The above case was tried on a filed stipulation of facts and on briefs. The facts are set forth here briefly because the issue is limited and presents a legal problem.
Defendant was general contractor for construction of a hangar at Burlington Airport. Defendant entered into a contract with a company known as Industrial Associates, Inc., as subcontractor for certain work on the construction job. Plaintiff furnished a completion and payment bond to subcontractor. The defendant and Industrial Associates also contracted for work on two other large construction jobs, but plaintiff did not bond those jobs, nor were they bonded at all.
On November 14, 1956 a petition in bankruptcy was filed for the subcontractor, Industrial Associates, Inc., and the company was adjudicated a bankrupt. Defendant, at request of plaintiff, completed the work of the subcontractor on the Burlington job and subtracted the cost from money due subcontractor.
The plaintiff paid out, under terms of its bond, $17,956.05 for unpaid labor and materials. There is due the subcontractor on this job from defendant the sum of $9,603.67. Plaintiff seeks recovery of this latter amount from defendant.
The subcontractor defaulted on the other two contracts it had with defendant. As a result there is due to defendant from the subcontractor the sum of $9,937.09. The sole issue is whether defendant may offset the money due it against the amount due the subcontractor, which under the terms of the bond become due to plaintiff, or whether plaintiff gets its money, leaving defendant, on its claim against the subcontractor, to its rights under the bankruptcy
law. Defendant filed claims in the bankruptcy court for the money due it under the other two jobs. No payment has been received from that source.
Plaintiff contends that the general contractor is obligated to pay over the funds for the following reasons.
The subcontractor, which defaulted, had an obligation to pay bills for labor and materials before it would be entitled to money due under the contract. The failure to make such payment was a default under the contract, and the general contractor had a right to use contract money to pay claims. The general contractor demanded a surety and this surety discharged the obligation and became subrogated to the rights of the general contractor to the contract balance. This right of subrogation was superior to right of the contractor to set off claims from other unbonded jobs, because the surety was entitled to protection of all undertakings of the general contractor in the subcontract and because claims attempted to be set off are not claims against the surety.
The surety further contends that the subcontractor has assigned contract balances to the surety, of which fact the general contractor was or should have been aware at the time it entered into the two unbonded contracts; and the general contractor may not set off against the surety, as assignee, claims arising from transactions entered into after it knew or should have known of the assignment.
In order to sustain such contentions and conclusions, the surety contends that funds in the hands of the general contractor are a trust fund which must remain intact as security for the claims of the surety, not to be disturbed by any claims of the general contractor arising from other jobs.
There is no question, from the stipulated facts, that the surety is subrogated to the rights of the subcontractor to these funds and would be entitled to receive the funds if this question of ...