Purdy v. Massey

Argued December 1, 1931. The basic question in this case is whether or not the bond in suit is one of guaranty or indemnity. The action is assumpsit on a completion bond; the lower court held it to be a guaranty, and the measure of damage thereon to be the cost of completion. These rulings were excepted to, and after judgment was entered on the verdict, they were assigned as error, and defendants appealed.

The facts are almost determinative of the issue, and are as follows: The plaintiff, Mrs. Elizabeth Purdy, sold to one Valentine Kulp, a straw man for Isaac Wood Massey, defendant, a piece of land in Philadelphia for $85,000; she received $25,000 in cash and a purchase-money mortgage, with bond, for the balance of $60,000. Massey intended to build a garage on the lot, and to finance the undertaking he induced plaintiff to subordinate her mortgage to another mortgage equal in amount to the cost of construction. She agreed to do so provided the building was completed or she received a bond guaranteeing completion. This arrangement was effected. Plaintiff subordinated her mortgage to a first mortgage placed with the Home Life Insurance Company for the contract price of the building, $80,000, after defendants, Massey as principal and Indemnity Insurance Company of North America as surety, had given their bond for $60,000, the amount of her mortgage. This bond, after reciting the facts, provided that if Massey should "complete the building mentioned free and clear of mechanics' liens or claims, then this obligation shall be void; otherwise to be and remain in full force and effect."

The garage was never built. Some neighbors objected to a public garage at that place, filed a bill in equity, and secured an injunction restraining Massey and Kulp "from using or operating or permitting to be used or operated as a public garage or automobile sales and service station . . . . . . any . . . . . . building . . . . . . erected on said lot." Massey and Kulp then refused to erect the building. The defendants were immediately notified and demand made upon them to perform the obligation of their bond. They declined to do so, the Home Life Insurance Company foreclosed its mortgage on account of nonpayment of interest, a sale was had, and the plaintiff's second mortgage was wiped out. She has received nothing on account of interest or principal due her on the mortgage given by Kulp, and the judgment which plaintiff has entered against him on the bond which the mortgage was given to secure is worthless, and nothing can be recovered thereon. Unless plaintiff can recover on this bond she will have received $25,000 for the property which she sold for $85,000, and she will have suffered a loss of $60,000 and interest thereon through no fault of her own. She no longer has her property or her mortgage, and she has now brought suit against defendants on their bond.

Is this bond one of guaranty or merely an indemnity against loss? "The distinction between the two agreements is simply that between an affirmative covenant for a specific thing, and one of indemnity against damage by reason of the nonperformance of the thing specified": Weightman v. Union Trust Co., 208 Pa. 449. In answering this question, the language of the bond itself should first be considered. If it is plain and unambiguous that the covenant is to do a specific thing, as for instance the erection of a building (Equitable Trust Co. v. National Surety Co., 214 Pa. 159; Trainor Co. v. Ætna Casualty Surety Co., 49 F.2d 769) there can be no doubt that the bond is one of guaranty. The covenants in a bond "should be construed to mean what the parties intended in so far as that intention can be ascertained by the words used": Equitable Trust Co. v. National Surety Co., supra. If, however, the language is not free from doubt, then the circumstances surrounding the making of the bond, and particularly the purpose for which it was given, should be taken into account: March v. Allabough, 103 Pa. 335; Ambridge v. P. B. St. Ry. Co., 234 Pa. 157. In this case such considerations lead to but one conclusion — that this bond was an absolute undertaking to erect and complete the building.

This bond is to be construed most strictly in favor of the plaintiff. The obligor, Indemnity Insurance Company of North America, is a paid surety engaged in the business of furnishing bonds for profit; we have frequently held that in cases of corporate sureties, the bond is to be strictly construed in favor of the obligee: Young v. American Bonding Co., 228 Pa. 373; South Philadelphia State Bank v. National Surety Co., 288 Pa. 300, and cases there cited.

The condition of the bond is performance of a specific thing — completion of the building provided for in plans and specifications made a part of the bond — and the only alternative for performance is the bond itself. It is obvious, being clearly expressed by the words of the bond and the circumstances surrounding the transaction, that the intent of all concerned was to give plaintiff in lieu of her first mortgage the enhanced value of the real estate by the addition of the building, or failing that, its equivalent in money — not to exceed the face value of the bond. It can readily be seen that such an arrangement was a sound business transaction, and as events happened, a wise precaution for and by the plaintiff. In giving up her first lien on the property to help finance the building, she could not have protected herself in any better way.

