Opinion
Opinion delivered September 22, 1930.
1. GARNISHMENT — MUNICIPAL CORPORATIONS. — A municipal corporation is not subject to garnishment by creditors of a contractor before completion of the improvement. 2. SUBROGATION — PRINCIPAL AND SURETY. — Where the surety of a defaulting contractor completes his contract, he is subrogated to the rights of the obligees in the bond to the extent necessary to reimburse himself; his claim being superior to that of a general creditor of the contractor or one who loaned money to the contractor to complete the work.
Appeal from Miller Chancery Court; C. E. Johnson, chancellor; reversed.
Willis B. Smith and J. A. R. Moseley, Jr., for appellant.
Will Steel and Gustavus G. Pope, for appellee.
STATEMENT BY THE COURT.
This appeal comes from a decree holding appellant city liable on an equitable garnishment to pay out of the balance due the insolvent contractor for the construction of the improvement certain sums due appellees upon an account independent of and unrelated to materials furnished or services performed in the making of the improvement.
Appellee, Offenhauser Co., a partnership, brought suit in the chancery court against J. R. Miller upon an account due from him to plaintiff in the sum of $602.83, alleged that he was a non-resident of the State, had no property in the State out of which the judgment could be collected, except retained percentages held by the city of Texarkana, Arkansas, under its contract for the construction of an airport for said city, and that plaintiff was entitled to an equitable garnishment against the city for the funds belonging to the said J. R. Miller.
The Texas Leather Mfg. Co., a Texas corporation, brought suit in the chancery court against J. R. Miller upon an itemized verified account in the sum of $303.90, and alleged in its complaint that the defendant was insolvent and the city of Texarkana, Arkansas, was indebted to him on account of labor and materials furnished in the construction of an airport, and prayed that an equitable garnishment be issued against said city.
Writs of garnishment were duly issued and served upon the city of Texarkana, Arkansas, in each of the suits.
Defendant Miller, the contractor, filed no answer in either suit, and judgment by default was rendered against him.
The appellant city filed an answer as garnishee, denying that it was indebted to Miller in any amount, and prayed that it be discharged with costs.
Plaintiffs contested the answer of the garnishee, and, the facts in the two cases on the question of the liability of the garnishee being identical, they were consolidated for trial by agreement.
The garnishment was issued and served in the Offenhauser case on June 20, 1929, and in the Texas Leather Mfg. Co. case on June 22, 1929.
In a substitute answer the garnishee pleaded that it was a municipal corporation, an agency of the government for public purposes, and the contract for the construction of the airport for the city by J. R. Miller was a function performed by it in its governmental capacity for the general benefit, and that at the time of the service of the writs of garnishment construction of the airport had not been completed, and the city was not subject to garnishment on account of such improvement; alleged that, because of the wrongful garnishments, the contractor was unable to proceed and made default, where upon the surety company had to take over and complete the improvement under the terms of the contract, and that the money due therefor was all paid to the claimants who had furnished materials, rendered services and done work in the completion of the improvement; denied any liability as garnishee.
It appears from the testimony that the improvement was not completed at the time the garnishments were issued, there being more than 3,000 yards of earth to be moved and some sodding and other work to be done, and that the contractor was unable to finish the improvement because of the garnishments, and made default, and the improvement was completed by the bonding company. The improvement was not entirely completed at the time of the trial.
Neither of appellees' claims grew out of or had any relation to the making of the improvement or the furnishing of materials for or labor done thereon, and all the money realized by the surety company from the retained percentages and other moneys paid by the city for the completion of the improvement was distributed to laborers and material furnishers for making the improvement, including the amount due for feed for mules of the contractor and gasoline for operating the motor equipment used in grading and rolling the ground.
The court found in favor of appellees, rendered judgment against the city on the garnishments, and from this decree the appeal comes.
