Fairbanks v. Crump Irrigation & Supply Co.

On August 22, 1927, the Crump Irrigation and Supply Company, Inc., hereinafter referred to as “the contractor,” contracted in writing with plaintiff and respondent Douglas Fairbanks to perform and provide the labor and materials and carry out the work of constructing for Fairbanks on a ranch belonging to him in San Diego County an overhead horticultural sprinkling system, for the total contract price of $26,000, of which $5,000 was payable on the completion, according to the specifications, of the ditching, besides which, on the first day of each month while the work was in progress, the contractor was to be paid eighty-five per cent of the value of the material and labor furnished during the previous calendar month, as estimated by Fairbanks’ engineer. The contract contained a clause to the effect that “party of the second part (the contractor) may assign any or all moneys due under this contract upon written consent of the party of the first part (Fairbanks).” The final payment embracing all sums due under the contract and not previously paid was to be made to the contractor within ten. days from the date of completion of the work. The bond required of the contractor for faithful performance of the work in the amount of $13,000, being fifty per cent of the contract price, was furnished by defendant and respondent Hartford Accident and Indemnity Company, hereinafter referred to as “the

“In addition to the reason set forth above for this request, allow me to call your attention to a provision contained in our contract with the Crump Irrigation and Supply Company.

“ ‘The undersigned further agree, as of this date, that the Surety shall, as surety on said bond, be subrogated to all their rights, privileges and properties as principal and otherwise in said contract, and they hereby assign, transfer and convey to the Surety all the deferred payments and retained percentages, and any and all moneys and properties that may be due and payable to the undersigned at the time of such breach or default or that thereafter may-become due and payable to them on account of said contract, or on account of extra work or materials supplied in connection therewith, hereby agreeing that such money, and the proceeds of such payments and properties, shall be the sole property of the Surety, and to be by it credited upon any loss, cost, damage, charge and expense sustained or incurred by it as above under its said bond.’

“This clause is rendered operative at our pleasure, and we do not feel it necessary at this time to insist that this assignment be made effective. It does, however, establish our right to come in ahead of any other assignments which have been made.”

On October 29, 1927, the surety company wrote Fairbanks, referring further to its said subrogation arrangement with the contractor, and undertaking to exercise what it claimed was its right thereunder of being subrogated, as of the date of the original contract, to the right to the whole contract price as it became payable. It does not appear that Fairbanks was ever advised of the subrogation contract until the surety company’s letter of October 21st was received, nor that appellant bank ever heard of it prior to the commencement of this action. In fact, the evidence only rather incidentally shows its existence. It was not pleaded in the surety company’s cross-complaint, and though mentioned in the findings preceding the interlocutory judgment as “an assignment or purported assignment” forming the basis of the surety company’s claim, it is not referred to in the findings made on the final hearing at all.

Besides the work embraced in the original contract there were extras to the value of $3,259.02 installed in accordance with the permission contained in the contract which, added to the $26,000 contract price, brought the aggregate to $29,259.02, of which Fairbanks at the time this action was begun had paid $17,406.10, leaving unpaid and in his hands

The bank has appealed both from the interlocutory and from the final judgment by separate notices of appeal, but both appeals are, without apparent objection from any of the parties, presented here upon the same transcript.

Appellant claims, first, that plaintiff and respondent Fairbanks was not entitled, by bringing money into court, to any discharge of his liability to it, and, secondly, that the trial court erred in excluding it from participating in the moneys deposited in court and in not awarding to it, therefrom, the amount of its $5,000 claim in full.

The surety company and the claimants other than the Columbia Steel & Tube Company and appellant bank, are satisfied with both interlocutory and final judgments, save as some claimants may have objections which they have not presented on this appeal, to the surety company’s participation with them pro rata in the distribution. The Columbia Steel & Tube Company has not appealed. Fairbanks is satisfied with the interlocutory judgment. If that is to stand, the final judgment does not concern him. Otherwise it does.

The contract, as we saw, provided that “any and all moneys due” might be assigned with Fairbanks’ “written consent.” Appellant rightly says that no such language was needed to make payments due assignable. But the language, having been used, must be given some effect, and it would have none unless it were tantamount to a provision that payments should not be assigned until due, and not then without Fairbanks’ written consent. We are aware of no reason why the provision, as so construed should not be given effect.

