Prudential Federal Savs. & Loan Assn. v. Hartford Acc. & Indem. Co.

• Decision Date: 20 May 1958
• Docket Number: 8736,Nos. 8719,s. 8719
• Citation: 7 Utah 2d 366,325 P.2d 899
• Court: Utah Supreme Court
• Parties: d 366 PRUDENTIAL FEDERAL SAVINGS & LOAN ASSOCIATION, a corporation, Plaintiff and Respondent, v. HARTFORD ACCIDENT & INDEMNITY COMPANY, a corporation, Defendant and Appellant. FELT SYNDICATE, Inc., Plaintiff and Appellant, v. HARTFORD ACCIDENT & INDEMNITY COMPANY, a corporation, Defendant and Respondent.

Page 899

325 P.2d 899

7 Utah 2d 366

PRUDENTIAL FEDERAL SAVINGS & LOAN ASSOCIATION, a corporation, Plaintiff and Respondent, v. HARTFORD ACCIDENT & INDEMNITY COMPANY, a corporation,

Defendant and Appellant.

FELT SYNDICATE, Inc., Plaintiff and Appellant, v. HARTFORD ACCIDENT & INDEMNITY COMPANY, a corporation,

Defendant and Respondent.

Nos. 8719, 8736.

Supreme Court of Utah.

May 20, 1958.

Moreton, Christensen & Christensen, Salt Lake City, for Hartford Accident & Indemnity Co.

Franklin Riter, Harry D. Pugsley, Salt Lake City, for Prudential Federal Savings & Loan Ass'n.

Woodrow D. White, C. Preston Allen, Salt Lake City, for Felt Syndicate, Inc.

CROCKETT, Justice.

Hartford Accident & Indemnity Company seeks reversal of judgments wherein it was held liable in amounts aggregating in excess of $90,000 on a performance bond it wrote upon Cassady Co. Inc., in connection with the latter's undertaking to construct homes in a residential subdivision known as 'Morningside Heights' in Salt Lake County on which the plaintiff, Felt Syndicate, Inc., was entrepreneur and promoter, and the plaintiff, Prudential Federal Savings & Loan Association, was the financer. The cases were consolidated for trial and are so treated on this appeal.

The principal basis of Hartford's attack upon the judgments is that the plaintiffs themselves were guilty of breaches of their contractual duties, which prevented its principal, Cassady, from performing his obligations. Inasmuch as the trial court found in favor of the plaintiffs, they are entitled to have us review the evidence and every reasonable inference fairly to be drawn therefrom in the light most favorable to them. ¹

The difficulties with which we are here concerned had their origin in the failure of the plan to develop and build the Morningside Heights Subdivision to work out as the parties expected. Felt Syndicate, Inc. initiated the enterprise. It acquired a tract of land and had it platted. The plan was to construct 100 homes to be valued at approximately $10,000 each, a total of $1,000,000, and sell them to veterans who were eligible for government insurance on their loans under the Federal Servicemen's Readjustment Act of 1944, 38 U.S.C.A. Sec. 693 et seq. Felt arranged with Prudential Federal Savings for financing of the homes. After inquiry and investigation of several contractors Felt selected Cassady, Co., Inc. to construct the homes upon terms satisfactory to the parties. It is of significance that it was known that Cassady lacked any extensive financing, and that partly because of that fact, he was required to furnish a performance bond to protect the interests of Felt and Prudential Savings (and also Pacific Coast Title Company whose rights are dealt with in Pacific Coast Title Insurance Company v. Hartford Accident & Indemnity Co., 7 Utah 2d 377, 325 P.2d 906. After some negotiations as to the form of such bond and the terms upon which Hartford would write it, a bond of $763,000 guaranteeing Cassady's performance was executed.

Further details of the plan were: that Veterans Administration approval of the plans would be procured; that Felt would be responsible for selling the homes; that after the buyer had been approved, he would make a suitable down payment and take title from Felt; a policy of title insurance would be procured from Pacific Coast Title Company; thereupon the buyer would execute a note and mortgage, bearing 4 per cent interest, to Prudential Savings, and would also execute to it written authority to retain the loan proceeds for disbursement to Felt, or to the contractor Cassady, or others as the latter directed, as they became entitled to the proceeds. After buyers had been found and the abovestated prerequisites had been complied with, including also the procurement of a title insurance policy and the execution and recordation of a mortgage in its favor, Prudential was to release money on the homes at certain stages of construction. The funds were to be disbursed through Associated Accountants, who had the duty to get lien waivers from subcontractors, laborers and materialmen.

