Lawrence v. Am. Sur. Co. of N.Y.

Citation249 N.W. 3,263 Mich. 586
Decision Date05 June 1933
Docket NumberNo. 117.,117.
PartiesLAWRENCE, State Treasurer, v. AMERICAN SURETY CO. OF NEW YORK et al.
CourtSupreme Court of Michigan

OPINION TEXT STARTS HERE

Appeal from Circuit Court, Ingham County; Charles B. Collingwood, Judge.

Action for declaratory judgment by Howard C. Lawrence, Treasurer of the state of Michigan, for and in behalf of the state of Michigan, against the American Surety Company of New York and others. From judgment in favor of plaintiff against the American Surety Company of New York, the Union Indemnity Company, the Western Casualty & Surety Company, the National Casualty Company, and the Maryland Casualty Company, and in favor of the other defendants, the American Surety Company of New York, the Union Indemnity Company, the Western Casualty & Surety Company, and the National Casualty Company appeal, and the plaintiff and the defendant the Maryland Casualty Company cross-appeal.

Modified and rendered.

Argued before the Entire Bench.Patrick H. O'Brien, Atty. Gen., and Charles F. Cummins, Asst. Atty. Gen., for plaintiff.

Coulter & Hampton, of Detroit, for defendant Maryland Casualty Co.

Monaghan, Crowley, Reilley & Kellogg, of Detroit, for defendant Massachusetts Bonding & Insurance Co.

Sherman T. Handy, of Lansing, for defendant Detroit Fidelity & Surety Co.

Bishop & Weaver, of Detroit, for defendant Indemnity Insurance Co. of North America.

Stevens T. Mason, of Detroit, for defendant Century Indemnity Co.

FEAD, Justice.

The action is for declaratory judgment upon the liability of the various defendants to the state and to each other. For convenience, we will abbreviate the names of the defendants, designating them by the distinguishing words in their titles.

January 1, 1931, Howard C. Lawrence became treasurer of the state of Michigan. He designated the Fidelity Bank & Trust Company of Detroit a depository of part of the surplus funds of the state. A contract was executed, requiring the bank to pay the funds ‘whenever called for,’ to the state treasurer, his successor in office, or the person lawfully entitled thereto.

Defendants executed surety bonds to the state treasurer and his successors in office to secure performance of the depository contract, the condition of the bonds being substantially in the words of the relevant statute, Comp. Laws 1929, § 348: ‘Surplus funds; security required for deposit; interest. Sec. 3. The state treasurer is hereby further instructed to require of any bank, before he shall have made it a depository of surplus funds belonging to the state, good and ample security, to be approved by the said state treasurer, the auditor general and the secretary of state, for the safe keeping and reimbursement of such surplus funds, whenever called for, and the payment of such rate of interest as the state treasurer, in his discretion, shall deem best for the interest of the state.’

In addition, the bonds contained the provisions:

‘1. It is mutually understood and agreed between the parties hereto that if the said surety shall so elect its liability for future actions or omissions of said principal may be terminated by giving thirty (30) days' notice in writting to the said Howard C. Lawrence, as Treasurer as aforesaid, or his successor or successors in office, and a like notice to the Secretary of State and Auditor General of said State; and the liability of said surety for the future actions or omissions of said principal shall cease at the expiration of said thirty (30) days, the said surety remaining liable for all or any acts of commission or omission covered by this bond or said contract up to and including the date of expiration of said thirty (30) days' notice.

‘2. It is mutually understood and agreed that the said surety shall be liable hereunder for only such proportion of the total loss sustained by the said Howard C. Lawrence, as Treasurer of the State of Michigan, or his successor or successors in office, as the penalty of this bond shall bear to the total penalties of all bonds, furnished by said Fidelity Trust Company, of Detroit, Michigan, as principal, in favor of said State Treasurer, and in no event shall the surety hereon be liable hereunder for any sum in excess of the penalty of this bond.’

The initial coverage of the deposit was American, $250,000; Union, $500,000; Century, $250,000.