(after stating the facts). Appellant insists for reversal that the court erred in holding that the funds due from the city to the contractor and paid to his surety company for completing the improvement were subject to garnishment for debts due from the contractor to either of appellees, not being for materials furnished or labor done in connection with the construction of the improvement. It has long been the established rule that an improvement district or governmental agency is not subject to garnishment at the instance of creditors of the contractor prior to the completion of the improvement contracted to be constructed. Newell Construction Co. v. Elkins, 161 Ark. 625, 257 S.W. 54; Wharf Imp. Dist. of Helena v. U.S. Gypsum Co., 181 Ark. 289, 25 S.W.2d 425.
The court's finding that the improvement to be constructed was completed at the time of the issuance of the garnishments was contrary to the preponderance and weight of the testimony, which was virtually undisputed, that it had not been completed, and the court erred in holding otherwise.
Under the terms of the bond, a common law bond, the surety company was liable to the payment of the accounts for feed furnished the contractor for the mules used in the construction of the improvement as well as for the gasoline purchased for operation of the motor equipment used thereon. The bond provides: "This bond is also made for the use and benefit of all persons, partnerships, firms or corporations who may furnish materials and labor for or on account of said contractor, or any of his sub-contractors in the construction of said landing strips, and this bond is conditioned that such contractor or contractors shall pay all indebtedness for labor and material furnished in the construction of said landing strips or in making said public improvements; and until said indebtedness for labor and material is fully paid, said bond shall continue in full force and effect, and said contractors, material furnishers and persons who perform labor upon said landing strips and each of them are hereby made obligees hereunder, the same as though their own proper names were written herein as such and they, and each of them may sue hereon."
In the application for the bond the contractor made an assignment and transfer of all deferred payments and retained percentages that might be due and payable to him at the time of any default in the contract or that might thereafter become due him under the contract" to be by it credited upon any loss, cost, damage, charge and expense sustained or incurred by it under said bond." The terms of the bond herein are broad enough to cover and include the payment of these claims and the case is not controlled by the decision in Goode v. Aetna Casualty Surety Co., 178 Ark. 451, 13 S.W.2d 6, but rather upon a proper construction of its terms by the rule announced in Mansfield Lbr. Co. v. National Surety Co., 176 Ark. 1035, 5 S.W.2d 294, and Leslie Lbr. Supply Co. v. Lawrence, 178 Ark. 574, 11 S.W. 458.
This bond recites it is also made for the use and benefit of all persons who may furnish materials or labor for or on account of said contractor in the construction of the landing strips, "conditioned that such contractor or contractors shall pay all indebtedness for labor and material furnished in the construction of said landing strips or in making said public improvements; and expressly that all such persons are made obligees in the bond and entitled to sue thereon.
There is no question here of the materials, furnished not being used in the construction of the improvement within the meaning of the bond, nor of any proper assignment of the claims not being made. The groceries charged for were furnished to the contractor and by him advanced and distributed to the laborers. It is also true that the surety on the contractor's bond who completed the contract in accordance with its terms upon default of his principal is subrogated to the rights of the obligees in the bond to the extent necessary to reimburse himself, and has an equity in the funds due the contractor under the terms of the contract superior to that of a general creditor or an assignee or one who loans money to the contractor to pay for labor or materials necessary to complete the work. Lacey v. Maryland Casualty Co., 32 F.2d 28; Riverview State Bank v. Wentz, 34 F.2d 419; Note 45 A.L.R., p. 381; Prairie State Bank v. U.S., 164 U.S. 227, 17 S.Ct. 142; Henningsen v. U.S. F. G. Co., 208 U.S. 404, 28 S.Ct. 389.
None of the money paid to the surety company by the city upon completion of the improvement by it was paid to the contractor after writs of garnishment were served, and he had no claim to the funds remaining in the hands of the city after making default on his contract, and there was therefore no money in the hands of the city belonging to the contractor at the time the garnishments were served which could have been subjected to the payment of the claims of appellees, and, as already said, the improvement was not completed at the time the garnishments were issued and the city was not subject to garnishment. The decree is reversed accordingly, and the cause remanded with directions to dismiss the complaints of appellees against the city, garnishee, for want of equity.