Present: All the Justices
INTERNATIONAL FIDELITY INSURANCE COMPANY
v. Record No. 942210
OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR.
November 3, 1995
ASHLAND LUMBER COMPANY, INC.
FROM THE CIRCUIT COURT OF HANOVER COUNTY
Richard H.C. Taylor, Judge
In this appeal, we consider whether a judgment creditor may
obtain a lien by writ of fieri facias on, and thus reach by
garnishment, funds retained by a principal relating to a contract
upon which the judgment debtor has defaulted, where the judgment
debtor's surety has assumed the duties and responsibilities of
its indemnitee.
On October 16 and 22, 1992, appellant International Fidelity
Insurance Company (IFIC) issued payment bonds on behalf of Nu-Way
Builders of Virginia, Inc. (Nu-Way) to secure the cost of labor
and materials on two contracts Nu-Way had been awarded from the
Virginia Department of Transportation (VDOT). The bonds were
issued pursuant to an agreement of indemnity between Nu-Way and
IFIC. The agreement included a provision that if Nu-Way breached
an indemnified contract, Nu-Way would assign to IFIC, inter alia,
"[a]ny and all percentages retained and any and all sums that may
be due or [t]hereafter become due on account of any and all
contracts referred to in the Bonds" issued pursuant to the
agreement.
Without indicating specific dates, the record establishes
that Nu-Way began work under the two contracts, purchasing
materials and letting sub-contracts for some portion of the work.
Prior to August, 1993, VDOT terminated both contracts because
Nu-Way failed to pay certain subcontractors and suppliers. At
that time, VDOT retained $34,123.47 of the contract funds.
Thereafter, IFIC made payments to Nu-Way's suppliers and
subcontractors in at least partial satisfaction of its bonds.
Appellee Ashland Lumber Company, Inc. (Ashland) was a
material supplier on open account to Nu-Way. On August 27, 1993,
Ashland filed a motion for judgment against Nu-Way and its
president, C. Earl Vipperman, Jr., alleging Nu-Way's failure to
pay on demand its account for materials received in the amount of
$15,071.36. Ashland obtained a judgment for the full amount of
the account plus interest, costs, and attorney's fees on February
4, 1994.
On August 26, 1994, Ashland filed with the clerk of the
trial court a suggestion for summons in garnishment to satisfy
the February 1994 judgment. The civil process related to the
suggestion for summons in garnishment, including a writ of fieri
facias, was delivered to the sheriff on August 29, 1994. On
August 31, 1994, the sheriff served VDOT with the writ of fieri
facias and an appurtenant garnishment summons in the amount of
$21,969.50.
Upon being served with the writ and summons, VDOT lodged
with the trial court funds sufficient to satisfy the garnishment,
noting in an accompanying letter that "[w]hile VDOT has tendered
[the funds] to the Court pursuant to the garnishment summons,
VDOT is not certain that the garnishment summons properly
attached to the funds." VDOT also provided IFIC with a copy of
the writ and summons.
On September 16, 1994, IFIC, pursuant to Rule 2:15, filed a
petition to intervene in the garnishment proceeding. Following
an ore tenus hearing on September 20, 1994, the chancellor
directed that the parties file memoranda in support of their
respective positions. In its memorandum, IFIC asserted that its
equitable right of subrogation as a surety related back to the
dates of the original surety bonds and, thus, took precedence
over a subsequent creditor. In the alternative, IFIC asserted
that its contractual right of assignment became effective prior
to Ashland's judgment and thus precluded garnishment of the funds
assigned to IFIC. Ashland asserted that IFIC failed to perfect
its right to the funds by recording the indemnity agreement or
otherwise obtaining a secured interest in the funds, thus
subordinating its claim to Ashland's judgment.
Upon consideration of the memoranda and oral argument, the
chancellor issued a letter opinion in which he stated:
[a]pplying the particular facts in this case to the
garnishment statute, it is the opinion of this Court
that [Nu-Way] "is or may be entitled" to the funds
[held by VDOT] and under none of the theories of [IFIC]
does it have priority over [Ashland].
In his final order, the chancellor, while permitting the
intervention of IFIC, ordered that the funds lodged with the
court be paid over to Ashland in satisfaction of its judgment
against Nu-Way. We awarded IFIC's appeal assigning error to the
chancellor's determination that IFIC's subrogation and assignment
rights did not preclude the garnishment.
