Maryland Casualty Co. v. Johnson

• Decision Date: 17 September 1926
• Docket Number: No. 307.,307.
• Citation: 15 F.2d 253
• Parties: MARYLAND CASUALTY CO. v. JOHNSON et al.
• Court: U.S. District Court — Western District of Michigan

15 F.2d 253 (1926)

MARYLAND CASUALTY CO. v. JOHNSON et al.

No. 307.

District Court, W. D. Michigan, N. D.

September 17, 1926.

Jones & Patek, of Ironwood, Mich., for plaintiff.

E. W. Massie, of Ironwood, Mich., for defendant Laughren.

W. S. Baird, of Bessemer, Mich., for defendant Hager.

Sanborn, Lamoreux & Pray, of Ashland, Wis., for defendant Scott-Taylor Co.

Charles M. Humphrey, of Ironwood, Mich., for defendant Gogebic Nat. Bank.

RAYMOND, District Judge.

A concise statement of the facts set forth in the voluminous pleadings is sufficient to make plain the issue upon which this case must be decided. It is averred that on November 9, 1922, defendant Lizzie Laughren entered into a written contract with defendant Emil Johnson for the remodeling and construction of an addition to the St. James Hotel at Ironwood, the contract price being $27,759.20; that plaintiff became surety upon the contractor's bond for faithful performance of the contract; that defendant Hager furnished material, for which there is an unpaid balance of $2,666.87; that defendant Scott-Taylor Company has a similar claim, upon which there is a balance of $664.41; and that defendant Gogebic National Bank received from the owner, Lizzie Laughren, the sum of $5,300 of the contract price, which should have been used to pay materialmen.

Plaintiff's prayer for relief asks that, if held liable to the above-named creditors, the decree shall impress this fund with a trust for the benefit of plaintiff. This prayer is founded upon the allegation that defendant bank had knowledge, through its cashier, of the source of said moneys, and of the provisions of the bond and application therefor, by which plaintiff was entitled to an assignment of all sums due on the contract until full performance thereof, including payment of materialmen.

No liens were filed by the materialmen, and suits were threatened by them against plaintiff upon the theory that under the terms of the bond there exists a direct liability of the surety for unpaid material. The bill of complaint was filed to restrain the threatened suits, and to procure an accounting, equitable subrogation, and various other forms of equitable relief. The defendant Johnson was not served with process, did not appear in the case, and is apparently financially irresponsible. The evident object of the bill of complaint is to obtain a decree that, if the claims of the materialmen are found to be a liability against plaintiff, the loss incident thereto shall be borne, not by plaintiff, but by defendant Laughren or the Gogebic National Bank. Because of the disposition to be made of the case, it is unnecessary to make further statement of the theories or facts upon which these claims are based.

The liability of the plaintiff, asserted by the materialmen, is based upon the following provision of the bond:

"Now, therefore, the condition of this obligation is such that, if the principal shall faithfully perform the contract on his part, and satisfy all claims and demands incurred for the same, and shall fully indemnify and save harmless the owner from all cost and damage which he may suffer by reason of failure so to do, and shall fully reimburse and repay the owner all outlay and expense which the owner may incur in making good any such default, and shall pay all persons who have contracts directly with the principal for labor or materials, then this obligation shall be null and void; otherwise, it shall remain in full force and effect."

It is argued by plaintiff and several of the defendants that this bond is not for the benefit of third parties, but is indemnity for the sole benefit of the obligee; also that, even though the bond be construed as being for the benefit of materialmen, under the rule prevailing in Michigan, a third party, a stranger to the contract, cannot maintain suit thereon.

On the other hand, it is insisted on behalf of the materialmen that the clear intent of the bond is to protect laborers and materialmen, as well as the owner of the property, and that this protection is available to them without filing liens; that it is not the rule in Michigan that such laborers or materialmen are strangers to the consideration of the bond in cases where, as in this case, the material was furnished in reliance upon the bond. It is further argued, even though the rule in Michigan formerly was as stated by plaintiff, that such rule has been changed by the Judicature Act and that sections 12353 and 12361 of the Compiled Laws of 1915 indicate an intent on the part of the Legislature to extend rights of action to third parties for whose benefit a contract is made. These sections are as follows:

"Every action shall be prosecuted in the name of the real party in interest, but an executor, administrator, guardian, trustee of an express trust, a party with whom or in whose name a contract has been made for the benefit of another, or a party expressly authorized by statute, may sue in his own name without joining with him the party for whose benefit the action is brought."

"In all equitable actions, all persons having an interest in the subject of the action and in obtaining the relief demanded, may join as plaintiffs, and any person may be made a defendant who has or claims an interest adverse to the plaintiff. Any person may at any time be made a party if his presence is necessary or proper to a complete determination of the cause. Persons having a united interest must be joined on the same side as plaintiffs or defendants, but when any one refuses to join, he may for such reason be made a defendant."

The question thus presented is whether the materialmen have rights of action against plaintiff upon the surety bond given in this case; the bond securing the performance of a contract for private work. A large number of cases have been cited by counsel representing the various parties, from which it appears that the authorities are in serious conflict upon this subject. Much confusion has resulted from the failure to distinguish between statutory bonds for the completion of public works of various kinds and bonds securing the completion of private contracts. Many cases fail, also, to distinguish the varying conditions contained in the bonds upon which suit is brought.

A considerable number of the cases cited by counsel for the materialmen involve the construction of statutory bonds for the faithful performance of contracts of a public nature. The liability of the surety in these cases is generally founded upon express statutory provisions. Liens for labor and material cannot be procured, and the statutes, which afford the sole protection for such claims, are generally given liberal construction. Obviously these cases (though frequently so cited by courts and text-writers) are not authority for sustaining liability, which must be based solely upon contracts between private individuals, with no such statutory support. The following cases are often, and, as it appears to the court, erroneously, so cited: Hill v. American Surety Co., 200 U. S. 197, 26 S. Ct. 168, 50 L. Ed. 437; Equitable Surety Co. v. McMillan, 234 U. S. 448, 34 S. Ct. 803, 58 L. Ed. 1394; R. Connor Co. v. Ætna Indemnity Co., 136 Wis. 13, 115 N. W. 811; Ætna Indemnity Co. v. Indianapolis Mortar & Fuel Co., 178 Ind. 70, 98 N. E. 706; United States v. American Blower Co., 41 Ind. App. 620, 84 N. E. 555; Clatsop County v. Feldschau, 101 Or. 369, 199 P. 953, 18 A. L. R. 1221; Standard Asphalt Co. v. Texas Bldg. Co., 99 Kan. 567, 162 P. 299, L. R. A. 1917C, 490; St. Louis v. Hill-O'Meara Const. Co., 175 Mo. App. 555, 158 S. W. 98; Royal Indemnity Co. v. Granite & Stone Co., 100 Ohio St. 373, 126 N. E. 405, 12 A. L. R. 378 (public work, though bond not statutory).

...