Continental Casualty Co. v. City of Pittsburgh

• Decision Date: 15 November 1946
• Docket Number: No. 3545.,3545.
• Citation: 68 F. Supp. 805
• Parties: CONTINENTAL CASUALTY CO. et al. v. CITY OF PITTSBURGH.
• Court: U.S. District Court — Western District of Pennsylvania

68 F. Supp. 805

CONTINENTAL CASUALTY CO. et al. v. CITY OF PITTSBURGH.

No. 3545.

District Court, W. D. Pennsylvania.

November 15, 1946.

Dickie, Robinson & McCamey, of Pittsburgh, Pa., for plaintiff.

John M. Marshall, Asst. City Sol., of Pittsburgh, Pa., for defendant.

McVICAR, District Judge.

The facts are fully stated in the Findings of Fact. From the facts found, it appears that the Middle West Construction Company entered into a written contract with the City of Pittsburgh, January 29, 1939, for the construction of a relief sewer in the Columbus Avenue Drainage Basin.

The contract provides, inter alia, that the contractor furnish all work and materials necessary for the performance of the contract and promptly pay for the same. It also provides for periodical payments by the City to the contractor with the right in the City to retain ten per cent until completion and acceptance; that in event of default by the contractor to make prompt payments for labor and materials, the City may complete the work and pay the balance to the contractor; if the cost of completion is in excess of the balance in the hands of the City, it is given the right to charge the same to the contractor and the sureties on its bonds; the City also has the right to withhold payments until specified evidence has been furnished to it of payment by the contractor for labor and materials; also that the contractor furnish two bonds, which were made a part of the contract; one, a performance bond; the other, a labor and material bond. These bonds were furnished by the Continental Casualty Company and the Massachusetts Bonding and Surety Company, Plaintiffs. They provide for faithful performance by the contractor of the terms of the contract and for the payment of labor and materials furnished. The Contractor assigned to the plaintiffs, all monies due it under the contract in event of its default.

The contractor entered into performance of the aforesaid contract with the City and made default in payment for labor and materials. The City notified the contractor of its default February 13, 1941, and called upon plaintiffs, the sureties, to complete said contract. Thereafter, the contract was completed and the cost of said completion, $25,861.21, was paid by the plaintiffs, the surety companies. There is a balance under the contract in the possession of the City of $23,834.13. It is conceded that plaintiffs are entitled to judgment for this amount, unless the City is entitled to the set off averred in its counterclaim.

On March 29, 1938, the City entered into a contract with the Middle West Construction Company for the construction of a relief sewer in the Spring Garden Drainage Basin. The Standard Accident Insurance Company became surety on the performance and labor and material bonds, covering said contract. Work was completed October 22, 1938. The City paid the contractor the amount found to be due it. In 1941, the City found that the sewer had not been constructed in accordance with the contract. Neither the City nor the contractor has done the work required to complete said sewer. The City, in 1944, estimated that the cost thereof would be $18,240.30, which is ten per cent to fifteen per cent higher than the cost would have been in 1941. This is the set off which it claims. Plaintiffs contend that the City is not entitled to this set off, as against the balance in the hands of the City under the Columbus Avenue sewer contract. The question is whether the City's claim of set off should be sustained or not.

The City contends that the assignment made by the contractor of monies in the hands of the City to the plaintiffs in event of default by the contractor was not effective to defeat defendant's right of set off, also that plaintiffs have no right of subrogation. Plaintiffs contend that the City is not entitled to set off against the balance in its hands under the present contracts, a claimed indebtedness by the City against the contractor under an earlier contract. Plaintiffs also claim that they are entitled to subrogation to the unpaid balance in the hands of the City under the present contract.

In the case: in Re L. H. Duncan & Sons, Appeal of Maryland Casualty Co., 3 Cir., 127 F.2d 640, the contractors entered into a written contract with the Commonwealth of Pennsylvania for the construction and improvement of a section of a State Highway. The contract provided that the contractors would make prompt payment in full for labor and materials used in the work. The contractors were required to furnish performance and labor and material bonds. The contractors made an assignment of all monies due them from the Commonwealth of Pennsylvania in event of default. The contractors performed the contract and defaulted in payment for labor and materials. The surety paid these claims and made claim for the money in the hands of the Commonwealth, which, by agreement, had been paid to the Trustee of the contractors, in bankruptcy; the amount being $6,912.27. The payment by the surety was in excess of that amount. The surety claimed that it was entitled to the fund aforesaid by subrogation, and also by reason of the equitable assignment which the contractors made to the surety in event of default by the contractors.

