane Co. v. Pacific Heat & Power Co., 36 Wash. 95, 78 Pac. 460. The court in that case had under consideration the provisions of a bond given under the same statutory provisions -as was the bond in the case at bar.

The court held that where a surety company guarantees the faithful performance of a contract pursuant to the statute for the benefit of laborers arid materialmen, and the contractor pays money received upon the contract to a party who furnished material for the improvement, and to whom the contractor was also indebted upon an old or' unsecured account,, the surety is not bound by an application of the money to the old account, but is entitled to have the same applied on. the contract in discharge of its liability.

Said the court: “The ¿Etna Indemnity Company did not undertake to secure the payment to the respondent of any old claims which were then due and unsecured, or any claims other than the one which was the subject of the contract.” It is urged that Crane Co. v. Pacific Heat & Power Co., 36 Wash. 95, 78 Pac. 460, so followed and applied by the court below, is against the weight of authority.

It is of course the general rule, as stated in 30 Cyc. 1228, 1233, and cited by the plaintiff in error, that a debtor paying money to his creditor has the primary right to direct the application, of the payment, arid that if he fail to make specific appropriation thereof the creditor may apply the payment to either of two or more debts which are owing to him from the debtor. But in 32 Cyc. 171, another doctrine is expressed which is directly applicable here.

I't is this: “Where a surety has become’ responsible for the payment of money by the principal, and the latter receives money under his contract, which he pays over, the creditor or obligee has no right to apply such payments in any other way than to the relief of the surety.” To sustain the contention that Crane Co. v. Pacific Heat & Power Co. is against the weight of authority, three cases are principally relied upon: Merchants’ Ins. Co. v. Herber, 68 Minn. 420, 71 N. W. 624; Bankers’ Surety Company of Cleveland, Ohio, v. Maxwell, 222 Fed. 797, -C. C. A.-; People v. Powers, 108 Mich. 339, 66 N. W. 215.

The Minnesota case announces the general rule that a surety cannot direct the application of payments made by a principal to another, and that he is bound by any application made by the principal and the creditor, or either of them; but the court goes on to say that this rule applies only to cases where the principal makes the payment from funds which are his own, free from any equity in favor of the surety to have the money applied in payment of the debt for which he is liable, and that where there is a special equity in favor of the surety the latter is entitled to have the money applied according, to that equity.

If, as we hold, there was in the case at bar an equity in favor of the sureties to have the money applied in payment of the liabilities incurred by the contractor under the contract, the decision in the Minnesota case is authority in support of the doctrine last cited from Cyc. rather than against it. In Bankers’ -Surety Co. of Cleveland v. Maxwell there was no discussion of the question of the equitable rights of a surety in the application of payments.

What the court held was that where one has funds in his hands belonging to a party who is indebted to him, a portion of which is secured and a portion unsecured, in the absence of a special direction from the debtor as to how the application should be made, he may apply such funds to the payment of his unsecured claim. But the case principally relied upon is People v. Powers. In that case it appears that the bond was one to secure the payment by a paving contractor and subcontractors for all labor performed and material furnished upon a contract let by the city for the improvement of a street.

The court held that the liability of the sureties on such a bond was not affected, as against the claim of a materialman, by the fact that the latter had received payment for an antecedent indebtedness against the contractor out of funds realized by the latter under his contract. It would seem that the conclusion of the court was principally influenced by the peculiar provisions and terms of the bond.

Referring to cases cited to the contention that the payment of the antecedent debt was inequitable, the court said that those cases differed from the case at bar for the reason that in the cases cited : “There was privity of contract between the sureties and the obligee, and the bond upon its face undertook that the contract shquld be performed. By accepting it the obligee was in duty bound not to vary the contract in such a way as to increase the liability of the sureties.” And the court said that in the case of People v.

Powers then under consideration, there was no actual privity of contract between the contractor and the sureties, .unless the statute can be said to create one by requiring the bond, which was evidently intended for the former. In that respect People v.

