United States Fidelity & Guaranty Co. v. Bass

619 F.2d 1057

Opinions

VANCE, Circuit Judge:

Two state executive officials appeal adverse money judgments for tortious conversion through erroneous disbursement of state funds by other state employees without defendants’ participation or knowledge. We hold that under Alabama law an action for conversion does not lie and public officials may not be held individually liable for their subordinates’ unauthorized actions. We therefore reverse the district court.

I.

Cherokee Construction Co. (Cherokee) entered a contract with the state of Alabama to construct and to improve a public road. It furnished a performance bond and a payment bond for labor and materials with United States Fidelity & Guaranty Co. (USF&G), a Maryland corporation, as surety. Cherokee completed the construction, but was unable to pay some labor and material claims. USF&G paid $11,882.53 to satisfy those claims under its payment bond.¹ Cherokee’s contract provided that the state would make progress payments for the construction and would retain five percent of each progress payment until the work was completed. USF&G’s surety agreement stated that “[u]pon the completion of said contract pursuant to its terms, if any funds remain due on said Contract, the same shall be paid to said Principal or Surety.” Under that provision, on November 27, 1974, USF&G notified the state highway department that it claimed an interest in the progress payment balances and retained funds, and, eight days later, it instructed the department that it should not pay any funds due on the Cherokee contract without USF&G’s express approval.² On October 10,1974, Cherokee sent one letter to the highway department instructing it to send the retainages to USF&G, and on October 24 it sent another letter countermanding the prior letter and asking the highway department to send the progress payment balances to Cherokee and the retained funds to a specified bank.

At all relevant times, appellant Ray D. Bass was the state highway director. Appellant Melba Till Allen became the state treasurer in early 1975 and held that office during the following events. On March 14, 1975, the Internal Revenue Service served on the state treasurer a notice of levy on Cherokee’s next payment and the treasurer’s office directed the highway department to deliver the next warrant to the treasurer’s office. On August 20, the highway department transmitted to the treasurer’s office one warrant to pay Cherokee $13,-043.67 and another to pay the company $7,210.04. The department then notified USF&G of the transfer. On August 27, USF&G requested the highway department to pay it from Cherokee’s contract balances for labor and materials claims; it did not specify or demand payment under the two warrants.

On September 3, the treasurer’s office disbursed the balances due on those two warrants to the IRS. According to the parties’ subsequent stipulations, Bass and Allen did not personally participate in and did not know about the disbursement. The state highway department employed more than five thousand persons during this period; its accounting division and legal division actually transferred the two payment warrants to the state treasurer.³ The treasurer’s office comprised approximately thirty-one employees in 1975; the deputy treasurer and subordinate employees actually disbursed the two warrants to the IRS.⁴

USF&G brought this diversity action against Bass and Allen in their individual capacities⁵ for conversion and for breach of contract based on the transfer of the $13,-043.67 and $7,210.04 warrants and the contract retainages to the IRS rather than to USF&G.⁶ The parties submitted the case to the court on the pleadings and stipulated facts. The district court concluded that Bass and Allen had converted payment warrants in which USF&G had legal title and a right to immediate possession, and entered judgment against them for $11,-882.53 plus interest and costs.

II.

Conversion under Alabama law is “a wrongful taking or a wrongful detention or interference, or an illegal assumption of ownership, or an illegal use or misuse” of another person’s property. Ott v. Fox, 362 So.2d 836, 839 (Ala.1978). Accord, State Farm Mutual Automobile Insurance Co. v. Wagnon, 53 Ala.App. 712, 717, 304 So.2d 216, 219 (1974). “To sustain an allegation of conversion in Alabama the plaintiff must be able to show legal title and the immediate right of possession to the property in question” at the time of the alleged conversion. Thompson v. Ford Motor Credit Co., 550 F.2d 256, 258 (5th Cir. 1977). Accord, Ott v. Fox, 362 So.2d at 839. Conversion generally does not lie for money such as general funds in the state’s hands, although a cause of action may arise from conversion of specific money capable of identification. Russell v. The Praetorians, Inc., 248 Ala. 576, 580, 28 So.2d 786, 789 (1947); Hunnicutt v. Higginbotham, 138 Ala. 472, 475, 35 So. 469, 470 (1903); see Lyxell v. Vautrin, 604 F.2d 18, 21 (5th Cir. 1979).⁷ USF&G thus could not maintain an action for conversion of nonidentifiable funds in state accounts for progress payments and retain-ages. USF&G argues, however, that the two payment warrants and apparently the retained fund account were identified property to which it had legal title and a right of possession.⁸ We disagree.

