Columbia Bank & Trust Co. v. United States Fidelity & Guaranty Co.

While agreeing to the conclusion reached by his honor, Justice Kane, in rendering the opinion of the court, in reversing and remanding this cause, we feel constrained to dissent from some features and desire to express our views thereon.

The statement of this case as presented by the pleadings is fully set forth in the opinion of the court. The first question presented: Did the surety company have the right to maintain its position of intervention without having previously paid the penalty of its bond? In answer to this question, we respectfully differ and take issue with the position in the opinion. The defendant in error, being the surety company, bases its right of intervention in this suit upon the allegations of its plea that it was surety in the sum of $50,000 to protect the state of Oklahoma, by reason of a deposit of the school fund in the bank, that it was liable on said bond to the full amount of the penalty, and that the Bank Commissioner had been paying the claims of other depositors in said bank in full, without in any way protecting the said deposit for which it was surety, and that it was the purpose and intent of said Bank Commissioner to pay off other creditors in full, to the exclusion of the said deposit for which it was surety, and that the effect of said payment of other depositors would be to unjustly and wrongfully prefer creditors to the exclusion of the school fund deposit and the detriment of the surety company. In connection with the plea of intervention, they ask that the Bank Commissioner be enjoined from paying out any of the assets remaining in his hands to other creditors or depositors in preference, and the said commissioner be restrained and enjoined from repaying to the banking board the guaranty fund advanced to him, or any part thereof, prior to the paying in full of the deposit secured by the said bond of the said surety company. The decree of the honorable trial court was fully responsive to the prayer of defendant in error.

In aid of the purpose in giving expression to our views upon the question presented, as well as some other features embraced in the case, we desire to state, as succinctly and briefly as possible, what we understand the condition of affairs bringing about the contention at issue. The Legislature of the state of Oklahoma enacted what is commonly known as the "Bank Guaranty Law" — in other words, a system creating a depositors' guaranty fund. The system was assailed as being unconstitutional, and its legality was sustained, not only by the Supreme Court of this state, in an elaborate and exhaustive opinion by Chief Justice Williams, in the case of Noble State Bank v. Haskell etal., 22 Okla. 48, 97 P. 590, but upon appeal to the Supreme Court of the United States, the case was affirmed. Evidently the purpose of the Legislature was to devise a plan to encourage the people and give proper security for the deposit of their earnings in banks created by that act. The system of guaranty and assurance put the state banks of Oklahoma between the depositor and possible loss. This was arranged for by the assessment plan provided for in sections 320 and 323, Comp. Laws 1909. Under the plan adopted, the Columbia Bank Trust Company was organized as a state bank, having its assets and deposits, and without restriction as to who should be a depositor, in the sense that such term is generally understood, with the exceptions in the limitations named in the statute. The Legislature, in its wisdom, had the foresight to make special provision for the safety of the school fund, and to positively inhibit that fund from being placed anywhere without its safety being absolutely guaranteed and protected. These safeguards are provided for in sections 7942 and 7943, Comp. Laws 1909. The purpose is evident. To have permitted a deposit of the school fund without restriction or limitation would have weakened the guaranty fund, and have endangered the safety of the deposits of the people, in whose interest that fund was created. In effect, the legislation is that the school fund shall not be deposited in any bank without ample security being taken therefor for its absolute redemption in the event of a failure in the place where said fund was placed. This legislation is clear and unambiguous, and wise and patriotic as well. No one understood it any better than the defendant in error and all other such investment or security companies.

It seems that $50,000 of the school fund, placed by the commissioners of the land office in the Columbia Bank Trust Company, was guaranteed by the defendant in error, which would not have been placed there but for such security, and the surety company, the defendant in error, would not have bound itself in the penalty it did, but for absolute compensation, under its own terms of compensation. Thus it is a surety for hire. We do not understand from the terms of its bond that it binds itself that, in the event of the state's failure to be reimbursed from other sources, it will only then be liable; but from the terms of the bond it absolutely guarantees the forthcoming of the school fund in the amount of its penalty, and, if default is made, its liability, already liquidated, shall be met promptly. All the conditions of the law imposing liability upon it as a surety for hire, as well as those enacted to safeguard said fund, were not only within the understanding, but the understanding on the part of the defendant in error, as if said terms and conditions had been in words expressed therein. The Columbia Bank Trust Company failed. The assessment plan was resorted to in an attempt to supply the guaranty fund. Finally the Bank Commissioner made application to the district court for an order authorizing him to sell certain promissory notes, bonds, and other securities, being assets of the bank, upon the ground of necessity to convert said assets in order to pay off the depositors, and requested an order of sale, and such other orders in connection with the administration of the affairs of said bank that may appear from time to time to be necessary and proper, and that the Bank Commissioner, together with any and all creditors and depositors of said bank, be given and awarded by the judge thereof all relief to which they may be entitled. The prayer of the Bank Commissioner seems to have been construed into an admission that the fund for which defendant in error was security is upon the same footing with other deposits. Therefore the defendant in error felt warranted in filing its plea of intervention and asked for the relief granted, as heretofore stated, by the trial court.

