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Pennsylvania R. Co. v. Fidelity & Deposit Co.

August 8, 1935

PENNSYLVANIA R. CO.
v.
FIDELITY & DEPOSIT CO. OF MARYLAND



Appeal from the District Court of the United States for the Eastern District of Pennsylvania; O. B. Dickinson, Judge.

Author: Buffington

Before BUFFINGTON and THOMPSON, Circuit Judges, and JOHNSON, District Judge.

BUFFINGTON, Circuit Judge.

In the court below, the Pennsylvania Railroad Company (hereafter called Railroad) brought suit against the Fidelity & Deposit Company of Maryland (hereafter called Fidelity) upon a security bond given by Fidelity to Railroad for the performance by the Pennsylvania Dock & Warehouse Company (hereafter called Warehouse) of a building contract between it and Railroad, which contract Railroad alleged Warehouse and Fidelity had not fulfilled, to the damage of Railroad. The case went to trial, and at the conclusion of Railroad's proofs the court granted a compulsory nonsuit and refused to take it off. Whereupon Railroad took this appeal. After due consideration had, we are of opinion the court erred in some of its rulings and in granting the nonsuit. The proofs are voluminous and the facts involved, and as the case goes back for retrial and new questions and considerations not now before us may then arise, we endeavor in this opinion to confine ourselves strictly and solely to the questions here involved.

The proofs of the plaintiffs, received or excluded, tended to show that Pennsylvania leased a tract of land to Warehouse for 21 years at a graduated rental, beginning at $50,000, taxes, water rents, etc. By the lease Warehouse agreed, at its own expense, to construct certain large improvements in the way of warehouses and manufacturing lofts to cost approximately $6,756,000; a cold storage building costing $1,780,000; a tunnel 50 feet wide under Railroad's Jersey City passenger station; a footway 60 feet wide, and a ramp 50 feet wide. The contract provided that Warehouse was to proceed with said work with all due diligence and dispatch, so that the "said structures may be commenced and completed as promptly as possible." The lease also provided for a surety bond, or bonds, in the following terms:

"One or more bonds in the total sum of Seven Million dollars ($7,000,000.00) with surety satisfactory to the Lessor, shall be executed by the Lessee and delivered to the Lessor, providing for the erection and completion of said warehouse buildings, tunnel, driveways and ramp and for the payment of any and all obligations hereunder until the erection and completion of said buildings, tunnel, driveways and ramp, whereupon, or upon the completion of said buildings, tunnel, driveways and ramp being otherwise assured to the satisfaction of the Lessor, said bond or bonds shall be cancelled and released. Said bond or bonds shall further provide that in case of failure of the Lessee to erect said buildings, tunnel, driveways and ramp within the time so specified the amount or amounts of said bond or bonds shall be held to be payable to the Lessor as liquidated damages for such failure so to do, and upon the receipt of the said amount or amounts the Lessor shall forthwith proceed to complete the construction of the said buildings, tunnel, driveways and ramp."

Thereafter Fidelity delivered to Railroad the bond of itself as surety and Warehouse as principal, for $7,000,000, in which the contract was recited and the bond conditioned as follows:

"Now, therefore, the condition of this obligation is such that if the Principal shall, at its sole cost and expense, construct and fully complete the warehouse buildings, tunnel, driveways and ramp, in said indenture of lease described, in the manner and within the time as provided for and required by said indenture of lease, and shall pay any and all obligations imposed upon it by said indenture of lease during the construction of said warehouse buildings, tunnel, driveways and ramp, and until the same shall have been fully completed, then this obligation shall be void; otherwise to be and remain in full force and effect.

"It is understood that in executing and delivering this bond, the Principal and Sureties hereby agree with the Obligee that if the Principal shall fail to erect said buildings, tunnel, driveways and ramp, within the time specified in Paragraph 5 of Article Four of said indenture of lease, that the penal sum of this bond shall be paid to the Obligee as liquidated damages, and not as a penalty for the Principal's failure so to do, and upon the receipt by the Obligee of said sum, the Obligee shall then forthwith proceed to complete the construction of said buildings, tunnel, driveways and ramp."

Thereafter Warehouse proceeded to perform its part of the contract, but in fact never completed it, and, after encountering financial troubles and in spite of the financial help by Railroad, hereafter recited, eventually went into bankruptcy. The attention of Fidelity was called to the situation, but it did nothing in the way of taking over the then uncompleted work. Such being the situation, Railroad gave or offered evidence at the trial of sums of money it advanced to Warehouse, and which were applied to and aided in the fulfillment, pro tanto, of the contract, and which advancements were made with the consent of all parties.

The proofs, offered or rejected, tended to show Railroad's damages, aggregating $5,215,168.86, together with interest made up by cash advancements, $2,464,800; the estimated cost of completing warehouses, $281,546; completing ramp, $38,739; the estimated cost of constructing the tunnel, $287,311; unpaid rentals, $154,166.66; unpaid taxes, $488,606.20; and the sum of $1,500,000 junior bonds which were taken by Railroad from Warehouse under an agreement between them of April 20, 1931, which bonds were rendered valueless by foreclosure proceedings induced by Warehouse's failure to complete. Such advance of money to Warehouse by Railroad, we here note, would seem to be allowed or approved by the tripartite agreement of March 9, 1931, which provided:

"It is mutually agreed by and between the parties hereto that any moneys which said The Pennsylvania Railroad Company may advance either by way of a loan or loans to said Pennsylvania Dock and Warehouse Company, or otherwise, for the purpose of fully completing the construction of said warehouse buildings, tunnel, driveways and ramp, if, as and when so advanced, and the completion of said construction by the use of any such moneys so advanced, shall not be deemed or construed in any way to prejudice or otherwise affect the rights, and/or liabilities of either or any of the parties hereto, under or by virtue of said bond, and likewise shall not be deemed or construed in any way to prejudice or affect any claim that any party hereto may assert against either of the other parties hereto."

The April 20, 1931, agreement between Warehouse and Railroad also contained the following:

"In consideration of the covenants and agreements herein contained to be kept and performed by the Railroad Company, the Warehouse Company, for itself and for its respective successors and assigns, does hereby fully and forever release and discharge the Railroad Company, its successors and assigns, from any and all liability and claims for damages which the Warehouse Company is now asserting, and/or which the Warehouse Company may, might, should or could, now or hereafter assert against the Railroad Company arising out of or on account of the terms, conditions, covenants, agreements, and stipulations, or either or any of them, in said Indenture of Lease bearing date August 20, 1929, ...


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