' The district court found “sufficient legal title” in the subrogation of USF&G to the state’s rights, the assignment of Cherokee’s rights under the surety agreement, Cherokee’s letter to the highway department ordering payment to USF&G, USF&G’s letter to that department claiming payments to Cherokee, and several sections of the Code of Alabama. The letters and statutes do not in any sense confer legal title. The district court’s conclusion that USF&G was subrogated to the state’s rights in the progress payments and retained funds followed from the erroneous finding that USF&G met Cherokee’s unpaid obligations under the performance bond rather than under the payment bond. Because USF&G acted under the payment bond, it was a creditor rather than a subrogee with respect to the state’s rights in the progress payments and retainages.⁹ See Aetna Casualty & Surety Co. v. United States, 435 F.2d 1082, 1084 (5th Cir. 1970); Trinity Universal Insurance Co. v. United States, 382 F.2d 317, 320 (5th Cir. 1967), cert. denied, 390 U.S. 906, 88 S.Ct. 820, 19 L.Ed.2d 873 (1968).¹⁰ We are not now concerned with the superiority of USF&G’s interest as to third parties. The critical point in an action for conversion is that USF&G did not acquire legal title and a right to immediate possession when a nonidentified fund account was merely changed into specific payment warrants or was merely credit^ to a particular retainage account. “When there is no obligation to return the identical money, but only a relationship of debtor or creditor, an action for conversion of the funds representing the indebtedness will not lie against the debt- or.” Lyxell v. Vautrin, 604 F.2d at 21.¹¹

USF&G also did not make the required demand for identifiable money or other property.¹² Under Alabama law,

[A] demand in an action of trover [and conversion] is only necessary where the taking was rightful, and where a demand and refusal are necessary to constitute a conversion. . . . [W]here there has been a wrongful assumption of property by the defendant which is of itself a conversion, no demand is necessary before the suit is brought.

Dixie v. Harrison, 163 Ala. 304, 312, 50 So. 284, 286 (1909). Compare McRae v. Bandy, 270 Ala. 12, 17, 115 So.2d 479, 483 (1959) (wrongful acquisition) with Clay County Abstract Co. v. McKay, 226 Ala. 394, 397, 147 So. 407, 410 (1933) (rightful acquisition). The state rightfully acquired the funds that it owed to Cherokee and other claimants. USF&G, therefore, was required to make a demand for identifiable money or specific property before conversion could occur. USF&G’s request for Cherokee’s contract balances on August 27,1975, was not such a demand.

III.

A state officer is not officially or individually liable under Alabama law for the performance or nonperformance of discretionary, or judicial, acts. “Under Alabama law, an official is liable only for malfeasance and misfeasance in the performance of his ministerial duties, and is not liable in a civil action for performance of his judicial acts, even if he acts corruptly.” Continental Bank & Trust Co. v. Brandon, 297 F.2d 928, 932 (5th Cir. 1962). Accord, Scott v. Ryan, 115 Ala. 587, 589, 22 So. 284, 285 (1897); see Hometrust Life Insurance Co. v. United States Fidelity & Guaranty Co., 298 F.2d 379, 385 (5th Cir. 1962). We cannot easily apply that test to the state treasurer and highway director because the fifth circuit reached contradictory conclusions as to the liability of the Alabama treasurer in two cases decided on the same day, compare Continental Bank & Trust Co. v. Brandon, 297 F.2d at 932-33, with Hometrust Life Insurance Co. v. United States Fidelity & Guaranty Co., 298 F.2d at 384, 386, and the Alabama courts have not clarified the law on that point. We need not reach the issues whether Bass and Allen acted judicially or ministerially and whether they exercised the requisite degree of care, however, because we conclude that USF&G has not proved that they actually authorized or participated in the transfer of the progress payment warrants and retained funds to the IRS.

The Alabama supreme court has said that a public “officer is not liable for the defaults and misfeasances of his clerks or assistants, even though they are appointed by him and are under his control, in the absence of allegation and proof that the officer was negligent or at fault in failing to exercise proper care and prudence in selecting the assistant or clerk, or in failing to properly supervise and superintend the acts and services of such employe[e] . . .” State v. Kolb, 201 Ala. 439, 440, 78 So. 817, 818 (1918). Accord, Franks v. Thompson, 59 F.R.D. 142, 144 — 45 (M.D.Ala.1973). An official must “direct or otherwise participate in” conduct of his subordinates, or act negligently in selecting them, before the official may be held officially or individually liable for their actions.¹³ Id. at 145. See also Williams v. United States, 353 F.Supp. 1226, 1233 (E.D.La.1973). The district court did not find and the record does not indicate that Bass or Allen personally authorized or participated in the transfer of the warrants and the retainages to the IRS.