In support of the plea of intervention, its attitude in this court is that its liability, if any, does not attach until all the assets of the Columbia Bank Trust Company and the revenues and resources of all state banks in Oklahoma are exhausted, and then when these are exhausted there is still a deficiency to provide for the school fund for which they are surety, it would be met by the bond. On this point, this is, in brief, its contention. In our view of the case, the position of the defendant in error is an anomalous one, in this: That if their contention is correct, there is no liability, hence no necessity for a bond, because, with mathematical certainty, it is evident that, if the assets, resources, and revenues provided by the guaranty law are to be resorted to to replace the fund that defendant in error is surety for, this can be supplied, and thereby destroy any possibility of liability. It must be conceded that the defendant in error is a surety for hire, that its obligation is that of a guarantor and indemnitor for hire, and, therefore, what is known and treated and favored by the law as a friendly surety presents a different status than the attitude of defendant in error.

We believe that section 1569, Comp. Laws 1909, furnishes the reason and the rule by which the status of defendant in error is to be determined. Section 1569 declares that:

"The rule of the common law requiring a strict construction of the obligations of a surety shall have no application to the obligations of a surety or guarantor or indemnitor for hire, and all such obligations shall be liberally construed, in accordance with the rules of the general law applicable to policies of insurance."

Guaranty, as defined by the statute (section 3573, Comp. Laws 1909), is "A promise to answer for the debt, default or miscarriage of another person." In section 3583, "A guaranty is to be deemed unconditional, unless its terms import some condition precedent to the liability of the guarantor." And again, in section 3584, "A guarantor of payment or performance is liable to the guarantee immediately upon the default of the principal, and without demand or notice." Referring to section 1569, in the opinion by his honor, Justice Kane, this language is used:

"The statute under consideration prescribes a new rule of construction to guide the courts of this state in construing contracts of suretyship, but does not affect the rights of a surety where there is no ambiguity in the contract."

We are unable to appreciate how the application of section 1569, a plain statutory provision, is to be qualified by the language, "does not affect the rights of a surety where there is no ambiguity in the contract." Either the statute has a direct application to the obligation of a surety or guarantor or indemnitor for hire, when such fact of surety or guarantor or indemnitor for hire is conceded, or should not be considered at all in treating of this question. It unqualifiedly says that the rule of the common law requiring a strict construction of the obligations of a surety, meaning a friendly surety, shall have no application to the obligations of a surety for hire, and, in fear of being misunderstood, it adds:

"But all such obligations [those of a surety for hire] shall be liberally construed, in accordance with the general law applicable to policies of insurance."

If we are to qualify the statute by a construed or patent ambiguity in the contract, and this feature is to control the admitted fact of a surety for hire, then there is no use for the statute, and it can serve no purpose in this case.

The old common-law rule, protecting friendly sureties, and declaring that a surety may compel his principal to perform the obligation when due, and that a surety may maintain an action against his principal to compel him to discharge a liability or debt for which the surety is bound, after the same has become due, has, in our opinion, no such application as will contravene or in any manner impair the unqualified and vigorous application of section 1569 to the attitude of this case. It is declared in section 3584, supra, that "a guarantor of payment or performance is liable to the guarantee immediately upon the default of the principal." The defendant in error, in signing the bond, made an undertaking which embraced as clearly the sections of the statute we have quoted as if the same had been in words expressed therein. It said to the state: "We stand sponsor for every dollar named as a penalty in this bond, and we promise to answer for the default as a guarantor of payment, and are liable immediately upon the default." The only two conditions precedent to a prompt payment of the penalty were, first, that there must be a default, and the other, the amount to be ascertained. In the case at bar, both the default and the amount are conceded, and, this being so, the unconditional liability of the defendant in error is clearly established.

