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STEWART v. NATIONAL SUR. CO.

December 9, 1932

STEWART
v.
NATIONAL SURETY CO. et al.



The opinion of the court was delivered by: WELSH

WELSH, District Judge.

This is a suit primarily to restrain certain defendants, who are officers of the commonwealth of Pennsylvania, from proceeding against a codefendant, the National Surety Company, a corporation of the state of Delaware, of which company the plaintiff, a resident of the state of New Jersey, is a stockholder.

 "The condition of this obligation is such that if the above bounden Franklin Trust Co. of Phila. Pa. shall faithfully and honestly keep and account for such funds, moneys, chattels or other property of the Commonwealth of Pennsylvania, which now are or may hereafter from time to time remain on deposit with, or be in the custody and keeping, of the said Franklin Trust Co. and shall pay over, deliver and account for the same, and any and every part thereof, from time to time, at any time when the same shall be demanded, to or upon the order of the said State Treasurer or other State officers by whom such deposit was made as aforesaid, or their successors in office and shall also from time to time, when the same shall be demanded, to or upon the order of the said State Treasurer or other State officers by whom such deposit was made as aforesaid, or their successors in office and shall also from time to time, when the same shall be demanded by the said State Treasurer or other State officers or their successors in office, pay to him or them or to his or their order for the use of the Commonwealth the whole or any part of such sum or sums of money, deposited as aforesaid, as the said Trust Co. may owe to the Commonwealth of Pennsylvania; and shall also pay over to the said State Treasurer, or his successors in office, for the use of the Commonwealth, interest on said moneys at the rate of two per centum per annum payable semi-annually, then this obligation to be void, otherwise to be and remain in full force and virtue. * * *

 "And in case of a breach of any of the conditions of the foregoing bond, the said surety holds itself bound as principal for any debts arising thereunder, in the amount aforesaid, and agrees to answer for the same without regard to and independently of any action taken against the said Franklin Trust Company of Philadelphia and whether the said Franklin Trust Company be first pursued or not."

 There were a number of other bonds of similar tenor furnished by the National Surety Company and other surety companies for other depositaries, which were paid by the bonding companies. Before payment could be made in the instant case, the plaintiff came to this court for relief.

 Under the Constitution of the State of Pennsylvania, the commonwealth has a priority status in all cases where it has a claim against a fund. The plaintiff alleges that notwithstanding the above bond and its conditions, the commonwealth of Pennsylvania has no right to make demand upon the National Surety Company until the state has exercised to the fullest extent its right of priority. As there are sufficient funds in the hands of the state receiver (the secretary of banking) to pay the commonwealth in full if such priority claims were exercised, the surety company would be absolved from all payment if the plaintiff's claim were well founded.

 The officers of the commonwealth take the position that they have the right to call on the surety company for full payment and then subrogate the surety company to the rights of the commonwealth to come in and claim against the fund pro rata with all the other depositors.

 The whole question has raised some very interesting problems, not the least of which is the question of jurisdiction. However, in view of all the cases cited by the parties, the court is assuming jurisdiction and will proceed to deal with the question on its merits. The arm of the court should never be interposed against an executive officer of the government, state or national, without evidence of clear disregard of law or constitutional rights. In this case the officers of the commonwealth of Pennsylvania were called upon to face such unusual conditions as may be called critical in our financial and industrial life. Banks were failing on every side, and only the wisest policies and conservative action on the part of those vested with responsibility could avert chaos. Undoubtedly, with these very grave responsibilities influencing them, the responsible state officials set out upon the task thrust upon them. They considered that under the law and the facts of the case they had two sources to which they could look for the return of the state moneys on deposit -- to the closed banks themselves, and, thanks to wise legislation, to the extra security of the bonding companies.

 The testimony reveals that the state officials wisely took the precaution to set aside, under their right of priority, sufficient moneys of the assets of the banks to absolutely protect the commonwealth.They also called upon the bonding companies to make payment in full on their bonds. The bonding companies, including the National Surety Company, have complied.

 Do these acts constitute such an invasion of the constitutional rights or statutory laws that a stockholder of the National Surety Company should have the right to an injunction of a federal court? The stockholder-plaintiff claims that the officers of the commonwealth have substituted for the constitutional priority rights of the state a claim against the surety company under its bond. This cannot be conceded in view of the testimony that the state officials now have in their own hands and under their own control, sufficient money which they have set apart under their priority claims to pay the state in full, awaiting only the official turning it over to the state treasury.

 Plaintiff also alleges that article 3, § 24, of the state Constitution has been violated. The section is as follows: "No obligation or liability of any railroad or other corporation, held or owned by the Commonwealth, shall ever be exchanged, transferred, remitted, postponed or in any way diminished by the General Assembly, nor shall such liability or obligation be released, except by payment thereof into the State Treasury."

 The whole spirit of this section is for a different purpose -- to accomplish an entirely different object, and only by a forced construction could it have reference to the instant case. Here the commonwealth officers are not releasing an obligation at all -- they are demanding that an obligation be fulfilled. If the state has a claim against two corporations, one a defunct bank and the other a surety company, and the officials of the state propose to demand payment of the surety company and subrogate the surety company to the state's right against the bank, it cannot be accurately stated that such action constitutes a violation of the article ...


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