Menorah Nursing Home, Inc. v. Zukov

• Decision Date: 11 December 1989
• Court: New York Supreme Court — Appellate Division
• Parties: MENORAH NURSING HOME, INC., f/k/a Menorah Nursing Home Company, Inc., et al., Plaintiffs, v. Nikita ZUKOV, et al., Defendants, Travelers Indemnity Company, Defendant Third-Party Plaintiff-Appellant; Alumni Plumbing & Heating Corp., et al., Third-Party Defendants-Respondents. (and fourth and fifth party actions).

Page 702

548 N.Y.S.2d 702

153 A.D.2d 13

MENORAH NURSING HOME, INC., f/k/a Menorah Nursing Home Company, Inc., et al., Plaintiffs, v. Nikita ZUKOV, et al., Defendants Travelers Indemnity Company, Defendant Third-Party Plaintiff-Appellant Alumni Plumbing & Heating Corp., et al., Third-Party Defendants-Respondents. (and fourth and fifth party actions).

Supreme Court, Appellate Division Second Department.

Dec. 11, 1989.

Friedman, Wang & Bleiberg, P.C., New York City (Arthur S. Friedman, Peter N. Wang and Susan J. Schwartz, of counsel), for defendant third-party plaintiff-appellant.

Lester Schwab Katz & Dwyer, New York City (Steven B. Prystowsky and Eric A. Portuguese, of counsel), for third-party defendant-respondent Alumni Plumbing & Heating Corp.

Rubin & Tablante, Mineola (Albert S. Tablante, Jr., and Jane R. Svoboda, of counsel), for third-party defendants-respondents Jaffie Mechanical, Inc., and Loxcreen Architectural Products Corp.

Popkin & Rothberg, Mineola (Neal S. Spector, of counsel), for third-party defendant-respondent Craft Roofing and Waterproofing, Inc., f/k/a Craft Roofing Corp.

Gottesman, Wolgel, Smith & Secunda, P.C., New York City (Kenneth W. Malamy, of counsel), for third-party defendant-respondent Nat. Bonding and Acc. Ins. Co.

Before BRACKEN, J.P., and RUBIN, HARWOOD and BALLETTA, JJ.

BRACKEN, Justice Presiding.

The plaintiffs have sued several parties whom they allege to have been responsible for economic losses suffered in connection with a construction project. The plaintiffs seek to impose liability upon the defendant and third-party plaintiff Travelers Indemnity Company (hereinafter Travelers) on the theory that Travelers is legally responsible as a surety for the alleged failure of the project's general contractor, Blitman Construction Corp. (hereinafter Blitman) to fulfill its contractual obligations. The Supreme Court dismissed the amended third-party complaint brought by Travelers against several of Blitman's subcontractors whose wrongful conduct allegedly caused the occurrence of Blitman's default. We now reverse the order under review insofar as appealed from because the law permits Travelers, as the party called upon to pay out damages for Blitman's default, to obtain indemnification to the extent that the wrongful conduct of any of the subcontractors might have caused that default.

I

On appeal, it is argued that Travelers has no standing to sue Blitman's subcontractors. The respondents, which have appeared separately and upon separate briefs, argue that as a surety on a performance bond compelled to pay out damages for the default of its principal, Travelers may be subrogated only to the rights of the obligees (the plaintiffs) to whom such damages are paid (see, United States Cas. Co. v. Jungreis, 21 A.D.2d 769, 250 N.Y.S.2d 749). Apparently, the parties to this appeal assume that the plaintiffs themselves would have no valid cause of action against the subcontractors; therefore, if Travelers can be equitably subrogated only to the rights of the plaintiffs (United States Cas. Co. v. Jungreis, supra ), then the amended third-party complaint was properly dismissed.

A

It is true that a surety who answers for the default of his principal pursuant to the terms of a performance bond, either by completing the work required under the principal's contract with the owner-obligee, or by paying compensation to the owner-obligee, is entitled to be subrogated to the rights of the obligee whom he has paid, or on whose behalf he has completed the contract (see generally, Pearlman v. Reliance Ins. Co., 371 U.S. 132, 83 S.Ct. 232, 9 L.Ed.2d 190; Scarsdale Nat. Bank & Trust Co. v. United States Fid. & Guar. Co., 264 N.Y. 159, 190 N.E. 330; Kolb v. National Surety Co., 176 N.Y. 233, 68 N.E. 247; Lewis v. Palmer, 28 N.Y. 271; State Bank of Albany v. Dan-Bar Contr. Co., Inc., 23 Misc.2d 487, 199 N.Y.S.2d 309, affd. 12 A.D.2d 416, 212 N.Y.S.2d 386; affd. 12 N.Y.2d 804, 235 N.Y.S.2d 835, 187 N.E.2d 19; American Surety Co. of N.Y. v. Town of Islip, 268 App.Div. 92, 48 N.Y.S.2d 749; 63 N.Y.Jur.2d, Guaranty and Suretyship, §§ 440, 585; Simpson, Suretyship § 47; McClintock, Equity § 123 [2d ed.]. However, the right of a surety under these circumstances to be subrogated to the rights of its obligee is not exclusive of all other equitable subrogation rights. The general rule is that, upon answering for the default of its principal, a surety may be subrogated to any claims which the defaulting principal might have against third parties whose wrongful conduct allegedly was a cause of the default (see generally, Courtney v. Commercial Lovelace Motor Freight, U.S.Cir.Ct., 10th Cir. Oct. 24, 1988, Moore, Barrett and Borby, JJ.; Travelers Indem. Co. v. Evans Pipe Co., 432 F.2d 211 [6 Cir.]; St. Paul Fire & Marine Ins. Co. v. United States, 370 F.2d 870 [5 Cir.]; Sentry Ins. Co. v. Lardner Elevator Co., 153 Mich.App. 317, 395 N.W.2d 31; Argonaut Ins. Co. v. Commercial Standard Ins. Co., 380 So.2d 1066 [Fla.App.]; U.S. Fidelity & Guaranty Co. v. North Amer. Steel Corp., 335 So.2d 18 [Fla.App.]; Maryland Casualty Co. v. King, 381 P.2d 153 [Okla.]; 11A Appleman, Insurance Law and Practice, § 6610). Similarly, a surety on a performance bond who completes the contract after a default by the principal is subrogated to the principal's right to contract payments which may have been retained by the owner-obligee (see, e.g., United States Fid. & Guar. Co. v. Triborough Bridge Auth., 297 N.Y. 31, 74 N.E.2d 226; Tri-City Elec. Co., Inc. v. People, 96 A.D.2d 146, 149, 468 N.Y.S.2d 283, affd. 63 N.Y.2d 969, 483 N.Y.S.2d 990, 473 N.E.2d 240; Scarsdale Nat. Bank & Trust Co. v. United States Fid. & Guar. Co., 264 N.Y. 159, 190 N.E. 330, supra; 63 N.Y.Jur.2d, Guaranty and Suretyship § 586; 16 Couch, Insurance, § 61:396) [2d ed.].

We believe that the statement made by the Appellate Division, First Department, in United States Cas. Co. v. Jungreis, 21 A.D.2d 769, 250 N.Y.S.2d 749, supra, to the effect that a surety on a performance bond may not be subrogated to the rights of any party other than the obligee, constitutes an incidental remark rather than an accurate summary of the court's holding. In any event, we do not believe that the obiter dictum in question is a correct statement of the law, nor does there appear to be any conceivable rationale to support such a rule. The doctrine of subrogation is an equitable one which the court should be inclined to extend rather than restrict (see generally, 23 N.Y.Jur.2d, Contribution, Indemnity and Subrogation § 25). It seems only equitable to permit Travelers, which is potentially liable to the plaintiffs as a result of its principal's default, to seek indemnification from the third-party defendants whose misconduct allegedly caused the default. Thus, Travelers is a contingent subrogee not only of the plaintiffs, but also of its principal Blitman.

Furthermore, Travelers does not lack standing simply because it has not yet been called upon to pay any money pursuant to its bond. While it is true that the remedy of subrogation is generally available to a surety only when the claim of the creditor obligee has been paid (see generally, 63 N.Y.Jur.2d, Guarantee and Suretyship, § 435), "[t]he Court of Appeals has already sustained the viability of a contingent third-party claim based on subrogation" (American Home Assur. Co. v. Flushing Sav. Bank, 68 A.D.2d 170, 174, 416 N.Y.S.2d 591 [Murphy, P.J., concurring], affd. 52 N.Y.2d 1010, 438 N.Y.S.2d 294, 420 N.E.2d 92, citing Krause v. American Guar. & Liab. Ins. Co., 22 N.Y.2d 147, 292 N.Y.S.2d 67, 239 N.E.2d 175; Consolidated Edison Co. of N.Y. v. Royal Ind. Co., 41 A.D.2d 37, 340 N.Y.S.2d 991; see also, Town of Wappinger v. Republic Insur. Co., 89 A.D.2d 621, 622, 452 N.Y.S.2d 674). In the interest of judicial economy, Travelers should be permitted to assert third-party causes of action which might be considered technically premature.

B

The Supreme Court dismissed Travelers' amended third-party complaint insofar as it was asserted against National Bonding and Accident Insurance Company (hereinafter National) on an additional ground. Travelers' claim against National is based on allegations that National is legally responsible to answer for the default of the subcontractor Mopal Contracting Corp. (hereinafter Mopal), on whose behalf National had issued a performance bond. National argued, and the Supreme Court held, that pursuant to the terms of its bond National may not be held liable to any party except its obligee (Blitman) or a "successor" of its obligee.

The court in Argonaut Ins. Co. v. Commercial Standard Ins. Co., 380 So.2d 1066, supra, considered and rejected essentially the same argument as is now being made by National in connection with the scope of the term "successor" as that term is used in a performance bond. In that case, the surety on a performance bond was held to have been subrogated to the rights of its principal, a general contractor. That surety was also held to be a "successor" of the general contractor, so as to have standing to sue the surety for one of the subcontractors. The court stated (Argonaut Ins. Co. v. Commercial Standard Ins. Co., supra, at 1068, n. 1):

"[The subcontractor's surety] suggests that we should give a very narrow construction to the word successor, which would limit it to situations involving successor corporations. We do not believe that so narrow a construction is called for in this context. As far as we can determine, the reason that bonds like the one involved here contain such a clause is to attempt to protect the surety from the claims of its principal's subcontractors and materialmen as third party beneficiaries under the bond".

In accordance with this view, Travelers may be considered a "successor" to Blitman as that term is commonly understood.

II

A

The third-party defendants advanced several arguments in support of their contention that the amended third-par...