The district court instead ruled as a matter of law that the highway director has a nondelegable duty to authorize fund transfers, such as the challenged one, to the state treasurer because Alabama law provides, “All the powers, authority and duties vested in the highway department shall be exercised by the highway director.” Ala. Code § 23-1-21 (1975). The court concluded that “Bass is responsible for the acts of his subordinates” even if the actions in fact were “taken by his chief accountant.” That approach misconstrues the cited statute, however, because the statute neither requires the highway director to make every decision and approve every transaction in a five thousand employee department nor prevents him from delegating some of those decisions. Instead, the statute authorizes the director to appoint the assistants and personnel necessary to carry on the department’s work. Id § 23-1 — 33. For example, it specifically establishes the position of a chief engineer that must post bond “for the faithful performance of his duties.” Id. § 23-1-22.¹⁴

The trial court also held that the state treasurer has a nondelegable duty to review fund transfers, apparently under the statutory provision that the treasurer is required “[t]o have custody of, and to keep safe, all moneys, bonds, mortgages and other securities required or permitted by law to be deposited with the state.” Id. § 36-17-3(9). The district court again misconstrued the import of the statute, which lists fifteen other duties in the same section. The same law authorizes the state treasurer to employ a chief clerk and other assistants and requires a bond of them for faithful performance of their duties. Id. § 36-17-4. The bond would be unnecessary if the treasurer were legally responsible for any misfeasance, malfeasance, or nonfeasance. Because the law permits the relevant duties of the highway director and state treasurer to be delegated to subordinate officials, Bass and Allen are not officially or individually liable for any wrongful actions of the public officers that actually transferred the payment warrants and retained funds to the treasurer’s office, then to the IRS. We do not intimate any view as to whether a state official may be held individually liable under Alabama law for actual negligent conduct in performance of official duties. See generally Allman v. Hanley, 302 F.2d 559, 561 (5th Cir. 1962).¹⁵

REVERSED and REMANDED.

Footnotes

1

. The district court opinion describes that payment as having been made under the performance bond.

2

. The retainages were larger than USF&G’s claim, amounting to $15,230.08 on March 27, 1974, and accumulating further after that date until August 20, 1975.

3

. The highway department’s letter of August 20, 1975, which transmitted the two disputed warrants to the treasurer’s office, was signed by Robert W. Pickett, Jr., the chief of that department’s accounting division. The letter stated that the action was taken under advice of counsel, by which it meant the department’s legal division.

4

. The treasurer’s office letter of September 3, 1975, which disbursed the two payment warrants to the IRS, had a signature space for Allen, but the copy in the record does not bear her signature, and the dictation code is “FB/gc,” which refers to Frank Barefield, the deputy treasurer. The letter cited an opinion of the state attorney general and contained a notation that a copy was being sent to Pickett in the highway department. See note 3 supra.

5

. The style and text of the complaint referred to “Bass as Highway Director” and “Allen as State Treasurer,” but USF&G represented and the district court found that the titles were “ ‘merely descriptive’ ” and that the suit was against Bass and Allen only in their individual capacities.

6

. Bass and Allen filed a third party complaint seeking to implead the United States, which the district court dismissed.

7

. We do not follow Ellis v. Zuck, 409 F.Supp. 1151, 1160 (N.D.Ala. 1976), aff'd on other grounds, 546 F.2d 643, 644 (5th Cir. 1977), to the extent that it misstates Alabama law on conversion actions for nonidentifiable money.

8

. Bass and Allen rely in part on the argument that an action for conversion does not lie un less USF&G had “exclusive” legal title to the payment warrants and retained funds, and that the IRS had partial title to any amounts in excess of $11,882.53. See Alabama v. Bessemer Materials, Inc., 224 F.Supp. 182, 184 (N.D.Ala.1963); Alabama-Tennessee Natural Gas Co. v. Lehman-Hoge & Scott, 122 F.Supp. 314, 319 (N.D.Ala.1954). See generally 10 Williston on Contracts § 1283 (3d ed. W. Jaeger 1967). The Alabama Supreme Court rejected the argument that a plaintiff claiming conversion must have exclusive or general legal title in Forbes & Carloss v. Plummer, 198 Ala. 162, 166-67, 73 So. 451, 454 (1916). See also Hamilton v. Hamilton, 255 Ala. 284, 289-90, 51 So.2d 13, 20 (1950) (title subject to divestment).