Unless, therefore, Smart had the authority, actual or ostensible, to waive for Fairbanks the contractual restriction that payments be due before being assigned, and also to consent for Fairbanks to particular assignments, the assignment to appellant bank was evidently, as in any way

“This will acknowledge receipt of your request regarding payments and cheeks when due will be prepared accordingly.

“W. A. Smart."

It does not appear that either this letter or the indorsement on it were ever communicated to appellant bank. Both were made long before the assignment under which it claims was executed and neither is shown to have any connection with that.

The evidence shows that a letter (Ex. B) from the contractor to Fairbanks of even date with the assignment (September 13, 1927), mentioning the assignment and inclosing a copy of it, found its way to Smart’s files. On the face of the letter it is addressed to Douglas Fairbanks at Los Angeles. Smart testified that it came to him through the mail, but he did not remember whence. This leaves it uncertain whether it was mailed by the contractor to Fairbanks at Los Angeles and by him remailed to Smart, or mailed by the contractor to Smart in the first instance. Smart testified that the “letter and assignment” (by which, as we suppose, the inclosed copy of the assignment is meant) did not remain in his possession down to the date on which he was being examined as a witness but that he believed he either sent them “to Mr. Springer (Fairbanks’ attorney of record in this case residing at San Diego) or to the Los Angeles office.” According to Mr. Springer he, Springer, had prior to October 18, 1927, though it does not appear how long before, been employed by Robert Fairbanks, agent for Douglas Fairbanks, to act for the latter in and about the matter of this contract and the payments due under it, and the original assignment to appellant bank

Reference has already been made in this opinion to the mention by the surety company in its letter to Fairbanks of October 21, 1927, of “assignments made” in connection with the contract.

There was also produced as part of Fairbanks’ evidence, and apparently from Bricksen’s files, a statement of the contractor dated October 22, 1927, known as exhibit 12, approved by Smart, reading as follows:

“Estimate No. 3.

“To payment due upon completion of ditching work on overhead irrigation system, Unit No. 3, in accordance with contract.......................................$5000.00. In accordance with assignment on file this check to be made payable to South Coast State Bank, Solana Beach, Calif.

“O.K.—W. A. Smart.”

It does not appear either that this statement of Smart’s approval of it was ever communicated to appellant bank.

It seems to us, so far as the question of actual authority in Smart to consent to the assignment was concerned, an authority admittedly not expressed but, as is claimed, implied from the situation, that there was in the circumstance that the handling of the payments under the contract was retained in the Los Angeles office, and in the further circumstance, that he was, in his general management of the ranch, not authorized to make large disbursements except on consultation with Robert Fairbanks or Erieksen, evidence to support the trial court’s finding that no such implied authority existed. So far forth, then, as against an attack on the judgment of the trial court, we are bound by the finding. (Tupman v. Haberkern, 208 Cal. 256 [ 280 Pac. 970 ].)

The next question is whether Smart had the ostensible authority, or, as appellants’ counsel prefers to put it, an “agency by estoppel” to consent to the assignment. It cannot be gainsaid that he was allowed to sign Fairbanks’ name by himself to the contract and that the instrument has since been recognized and acted upon by all parties as valid and binding. Out of it arose the claim to the

It is said in section 2317 of the Civil Code that “ostensible agency is such as a principal intentionally or by want of ordinary care causes or allows a third person to believe the agent to possess.” It has been laid down that, where the agency is general, third persons are not bound by limitations placed by the principal on the agent’s authority, but which are unknown to them (Thomas v. Fursman, 39 Cal. App. 278 , 284 [ 178 Pac. 870 ]), yet that where it is special those who deal with the agent must inquire into its limits. (Blum v. Robertson, 24 Cal. 127 .) Still, with regard to either general or special agents, “the question of the authority of the agent must depend, so far as it involves the rights of innocent third persons who have relied thereon in good faith, upon the character bestowed and not upon the instructions given. Or in other words, the principal is bound to third persons who have relied thereon in good faith, and in ignorane of any limitations or restrictions, by the apparent authority he has given to the agent, and not by the actual or express authority, where that differs from the apparent, and this, too, whether the agency be a general or a special one.” (Whitton v. Sullivan, 96 Cal. 480 , 483 [ 31 Pac. 1115 ].) Decisions to the effect that a third person in dealing with an agent must at his peril inquire into the agent’s authority have no application where, by reason of the conduct of the principal there is apparently no reason for inquiry. (Robinson v. American Fish Co., 17 Cal. App. 212 , 219, 220 [ 119 Pac. 388 ].) In Hicks v. Wilson, 197 Cal. 269 , 274 [ 240 Pac. 289 ], where the owner of land had instructed the purchaser to do business with a broker who had no actual authority to receive the purchase money, it was held that the purchaser had a right to rely on the instructions given him to the extent of pay

