159 A. 545 | Pa. | 1931
Lead Opinion
Argued December 1, 1931. The basic question in this case is whether or not the bond in suit is one of guaranty or indemnity. The action is assumpsit on a completion bond; the lower court held it to be a guaranty, and the measure of damage thereon to be the cost of completion. These rulings were excepted to, and after judgment was entered on the verdict, they were assigned as error, and defendants appealed. *292
The facts are almost determinative of the issue, and are as follows: The plaintiff, Mrs. Elizabeth Purdy, sold to one Valentine Kulp, a straw man for Isaac Wood Massey, defendant, a piece of land in Philadelphia for $85,000; she received $25,000 in cash and a purchase-money mortgage, with bond, for the balance of $60,000. Massey intended to build a garage on the lot, and to finance the undertaking he induced plaintiff to subordinate her mortgage to another mortgage equal in amount to the cost of construction. She agreed to do so provided the building was completed or she received a bond guaranteeing completion. This arrangement was effected. Plaintiff subordinated her mortgage to a first mortgage placed with the Home Life Insurance Company for the contract price of the building, $80,000, after defendants, Massey as principal and Indemnity Insurance Company of North America as surety, had given their bond for $60,000, the amount of her mortgage. This bond, after reciting the facts, provided that if Massey should "complete the building mentioned free and clear of mechanics' liens or claims, then this obligation shall be void; otherwise to be and remain in full force and effect."
The garage was never built. Some neighbors objected to a public garage at that place, filed a bill in equity, and secured an injunction restraining Massey and Kulp "from using or operating or permitting to be used or operated as a public garage or automobile sales and service station . . . . . . any . . . . . . building . . . . . . erected on said lot." Massey and Kulp then refused to erect the building. The defendants were immediately notified and demand made upon them to perform the obligation of their bond. They declined to do so, the Home Life Insurance Company foreclosed its mortgage on account of nonpayment of interest, a sale was had, and the plaintiff's second mortgage was wiped out. She has received nothing on account of interest or principal due her on the mortgage given by Kulp, and the judgment which plaintiff has entered against him on the bond which the *293 mortgage was given to secure is worthless, and nothing can be recovered thereon. Unless plaintiff can recover on this bond she will have received $25,000 for the property which she sold for $85,000, and she will have suffered a loss of $60,000 and interest thereon through no fault of her own. She no longer has her property or her mortgage, and she has now brought suit against defendants on their bond.
Is this bond one of guaranty or merely an indemnity against loss? "The distinction between the two agreements is simply that between an affirmative covenant for a specific thing, and one of indemnity against damage by reason of the nonperformance of the thing specified": Weightman v. Union Trust Co.,
This bond is to be construed most strictly in favor of the plaintiff. The obligor, Indemnity Insurance Company of North America, is a paid surety engaged in the business of furnishing bonds for profit; we have frequently held that in cases of corporate sureties, the bond is to be strictly construed in favor of the obligee: Young *294
v. American Bonding Co.,
The condition of the bond is performance of a specific thing — completion of the building provided for in plans and specifications made a part of the bond — and the only alternative for performance is the bond itself. It is obvious, being clearly expressed by the words of the bond and the circumstances surrounding the transaction, that the intent of all concerned was to give plaintiff in lieu of her first mortgage the enhanced value of the real estate by the addition of the building, or failing that, its equivalent in money — not to exceed the face value of the bond. It can readily be seen that such an arrangement was a sound business transaction, and as events happened, a wise precaution for and by the plaintiff. In giving up her first lien on the property to help finance the building, she could not have protected herself in any better way.
That this is a guaranty bond, an affirmative covenant to complete the building in event of default by the principal, is firmly established by our cases: Janes v. Scott,
In regard to the measure of damage, the court below required the plaintiff to show the cost of erecting the building contemplated in the contract. The estimates of the witnesses ranged from $45,000 to $70,000, and the court instructed the jury that if they found the fair cost to be more than $60,000, they could not give a verdict in excess of that sum because such was the amount of the bond. The verdict was for $60,000 with interest. In fixing compensation for damage resulting from breach of a contract the general rule is that the injured party should be placed in the same position as if there had been no breach. The object of the law is to place such party in as good position as if the contract had been kept. In the instant case the bond guaranteed the completion of the building; if there had not been a breach of the obligation of the bond, the building would have been erected. Since this was not done, the plaintiff can only be put in as good position as if the contract had been carried out by giving her the cost of construction, not exceeding, of course, the amount of the bond. The measure of damage on a bond guaranteeing completion is the cost of completion: Equitable Trust Co. v. National Surety Co., supra; Mechanics Trust Co. v. Fidelity Casualty Co., supra; Board of Education v. Maryland Casualty Co.,
Defendants contend that the injunction issued against Kulp and Massey was a sufficient legal excuse and justification for their failure to erect the building. It is their only excuse, and it is neither legal nor sufficient. An examination of the decree shows that they were restrained only from operating a public garage on the *296
premises; not one word was said against the construction of this or any other building on the property. They could have erected any kind of building, the decree only prohibited them from using whatever building might be erected as a public garage. The precise question was passed upon in Penniman v. Hoffman,
It is also contended by defendants that the plaintiff has no interest in the present cause of action, and is therefore not entitled to recover. At the trial an offer was made to show that plaintiff has no financial interest in the property or in the mortgage. An objection to this offer was sustained by the court, which action is assigned as error. The offer was properly refused; it was not within the issues framed under the pleadings, not having been pleaded as a defense: Ruth-Hastings Glass Tube Co. v. Slattery,
The assignments of error are overruled and the judgment of the court below is affirmed.