9

. After meeting a payment bond obligation, a surety might be a subrogee toward a private party’s rights in payment balances and retain-ages, if the government is involved merely as a stakeholder, not as a setoff claimant. See Pearlman v. Reliance Ins. Co., 371 U.S. 132, 139, 141, 83 S.Ct. 232, 236, 237, 9 L.Ed.2d 190 (1962); Henningsen v. United States Fidelity & Guar. Co., 208 U.S. 404, 410, 28 S.Ct. 389, 391, 52 L.Ed. 547 (1908); Maryland Cas. Co. v. Du-pree, 223 Ala. 420, 424, 136 So. 811, 813 (1931); Note, Reconsideration of Subrogative Rights of the Miller Act Payment Bond Surety, 71 Yale L.J. 1274, 1275-76, 1291-93 (1962). After meeting a performance bond obligation, a surety might be subrogated to the state’s rights to contract and retained funds, even against tax setoff claims. Prairie State Nat. Bank v. United States, 164 U.S. 227, 232-33, 17 S.Ct. 142, 144, 41 L.Ed. 412 (1896); Alabama v. Bessemer Materials, Inc., 224 F.Supp. at 184.

10

. The Alabama statute for public contract bonds in relevant part is construed consistently with the federal Miller Act, which the cited cases construe. Water Works, Gas & Sewer Bd. of the City of Oneonta, Inc. v. P.A. Buchanan Contracting Co., 294 Ala. 402, 318 So.2d 267 (1975); see Price v. H.L. Coble Constr. Co., 317 F.2d 312, 321 (5th Cir. 1963).

11

. Ordinarily a contracting party enforces its claim against another private party through an action of debt for a specific sum or assumpsit for damages rather than through an action for conversion. Russell v. The Praetorians, Inc., 248 Ala. at 580, 28 So.2d at 789; Hunnicutt v. Higginbotham, 138 Ala. at 475, 35 So. at 470. Because in most cases the state is immune from suit, USF&G’s proper remedy was to enforce its subrogation right through a petition for mandamus to compel specific state officials to discharge their nondiscriminatory duty to pay the amounts due. State Board of Administration v. Roquemore, 218 Ala. 120, 123-24, 117 So. 757, 759 (1928) (mandamus to compel state highway department officer to pay sum due to private seller under executed contract); Alldredge v. Bailey, 29 Ala.App. 44, 45, 191 So. 647, 648, cert. denied, 238 Ala. 441, 191 So. 649 (1939) (mandamus to compel county official to draw warrant to pay amount due under executed employment contract).

12

. The district court erroneously said, in the midst of its legal discussion, that the state failed to turn over the payment warrants “after demand by USF&G.” The record does not disclose any such demand specifically requesting the warrants.

13

. The court in Kolb qualified its holding with the following consideration: “It is true that we have statutes making certain officers liable as for the acts of their assistants and clerks; in such cases the special statute, of course, controls.” 201 Ala. at 440, 78 So. at 818. Alabama imposes liability on sheriffs in several specific circumstances, e. g., Ala.Code §§ 36-22-9, 36-22-22, 36-22-23 (1977). Those statutory provisions may modify the general rule of official nonliability for subordinates’ actions in some cases involving the sheriffs liability for his deputy’s conduct. See, e. g., Harwell v. Morris, 255 Ala. 344, 346, 51 So.2d 511, 512 (1951); National Surety Co. v. Boone, 227 Ala. 599, 603, 151 So. 447, 450 (1933). But see Langis v. Byrne, 222 Ala. 183, 184, 131 So. 444, 445 (1930); Scott v. Ryan, 115 Ala. at 589-90, 22 So. at 285.

14

. Alabama law generally permits a ministerial duty to be delegated and performed by a deputy or assistant. Lucas v. Belcher, 20 Ala.App. 507, 508-09, 103 So. 909, 911, cert. denied, 212 Ala. 597, 103 So. 912 (1925); see Merlette v. State, 100 Ala. 42, 45, 14 So. 562, 563 (1894).

15

. We also do not reach the issues whether the impleader issue has been properly appealed; whether dismissal of the third party complaint was proper; whether USF&G’s claim under the state’s rights had precedence over the IRS levy on Cherokee’s assets; and whether Bass and Allen enjoy sovereign or qualified immunity under these facts.