Matter of Empire State Surety Co. , 216 N.Y. 273 ( 1915 )

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[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.]

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] The Empire State Surety Company was a corporation organized under section 70 of the Insurance Law and authorized to carry on the business of liability insurance in this state. On December 16th, 1912, in a proceeding instituted under and in pursuance of section 63 of the Insurance Law it was declared insolvent and the superintendent of insurance was directed to take possession of its affairs and liquidate its business. On September 20th, 1913, an order dissolving the company was entered. On May 11th, 1914, the superintendent of insurance filed a report rejecting as contingent certain claims against the estate of the surety company. These claims arose under bonds given pursuant to a statute of the United States. (33 U.S. Stat. at Large, ch. 778.) This statute requires a contractor engaged in the construction of government work to file a bond, with sufficient sureties, providing among other things for the prompt payment by him to all persons furnishing labor and materials to be used in such work. Under this statute the United States has the exclusive right to bring action thereon within six months after the "completion and final settlement of such contracts." It is therein provided that in that action the laborers and materialmen may intervene, prove their claims, and have them paid subject to the priority of the claim and judgment of the United States. If the Federal government fails to bring the action within the time stated any claimant may institute a suit in the interest of all creditors who choose to intervene to have their respective claims liquidated. In the event of the penalty of the bond being insufficient, the judgments of the various claimants are to be for a pro rata amount. The claimants and appellants represented on this appeal were subcontractors on various United States government contracts. The Empire State Surety Company had issued bonds covering all such contracts. No action, however, had been brought by the United States government upon any of the contracts here involved within the six months after completion thereof as provided by the statute.

There are two general classes of claims involved. (1) Claims upon which causes of action had accrued and upon which actions against the surety had been commenced before December 16th, 1912, the date of the entry of the order of liquidation in which actions judgments on that date had not been entered. (2) Claims upon which no causes of action against the surety had accrued before the date of the entry of the order of liquidation and upon which claims no actions were commenced until after the date of the entry of the order of liquidation. We are all of the opinion that the claims within the latter class are contingent and were properly rejected. In so holding we follow and apply the actual decision made in People v. Metropolitan Surety Company (211 N.Y. 107). As to the claims within the first class referred to above we are of the opinion that they were certain and absolute at the date of the entry of the order of liquidation, and they should be allowed to participate in the ratable division of the assets of the insolvent surety company. The bonds under which the claims of these appellants arise were given to secure the faithful performance of contracts made by contractors with the United States of America for the doing of public work. These statutory bonds were filed under the provision of the Federal statute referred to above. They were executed by the contractor as principal and the Empire State Surety Company as surety. The date of the completion and final settlement of the contracts was prior to the date of the entry of the order of liquidation. These claims cannot properly be said to be contingent. The work under the contracts upon which they arose was completed. The claims themselves were liquidated. A cause of action upon these claims had accrued and action upon them had been commenced prior to the entry of the order of liquidation. The action was commenced soon after the expiration of the six months' period during which time the Federal statute prohibited the commencement of such action. We have recently held in reference to claims in this proceeding that where employers were insured against accidents and an accident covered by the policy had happened and the insurer had failed to perform its contract claims against the insurer were certain and not contingent. (Matter of Empire State Surety Co., 214 N.Y. 553,565.) If such unliquidated claims are nevertheless certain there can be no basis for holding that the claims of contract creditors who have completed the work under the contract and whose cause of action had accrued before the entry of the order of liquidation are uncertain and contingent. The distinction now sought to be established between these two classes of claims has no basis in reason, and must, if adopted, result in injustice to those who own such claims. The distinction is not the result of any statutory discrimination. It is sought to be made solely in deference to the supposed authority of People v. MetropolitanSurety Co. (211 N.Y. 107). In that case, which arose under the Federal statute referred to above, the claimants had no cause of action because the six months' period within which the statute gave the United States the right to sue had not expired, and until that time the creditor's right of action had not accrued. The action contemplated by the Federal statute is a representative action, and under that statute no cause of action accrued to the creditor within the six months unless the United States instituted the action before that time. It was upon this ground that the decision in People v. Metropolitan Surety Company (supra) was actually made, although in the prevailing opinion it was said that a judgment alone could render the claim absolute. That this was the question decided in that case appears from the prevailing opinion which said that the liability of the surety "remained qualified and conditional. Its certainty or absoluteness depended upon the possibility that, by means of the only method provided or permitted by the statute and not then instituted, the validity and enforcibility of the claim be adjudicated. * * * It is unnecessary to consider whether or not the presentation of the claim to the receiver and the subsequent proceeding is a suit or action brought by the claimant. We are not required to passbeyond the fact that the claimant has no right of action and the surety company no liability cognizable in this action or proceeding. Whatever right of action was in the claimant or liability on the part of the surety was conditioned upon the use of the statutory remedy. Divorced from that remedy the right and the liability are non-existent. The claimant should have conformed with the provisions of the statute and obtained in the statutory action and presented to the receiver a judgment establishing the validity and amount of his claim. His claim as presented was conditional and not absolute, and its allowance was error." (p. 117.) It is evident from this quotation that the question actually decided in that case was that the creditor's claim was contingent because at the time he had no cause of action, and no suit had been commenced either upon the bond or by any creditor of the principal debtor in the Federal courts as provided by the Federal statute. In the present case the action had been commenced under the Federal statute before the entry of the order of liquidation, and the claims of these appellants may well be held to be certain, whereas in cases where the creditor had no cause of action they could properly be held to be contingent. This view of the case is in accord with that so well stated at the Appellate Division in the dissenting opinion of Presiding Justice INGRAHAM. In that opinion he said: "The Federal statute, as I read it, recognizes the fact that after the six months' period in which the United States could sue had expired then the liability to the creditors became fixed, and the proper proceeding by the commencement of the action in the Federal courts had been taken to enforce it. The liability did not depend upon the judgment in that action, but upon the facts as they then existed, and the judgment of the Federal court in that action was a mere ascertainment of the amount due the creditors as against the principal and his surety. And this, I think, was recognized in the opinion of the majority of the court in the Metropolitan Surety Company case, when it was said: ``We are not required to pass beyond the fact that the claimant has no right of action and the surety company no liability cognizable in this action or proceeding. Whatever right of action was in the claimant or liability on the part of the surety was conditioned upon the use of the statutory remedy.' That remedy had been invoked by the petitioner and he was pursuing it when the insolvency of the surety required liquidation of its affairs, and when judgment was finally entered in the Federal action commenced prior to the entry of the order for the liquidation of the affairs of the surety, that judgment it seems to me, determined the amount of the obligation of the surety which existed at the time of its liquidation."

The application of these principles to the questions certified to us by the Appellate Division requires that questions 1, 2, 5, 6 and 7 in the order of the Appellate Division, dated June 25th, 1915, should be answered in the affirmative, and questions 3 and 4 contained in that order be answered in the negative. Question 1 in the order of the Appellate Division, dated July 9th, 1915, should be answered in the affirmative, and question 2 contained in that order should be answered in the negative.

I advise that the order appealed from be reversed, with costs, and that the questions certified to this court by the Appellate Division be answered in the manner indicated above.

WILLARD BARTLETT, Ch. J., CHASE and POUND, JJ., concur: COLLIN, CUDDEBACK and HOGAN, JJ., dissent.

Order reversed, etc.