United States Fidelity & Guar. Co. v. American Surety Co.

• Decision Date: 10 November 1938
• Docket Number: No. 3348.,3348.
• Citation: 25 F. Supp. 280
• Parties: UNITED STATES FIDELITY & GUARANTY CO., for Use of REEDY, v. AMERICAN SURETY CO. OF NEW YORK.
• Court: U.S. District Court — Western District of Pennsylvania

25 F. Supp. 280

UNITED STATES FIDELITY & GUARANTY CO., for Use of REEDY, v. AMERICAN SURETY CO. OF NEW YORK.

No. 3348.

District Court, M. D. Pennsylvania.

November 10, 1938.

Miller Alanson Johnson, of Lewisburg, Pa., J. A. Welsh, of Shamokin, Pa., and D. M. Johnson, of Scranton, Pa., for plaintiff.

M. J. Martin, of Scranton, Pa., for defendant.

WATSON, District Judge.

Newton C. Reedy brought this action against the American Surety Company on its Labor and Materialmen Bond to recover the sum of $20,237.88, which the Use-Plaintiff expended in the construction of a Teacher's Training School at Lock Haven. During the course of the trial, by agreement of counsel, the case was withdrawn from the jury and referred to Harry Needle, Esquire, as Referee. The Referee filed a very able and complete report on June 8, 1938, finding in favor of the Plaintiff in the sum of $17,857.52. The case was then brought here for rulings upon the exceptions to the report of the Referee.

The Defendant's exceptions relate to four contentions which are elaborately discussed in its brief. They are: First, that the Plaintiff was a joint adventurer with the surety's principal; secondly, that the Plaintiff is not a materialman, and, hence, is not within the purview of the bond; thirdly, that the Plaintiff is a donee beneficiary and is not a party to the bond and is, therefore, not entitled to sue on the bond; fourthly, that the Referee erred in not finding that the evidence disclosed bad faith on the part of the use-plaintiff.

The Plaintiff alleges error in that the Referee excluded certain items as not being labor and material as those terms were used in the bond.

The facts found by the Referee are about as follows:

On November 23, 1938, John C. Snyder entered into a contract with the State Council of Education of Pennsylvania to erect a Teacher's Training School for the State Normal School at Lock Haven, Pennsylvania. Shortly after work on the building had been started, John C. Snyder failed and his surety, The United States Fidelity and Guaranty Co., undertook to finish the contract. On August 14, 1929, it entered into a contract with Thomas W. Piollet and J. M. Ayers, co-partners, trading as the Towanda Lumber Co., whereby the Towanda Lumber Co. was to complete the building in accordance with the John C. Snyder contract. Thereafter, the Towanda Lumber Co. hired Newton C. Reedy, the use-plaintiff (hereinafter called the Plaintiff), to act as superintendent of the work at Lock Haven. The Plaintiff had acted in that capacity for John C. Snyder and was familiar with the work which was to be done in connection with the contract. It was orally agreed that the Plaintiff should furnish the labor and material in accordance with the plans and specifications of the John C. Snyder contract and the Towanda Lumber Company would repay him as it received money from the United States Fidelity and Guaranty Company. For these services, the Plaintiff was to receive $75 per week and expenses and 10% of the profits made on the contract. The 10% of the profits was variously described as a bonus or in the nature of additional compensation for furnishing the labor and materials. The Plaintiff then entered into the work of constructing the building. He established an account in the Clinton Trust Company designated as being the account of the Towanda Lumber Company, N. C. Reedy, Superintendent. This account contained the personal funds of the Plaintiff and was subject to withdrawals by his signature alone. The evidence clearly shows that the Towanda Lumber Company could not draw on this account nor could the Plaintiff draw on the various accounts of the Towanda Lumber Company. The building was, in due course, completed and accepted. The Plaintiff paid a considerable portion of the expenses in connection with the work and there remains an amount of $20,237.88 which has not been repaid him by the Towanda Lumber Company. Of this amount, $17,857.59 was expended for actual labor and materials entering the building; for freight, $1,513.49; for haulage, $86.20; for electricity, $67.14; for telephone, $186.61; for photographs, $33.35; for board and expenses, $493.50. The Towanda Lumber Company became insolvent and the Plaintiff brought this action against its surety, The American Surety Company, on its Labor and Materialmen Bond.

Recovery by the Plaintiff is resisted on the ground that he was a joint adventurer with the Towanda Lumber Company. As such he would not be entitled to recover from a surety as to which he is a joint principal. United States, for Use and Benefit of Walker, v. United States Fidelity & Guaranty Co., D.C., 4 F.Supp. 854. However, looking at all the facts of the case, there is a greater weight in favor of the argument that such a relationship did not exist here.

Joint adventure is a concept which is of rather recent origin and as yet differs little from a partnership. 33 C.J. 841. The cases still regard it as a partnership limited in scope and duration. First Mechanics Bank of Trenton v. Com'r of Internal Revenue, 3 Cir., 91 F.2d 275. It has been variously defined by the cases and in a majority of these the courts have retained the terminology of partnership. In Chisholm v. Gilmer, 4 Cir., 81 F.2d 120, a joint adventure is said to exist "when two or more persons combine in a joint business enterprise for their mutual benefit, with an express or implied understanding or agreement that they are to share in the profits or losses of the enterprise, and that each is to have a voice in its control and management." page 124. There is little disagreement with regard to the definition of a joint adventure, but in applying the definition to the facts, the cases so closely restrict their holdings to the facts of each particular case that authorities are of little aid in determining whether or not a given relationship constitutes a joint adventure. The sharing of profits is an element to be considered but it is not controlling. Marcus v. Grant, 289 Pa. 1, 137 A. 120; First Mechanics Bank of Trenton v. Com'r of Internal Revenue, supra. Also, to give to one employed a share of the profits in lieu of, or in addition to, a stated salary does not convert an employer-employee relationship into one of joint adventure. 33 C.J. 844. However, where the person alleged to be a joint adventurer was a promoter or an original party to the undertaking the cases uniformly hold that the relationship does exist. 33 C.J. 844.

The only case which deals with a situation comparable to that of the present case is United States, for Use and Benefit of Walker, v. United States Fidelity & Guaranty Co., D.C., 4 F.Supp. 854. In that case suit was also brought against the surety of the general contractor to recover the value of labor and materials allegedly furnished by the Plaintiff to the General Contractor. However, there were additional factors evidencing an intention to engage in a joint undertaking which do not appear in the case under consideration. The Plaintiff and the general contractor, in the Walker Case, established a joint account wherein the funds of both parties were mingled and checks in payment of the project were deposited. From this joint account all payments for labor and materials were made by checks drawn indiscriminately by either of the parties. Even the premium of the bond was paid from this account. Further, the account was significantly labelled "this is a joint partnership account for the purpose of transacting business together in connection with road contracts which we have taken jointly." With this clear indication of how the parties regarded the transaction, it is not difficult to understand how the Court arrived at its conclusion that the parties were joint adventurers.

That the relationship of the parties in the present case is not that of joint adventure can be determined by examining the facts. It is true that the Plaintiff was to receive a share in the profits but this is not controlling. Even so, the share in the profits was not in the nature of an interest in the benefits of a business in which the Plaintiff was a co-owner, but was more nearly in the nature of additional compensation for the supplying of labor and materials. There must be some further manifestation of an embarking...