Inasmuch as Prudential Savings did not desire to hold these 4 per cent mortgages for their life of 25 years because both the rate of interest and of repayment was too slow and they required their capital to be more active, the arrangement was that a larger financial institution, Prudential Insurance Company of America, would, upon the completion of the project and the government approval and insurance of loans, purchase the entire 100 mortgages from Prudential Savings.

Cassady began to construct the homes, using mass production methods in what he called a 'straight line' assembly system. It was his obligation to complete the entire project within six months. Soon after operations commenced the project ran into difficulties largely because this 'straight line' system did not accommodate itself to the sales program, either in sequence of construction or in amount. Buyers, quite naturally, did not select homes just in the order they were being built. The result was that homes nearly completed often wanted for purchasers, while others already sold, but further down the production line were behind the buyers' demands to have work done on them. Cassady insisted that he would not move his construction equipment and material around the project to work on the houses in the order in which they were sold, and that the only way he could keep within his construction costs and meet his time schedule was by the 'straight line' production method; meanwhile Prudential Savings insisted that it had neither authority nor duty under its agreement to disburse funds on any particular house until the buyer had been signed up and a mortgage was recorded in its favor.

Cassady's funds gradually became tied up in homes upon which he could not receive loan proceeds so he was unable to pay his help and material suppliers. Some of them refused to continue performance and filed liens to secure their claims. Other factors contributed to further perplex the situation: because of limited money and credit he could not purchase in large quantities or otherwise take advantage of the business position that healthy finances and credit affords. The Korean War also had its effect in inflating prices and making it more difficult to get labor and materials so that his expenses increased.

It is now plain from hindsight, which we all have in such generous measure, that the fundamental difficulty was that no provision had been made for a general project loan or other source of funds to cushion Cassady's operation as the work progressed. It had been assumed that the project could be financed by Prudential Savings making advances upon individual loans to each buyer. But delays and deficiencies in construction caused difficulties in getting Veterans Administration approval of the loans and this resulted in everybody wanting their money and no one being able to move forward. All of which caused a spiral of pressures of increasing intensity upon Cassady so that it became impossible for him to proceed with the project.

In an effort to alleviate the difficulties, the parties entered into two supplemental agreements, the final one, pertinent here, on February 16, 1951. Prudential Savings was authorized to withhold progress payments until corrections were made so that construction would meet V. A. inspection; Cassady's time limit for construction was extended for another three and a half months; the price allowed Cassady for the construction of each house was increased; the disbursement was changed from 75 per cent maximum to 90 per cent prior to V. A. approval; and the disbursal of funds through Associated Accountants was eliminated. Prudential Savings was given sole discretion to pay out the funds in such manner as in their judgment would expeditiously move the project forward to completion. It is also of importance: that Prudential Savings waived certain rights which had inured to it because of Cassady's failures and delays; that Cassady therein agreed that Prudential Savings had thus far performed all of its obligations; and that he made no complaint against Felt up to that time.

The new plan likewise did not work out as expected, Cassady was again soon out of funds and unable to continue operations. The fact is that he never actually completed the construction of any of the houses to the point where the Veterans Administration would approve them for government insured loans. Plaintiffs served notice of default on Cassady and his bondsman, Hartford, for failure to meet the obligations of his contract.

As a result of the failure of Cassady, it was impossible for Prudential Savings to complete its transaction of placing the mortgages with the Prudential Insurance Company. The damages awarded to Prudential Savings represents the difference in the interest rate of 4% on these loans which it is now obliged to carry, as contrasted with 5 1/2% which is the going rate of interest for loans of this character in the ordinary course of business without such government insurance. Felt's damages award was for loss of profit which it was to have received if the plan had gone on to completion.

The first obstacle to Hartford's contention that Cassady's failure to perform was in reality caused by various breaches by plaintiffs of their duties under the contract, including especially the fact that Prudential Savings did not make money available for him to pay for current operations, is the supplemental agreement referred to above. Hartford argues that it is not bound thereby, but only by the modification of certain portions of the original contract to which it expressly agreed; that it does not stand in the shoes of Cassady with respect thereto, nor with respect to his agreements in waiving breaches that had theretofore occurred. The trial court found that Hartford did become a party to the supplemental contract by...