Johnson v. Martin
| Decision Date | 08 January 1915 |
| Docket Number | 11997. |
| Citation | 145 P. 429,83 Wash. 364 |
| Court | Washington Supreme Court |
| Parties | JOHNSON v. MARTIN et al. |
Department 1. Appeal from Superior Court, King County; King Dykeman Judge.
Action by Conrad Johnson against H. S. Martin and another and J. S Elliott and others. From the judgment, the last-named defendants appeal. Reversed, with directions.
Jas. B Murphy and Wm. A. Greene, both of Seattle, for appellants.
Robt. C. Saunders, of Seattle, for respondents.
This case comes to us upon an agreed statement of facts which we shall epitomize. Respondent H. S. Martin was a contractor engaged in building houses. He and his wife, Ellen Martin were the owners of property described as lots 1, 2, and 3 block 57, Salmon Bay Park addition to the city of Seattle. The property had been mortgaged to respondent Conrad Johnson. Thereafter Martin entered into a contract to build a dwelling house for the appellant J. S. Elliott in consideration of the sum of $7,800, and agreed to pay for the labor and material and to deliver the premises free and clear of all liens and claims of whatsoever nature arising or growing out of his contract. Martin gave Elliott a bond in the penal sum of $4,000, 'conditioned that the said H. S. Martin would erect the said building for the said J. S. Elliott according to the plans and specifications, and fully perform his contract in all respects.' This bond was signed by the appellant the United Surety Company, as surety. To secure the surety company against any loss or damage it might suffer on account of the Elliott bond or on account of any other bond that it might thereafter enter into as surety, Martin and his wife executed a trust deed, the recitals and conditions of the deed being as follows:
Martin entered into the performance of his contract, but defaulted, and Elliott was compelled to pay lien claims aggregating $2,034.34. Elliott also obtained a judgment against Martin for $403.63, for failure to complete the building according to the plans and specifications. In defending the lien claims in the superior and in the Supreme Court Elliott expended by way of court costs the sum of $245.65, and paid attorney's fees aggregating $750. Johnson, the mortgagee, thereafter began suit to foreclose his mortgage. The Elliotts and the receiver of the surety company, which had become insolvent, were brought in as parties, and the present controversy is waged between them and the Martins.
It is the contention of the appellants that Elliott and wife are entitled to a substitution and to be subrogated to the security held by the surety company and to the benefits of its contract as evidenced by the deed of trust.
The contention of respondent may be briefly stated. It is: That the contract between Martin and the surety company is personal to the parties; that the condition of their contract, as evidenced by the trust deed, is that the property should stand in satisfaction only of 'any loss or damage' suffered by the surety company on account of its undertaking; that it has suffered no 'loss or damage,' as distinguished from a liability; that it is now insolvent and unable to meet the penalty of the bond, and therefore no cause of action has been stated or can be stated by the Elliotts, under the rule announced in Puget Sound Imp. Co. v. Frankfort, etc., Ins. Co., 52 Wash. 124, 100 P. 190; Sheard v. U.S. F. & G. Co., 58 Wash. 29, 107 P. 1024, 109 P. 276; Ford v. AEtna Life Ins. Co., 70 Wash. 29, 126 P. 69. These cases were all actions at law brought against an indemnitor, and were correctly decided upon the theory that there was no privity, and hence could be no recovery under a strict interpretation of the obligation assumed. The indemnitor was the party defendant. No loss or damage had been suffered, or the company had terminated its contract. The suit was on the bond alone. Here the surety or its receiver is not contesting It could not raise that issue. Its bond is conditioned for the 'faithful performance of the building contract.' It is not an indemnity bond. It says nothing about 'loss or damage.' This suit is not primarily a suit upon the trust deed. It is against Martin and the surety upon his bond, which is an undertaking on the part of Martin and the surety company to pay in any event. The question, then, is whether a contract collateral to a direct promise to pay will inure to the benefit of the principal creditor; he having suffered a loss growing out of a breach of the original contract--a contract to build a house free of lien and according to plans and specifications. The question whether the surety company might successfully defend an action on the ground that it was insolvent and could not suffer a 'loss or damage' is not involved. We are to inquire whether equity will permit Martin to defeat his contract by resorting to a technical defense reserved by his surety, not against the Elliotts, but against him, for its own benefit, or whether it will take the parties as they were at the outset and do what they intended to do. Martin intended to build a house according to the plans and specifications and free of lien. If he did not he expected and intended that his trustee should pay the loss out of his own property. The only thing standing in the way of the due execution of the contract is a competent trustee. It is a primary rule that equity will not permit a trust to fail for the want of a trustee.
The features which distinguish the cases cited from the case at bar may be illustrated by reference to the Ford Case. It is typical of the three cases and of the authorities cited in the several opinions. A recovery was denied upon the theory that there was no privity between the indemnitor and the party plaintiff. The contract did not extend either in law or in equity to a tort or contract creditor of the insured party. The indemnifying company was a stranger to the plaintiff in each and every case, while here there is a tie of privity between the surety company and the principal creditors, the Elliotts, in virtue of the bond and the trust deed which was given to sustain the liability assumed by the company, and but for which, we may assume, it would not have signed the bond to answer for the default of Martin. We may further assume that the Elliotts would not have entered into a contract with the Martins if Martin had not executed the bond, and we may assume that the surety would not have engaged as a bondsman if it had not been secured. With these assumptions before us, equity will not allow the Martins to say their obligation is not good when resort to the substance of the whole transaction is necessary to keep it whole. There is nothing in the cases demanding it, nor would we, in the absence of controlling principles of law or equity, extend the doctrine of the cases relied on to the extent of destroying a security given by the Martins to secure their unqualified promise.
Under well-settled authority a principal creditor may subject any security held by a surety upon the principal obligation to the payment of his debt. The earliest expression of the rule which we have noted is found in Maure v. Harrison, cited in 1 Eq. Ca. Abr. 93:
'A bond creditor shall, in this court, have the benefit of all counterbonds or collateral security given by the principal to the surety; us, if A. owes B. money, and he and C. are bound for it, A. gives C. a mortgage or bond to indemnify him, B. shall have the benefit of it to recover his debt.'
The more modern doctrine is well stated by the Court of Errors and Appeals of New Jersey in the case of Demott v. Stockton Paper Ware Mfg. Co., 32 N. J. Eq. 124, where it is said:
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