Henningsen v. United States Fidelity Guaranty Company/Opinion of the Court

A motion is made to dismiss on the ground that the jurisdiction of the circuit court was invoked solely on the ground of the diversity of citizenship of the parties, and hence the decree of the circuit court of appeals was final. The motion must be overruled. Diversity of citizenship was, it is true, alleged in the bills, but grounds of suit and relief were also based on the statutes of the United States, as from the discussion of the merits will be seen. Those statutes entered as elements into the decision of the circuit court of appeals, and were necessary elements. Howard v. United States, 184 U.S. 676, 46 L. ed. 754, 22 Sup. Ct. Rep. 543; Warner v. Searle & H. Co. 191 U.S. 195, 205, 48 L. ed. 145, 147, 24 Sup. Ct. Rep. 79.

Passing to the merits of the case, the question turns upon the respective equities of the parties. Appellants concede that the bank was not, by the making of the loans to Henningsen, entitled to subrogation to the rights, if any, of the United States or the laborers or materialmen, and also that, if the guaranty company is entitled to subrogation to any right of the United States government arising through the building contract, the bank can make no claim by reason of the assignment.

Henningsen (for we may leave Clive out of consideration) entered into a contract with the United States to construct buildings. The guaranty company was surety on that contract. Its stipulation was not merely that the contractor should construct the buildings, but that he should pay promptly and in full all persons supplying labor and material in the prosecution of the work contracted for. He did not make this payment, and the guaranty company, as surety, was compelled to and did make the payment. Is its equity superior to that of one who simply loaned money to the contractor, to be by him used as he saw fit, either in the performance of his building contract or in any other way? We think it is. It paid the laborers and materialmen, and thus released the contractor from his obligations to them, and to the same extent released the government from all equitable obligations to see that the laborers and supplymen were paid. It did this not as a volunteer, but by reason of contract obligations entered into before the commencement of the work. Prairie State Nat. Bank v. United States, 164 U.S. 227, 41 L. ed. 412, 17 Sup. Ct. Rep. 142, is in point. In that case Sundberg & Company, in 1888, contracted with the government to build a customhouse at Galveston. Hitchcock was surety on that contract. On February 3, 1890, in consideration of advances made and to be made by the Prairie Bank, Sundberg & Company gave a power of attorney to a representative of the bank to receive from the United States the final payment under the contract. In May, 1890, Sundberg & Company defaulted in the performance of this contract and Hitchcock, as surety, without any knowledge of the alleged rights of the bank, assumed the completion of the contract and disbursed therein about $15,000 in excess of the current payments from the govenment. In a contest between Hitchcock and the Prairie Bank it was held that Hitchcock had the superior euqity, and the judgment of the court of claims in his favor for the amount still due from the government was affirmed. The bank loaned to Sundberg & Company about $6,000 prior to the time that they defaulted in the performance of their contract, and prior to any action by Hitchcock in completing the contract or in paying out money, so that the bank actually parted with $6,000 of its money before Hitchcock parted with any of his. It was held that Hitchcock's equity commenced with his obligation ligation in 1888 to see that Sundberg & Company duly performed their contract with the government. Mr. Justice White, delivering the opinion of the court, reviewed the authorities at length and discussed the question fully. He said (p. 232):

'Under the principles thus governing subrogation, it is clear whilst Hitchcock was entitled to subrogation, the bank was not. The former, in making his payments, discharged an obligation due by Sundberg, for the performance of which he, Hitchcock, was bound under the obligation of his suretyship. The bank, on the contrary, was a mere volunteer, who lent money to Sundberg on the faith of a presumed agreement and of supposed rights acquired thereunder. The sole question, therefore, is whether the equitable lien which the bank claims it has without reference to the question of its subrogation is paramount to the right of subrogation which unquestionably exists in favor of Hitchcock. In other words, the rights of the parties depend upon whether Hitchcock's subrogation must be considered as arising from and relating back to the date of the origianl contract, or as taking its origin solely from the date of the advance by him.'

It seems unnecessary to again review the authorities. It is sufficient to say that we agree with the views of the circuit court of appeals, expressed in its opinion, in the present case:

'Whatever equity, if any, the bank had to the fund in question, arose solely by reason of the loans it made to Henningsen. Henningsen's surety was, upon elementary principles, entitled to assert the equitable doctrine of subrogation, but it is equally clear that the bank was not, for it was a mere volunteer, and under no legal obligation to loan its money. Prairie State Nat. Bank v. United States, supra; AEtna L. Ins. Co. v. Middleport, 124 U.S. 534, 31 L. ed. 537, 8 Sup. Ct. Rep. 625; Sheldon, Subrogation, § 240.' See also United States Fidelity & G. Co. v. United States, 204 U.S. 349, 356, 357, 51 L. ed. 516, 519, 520, 27 Sup. Ct. Rep. 381.

The decree of the Circuit Court of Appeals is affirmed.