Dissenting Opinion
My objection to the majority opinion relates solely to the rule relating to the measure of damages which is there adopted and based on Mechanics Trust Co. v. Fidelity Casualty Co.,
While there is a distinction between indemnity and guaranty bonds, it is not important where only the measure of damages is involved. Under either contract the rule as to damages is compensation for the loss suffered. In one it is payable only when the insured actually sustains and has paid a loss; in the other, the compensation is recoverable immediately when a loss occurs; but the rule or standard for the ascertainment of the amount of liability is the same under both contracts. In other words, the nature of the bond will not affect the measure by which damages or loss is to be ascertained.
The majority opinion states: "The condition of the bond is performance of a specific thing . . . . . . and the only alternative for performance is the bond itself." This cannot be correct if it means that in case the building is not completed, no matter to what extent, the surety will be liable for the penal sum of the bond; the penal sum merely limits the surety's obligation, which is to reimburse the obligee for the actual damage which he has suffered or may suffer: Keck v. Bieber,
The value of mortgagee's security is not to be arrived at, as appellee seems to think it was bound to be, by treating the property as in a completed state, and separating the various parts of the land, i. e., the lot and this building, placing a value on the latter. Nor was the agreement to construct the building additional security beyond insuring or guaranteeing payment of the full amount of the secured mortgage, if the cost of completion equaled that sum. Suppose the completion bond covered both contracts, what would be the rule as to damages when, as here, the property sold for less than the first mortgage? But in any event the first mortgage might require for its satisfaction the entire value of the property with the building in a completed state, and thus utterly destroy the property's value as a security to the second mortgage. The bond, under such circumstances, would be for the protection of a nonexistent interest; and no injury could possibly be said to have resulted from the contractor's default, so as to give rise to a claim for more than nominal damages.
The rule of cost of completion as a measure of damage is undoubtedly correct where the obligee of the bond is the owner and not the mortgagee. The owner is, of course, entitled absolutely to the premises in the state in which it has been agreed they should be placed, viz. a lot with a completed building. In this situation, there is considerable authority supporting the rule: Union Indemnity Co. v. Vetter,
In this case, however, the obligee of the surety's undertaking is not the owner of property, but a mortgagee, and a different rule is and should be applied, as the mortgagee's interest is different, and his loss occasioned by a failure to complete is likewise different. The owner is entitled to have his building as contracted for, but the mortgagee has no such contract as will entitle him to enforce such liability. The mortgagee has no interest in the property as such, (it is only security for his debt); and the fact that a bond is given guaranteeing completion of a certain building upon it, adds nothing to this status nor does it alter or increase the holder's rights under his mortgage with respect to that property, though it may add to his security. The mortgagee has an interest in the property only in so far as the property stands as security for his debt, beyond this, he has no further interest. All he is entitled to in any case is full and adequate security for the sum he has advanced, and it is difficult to see how he can become entitled to anything more than this by virtue of the surety's undertaking as noted in the completion bond under consideration. The court below having taken as the measure of damages the cost of completion was, in my opinion, in error. It may often be that an incompleted structure will be of sufficient security value to protect the mortgagee, or that the land itself may be sufficient for this purpose. It seems plain that in such a case it could not be laid down as a rule that the mortgagee, who is adequately protected, would, by virtue of his bond, be entitled to collect what it would cost to construct the building in its entirety no matter to what extent it might be incompleted.
The correct measure of damage is the loss on the security value of the mortgage caused by the failure to complete. Here appellee's measure of damage is the difference *300
between the value of the land without the building or the building in any state of completion, and the value with the completed building thereon, less the first mortgage; recovery being, of course, limited to the loss thus established on appellee's mortgage. See German-American Title Trust Co. v. Citizens' Trust Surety Co.,
This question has been admirably discussed and this conclusion reached by Judge KIRKPATRICK in Trainor Co. v. Ætna Casualty Surety Co., 49 F.2d 769. So too, in Province Securities Corp. v. Md. Casualty Co.,
In the light of the foregoing discussion and on the authority of the cases cited, I would reverse the lower court. *301