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March 10, 1942

AETNA CASUALTY & SURETY CO. (WILLIAM EISENBERG & SONS, Inc., et al., Third-Party Defendants)

The opinion of the court was delivered by: FORMAN

FORMAN, District Judge.

On February 28, 1935, William Eisenberg & Sons, Inc., made a contract with the United States for the erection of a dam at Beach City, Ohio, and on March 6, 1935, through its president, Harry Eisenberg, and secretary and treasurer, Israel Eisenberg, made application to and received from Aetna Casualty and Surety Company, as surety, a bond to the United States of America in the principal amount of $421,757.05 as required by the Heard Act, 40 U.S.C.A. § 270, conditioned upon the performance of the work and for the payment of all bills for labor and materials incurred in the prosecution of said work.

Paragraph 2 of the application provides as follows: "The indemnitor(s) will at all times indemnify and keep indemnified the Company, and hold and save it harmless from and against any and all damages, loss, costs, charges and expenses of whatsoever kind or nature, including counsel and attorney fees, whether incurred under retainer or salary or otherwise, which it shall or may at any time sustain or incur in connection with any litigation, investigation, collection of premiums, or other matter connected with such suretyship, including any suit instituted to enforce the obligations of this agreement of indemnity; and the indemnitor(s) will pay over to the Company, its successors and assigns, all sums of money which it or its representative shall pay or cause to be paid, or become liable to pay on account of such suretyship, and on account of any damages, costs, charges, and expenses of whatsoever kind or nature in connection therewith as aforesaid, such payment to be made to the Company as soon as it shall have become liable therefor, whether it shall have paid out such sum or any part thereof or not, and said Company is hereby authorized to prove such expenses, costs and attorney fees, in any action or proceeding and to include the same in any judgment."

 Paragraph 4 of the application provides as follows: "* * * said principal(s) do hereby assign, transfer and convey to said company [the surety] all the deferred payments and retained percentages arising out of this contract, and any and all monies and properties that may be due and payable to said principal(s) * * * if the principal fails to pay bills incurred on the work, when they become due and payable, whether the company may be liable for such bills or not."

 Thereafter the Eisenberg Corporation proceeded with the work under the contract, and by December of 1936 it found itself in financial difficulties as it did not have money to pay outstanding bills for labor and materials, although the government owed it approximately $43,000 representing retained percentage under the contract. Hence, in December, 1936, and on January 6, 1937, Israel Eisenberg conferred with representatives of the surety, and revealed the financial status of the Eisenberg Corporation with the hope that it would either cooperate in persuading the government to release the retained fund for the payment of bills or lend it money for that purpose. Representatives of the surety suggested that inasmuch as its bond guaranteed the payment of labor and material bills, it would recognize assignments of such claims to any bank lending money to the Eisenberg Corporation and guarantee their payment, but that it would be necessary for the Eisenberg Corporation to execute a power of attorney authorizing it to collect future payments from the government in order to insure application of payments to labor and material bills. Israel Eisenberg objected to the execution of a power of attorney on the ground that it would jeopardize the corporation's relation with the government. However, he promixed orally that he would personally see that future payments under the contract were applied to labor and material bills. Afterwards, Israel and Harry Eisenberg discussed the matter with the First Camden National Bank and Trust Company whose Finance Committee considered a proposed loan on January 19 and February 2, 1937, but deferred action until the receipt of more details regarding the retained percentage and the form of the original contract for construction. On the latter date the bank addressed a letter to the surety inquiring as to the condition of the contract, asked for an explanation concerning the retained percentage and advice as to time of payment thereof after final payment. This information was furnished on February 5, 1937. The bank then procured from the Eisenberg Corporation a copy of the bond to the United States.

 Pending the negotiations between the Eisenberg Corporation and the bank, the surety again requested on February 18, 1937, that the Eisenberg Corporation execute a power of attorney authorizing it to receive future payments under the contract for application to labor and material bills which was again refused. On this occasion, however, Israel Eisenberg promised the surety in writing as follows: "Should anything occur which might jeopardize the ability of this company to complete the Beach City project according to contract, the Wm. Eisenberg & Sons, Inc., hereby pledges itself to notify you immediately and to place in your hands a power of attorney to receive all future estimates and to collect the proceeds thereon, permitting this company to complete the project by giving your company joint control of the funds to be received from the project."

 On February 23, 1937, the surety addressed a letter to the bank as follows:

 "Heretofore, on or about the 6th day of March, 1935, the Aetna Casualty & Surety Company, as surety executed a contract bond running to the United States of America in the amount of $412,757.35, which said bond, in accordance with the provisions of the Hurd [Heard] Act (40 U.S.C.A. § 270), guaranteed the faithful performance by William Eisenberg & Sons, Inc., of a contract with the Government for the construction of a dam at Beach City, Ohio, and payment of all bills for labor and material incurred in connection therewith. We are informed that the value of the work done to date under this contract amounts to approximately $660,251.58, and that the contractor has already received payments of $616,745.82, leaving retained percentage 'earned' in the approximate amount of $43,000.20.