We need only address IFIC's rights of equitable subrogation,
which we find dispositive of this appeal. A garnishment of funds
or other intangible property cannot proceed without a valid lien
on that property by writ of fieri facias. See Code § 8.01-512.3
(designating form of garnishment summons to require garnishee to
answer "by reason of the lien of fieri facias"); see also
Virginia Nat'l Bank v. Blofeld, 234 Va. 395, 400, 362 S.E.2d 692,
695 (1987)(construing Code §§ 8.01-511 and -512.3 "against the
background of [Code § 8.01-501]"). The writ of fieri facias
creates a lien in favor of the judgment creditor only to the
extent that the judgment debtor has a possessory interest in the
intangible property subject to the writ. Lynch v. Johnson, 196
Va. 516, 521, 84 S.E.2d 419, 422 (1954). Accordingly, when the
judgment debtor has no interest in the property held by the
suggested garnishee, the writ does not create a valid lien on
that property, and the suggestion for summons in garnishment must
fail.
Code § 8.01-501 provides, in pertinent part, that
[e]very writ of fieri facias shall . . . be a lien from
the time it is delivered to a sheriff or other officer
to be executed, on all the personal estate of or to
which the judgment debtor is, or may afterwards and on
or before the return day of such writ become, possessed
or entitled, in which, from its nature is not capable
of being levied on . . . .
Thus, the threshold question presented to the chancellor in
this case was whether, on August 29, 1994, when Ashland had the
writ of fieri facias delivered to the appropriate sheriff, Nu-Way
had or would have any possessory interest in funds held by VDOT
before or on the return date of the summons in garnishment. We
hold that it did not.
By virtue of its default on the two contracts with VDOT,
Nu-Way was terminated from these contracts and any right it had
to receive further funds from VDOT was extinguished at that time.
IFIC, as Nu-Way's surety, then became responsible for the debts
of its defaulted indemnitee, and upon payment of the
subcontractors and materialmen, would be entitled, by equitable
subrogation, to any receivables due on the contracts. IFIC
correctly asserts that its rights relate back to the dates of the
surety contracts, in this instance October 16 and 22, 1992, the
dates the bonds were issued. Dickenson v. Charles, 173 Va. 393,
402-03, 4 S.E.2d 351, 354-55 (1939). Although IFIC would not
have a present right to receive the funds until it satisfied all
the requirements of its bonds, this limitation on its rights does
not permit the defaulted indemnitee, Nu-Way, or its judgment
creditor, Ashland, to assert a continuing right to the funds.
In short, on August 29, 1994 when Ashland attempted to
establish a lien on the funds retained by VDOT, Nu-Way had no
possessory interest in the funds. Accordingly, no lien was
established and no garnishment of the funds could result.
Ashland's reliance on Electric Transmission Company v.
Pennington Gap Bank, Inc., 137 Va. 94, 119 S.E. 99 (1923), is
misplaced. That case dealt with a mechanic's lien and a
creditor's lien secured by a deed of trust which "had already
attached, or could be asserted, when the surety assumed the
completion of the contract." Id. at 105, 119 S.E. at 103. Here,
the lien could not have been asserted until Ashland obtained its
judgment against Nu-Way, several months after IFIC assumed
responsibility for the debts on the contracts. 1
Having determined that the chancellor erred in awarding a
garnishment in favor of the judgment creditor, there remains the
question of the disposition of those funds lodged with the court
by the suggested garnishee. Assuming, without deciding, that
IFIC's petition for intervention permits it to assert a claim to
receive the funds, compare Rule 2:15 (procedure for intervening
in equitable suits) with Code § 8.01-365 (procedure for filing
third party claim to funds subject to writ of fieri facias), we
hold that the record before us does not establish affirmatively
that at the time of the chancellor's final ruling IFIC had fully
discharged its duties under the two bonds, thus entitling it to
the retained funds. Although it was alleged in oral argument
that those duties have subsequently been discharged and VDOT has
paid the remaining funds it retained to IFIC, we are concerned
here only with the facts that were available to the trial court.
Those facts do not establish the respective rights between IFIC
2
and VDOT, the suggested garnishee , to the funds lodged with the
1
Ashland has asserted that its judgment against Nu-Way
should be afforded the same dignity as a mechanic's lien.
However, the record of this case establishes only that Ashland
had "an open account from numerous jobs and invoices," and not
that it was a supplier on the specific contracts related to the
funds retained by VDOT. We express no opinion on whether a
different result would have been reached if Ashland's judgment
had been obtained in lieu of a mechanic's lien on supplies for
the contracts.
2
Nonetheless, VDOT was not an indispensable party to this
appeal, as suggested by Ashland in its motion to dismiss. We
distinguish the present appeal from Butler v. Butler, 219 Va.
164, 247 S.E.2d 353 (1978), wherein we held that the suggested
garnishee was indispensable to the appeal of a garnishment
proceeding. Unlike Butler, this appeal was brought by an
intervening third party. By intervening, IFIC placed itself in
court.
For these reasons, we will reverse the chancellor's order
directing that the funds be paid to the judgment creditor and
remand with directions that further proceedings be held
consistent with this opinion.
Reversed and remanded.
opposition only to the judgment creditor, thus only the judgment
creditor was an indispensable party to the intervenor's appeal of
the chancellor's unfavorable ruling.