United States v. Federal Surety Co.

• Decision Date: 02 October 1934
• Docket Number: No. 3662.,3662.
• Citation: 72 F.2d 964
• Parties: UNITED STATES, to Use of COLONIAL BRICK CORPORATION et al. v. FEDERAL SURETY CO. et al.
• Court: U.S. Court of Appeals — Fourth Circuit

72 F.2d 964 (1934)

UNITED STATES, to Use of COLONIAL BRICK CORPORATION et al. v. FEDERAL SURETY CO. et al.

No. 3662.

Circuit Court of Appeals, Fourth Circuit.

October 2, 1934.

Leonard J. Ganse, of Washington, D. C. (Sykes, Nyburg, Goldman & Walter, of Baltimore, Md., on the brief), for appellants.

William R. Semans and Roszel C. Thomsen, both of Baltimore, Md. (William D. Macmillan, of Baltimore, Md., Edmond M. Cook, of Davenport, Iowa, and Walter L. Clark, of Baltimore, Md., on the brief), for appellees.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

This case arises in connection with the companion case at law, 72 F.(2d) 961, in which we have this day sustained an order of the District Court wherein a motion to quash the writ of summons against the Federal Surety Company, hereinafter called the Surety Company was granted. This appeal is taken from orders of the District Court in equity sustaining motions of London & Lancashire Indemnity Company of America and of Guardian Casualty Company to dismiss the bill of complaint, and from two other orders of the District Court sustaining motions of E. W. Clark, receiver of Federal Surety Company, to quash the writs of subpœna issued against the Surety Company and E. W. Clark, receiver, respectively, and to vacate and set aside the returns thereon. The motions of London & Lancashire Indemnity Company of America and of Guardian Casualty Company questioned the sufficiency of the bill of complaint on the ground that it showed on its face that neither the complainants nor the said defendants were residents of the state of Maryland, and therefore the court had no jurisdiction over the defendants; and also on the ground that the facts alleged were insufficient to constitute a cause of action against them. The motions of E. W. Clark, receiver, were similar in character to those filed by him in the companion case, and were based on the fact that by a decree of the district court of the state of Iowa, in and for Scott county, the Surety Company had been formally dissolved and the said defendant had been appointed a permanent receiver to wind up the business and distribute the assets.

We consider first the motion to dismiss the bill of complaint wherein substantially the following facts are alleged: On September 11, 1930, the National Contracting Corporation entered into a contract with the United States for the construction of officers' quarters at Fort George G. Meade, Md., and on September 24, 1930, in compliance with the Hurd Act, 40 USCA § 270, the contractor, as principal, and the Surety Company, as surety, executed a bond to the United States in the sum of $94,937, which contained the usual conditions for the faithful performance of the contract and for the prompt payment to all persons supplying the principal with labor and materials in the prosecution of the work covered by the contract. In the following month, London & Lancashire Indemnity Company of America and Guardian Casualty Company, as reinsurers, executed separate reinsurance agreements in the standard form with the Surety Company. In each of these agreements it was provided in substance that the reinsurer, in consideration of the premium stated therein, reinsured the Surety Company under the above-described bond, against loss thereunder and against costs, expenses, and interest, subject to the following conditions and provisions: That the premium payable in each case to the reinsured should be that proportion of the total premium which the amount of the liability of the reinsurer bore to the total liability under the bond, less the commission; and that the validity of the agreement should not be affected by the failure of the Surety Company to pay the reinsurer either the initial or any subsequent premium due from the former to the latter. The total liability of the reinsurer was limited to one-third of the total liability under the bond, and its proportionate share of the costs, expenses, and interest. The Surety Company was to take charge of all matters arising under the bond in connection with claims, to settle or compromise any claims, and defend, settle, or compromise any suits, and take any other action not involving the extension of credit or the advancing of money in connection with any claim under the bond as it might deem advisable; and such determination, settlement, or compromise was to be final, conclusive, and binding upon the reinsurer. The reinsurer was to be entitled to share with the Surety Company any collateral security or indemnity held, or right of action possessed by the Surety Company in connection with the bond, or any salvage or recovery made on account of any loss. It was also provided that if under any law the agreement was required to be in such a form as to enable the obligee or beneficiary of the bond to maintain an action thereon against the Surety Company jointly with the reinsurer, and upon recovering judgment against the Surety Company, to have recovery against the reinsurer for payment to the extent to which it might be liable under the agreement, then the agreement should be deemed to be a compliance with such law. The liability of the reinsurer became effective as of the date of the execution of the bond and coextensive in time with the liability of the Surety Company. The reinsurers in fact received proportionate parts of the premium paid by the contractor for the bond.