“This rule, applies only to that class of cases in which the new obligation is accepted by the creditor as conditional payment of the original debt, or in which the new

obligation ‘for the time being at least, is to take the place of and represent the original debt. That class is distinguishable from, and not to be confounded with, the class where the creditor has accepted simply a new additional or collateral security for an antecedent debt. In the former transaction an agreement to give time may be implied, but not out of the latter transaction.’ ” (Citing Austin v. Cur tis, 31 Vt. 64 , 76.)

Even so, however, the case at bar comes precisely within the class of eases where the time for the payment of the debt is extended and the creditor’s position thereby changed. The change is not only presumptively a detriment to the creditor, but, in this case, affirmatively appears to have been one, since after receiving the extension the debtor became so financially embarrassed that he abandoned the work. Besides, the Supreme Court has repeatedly held “that not only does an antecedent indebtedness constitute a valuable consideration for a transfer in satisfaction and discharge of said indebtedness, but it is also a valuable consideration within the protection of the equitable doctrine of bona fide purchase for a transfer merely as security for a preexisting debt.” (Smitton v. McCullough, 182 Cal. 530 , 537 [ 189 Pac. 686 , 689], and cases cited.)

In fine, we think that all the requisite circumstances here concur to estop Fairbanks to deny that Smart was authorized to consent to the assignment to appellant bank.

There is, of course, in addition to all questions of estoppel and ostensible agency, the further question of a ratification by Fairbanks of Smart’s consent to the assignment claimed to result both from the situation, as we have recited it, and also from the position assumed in his behalf in the pleadings and at the trial, which was, in effect, that he was at that stage making no. objection to Smart’s action as a consent to the assignment, but did repudiate it as any such acceptance of the assignment as would bind him to liability to recognize it, otherwise than as a charge on the contract price. Undoubtedly, as said in Ralphs v. Hensler, 97 Cal. 296 , 302 [ 32 Pac. 243 , 245], “Where an authorized agent transcends his authority, the liability of the principal to be held to have ratified the unauthorized acts by mere acquiescence is much greater than it would be in ease an utter stranger had assumed to act as agent without any

We have next to consider, then, the effect of the assignment, treating it as though it had been presented to Fairbanks and consented to by him on September 14, 1927. It was not subject to the subrogation arrangement between the contractor and the surety company even though such arrangement existed, because that arrangement was not brought to Fairbanks’ notice until the surety company’s letter of October 21st was received (whenever that may have been) and the conclusions which we have just reached charge him with notice of the assignment to the bank as of September 14th, and" it is the law that, as between conflicting assignments, by an obligee of funds payable by an obligor, that which is first brought to the obligor’s attention has the priority. (Graham Paper Co. v. Pembroke, 124 Cal. 117 , 120 [ 71 Am. St. Rep. 26 , 44 L. R. A. 632 , 56 Pac. 627 ]; Widenmann v. Weniger, 164 Cal. 667 , 672, 673 [ 130 Pac. 421 ].) The truth is that this subrogation agreement has been treated in the present litigation from start to finish as unimportant, and, we think, rightly so. Reverting, then, to the assignment to the bank, we do not think that its effect is even doubtful. It transferred to appellant bank the right to receive from Fairbanks the $5,000, out of the contract price for the work, subject to no other condition precedent than that the right to such $5,000 should mature by the contractor’s completion, while not

“All liens for labor done or materials furnished for the building primarily rest upon this contract and derive their validity therefrom.”

It is also said in that case that “the liens of such persons originating under and depending for their validity upon the original contract would date back to the time of commencement of work upon the building.” We are required, however, to look to the nature and the limits of the rights with which either lienholders or surety company can be held to have been thus invested.

“The general constitutional principle which has always underlaid the mechanic’s lien law of California is that the liability to liens upon the property of an owner who on his part has exactly complied with a valid building contract is limited by the price stipulated for in that contract. This means not only that the aggregate amount of liens cannot exceed the contract price but that payments made in good faith to the contractor in accordance with the terms of the contract before notices of lien are filed or stop notices given are a pro tanto discharge to the owner from liability. ’ ’ (17 Cal. Jur., pp. 43, 44, and cases cited.)