Powers differs from the present case, in that the sureties in the latter not only undertook and covenanted that the contractors should faithfully perform their contract, and should pay all claims for labor or work or material on account of subcontractors, materialmen, laborers, and contractors furnishing labor and material under said contract, but they covenanted with the city that the contractors should well and faithfully perform all the covenants and conditions in said contract, thus evidencing that “privity of contract between the sureties and the obligee" which was said to be lacking in People v. Powers.

The doctrine so announced in 32 Cyc. 171, and Crane Co. v. Pacific Heat & Power Co., is fully sustained by United States v. American Bonding & Trust Co., 89 Fed. 925, 32 C. C. A. 420, a case in which the Circfiit Court of Appeals for the Fourth Circuit held that, where a firm supplied a contractor with materials for work, with reliance on the security furnished by the contractor’s bond which was conditioned on full payment for work and materials, and payments were made by the contractor to the firm but were applied on a pre-existing debt, the firm could not recover on the bond.

A similar state of facts existed in the case at bar for Hackett testified that he came to Vancouver and learned of the bond, and that the sureties were responsible, and that, relying upon the faith of the bond, he sold the material, and that he had an understanding with Rector-that tire plaintiff was to be paid for the material as the money was received from the city. In Bross v. McNicholas, 66 Or. 42, 133 Pac. 782, Ann.

Cas. 1915C, 1272, the court said: “While the authorities are not- in harmonious accord, we think that, as a general proposition, the surety cannot direct the application of payments made by the principal and the creditor, or either of them.

However, this rule is applicable solely in those cases where the principal makes the payment from funds which are his own. and are free from any equity in favor of the surety to have the- money applied in payment of the debt for which the surety is liable; but where the specific money paid, or property delivered to the creditor, is the identical money or property for the payment and delivery of which the debtor and his surety obligated themselves by the contract and undertaking, the surety is not bound by an application of the money or property to some other debt for which the surety is not liable.

In such cases the surety is equitably entitled to have the money paid, or the property delivered, applied to the payment of the debt or the liquidation of the contract for which he is liable.” So in Crane Bros. Mfg. Co. v. Keck, 35 Neb. 683, 53 N.

W. 606, the court held that: “While as beween the debtor owing several debts and his creditor, where the former, at the time of payment of a sum of money, fails to designate the debt on which it is to be applied, the latter may do so, yet there is an exception to this rule, as where the money was received by the debtor from a third party whose property would be liable for the debt in case the money was not applied upon the third party’s liability.” In First Nat. Bank v. City Trust, Safe Deposit & Surety Co., 114 Fed. 529, 52 C. C.

A. 313, this court affirmed the equitable rule, which in its principle is applicable to the case at bar, that the claim and equity of the surety in the fund to be created arises when he enters into the contract of suretyship, and that subsequent to that-date the con-, tractor has no power to create a lien upon the payments to be made by the city and to malee it paramount to- the lien of the surety. This review of the authorities shows that the decision in Crane Co. v. Pacific Heat & Power Co. is not against, but is in accord with, the weight of authority.

Not only that, but it announces a sound' doctrine,-which, in justice, should be applied to all such contracts as that which is here under consideration. That doctrine has become tire settled "rulé in Washington, and the'Sureties 'on the contract in ques-, tion had the right to rely upon it as the law of that state, and we may assume that they did so- when they became sureties upon the contract. A federal court ought not to upset the rule thus established by the Supreme Court of a state for the guidance of its own citizens, unless that rule is against the very decided weight of authority. In Detroit v.

Osborne, 135 U. S. 492, 498, 10 Sup. Ct. 1012, 1013 (34 L. Ed. 260), it is said: “There should be, In all matters of a local nature, but one law within the state; and that law is not what tills court might determine, but what the Supreme Court of the state has determined.” And in Equitable Life Assurance Soc. v. Brown, 213 U. S. 25, 44, 29 Sup. Ct. 404, 410 (53 L.

Ed. 682), the court said: “Tlie decisions of the highest court of New York are therefore binding upon this court as to the meaning and effect of the charter of the defendant, and as it is a New York company, and the contract is a New York contract, executed and to be carried out therein, its meaning and construction, as held by the highest court of the state, will be of most persuasive influence, even if not of binding force.” The judgment is affirmed. <&wkey;>For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes