Prudence Co v. Fidelity Deposit Co of Maryland

• Decision Date: 03 February 1936
• Docket Number: No. 270,270
• Parties: PRUDENCE CO., Inc., v. FIDELITY & DEPOSIT CO. OF MARYLAND et al. *
• Court: U.S. Supreme Court

297 U.S. 198

56 S.Ct. 387

80 L.Ed. 581

PRUDENCE CO., Inc.,

v FIDELITY & DEPOSIT CO. OF MARYLAND et al.^*

No. 270.

Argued Jan. 8, 9, 1936.

Decided Feb. 3, 1936.

Mr. Alfred T. Davision, of New York City, for petitioner.

[Argument of Counsel from pages 199-200 intentionally omitted] Mr. John W. Davis, of New York City, for respondents.

[Argument of Counsel from pages 201-203 intentionally omitted] Mr. Justice CARDOZO, delivered the opinion of the Court.

We are to determine the measure of damages upon a bond conditioned against loss through the failure to complete a building at the time and in the manner called for by the building contract.

In September, 1929, petitioner, the Prudence Company, Inc., undertook to make a mortgage loan of $6,650,000 in aid of the construction of Essex House, an apartment hotel in the city of New York. The borrower covenanted that the building would conform to plans and specifications, and would be completed not later than December 16, 1930. As part of the same transaction, two surety companies, the respondents in this court, signed a bond in the sum of $3,000,000, indemnifying the lender against loss through the failure of the borrower to construct and pay for a building conforming to the contract, and complete it by the stated time. The bond also provided that in the event of the borrower's default, t e lender, if it so elected, should be at liberty to go forward with the work, and charge the cost against the sureties. Other conditions are believed to be immaterial to any question now before us.

On December 16, 1930, the borrower made default under the mortgage, abandoning doning the work with the building then unfinished. At that time the petitioner's advances under the building loan agreement were $6,575,000, the full amount promised, less $75,000 retained by agreement. On December 18, 1930, petitioner through its nominee brought suit in the state court for the foreclosure of the mortgage. On January 6, 1931, it went into possession with the mortgagor's consent. On January 19, 1931, there was a judgment of foreclosure, followed by a sale on March 17, 1931, at which the mortgagee was the buyer, the bid of $6,000,000 being applied upon the mortgage. A deficiency judgment of $716,215.02 was entered the next month.

Petitioner in possession of the building went on with the unfinished work, bringing it to completion in October, 1931. An action on the bond was then begun against the sureties. The trial court gave judgment for damages in the sum of $798,416.81, made up of three classes of items The cost of completion; the loss from omissions and inferior substitutions; and the interest on investment, together with taxes and insurance charges, while the building was idle because unready for its occupants. (D.C.) 7 F.Supp. 392. The Circuit Court of Appeals for the Second Circuit found this award to be excessive. In the view of that court no award should have been made for interest, taxes, or insurance during the period of idleness. Payments necessary to complete the building were properly allowed, for they were evidence of the difference in value between an incomplete and a completed structure. Reparation was also to be made for omissions and substitutions to the extent that they diminished value, unless strict compliance had been waived by the lender or its agents. However, the extent of the recovery was not susceptible of ascertainment without the aid of a new trial. This was so because evidence of waiver had been offered by the surety and erroneously excluded. A remand was thus necessary to elicit all the facts. 77 F.(2d) 834. Before a second trial was had, a writ of certiorari (296 U.S. 566, 56 S.Ct. 123, 80 L.Ed. 399) issued at the instance of petitioner to resolve a claim of conflict between the decision to be reviewed and a decision of this court. Trainor Co. v. AEtna Casualty & Surety Co., 290 U.S. 47, 54 S.Ct. 1, 78 L.Ed. 162. The writ states that it is 'limited to the question of the measure of damages,' thus excluding from our consideration the ruling of the court below as to the effect of waiver of performance.

Limiting our review accordingly, we think the extent of the recovery upon the new trial that will be necessary has been too narrowly confined.

The petitioner should be placed in the same position it would have occupied if the building had been completed on December 16, 1930. Trainor Co. v. AEtna Casualty & Surety Co., supra, 290 U.S. 47, at pages 54, 55, 54 S.Ct. 1, 78 L.Ed. 162; Kidd v. McCormick, 83 N.Y. 391, 398; Province Securities Corporation v. Maryland Casualty Co., 269 Mass. 75, 94, 168 N.E. 252. To give it nothing but the cost of doing the unfinished work, plus the loss resulting from omissions and substitutions, would be a scant measure of reparation, allowing nothing for delay. Ruff v. Rinaldo, 55 N.Y. 664; C. W. Hunt Co. v. Boston Elevated R. Co., 199 Mass. 220, 233, 235, 85 N.E. 446; Sedgwick, Damages (9th Ed.) § 645. If performance had been prompt, the mortgagee would have had the security of a finished structure, which a buyer at a foreclosure sale could have utilized at once. During the pendency of the suit, the rents might have been impounded at the hands of a receiver and applied upon the deficiency resulting from the sale. Freedman's Saving & Trust Co. v. Shepherd, 127 U.S. 494, 503, 8 S.Ct. 1250, 32 L.E . 163; Worthen Co. v. Kavanaugh, 295 U.S. 56, 62, 55 S.Ct. 555, 79 L.Ed. 1298, 97 A.L.R. 905. With the building still unfinished, there were no rents to be collected and hence none to be applied in reduction of the debt. More important still, the amount of any bid was certain to be reduced by notice to the bidders that the building would be unproductive until ready to be occupied. From the point of view of bidders the reduction in value as the consequence of delay would be made up of two factors; the estimated cost of finishing the work, and the estimated carrying charges, not to exceed the rental value, during the period of idleness. Cf. Trainor Co. v. AEtna Casualty & Surety Co., supra, 290 U.S. 47, at page 55, 54 S.Ct. 1, 78 L.Ed. 162; Kidd v. McCormick, supra, 83 N.Y. 391, at page 398. So at least an assessor of the damages might find as a fair inference of fact, even if the finding does not...