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Home > Journals > Michigan Law Review > MLR > Volume 42 > Issue 1 (1943)

 

Abstract

A contract for construction of a city sewerage system provided for progress payments on the fifteenth of each month of ninety per cent of the engineer's estimate of work done during the preceeding month, ten per cent being retained by the owner until final completion of the contract. The contract also required the contractor by the twentieth of the month to pay all labor costs and ninety per cent of the cost of materials delivered the month before. Because the necessary estimates had not been made, the June check was not paid to the contractor on the payment date. On June 28, the contractor borrowed $4,000 from defendant bank and assigned to it the June estimate check. In July, the bank advanced $800 more on the faith of the assignment. The contractor abandoned the job in August and his surety completed it at an expense of about $20,000, including payment of delinquent accounts for labor and materials. Thereafter the owner paid the June check with interest, $5,105.77, to the bank. The owner then held $10,700 still due on the contract of which $8,200 represented retained percentages. Unknown to either the owner or the bank, the contract between principal and surety, embodied in the application for the bond, provided that "in the event of claim or default under the bond all payments due or to become due under the contract" should be made to the surety. The surety brought a petition against the owner and the bank praying that the $10,700 remaining in the owner's hands be applied to material bills and that the $5,105.77 paid the bank be restored and likewise applied. This would fall $5,000 short of exoneration. The court found the contractor was probably in default in payments for materials prior to June 15 when, absent such default, the June progress payment was due, and was certainly in default when he made the assignment to the bank on June 28. It therefore held he had no right to the payment when he made the assignment and the bank took nothing thereby. But the court found that $4,450.29 of the money loaned by the bank to the contractor was used by him in paying claims of laborers and materialmen for which the surety would, have been liable, and it found that the loans were made for this purpose. Held, that to the extent that the bank loan was used for claims on which the surety was liable the surety's right of subrogation is not superior to the bank's equitable right to retain so much of the money paid to it under the assignment. Town of River Junction v. Maryland Casualty Co., (C.C.A. 5th, 1943) 133 F. (2d) 57.

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