For the position of the defendant in error to be consistent, it should have refrained from intervening until it was ascertained that, by the bankruptcy of the state banks on the assessment plan, there was a deficiency for it to pay. From our viewpoint, in order to maintain a plea of intervention, it is presupposed that an interest exists in the subject-matter, or is at least rightfully asserted in the subject-matter of the original suit. The subject-matter of the suit at issue is an attempt to accumulate the assets of a defunct bank, to discharge its preference lien obligations due, in the first place, to the depositors' guaranty fund, and then to the depositors in said bank. The defendant in error has not only failed, but refuses, to pay any of the penalty of the bond, and it seems that it bases its action upon the supposititious theory that there might be something left for it to pay after the state banks and all other sources of revenue had been exhausted, and therefore it claims the right of intervention.

Another view in support of our position against the right of intervention, and as contending for the unqualified application of the statutory provision embraced in section 1569, is presented in the rules of the general law applicable to policies of insurance. Bearing in mind that this defendant in error stands as a surety for hire, an insurer of $50,000 of the school fund placed in a bank by its consent, and then we ask, in the event of a loss, no matter the causes producing that loss, what legal right would this surety company have to dispute the payment of that loss, or to interrupt its payment, more than would an insurance company have to stop the payment of its policy when, from natural causes, a life had been destroyed, or to look to the estate of the deceased for reimbursement after having paid the policy? An insurance company insures a life; it pays the loss upon death being ascertained. If it insures property, it pays the valuation upon its destruction, and why? Because its contract obligates it to do so.

We quote from the bond in this case:

"The condition of the foregoing obligation is such that, whereas, the said obligee has designated the said principal [the Columbia Bank Trust Company] as a depository for the funds and moneys that shall come into the possession of the commissioners of the land office of the state of Oklahoma by virtue of the performance of the official duties of the said commissioners of the land office, as provided by the laws of Oklahoma and acts of Congress: Now, therefore, the condition of the above obligation is such that, if the said principal shall, during the term beginning at nine o'clock a.m. on the 18th day of May, 1909, and ending with the close of banking hours on the 17th day of May, 1910, well and faithfully perform the trust reposed in it by such designation, and shall promptly pay all funds and moneys so deposited with it, either on legal order or on check or draft of the commissioners of the land office or the secretary of the commissioners of the land office of the state of Oklahoma, and shall well and truly indemnify the said obligee from any and all losses which it may suffer or sustain during the period as aforesaid, by reason of the designation of said principal as such depository aforesaid, then this obligation to be void; otherwise, to remain in force and virtue."

The seven expressed conditions to the bond in no wise interfere with the contract entered into, and there is no complaint that any of the expressed conditions are pertinent in this case. It is true that the third expressed condition stipulates that:

"In the event of default on the part of the principal, the surety shall be liable hereunder for only such proportion of the total loss sustained by the obligee as the penalty of this bond shall bear to the total penalty of all bonds and securities furnished to the obligee, and in no event shall the surety be liable hereunder in excess of the penalty of this bond."

And to this we say that there is no complaint or plea that there are other sureties for the deposit in question. Therefore this feature needs no further reference, as the amount of the penalty and the default are both conceded.

But back to the question: "Did the surety company have the right to maintain its petition of intervention, without having previously paid the penalty of its bond?" This question is answered in the affirmative in the opinion delivered by his honor, Justice Kane, and inasmuch as, by the terms of the bond, the bank is called the principal, the surety company the surety, and the state of Oklahoma the obligee, this must be the legal relation of the parties in determining their rights and liabilities, and in support of this section 3606, Comp. Laws 1909, is invoked, which says that "a surety may compel his principal to perform the obligations when due," and section 6055, which declares: "A surety may maintain an action against his principal to compel him to discharge the debt or liability for which the surety is bound after the same has become due." We do not dissent from this rule or this equitable principle, but we do contend it has its exceptions in application. This is the rule of strictissimi juris, by which the rights of uncompensated sureties are determined; but, when we look to section 1569 of the statute, we find a broader and more liberal construction, and as well a different construction, determining the rights of the insurer and insured in the case of compensated sureties. Under the common law, the rule ofstrictissimi juris applies, without regard to the question whether the surety is a gratuitous one or for hire.

The defendant in error in this case is engaged in the business for profit. In the case of Hormel Co. v. AmericanBonding Co., 112 Minn. 288, 128 N.W. 12, 33 L. R. A. (N. S.) 513, where the company executed a guaranty insurance bond to indemnify the respondent against loss from the failure of the principal of the bond to perform his part of a building contract to which he and respondent were parties, it is said:

"While the bond in form resembles a contract of suretyship, it is in fact a contract of insurance, to which the rules of construction peculiar to contracts of suretyship proper do not belong, but to which the rules governing ordinary contracts of insurance are applicable."