The Court, in an opinion by Judge Biggs, stated that the case was governed by Pennsylvania law. The Court reviewed the Pennsylvania cases, including DuBois v. United States Fidelity & Guaranty Company, 341 Pa. 85, 18 A.2d 802, Sundheim v. Philadelphia School District, 311 Pa. 90, 166 A. 365, and Lancaster County National Bank's Appeal, 304 Pa. 437, 155 A. 859, and in conclusion stated 127 F.2d 644:

"In view of what we have stated we think we must reach the conclusion that the case at bar on its facts is controlled by the Lancaster Bank case rather than the Sundheim and DuBois cases. In the contract at bar there was an express provision that the partners should make prompt payment in full for labor and materials. There was a breach of the covenant in this respect by the contractors and the surety made this breach good as it was required to do under its bond for the payment of materialmen and laborers. The fact that this bond was a separate obligation from the construction bond does not seem to us to be important though the appellee lays emphasis upon this fact. We conclude that under the law of Pennsylvania, putting to one side all questions which might arise by reason of the adjudication in bankruptcy of the partners, the surety was entitled to subrogation to the unpaid balance upon the contract. * * *

"The rights of the surety under the circumstances of the case at bar, however, are paramount to those of the contractor, according to Justice Simpson's statements made in the Lancaster County National Bank case, made so by the statute, contract and bond. The surety is subrogated in the case at bar to the rights of the laborers and materialmen and not to those of the contractor. It follows that the surety's right to subrogation in the fund is paramount to the right of the trustee in bankruptcy to that fund."

This case is like the present case in that the contract provides that the contractor shall make prompt payment of claims for labor and materials; that the contractor failed to make such payments; that the surety paid for the same and the surety had an assignment from the contractor for monies due the contractor in event of his default. The decision was in favor of the surety.

In Wells v. City of Philadelphia, 270 Pa. 42, 112 A. 867, 868, the plaintiff, a surety company, was a surety on bonds for the performance of contract and for the payment of labor and material. The contractor did not complete the contract but the surety, on demand, did at a cost exceeding the balance in the hands of the City. The question involved was whether the plaintiff, a surety company, was entitled to the balance in the hands of the City. It was held that it did have that right.

The Court in an opinion by Justice Kephart said: "* * * When default on the contract was declared against Wells and those under him, the surety was called upon to complete the contract in accordance with the obligation assumed by it with the city; the surety, on electing to complete, stood in a new relation to the contract. It was in direct relation to defendant as a party contracting to complete the work, becoming so on the contractor's default. In agreeing to finish the work, it exercised its rights under the contract and bond, stepping into the shoes of the contractor, operating under the contract as though a party originally alternately bound by its terms. See Philadelphia v. Harry C. Nichols Co., 214 Pa. 265, 273, 63 A. 886. It was not a new engagement, but a continuation of the old one, wherein the surety succeeded to all rights of the contractor under the contract, as well as liabilities to the owner thereunder. As to any money retained, the surety then stands to that fund in the same position as the owner of the property to which the contract relates. The surety's relation, through compulsion (default), dated even with the owner's relation. From this fund and the unpaid contract price it is entitled to sufficient to save itself from loss on its suretyship engagement; nor can the contractor, by assignment or otherwise, deprive it of this right. * * *."

In Maryland Casualty Co. v. United States, 100 Ct.Cl. 513; Id., D.C., 53 F. Supp. 436, the contractor defaulted in his contract with the United States and as a result the surety on his bond was required to make payment of monies due materialmen and laborers. The surety sought in that proceeding to recover money due the contractor, in the possession of the United States. The United States set up a set off by reason of taxes and other debts due it from the contractor. The question arose whether the United States had a right to such a set off. The Court of Claims held that it did not have the right.

In the opinion of...