After execution of the contract, bond, and reinsurance agreements, material and labor were furnished to the contractor in the construction of the work by the use-plaintiffs, as subcontractors for whose benefit the pending suit was filed. The contractor defaulted in payments due certain of the subcontractors, who thereupon notified the contractor and its surety that they would not further perform their subcontracts; and thereupon, the Surety Company agreed that if they would continue performance, it would pay the amounts in arrears, and that all material and labor thereafter supplied should be furnished directly to it and charged to its account. The arrearages were paid in compliance with this undertaking, and the use-plaintiffs between January 20, 1931, and August 31, 1931, furnished additional material and labor, in the aggregate sum of $20,361.20, which were used in the construction of the work but not paid for either by the contractor or the surety. The contractor failed to complete the work and was declared by the United States to be in default on August 31, 1931. Demand was made upon the Surety Company to complete, but it likewise failed, and on September 17, 1931, was declared in default. The work was completed, on or about February 4, 1932, by an outside contractor after the United States had advertised for bids.

Both the contractor and the surety company had become hopelessly insolvent and had ceased to do business when they defaulted on the work at Fort Meade, and there were numerous unpaid claims for material and labor furnished under the contract. On September 25, 1931, the district court of Scott county, Iowa, entered a decree in certain proceedings against the Surety Company, by which it was dissolved, and E. W. Clark was appointed permanent receiver. Thereafter, on November 10, 1931, Raphael Walter was appointed an ancillary receiver by the circuit court of Baltimore City. It also appears from exhibits filed with the motions of the receiver to quash the writs of summons against him and the Surety Company that on December 22, 1931, the Iowa court issued a supplemental decree in which it abated all actions against the Surety Company and all debts due by it, declaring that all judgments or liens against the Surety Company after September 25, 1931, were nullities, and ordered the receiver to refrain from defending any action against the company and its creditors, but to appear solely for the purpose of abating the same.

Prior to the entry of these decrees, the Colonial Brick Corporation, one of the use-plaintiffs, brought an action against the Surety Company on an open account in the Supreme Court of the District of Columbia, to which the Surety Company appeared, and subsequent to the decrees, to wit, on November 15, 1932, judgment was entered for the plaintiff therein for the amount of its claim with interest and costs.

Receivership proceedings against the contractor were brought in Virginia and District of Columbia courts, and the sum of $7,759.81 due the contractor, which remained in the hands of the United States, was paid to the receivers and distributed pro rata amongst the materialmen and laborers, leaving still due and owing to the use-plaintiffs in this action the aggregate sum of $18,042.30.

On October 12, 1932, the companion action hereinbefore mentioned was brought in the District Court of the United States for the District of Maryland under the Hurd Act (40 USCA § 270) by the United States to the use of the Colonial Brick Corporation and other creditors who might intervene. On January 28, 1933, the bill of complaint in the instant case in equity was filed, setting up the aforegoing facts; and further alleging that since the contractor and surety are both insolvent, the use-plaintiffs will be unable to obtain payment of any judgment that they might obtain in the action at law, and will be limited to redress against the reinsurers to the extent of their proportionate liability under their agreement; that the reinsurers received proportionate parts of the...