In 33 L. R. A. (N. S.) 513, we find in the notes to the opinion, supra, this text, and in support of which the author has cited numerous authorities, not only from the Supreme Court of the United States, but the federal courts and Circuit Courts of Appeals and the state courts; and this is the doctrine laid down, viz.:

"The overwhelming weight of authority supports the proposition that the rule of strictissimi juris, by which the rights of uncompensated sureties are determined, is not applicable to the contracts of surety companies which make the matter of suretyship a business for profit; that their business is essentially that of insurance; and that, therefore their rights and liabilities under their contracts will be governed by the laws of insurance."

An examination of many of the authorities referred to supports the conclusions of the author. In American Bonding Co.v. Morrow, 80 Ark. 49, 96 S.W. 613, 117 Am. St. Rep. 72, it was declared to be now well settled that a bond of a surety company, like any other insurance policy, was to be most strongly construed against the insurer, since its language was that selected and employed by the latter, and, when doubtful or ambiguous, must be given the strongest interpretation against the insurer which it will reasonably bear. In Carstairs v.American Bonding T. Co., 54 Cow. C. A. 85, 116 Fed. 449, and187 U.S. 644, 23 Sup. Ct. 844, 47 L. Ed. 346, in which a writ ofcertiorari was denied, it was declared to be "quite true that the written contracts of indemnity issued by surety companies had come to be looked upon by the courts and to be treated more as policies of insurance than as bonds." The court said:

"As contracts of indemnity, they will be liberally construed, so as to effectuate the purpose for which they were issued, and as, like policies of insurance, they are generally prepared by the bonding company, the rule of contra proferentem will often be applied in construing their stipulations."

In United States Fidelity Guaranty Co. v. Golden Pressed Fire Brick Co., 191 U.S. 416, 24 Sup. Ct. 142, 48 L. Ed. 242, this language is used:

"The rule of strictissimi juris is a stringent one, and is liable at time to work a practical injustice. It is one which ought not to be extended to contracts not within the reason of the rule, particularly when the bond is underwritten by a corporation, which is undertaken for a profit, to insure the obligee against the failure of performance on the part of the principal obligor."

In Kansas City v. Davidson, 154 Mo. App. 269, 133 S.W. 365, it was declared that "sureties for hire were not favorites of the law, entitled to stand upon the strict terms of their obligations, but their status was rather that of insurers, and that their contracts should be reasonably construed to give effect to the protective purposes of their execution." InWalker v. Holtzclaw, 57 S.C. 459, 35 S.E. 754, it was held that "while, as a general rule, a surety was a favorite of the law, and his contract should be strictly construed in his favor, such rule had no application where the surety received compensation, and the suretyship was in the line of his regular business." The defendant in error was paid to make this bond, and a plain liability arose on it which ought to be discharged.

Referring again to the contention of the defendant in error, which, to be maintained, would result in no liability whatever for having made the bond, we are yet at a loss to understand how the rule of intervention applies. If there is no liability, then it follows that the surety company had no interest in the subject-matter involved in this case. Upon the other hand, if there is liability, it is a liquidated one, as both the amount and default are conceded. The question is not: Has it the right to intervene if it had paid the penalty, and then, with clean hands, come into court for equitable relief? It comes to court, virtually denying liability, and demanding, without paying a dollar, and without acknowledging liability, the right to stop the Bank Commissioner, operating directly under the laws of the state of Oklahoma, from accumulating and collecting the assets of a defunct principal, which are sought by him to strengthen the guaranty fund to reimburse the depositors in whose interest the law was primarily formed.

In furtherance of this view, we urge that the law was so formed as to induce people generally to deposit their earnings in the state banks. It was an open invitation to them, guaranteeing to them protection by the methods adopted in the act. But how different is the proposition under consideration! The commissioners of the land office were inhibited by positive statute from depositing this school money in that or any other bank unless it first provided against any sort of contingency whereby loss would result. Such deposits made by them were independent and distinct, and this the defendant in error knew at the time it made the bond, because its obligation is conditioned "as provided by the laws of Oklahoma." As is said by his honor, Justice Kane, in the opinion of the court:

"That the money deposited in the bank by the commissioners of the land office was a deposit in a broad sense is probably true, but it is clear to our minds that the commissioners of the land office are not such depositors, and the funds which the law permits them to deposit in pursuance of their official duties are not such deposits, as fall within the purview of section 323, supra."