 "It appears that the contractor is heavily indebted for labor and material bills, and while the responsibility of the Aetna as surety for the actual payment of such bills does not accrue until six months after the final settlement of the contract, its liability for this eventual payment is nevertheless fixed and definite for all labor and material bills which may be shown to have been incurred in connection with the project.

 "The contractor has informed us that he desires to borrow from you the sum of $30,000 to be used for the sole purpose of paying the following bills for material and labor incurred in the project above mentioned: * * *

 "We are further informed that you will take as security for this loan an assignment from each material and labor claimant of all of his rights of every description against this Company on the aforesaid bond executed for William Eisenberg & Sons, Inc. Being desirous of assisting the contractor in procuring such loan, and in consideration of your making such loan to them, and as an inducement to you so to do, it is hereby agreed as follows:

 "(1) We affirm our aforesaid bond to be a valid and subsisting obligation, and further affirm that it is unqualifiedly liable for the bills hereinbefore listed in the amounts indicated above, and we hereby estop ourselves from denying the fact in any court to your prejudice.

 "(2) If you take assignments of such bills, and claims, on a form similar to the one attached hereto, or on any other appropriate form, we hereby agree to recognize such assignment to the fullest extent, and agree to pay the bill evidenced thereby, without interest, however, or so much thereof as remains unpaid at the expiration of six months subsequent to the final settlement of the foregoing construction contract at all events, not later than one year from February 23, 1937.

 "The situs of this guaranty is New Jersey and shall be construed under the laws of said State."

 Following receipt of this letter, the bank lent the Eisenberg Corporation $29,912.36 which was used for the payment of laborers and materialmen from whom the bank took assignments of their claims. It also took a demand note in the aggregate amount from the Eisenberg Corporation.

 Following the above transaction, the Eisenberg Corporation proceeded with the work, and on August 6, 1937, Israel Eisenberg addressed a letter to the surety advising that the work had been entirely completed, the last paragraph of which provided as follows: "In carrying out the completion of this project, we wish to assure you that we have endeavored to the best of our ability to adhere to our verbal agreements as to the use of the moneys received. We have in the past and are now endeavoring to adhere to this arrangement in the most honorable manner possible, and will always endeavor to do so."

 In November, 1937, it appeared that the money due the Eisenberg Corporation under its contract with the government would be insufficient to pay bills for labor and materials, and the surety again demanded of Israel and Harry Eisenberg the execution of a power of attorney authorizing the payment of government checks in its favor to insure application of payments to laborers and materialmen, and in the alternative the surety threatened to impound future payments to the corporation by instituting a suit in equity. Again, Israel Eisenberg sought a compromise. Later in November a formal demand for the power of attorney was made of Israel and Harry Eisenberg and again a compromise was sought. The surety relented and relied on an oral agreement to turn over the government checks.

 On December 11, 1937, the semi-final payment in the amount of $15,924.17 was received by the Eisenberg Corporation. Harry Eisenberg endorsed it and presented it to the surety together with a list of bills to be paid from the proceeds. The surety cashed the check and made funds available in an equal amount in the City National Bank of Philadelphia out of which the Eisenberg Corporation did pay the designated creditors. That bank was presented with a certified copy of a resolution of the Eisenberg Corporation authorizing the opening of the account, and Harry and Israel Eisenberg signed signature cards.

 On January 10, 1938, the Eisenberg Corporation received the final payment of $58,299.21 under the contract. Harry and Israel Eisenberg decided that it was to the best interest of the Corporation to pay the money out to banks and other creditors which had unsecured obligations, and that they were under no duty to turn the money over to the surety. This check was deposited in the general bank account of the Eisenberg Corporation in the Northwestern National Bank of Philadelphia, and a check was drawn against it payable to the First Camden National Bank and Trust Company in the amount of $20,500 being the balance due on its unsecured obligation. In addition to the above sum, it is alleged that there was paid to the plaintiff bank the sum of $917.76 interest on the unsecured loans to the Eisenberg Corporation. No part of the proceeds of the check for $58,299.21 were paid on account of any of the labor and material bills of which the plaintiff bank had taken assignments. The total possible liability of the surety for labor and material bills on this contract including the claims assigned to the two banks as above set forth is $78,209.34 made up as follows: Gross claim of Plaintiff for assignments in its hands $29,912.36 Less payment made by defendant Surety Co. $20,500.00 n *9,412.36$ QNet claim of Plaintiff Claim of Northwestern National Bank for assignments held by it 10,000.00 Other claims paid by Defendant 47,709.34 $78,209.34


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