March 26th, the Century mailed notice of cancellation to the three officers named in the statute and it was received by them. April 25th, the bank forwarded bonds of the Maryland, $60,000; Indemnity, $50,000; Detroit, $50,000; Western, $40,000; and Massachusetts $50,000-aggregating $250,000, to the state treasurer, and requested return for cancellation of the Century bond. The substituted bonds were approved by the three officers and filed April 27th, and the Century bond returned the next day for cancellation.

May 22d, the state treasurer acknowledged receipt from the bank of the National bond, $50,000, and Maryland bond, $10,000, in substitution for the Maryland $60,000 bond, and returned the latter. The substituted bonds were approved by the three state officers.

September 8th, Indemnity bond, $50,000, was returned by the state treasurer to the bank at its request, without notice of cancellation, with no substitution, and without knowledge or approval of the auditor general and secretary of state.

September 21st, the Detroit gave notice of cancellation of its $50,000 bond, but to the state treasurer only, who returned the bond September 23d without knowledge or approval of the other officers, and without substitution of other bonds.

September 8th, the state treasurer returned the Massachusetts $50,000 bond to the bank at its request. September 11th the surety wrote the state treasurer acknowledging receipt of the bond for cancellation, asking confirmation of cancellation, with statement of the treasurer that the funds covered by it had been returned to the state, and that the bond was not effective after September 10th. September 14th the state treasurer wrote the surety, stating that he was inclosing the bond, it had been returned for cancellation to the bank on September 8th, and the funds covered by it had been withdrawn. The surety gave evidence that cancellation had been requested because of an agreement between it and the bank that, on cancellation, the surety would write a depository bond for the bank in like amount to cover state highway deposits. The latter bond was executed September 11th. The amount has been paid to the state. Before writing the latter bond, the surety had legal advice that the state could cancel the former.

The state treasurer returned the bonds for cancellation under the belief that he had a right to do so in proportion as the deposit decreased. In September he was making regular and heavy withdrawals from the bank. It will be noted that the Century and Maryland bonds were replaced by substitutes more than thirty days before the bank closed, while the Detroit Company gave notice of cancellation and its bond and those of the Indemnity and Massachusetts Companies were returned within such period.

October 7th, the depository bank closed and went into receivership, holding state deposits of about $600,000, derived from miscellaneous sources, such as taxation, license fees, donations, etc., representing moneys belonging to both general and various special funds of the state. It also held two deposits, carried separately, under the designation Howard C. Lawrence, State Treasurer, Trustee for Receivers of’ designated banks in the sum of $40,000 and $18,000, respectively. These funds were in the hands of the state treasurer by virtue of Comp. Laws 1929, § 11959, which requires receivers of banks to remit moneys collected by them to the state treasurer, who disburses them only on order of court. In the state treasurer's report of June 30th, the state funds carried in the general account in the bank were reported as secured by depository funds of defendants, but the receivership accounts were separately listed as unsecured.

Between November 21, 1930, and October 7, 1931, the state treasurer and his predecessor had drawn several checks against the deposit account amounting to over $4,000, which were not presented to the bank before it closed and were payable to residents of the state.

In circuit court judgment was entered in favor of the state against the American, Union, Western, National, and Maryland, the latter on its $10,000 bond. Those defendants appealed. The other defendants had judgment of no liability. The state has appealed.

The state contends the cancellation and pro rata clauses are invalid; there exists no power to release or substitute securities once approved; and all the bonds are cumulative. It claims judgment against all defendants in the penal sums of their bonds, leaving those who pay to their remedy of contribution against the others.

Defendants agree with the state's position or oppose it as their interests lie. They further deny all liability on the ground the moneys deposited were not ‘surplus funds' covered by the statute. Other questions will be noted later.

At the outset, we must brush aside the stressed contention that public welfare demands that the state have such construction of the law and bonds as will certainly preserve its founds inviolate. The state is entitled to the full protection of the laws it enacts, but citizens dealing with it are entitled to like protection. There can be no virtue in a ruling which will favor the state at the expense of the legal rights of those who deal with it. ‘When a decision is right, the government wins though it loses the suit.’

Are the bonds to be viewed as commonlaw contracts or as obligations into which the terms of the statute are woven?

It is the general rule that existing law becomes part of a statutory bond, i. e., one commanded or provided by statute, so that omitted conditions required by the law are read into the bond, and conditions not so required, which limit...

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