This being true, and the deposit not in a class with those in section 323, it but strengthens our position that it was an independent act, made in conformity with the law, which was sanctioned by the defendant in error, and for which it was paid, in response to which it obligated itself to see that $50,000 was reimbursed to the school fund upon default of the principal.

Upon what rule is the right of contribution or subrogation denied in this case, but upon the one we invoke under the authority of section 1569? Gratuitous sureties are favored by the law, and all such, when they pay in default of their principals, in the absence of ability to make their principals first respond, are entitled to contribution and subrogation, and can intervene in all proceedings where the subject-matter in which they are interested is at issue. We recognize this right in its fullest scope; but when we are called upon to assent to the proposition, under the conditions of this record, that a surety can intervene, at least without first paying the penalty it has obligated itself to discharge, we must be permitted to dissent.

The benefit legislation, designed to inspire interest in the state banks and to re-awaken the confidence of the people that a deposit of their earnings would be secure, was not, in our judgment, intended to operate as a shield in the protection of those who, for compensation and hire, would become surety for the safety of a special deposit. The depositors' guaranty fund is created by contributions from the state banks, and the state, in its sovereign capacity, in order to protect the guaranty fund and have the contributors to it to an extent indemnified against unusual assessments, holds a first and preference lien upon all the assets of said bank and all liabilities against the stockholders, officers, and directors of said bank, and against all other persons, corporations, or firms, and provides that such liabilities may be enforced by the state for the benefit of the depositors' guaranty fund. At the risk of repetition, we insist that this first lien and the purposes for which the lien was created were known by the defendant in error when it guaranteed the deposit in question, and, as insisted by counsel for plaintiff in error, the obligation of the surety company to pay the deposit is subject to this first lien.

If the commissioners of the land office had no right to deposit the school fund without taking security therefor, which they did not, then in such case the contention can be safely maintained that the special deposit in this case would have no claim upon the depositors' guaranty fund, because of its independent and distinctive features. The Columbia Bank Trust Company, although the principal, is not the beneficiary, of the bond; nor is the penalty of the bond a part of the assets of the bank. The state is the obligee of the bond, for the benefit of the school fund, and therefore the penalty of the bond is an asset of the school fund. The lien held by the state upon the assets of the bank, as we contend, does not apply to this special deposit; it has no relation to it, therefore, leaving the matter as a contract in effect between the commissioners of the land office and the surety company, the defendant in error, which not being complied with, the commissioners of the land office have the right to demand immediate payment of the penalty, the default and amount being conceded.

The commissioners of the land office looked to the solvency of the surety company, as they are required to do by the law, and are not required to investigate the solvency of the place in which the money is to be deposited. This is the duty of the surety company, and in this is conceded the duty of the commissioners to look to it for the payment of the deposit. Banks as depositaries were not relied upon; the depositors' guaranty fund was not looked to, as it is plainly meant by section 7943 that banks and trust companies are to be used as a receptacle for the deposit only upon the condition that, when not forthcoming the surety or indemnitor for such forthcoming will promptly supply the default. In our view of the law, on the record of the case as presented, the plea of intervention has no standing in this case and should not have been allowed.

If the right of intervention, without having paid the penalty of the bond, is permitted, as is stated affirmatively in the opinion of the court, then it seems to us that this case ought not to be reversed, and why? Because there is involved in the right of intervention the proposition that the school fund deposit is upon a footing with other depositors, and is entitled to a pro rata distribution of the guaranty fund to reimburse such deposit; and if such reimbursement can be had, as provided in the guaranty law, then there is nothing for the defendant in error to pay. The intervention plea is in; in the opinion of the court it has the right there, and, being in, the issues raised by it have to be determined. Its permitted presence is a predetermination of the right to a distribution of that fund. The issues in the case being thus settled, all that is left is to apply the remedy provided by law for the reimbursement of depositors all alike.

The contention of defendant in error, that the resources provided by law shall be exhausted before it is called upon to pay the penalty or any part thereof, follows as a legal sequence to the admitted right of intervention. Intervention conceded carries with it all the other rights granted to it by the honorable trial court, and in the face of such a concession we fail to understand why the judgment of the lower court should not be affirmed. But holding views diametrically opposite to the right of intervention as sought in this case, and to the right of defendant in error to have the resources of the state banks exhausted before liability accrues, compels us to dissent.

We concur in the conclusion reached, that this case should be reversed and remanded; and it is our holding that the plea of intervention should be dismissed, and that the restraining order issued in this case by the honorable trial court be dissolved.