American State Bank v. United States Fidelity & Guaranty Co.

• Decision Date: 21 May 1964
• Docket Number: No. 14425.,14425.
• Citation: 331 F.2d 479
• Parties: AMERICAN STATE BANK, Plaintiff-Appellant, v. UNITED STATES FIDELITY & GUARANTY COMPANY, Defendant-Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

331 F.2d 479 (1964)

AMERICAN STATE BANK, Plaintiff-Appellant, v. UNITED STATES FIDELITY & GUARANTY COMPANY, Defendant-Respondent.

No. 14425.

United States Court of Appeals Seventh Circuit.

April 28, 1964.

Rehearing Denied May 21, 1964.

Carl R. Becker, Becker, Kinnel, Doucette & Mattison, Milwaukee, Wis., for plaintiff-appellant.

Laurence E. Gooding, Jr., Maxwell H. Herriott, Milwaukee, Wis., for defendant-respondent.

Before HASTINGS, Chief Judge, and KNOCH and SWYGERT, Circuit Judges.

HASTINGS, Chief Judge.

This is a diversity action by plaintiff, American State Bank, a banking corporation organized and existing under the laws of Wisconsin, to recover $17,805.16 under a performance bond issued by defendant, United States Fidelity & Guaranty Company, a corporation organized and existing under the laws of Maryland. Plaintiff claims to be subrogated to the rights of laborers and materialmen on the bond.

The district court entered judgment dismissing plaintiff's action on the merits and granting defendant the costs of the action. Plaintiff appealed.

On March 17, 1953, plaintiff loaned $22,000 to Universal Map & Survey Company, a Wisconsin corporation, and received as security certain accounts receivable of Universal, including that of Indiana Farm Bureau Co-operative Association, Inc. This loan was subsequently increased to $50,000.

On March 31, 1953, Universal entered into a contract with Buckeye Pipeline Company, Inc., an Ohio corporation, in which Universal agreed to construct a petroleum products pipeline within the State of New York. Universal agreed to furnish and pay for all labor, equipment and material, and to furnish a performance bond satisfactory to Buckeye for the full amount of the contract, $642,260, executed by a responsible bonding company.

Universal obtained defendant as surety on the performance bond. The bond was executed in Wisconsin by Universal as principal and defendant as surety, and accepted by Buckeye in New York. The bond provided, in pertinent part, "* * * if the Principal Universal shall fully indemnify and save harmless the owner Buckeye from any and all claims and liens by materialmen, mechanics or laborers * * * then this obligation shall be null and void; otherwise to remain in full force and effect."

On or about July 17, 1953, the Farm Bureau paid $25,000 on its account by check to Universal. Out of this amount, Universal paid $17,805.16 to laborers and materialmen in connection with construction of the pipeline. Plaintiff did not consent to nor receive notice of these payments to laborers and materialmen.

The pipeline was completed in 1954. Universal was adjudicated a bankrupt, its assets were fully administered and the bankruptcy estate was closed. Plaintiff filed a claim in the bankruptcy proceedings but received no dividend thereon.

Plaintiff claims that the laborers and materialmen had rights under the performance bond and when they received $17,805.16 from Universal out of money which represented security to plaintiff, plaintiff became subrogated to these rights.

The district court, in construing the bond, applied New York law and held that laborers and materialmen had no rights thereunder against defendant. The court did not reach the issue of whether, assuming laborers and materialmen had rights under the bond, plaintiff was subrogated to these rights.

On appeal, plaintiff contends that the district court should have applied Wisconsin law in construing the bond and that, under Wisconsin law, laborers and materialmen have rights on the bond.

Both parties agree that in diversity of citizenship cases, the federal courts, when deciding conflict of laws questions, must follow the conflict of laws rules prevailing in the states in which they sit. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). While agreeing that Wisconsin conflict of laws rules are applicable, the parties disagree as to which rules apply to the present case.

The district court held that the applicable Wisconsin rule was set out in Pat J. Murphy, Inc. v. Drummond Dolomite, Inc., E. D. Wis., 214 F.Supp. 496, 498 (1963) as follows:

"The Wisconsin rule of conflict of laws with respect to contracts has recently been stated in Estate of Knippel, 7 Wis.2d 335, at pages 341-342, 96 N.W.2d 514, at page 517 (1959), as follows:

"`* * * With respect to various other types of contract, (other than antenuptial agreements) this court has held that the choice of law governing validity and interpretation is basically a question of the intention of the parties except where their intention is to commit a fraud on the law. In the absence of evidence to the contrary, the law of the place of making the contract is presumed to be intended unless the place of performance be different. In the latter instance there is a rebuttable presumption that the law of the place of performance controls. (Citations omitted.) * * *\'"

The district court held and found that, "The contract with which we are here concerned, the performance bond, although executed in Wisconsin, was to be performed in New York where the work contracted for by Buckeye was to be done by Universal. Nothing in the facts here presented rebuts the presumption that New York law is controlling or gives rise to even an inference that the parties intended that the rights under the bond of laborers and materialmen performing work and furnishing material in New York be governed by Wisconsin law."

Plaintiff, while agreeing with the above quoted statement of Wisconsin law, contends that it is inapplicable because the issue in this case is not one of substantive contract rights but is concerned with procedural and evidentiary rules. Further, that the Wisconsin conflict of laws rule applicable to insurance contracts is different from the general contract rule.

Plaintiff urges that the issue in this case is whether the parties to the performance bond intended to benefit laborers and materialmen and the sufficiency of the proof of such intention must be weighed by the rules of the forum.

While agreeing with plaintiff that the general rule is that matters of procedure, rules of evidence and rules of practice are governed by the law of the forum, Nelson v. American Employers' Ins. Co., 258 Wis. 252, 255, 45 N.W.2d 681, 682, 22 A.L.R.2d 1244 (1951); 11 Am.Jur. Conflict of Laws § 186 (1937), we cannot agree that the issue in this case is to be determined by the laws of procedure or evidence. The issue here is one of construction and interpretation of the performance bond, compare Builders' Lumber & Supply Co. v. Chicago Bonding & Surety Co., 167 Wis. 167, 166 N.W. 320 (1918) with Fosmire v. National Surety Co., 229 N.Y. 44, 127 N.E. 472 (1920), and such issues are not determined by the law of the forum in conflict of laws cases. Estate of Knippel, 7 Wis.2d 335 at 341, 342, 96 N.W.2d 514 at 517 (1959); 15 C.J.S. Conflict of Laws 21, subd. b (1939).

Plaintiff argues that the general Wisconsin conflict of laws rule for contracts is inapplicable to insurance contracts written in Wisconsin; that under Wisconsin law a contractor's bond executed by a commercial surety for a premium is a contract of insurance; and that the Wisconsin conflict of laws rule as to insurance contracts is applicable to surety contracts.

The "almost universal rule" is that contracts of insurance are governed by the law of the state where such contract is finally consummated. 29 Am.Jur. Insurance § 31 (1960). While ...