It is said, therefore, that “the unpaid balance of such contract price is a fund set apart for the satisfaction of lien claimants,” and the lien on the property is a charge to secure its payment. (Stockton Lbr. Co. v. Schuler, 155 Cal. 411 , 413 [ 101 Pac. 307 , 308].) The restriction, however, which prior to the legislation of 1911 appeared in section 1184 of the Code of Civil Procedure upon the pro

“The principle is, that if the laborer or materialman postpones the service of stop notice until after an installment matures, he can reach only such interest as the contractor then has in that instalment, and that he must take it subject to all previously acquired rights of third persons.”

Whatever legitimate objections, then, either surety company or those furnishing labor or materials might have made, had the $5,000 been paid to appellant bank before it fell due, automatically lost their force as soon as, without intervening default on the contractor’s part or service of stop notices, payment actually became due.

If, then, on the completion of the ditching, on October 15th, the contractor, not being as yet in default with him, had demanded the $5,000, obviously Fairbanks would have had no lawful ground for refusing to pay it. Had he then paid it to the contractor, no stop notices having been served, he -would have been charged with no responsibility for its application. Doubtless, had the assignment not been made, and the $5,000 not been in fact paid to the contractor when due, and had the contractor subsequently defaulted and abandoned its job, Fairbanks would have been relieved of any obligation thereafter to make to it that or any other payment on the contract price until there had been deducted therefrom the cost of finishing the work contracted for, but that would have been because the contractor was personally obligated to see the work done. But here the original assignment had been made, with what we have held tantamount to Fairbanks’ consent, to appel

The lienholders and the surety company particularly urge on our attention the case of Roberts v. Spires, 195 Cal. 267 [ 37 A. L. R. 763 , 232 Pac. 708 ], decided in 1925, in which, continuing to follow the doctrine laid down under the law as it stood prior to the legislation of 1911 in Stockton Lbr. Co. v. Schuler, supra, that the unpaid balance of the contract price constitutes a fund which is set apart for the satisfaction of lien claimants, for which the lien on the land is mere security, it was held when there was no provision in a building contract permitting the owner to deduct damages for the contractor’s delay in completing the building, or which in anywise imputed notice to laborers or materialmen that the contract price might be so diminished; that such owner could not, as against lien claimants, offset a claim against the contractor for damages resulting from delay in completing the building against the unpaid balance of the contract price. The whole basis of the decision, however, seems to be the right of those furnishing labor and materials to rely on the terms of the contract as written

Our attention is called to Castro v. Malcolm, 66 Cal. App. 635 [ 226 Pac. 976 , 979], as holding that the unpaid part of the contract price must, upon a contractor’s default, be appropriated to the cost of finishing the work and reimbursing a surety company which, pursuant to its obligation to the owner, has finished the work and become subrogated to the owner’s rights, as against an assignee of the contractor who has merely advanced moneys that have gone into the contractor’s general account and are not traceable into the work. That case involved a contract let by a county providing for progress payments of seventy-five per cent of the estimated value of the work and the retention by the county of twenty-five per cent until thirty-five days after final completion, in addition to which it was provided that should the contractor leave work undone the county might complete it and that the expense of so doing should be “deducted and paid by the county out of any moneys then due or to become due to the contractor under the contract or any part thereof.” But the situation there differed from that in the case at bar in that (1) the contractor’s assignee did not at the time of taking the assignment change its position in reliance on it, and in that (2), as the court said, “by the very terms” of a section of the contract, “the county . . . was given the right to use all the moneys due the contractor under any circumstances and was not limited to the 25 per cent specified to be retained by the county in other portions of the contract.” As we just saw, owner and contractor may, as between themselves, contract as they like, and obviously an assignee of the contractor is bound, in taking an assignment of anything due thereunder, to know whether by the terms of the contract it is otherwise appropriated.

Doubtless, also, when statutes require, as did section 1184 of the Code of Civil Procedure, prior to the legislation of

It follows that appellant bank is entitled to have its $5,000 with interest at seven per cent per annum from December 1, 1927, when, according to the findings, its demand for the same was definitely refused, paid to it from the $11,852.92 deposited in court, as a claim having priority over the other claims here involved, except to the extent, if at all, that evidence to be produced before the trial court may show that the obligation of the contractor to it has been otherwise satisfied. The respective rights, as between themselves, of the surety company and the claimants under material and labor liens, have not been argued and we, therefore, express no opinion thereon.

