Lumbard, Chief Judge, and Moore and Kaufman, Circuit Judges. Irving R. Kaufman, Circuit Judge (dissenting).
Appellant, Franchi Brothers Construction Corp. (Franchi), contracted with the United States, in October of 1962, to construct an ammunition storage facility (the storage facility) in Burlington, Vermont. Pursuant to 40 U.S.C.A. 270a et seq. (the Miller Act), Franchi furnished the United States with a payment bond, naming Franchi as principal and appellant Maryland Casualty Co. (Maryland) as surety, conditioned on prompt payment to all suppliers of labor and materials for the construction.
Franchi engaged Fairway Electrical Contractors, Inc. (Fairway), as a subcontractor, to perform the electrical work on the storage facility. Between December 11, 1962, and August 21, 1963, Fairway purchased electrical supplies (total value of $18,647.38), for use in the construction of the storage facility, from the appellee, Hyland Electrical Supply Co. (Hyland), a company with whom Fairway had done business before and to whom it still owed money for supplies not connected with the Franchi contract.
Franchi's payment bond secured payment only for the electrical supplies sold by Hyland to Fairway for use in the construction of the storage facility.
In March of 1963, Fairway and Hyland requested Franchi to make any payments to Fairway for work done on the storage facility in the form of checks payable to Fairway and Hyland. Franchi was also requested to send the checks to Hyland. Thereafter, Franchi made out checks to Fairway and Hyland, but sent them to Fairway.
On June 7, 1963, the first such check, in the amount of $7,000, was sent by Franchi to Fairway. Fairway forwarded the check to Hyland on June 14, 1963, and asked Hyland to endorse it. Hyland did so and returned the check to Fairway. Fairway then sent two $2,000 checks of its own to Hyland with directions to apply one to reduce the indebtedness of Fairway for the supplies for the storage facility and to apply the other to reduce Fairway's past indebtedness on other accounts, unsecured by the Franchi-Maryland payment bond. The instructions given to Hyland by Fairway made it clear that the source of both checks was Franchi's payment to Fairway. In fact, Hyland admits having such knowledge.
Hyland then notified Franchi of the payment received from Fairway (whether Franchi was notified of the receipt of one or both of the $2,000 checks is not clear from the record), and later sent a copy of Hyland's ledger card for the storage facility supplies, showing the account had been reduced by $2,000.
Franchi sent a second check to Fairway (also made payable to Fairway and Hyland) on July 19, 1963, in the amount of $12,597. Fairway sent this check to Hyland with instructions to apply $7,000 to the Franchi account, "our portion of the check for labor to be applied to our regular account." Hyland deposited the $12,597 in its own account and notified Franchi of the receipt and application of these funds. Hyland also wrote to Fairway that "we will advise you as to what invoices this money must pay on this account." No proof of any such advice was offered.
Evidence was introduced that Franchi had sent a third check to Fairway, payable to Fairway and Hyland, in the amount of $4,000 or $4,500. Payment on this check was stopped when Franchi learned that Fairway was filing a petition in bankruptcy.
The total price for materials furnished to Fairway for the storage facility was $18,647.38. Hyland applied $9,000 to the reduction of that account pursuant to Fairway's instructions, leaving a balance of $9,647.38. As Fairway was unable to pay this balance, Hyland instituted the present suit against Franchi and Maryland on the payment bond, seeking judgment in the amount of $9,647.38.
Franchi's defense was that it had drawn checks totalling $19,597 payable to Fairway and Hyland, and that Hyland was under an equitable obligation to apply the total amount of the Franchi checks in reduction of the secured debt. Thus, Franchi argues, its obligation to Hyland has been completely discharged.
After trial before the court, judgment was entered for Hyland against both defendants in the amount of $9,647.38. In finding for plaintiff, the trial judge asserted two apparently alternative grounds for the decision.
The first ground was in the nature of an estoppel -- because Franchi had "notice and knowledge of the amount and manner of the application of funds it paid to Fairway and Hyland," it was "estopped from contesting such application of the funds."
The second ground concerned the nature of the payments from Franchi. The court reasoned that the checks from Franchi payable jointly to Fairway and Hyland represented payments to Fairway for labor and materials; that the payments to Hyland from Fairway to be credited to the storage facility account represented that portion of the Franchi checks which was for materials; and that the remainder of the Franchi checks represented reimbursement to Fairway for labor costs already paid out of Fairway's funds from other sources. The court concluded that these funds in the ...