City of Philadelphia v. National Surety Corporation

• Decision Date: 27 January 1944
• Docket Number: No. 8321.,8321.
• Citation: 140 F.2d 805
• Parties: CITY OF PHILADELPHIA, to Use of WARNER CO., v. NATIONAL SURETY CORPORATION (CITY OF PHILADELPHIA, Third-Party Defendant). NATIONAL SURETY CORPORATION v. CITY OF PHILADELPHIA.
• Court: U.S. Court of Appeals — Third Circuit

140 F.2d 805 (1944)

CITY OF PHILADELPHIA, to Use of WARNER CO., v. NATIONAL SURETY CORPORATION (CITY OF PHILADELPHIA, Third-Party Defendant). NATIONAL SURETY CORPORATION v. CITY OF PHILADELPHIA.

No. 8321.

Circuit Court of Appeals, Third Circuit.

Argued October 5, 1943.

Decided January 27, 1944.

George E. Beechwood, of Philadelphia, Pa. (Conlen, La Brum & Beechwood, of Philadelphia, Pa., on the brief), for appellant.

Samuel Feldman, of Philadelphia, Pa. (Robert McCay Green, of Philadelphia, Pa., on the brief), for appellee.

Before BIGGS, JONES, and GOODRICH, Circuit Judges.

BIGGS, Circuit Judge.

In the years from 1927 to 1931 the City of Philadelphia, a first class city of the Commonwealth of Pennsylvania, entered into contracts with Municipal Construction Company, Inc., a Pennsylvania corporation, hereinafter called Municipal, for the paving, maintenance and repair of certain streets in Philadelphia. In connection with each contract Municipal executed a bond with Union Indemnity Company, a Louisiana corporation, as surety, to secure the faithful performance of the terms of the contract. In 1931, while Municipal was still obligated to maintain and repair the pavements covered by the contracts, Municipal "ceased active operations".¹ Union Indemnity was placed in receivership in 1932. The City gave notice to Municipal and to Union to carry out the maintenance provisions of the contracts and upon the failure of Municipal and Union to fulfill their obligations, the City performed the maintenance work itself at a cost of $10,661.49. A suit was brought by the City against the surviving ancillary receiver of Union Indemnity Company in the Court of Common Pleas of Philadelphia County to recover the sum expended. This suit is still pending.²

In 1879, the Select and Common Councils of Philadelphia passed an ordinance directing the heads of the several departments of the City to award no contract for work or materials to any contractor who had defaulted in payment for either work or materials on a city contract, Ordinances of the City of Phildelphia, 1879, p. 38. This prohibition was sought to be implemented by another ordinance passed on April 4, 1882, Ordinances of the City of Philadelphia, 1882, p. 108, the latter ordinance providing that the heads of the departments of the City were to keep a book in which should be entered the name of each defaulting contractor and that this book should be open for the inspection of all persons desiring information.

Despite the fact that Municipal was a defaulting contractor, the City on and after September 30, 1938 entered into five more contracts with Municipal for the paving, repair or alteration of city streets. Municipal was required to execute and deliver to the City performance and "additional" bonds with corporate surety to secure these contracts. National Surety Corporation, a New York corporation, was the corporate surety. After the work upon the five new contracts had been accepted by the City, the City withheld the sum of $13,281.47³ from Municipal in order to reimburse itself with interest for its expenditures in completing the work covered by the contracts entered into by the City with Municipal from 1927 to 1931.

One of the subcontractors on the five contracts entered into by the City with Municipal on and after September 30, 1938 was Warner Company, a Delaware corporation, which had furnished materials as a subcontractor. Municipal did not pay Warner Company $12,479.94 which was due it and Warner Company demanded payment from National Surety. National Surety did not pay Warner Company and that company brought suit in the name of the City of Philadelphia to its use against the National Surety in the Court of Common Pleas of Philadelphia County⁴ to recover upon the five additional bonds. The case was removed to the District Court of the United States for the Eastern District of Pennsylvania, apparently on the ground of the diversity of citizenship of the parties. National Surety then summoned the City as a third-party defendant, alleging in its complaint (1) that the course of conduct of the City in accepting Municipal as a contractor in violation of the ordinance of April 8, 1882 resulted in a fraud upon it causing it damage in the amount of $12,437.79, the amount claimed by Warner Company, (2) that each of the written applications and indemnity agreements secured by it from Municipal when the bonds were executed contained clauses which effected assignments to National Surety from Municipal of all "* * * the deferred payments and retained percentages, and any and all money and properties that may be due and payable to the undersigned at the time of any breach or default in said contract or that thereafter may become due and payable to * * * Municipal on account of said contract or on account of any extra work or materials supplied in connection therewith, Municipal hereby agreeing that such money, and the proceeds of such payments and properties shall be the sole property of * * * National Surety and to be by it credited upon any loss, cost, damage, charge and expense sustained or incurred by it in connection with said bond.", and (3) that the City by reason of its "factual misrepresentation" that Municipal was not a defaulter is estopped from withholding any part of the contract prices or from asserting any right of set-off against moneys due from the City to Municipal on contracts for which National Surety had executed performance and additional bonds.

The City filed an answer to the third-party complaint praying that it be dismissed on the ground that it failed to disclose any cause of action arising out of the controversy set forth in the original complaint. Warner Company then amended its complaint seeking recovery in the alternative from the City or from National Surety.

The court below granted the City's motion to dismiss, holding, inter alia (1) that the City could not be held liable for the negligence of its officers who had acted in derogation of the ordinances referred to, (2) that there could be no estoppel against the municipality in the circumstances which we have narrated, (3) that it was "questionable" if National Surety was deceived by a factual misrepresentation that Municipal was not a defaulter, and (4) that the City was under no obligation to see that materialmen were paid the sums due them under contracts executed by the City for municipal works. See the opinion of Judge Kalodner, 48 F.Supp. 381-385.

The judgment of the court below must be affirmed. Rule 14(a) of the Rules of Civil Procedure, relating to Third-Party Practice, 28 U.S.C.A. following section 723c, provides that a defendant may bring a third party as a third-party defendant into an existing suit by serving "* * * a summons and complaint upon a person not a party to the action who is or may be liable to him or to the plaintiff for all or part of the plaintiff's claim against him". It follows that in order for National Surety to avail itself of the benefits of the rule it is necessary that the City be liable either to National Surety or to the Warner Company for all or part of Warner Company's claim against National Surety.

As we have stated Warner Company was a materialman who furnished materials to the five jobs covered by the contracts let to Municipal on or after September 30, 1938. Under the law of Pennsylvania a municipal corporation such as the City of Philadelphia has no obligation to pay materialmen. A municipality is liable to the contractor but not to a subcontractor, a materialman or a laborer. City of Philadelphia v. Stewart, 201 Pa. 526, 532, 51 A. 348, 350; City of Philadelphia to Use of McFarland v. McLinden et al., 205 Pa. 172, 176, 54 A. 719, 720; Lesley v. Kite, 192 Pa. 268, 43 A. 959. The "additional" bonds covering the five contracts were executed by National Surety pursuant to the provisions of the two Pennsylvania statutes of June...