Since the disposition which we make of the case renders it unnecessary to inquire whether, were appellant bank not entitled to the amount of its claim from the $11,852.92 deposited in court, Fairbanks would be personally liable to

Cary, P. J., and Barnard, J., concurred.

A petition for a rehearing of this cause was denied by .the District Court of Appeal on' October 7, 1930, and the following opinion then rendered therein:

the rehearing of this case it is claimed that our opinion overlooks the failure of appellant bank to establish that no part of the contractor’s indebtedness to it has been repaid to it. That matter was in fact expressly dealt with and in reversing the judgment we distinctly left it to the trial court to hereafter ascertain the facts in that behalf to the end that appellant should have credit from the fund assigned to it only for an amount equivalent to whatever remains unpaid on the contractor’s obligation to it with the interest thereon. The surety company’s real point is not so much that the matter was overlooked as that appellant bank was not required to prove a negative, namely that the obligation to it had not been paid. No such burden rested on it. (Light v. Stevens, 159 Cal. 288 , 292 [113 Pac. Levey v. Henderson, 177 Cal. 21 , 23 [ 169 Pac. 673 ].)

“We would loan them (i. e., loan the contractor) on an assignment, and when that assignment was paid off we would take another assignment; kept the fund revolving. . . .

“They (i. e., the contractor) paid off probably some assignment, and then a new assignment was made, and a new note made. Any old indebtedness was paid off at that time and a new note was made.”

In the light of this testimony it cannot successfully be claimed that the evidence is insufficient to show that when the present collateral was taken the position of appellant bank was changed to its detriment (King v. Mellon Nat. Bank, 227 Pa. 22 [ 75 Atl. 832 ]; Crawford v. Dollar Sav. F. & T. Co., 236 Pa. 206 [ 84 Atl. 694 ]).

Up to this point we have, in discussing the petitions for rehearing, done so on the basis which would apply were it necessary for appellant bank in order successfully to rely on an ostensible agency, to make out a strict ease of agency by estoppel, that is to show the presence of each of the elements referred to in the passage from 2 C. J. 464, quoted in our original opinion. We adhere to the view that the showing made was sufficient for that purpose.

In view, however, of the doctrine laid down in Smitton v. McCullough, 182 Cal. 530 [ 189 Pac. 686 , 689], we are not prepared to hold that appellant bank was under any obligation to go so far as that, because it is there held, as noted in our original opinion, “that not only does an antecedent indebtedness constitute a valuable consideration for a transfer in satisfaction and discharge of said indebtedness, but it is also a valuable consideration, within the pro

The point is made that we did not in our original opinion notice the contention that the pleadings of appellant bank, in effect at least, alleged an actual agency in Smart to accept in Fairbanks’ behalf the assignment from the contractor to the bank, whereas our decision sustains the position of the bank on the basis of an ostensible agency not pleaded as such. But, as pointed out by counsel for the bank in his brief, even if his pleading could be construed as alleging an actual agency, proof of an ostensible agency could not amount to a variance. (Donnelly v. San Francisco Bridge Co., 117 Cal. 417 , 421, 422 [ 49 Pac. 559 ].)

A considerable part of the surety company’s petition for rehearing is devoted to the claim that we failed to pass on its assertion of the right to be subrogated to the right of the owner under the doctrine of Castro v. Malcolm, 66 Cal. App. 635 [ 226 Pac. 976 ], and the eases therein relied upon. So far as the controversy between the surety company and appellant bank is concerned, that matter was expressly and necessarily passed on to the extent of holding that neither the owner nor the surety company have any right to deprive the appellant bank of the $5,000 covered by the assignment, in so far as the indebtedness from the contractor to the bank, for which that assignment was made security, may remain unpaid. To these views we adhere. We declined on the present appeal to pass on the respective rights, as between themselves, of the surety company and the claimants under material and labor liens, saying that their rights as between themselves had not been argued. To this we might have added that such a discussion would hardly be relevant to the present appeal, which is one by the bank to gain relief from a judgment against it. The surety company now asserts that all these matters were

The petitions for rehearing are each denied.

A petition by respondent to have the cause heard in the Supreme Court, after judgment in the District Court of Appeal, was denied by the Supreme Court on November 10, 1930.