That this is a guaranty bond, an affirmative covenant to complete the building in event of default by the principal, is firmly established by our cases: Janes v. Scott, 59 Pa. 178; Union Trust Co. v. Citizens' Trust Co., 185 Pa. 217; Folz v. Tradesmen's Trust Saving Fund Co., 201 Pa. 583; Equitable Trust Co. v. Nat. Surety Co., supra. To the same effect see Trainor Co. v. Ætna Casualty Surety Co., supra. Our recent case, Mechanics Trust Co. v. Fidelity Casualty Co.,304 Pa. 526, is directly in point. There the bond recited that the principal had agreed to construct certain dwellings, and further that if the principal "shall well and faithfully perform his part of the agreement and erect said dwellings, then this obligation shall be void, otherwise to be and remain in full force and effect." We held this to be a guaranty bond, and on default, the surety was bound to take the place of the principal and erect the dwellings, and that the cost of doing that which it should have done was the measure of damage for which defendant was liable. It follows that the bond in suit is an absolute undertaking to erect and complete the building, and defendants having failed to keep their obligation are liable for the loss plaintiff sustained, not exceeding the amount of the bond.

In regard to the measure of damage, the court below required the plaintiff to show the cost of erecting the building contemplated in the contract. The estimates of the witnesses ranged from $45,000 to $70,000, and the court instructed the jury that if they found the fair cost to be more than $60,000, they could not give a verdict in excess of that sum because such was the amount of the bond. The verdict was for $60,000 with interest. In fixing compensation for damage resulting from breach of a contract the general rule is that the injured party should be placed in the same position as if there had been no breach. The object of the law is to place such party in as good position as if the contract had been kept. In the instant case the bond guaranteed the completion of the building; if there had not been a breach of the obligation of the bond, the building would have been erected. Since this was not done, the plaintiff can only be put in as good position as if the contract had been carried out by giving her the cost of construction, not exceeding, of course, the amount of the bond. The measure of damage on a bond guaranteeing completion is the cost of completion: Equitable Trust Co. v. National Surety Co., supra; Mechanics Trust Co. v. Fidelity Casualty Co., supra; Board of Education v. Maryland Casualty Co., 27 F.2d 20. And in a case such as this, where the work was never begun, this cost will be the whole cost of construction.

Defendants contend that the injunction issued against Kulp and Massey was a sufficient legal excuse and justification for their failure to erect the building. It is their only excuse, and it is neither legal nor sufficient. An examination of the decree shows that they were restrained only from operating a public garage on the premises; not one word was said against the construction of this or any other building on the property. They could have erected any kind of building, the decree only prohibited them from using whatever building might be erected as a public garage. The precise question was passed upon in Penniman v. Hoffman, 262 Pa. 100. There a decree was issued enjoining the use of a proposed building as a public garage. The building was completed substantially without change from the original plans, and this court held that it was proper for the lower court to refuse to order its removal, inasmuch as the prohibition went only to the offensive use of the structure, and not to the character of its architecture.

It is also contended by defendants that the plaintiff has no interest in the present cause of action, and is therefore not entitled to recover. At the trial an offer was made to show that plaintiff has no financial interest in the property or in the mortgage. An objection to this offer was sustained by the court, which action is assigned as error. The offer was properly refused; it was not within the issues framed under the pleadings, not having been pleaded as a defense: Ruth-Hastings Glass Tube Co. v. Slattery, 266 Pa. 288. In addition, she is the legal plaintiff, and as such has the right to sue, and whether or not an assignment was made by her is immaterial: American Mfg. Co. v. Morgan Smith Co., 25 Pa. Super. 176. It can be no concern of defendants, certainly can in no way affect their rights, if recovery is had in the name of the legal plaintiff: Berks Co. v. Levan, 86 Pa. 360. The result in either event is an adjudication of the issue: Adams v. Edwards,115 Pa. 211; C. H. Hardy Auto Co. v. Posey, 50 Pa. Super. 399. The suit was brought in the name of the person with whom defendants contracted and her right alone is in question: Guaranty Trust Safe Deposit Co. v. Powell, 150 Pa. 16. So long as the bond held by the plaintiff represents value, it is immaterial whether plaintiff is acting in her own right or as the nominee of someone else. This is a matter with which defendants have no concern.

The assignments of error are overruled and the judgment of the court below is affirmed.