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City of Philadelphia v. Lieberman

February 8, 1940


Appeal from the District Court of the United States for the Eastern District of Pennsylvania; George A. Welsh, Judge.

Author: Maris

Before MARIS, CLARK, and JONES, Circuit Judges.

MARIS, Circuit Judge.

Consolidated Indemnity and Insurance Company, hereinafter called Consoliated, was a New York corporation engaged in the business of insurance and indemnity In order to qualify as surety upon contracts for the City of Philadelphia and pursuant to the requirements of an ordinance of that city approved July 21, 1887, it deposited with the Broad Street Trust company, of Philadelphia, bonds of the face value of $100,000. This was done under the terms of a depository agreement executed by Consolidated and a custodian agreement executed by Broad Street Trust Company November 30, 1929. The securities so deposited were approved by the City of Philadelphia December 2, 1929.

On May 29, 1934, a New York court of competent jurisdiction ordered that the affairs of Consolidated be liquiated. Pending the proceedings in New York, on May 11, 1934 the plaintiffs were appointed ancillary receivers in equity of all assets of Consolidated located within the jurisdiction of the District Court for the Eastern District of Pennsylvania. On June 14, 1934, the ancillary receivers, the Broad Street Trust Company and the City of Philadelphia, with the consent of the district court, reaffirmed the terms of the deposit agreement of 1929 and agreed upon the release of the original bonds deposited under the old agreement and the substitution of thers of equal face value.

By bill in equity filed February 17, 1937, the plaintiffs, the ancillary receivers of Consolidated, sought to obtain information from the City of Philadelphia as to all bonds upon which Consolidated was surety to it; an accounting of any sums in excess of outstanding claims or judgments that the city had or might have against principals for whom Consolidated was surety and the return to the plaintiffs of all securities in excess of those amounts. The matter was referred by the district court to a special master April 22, 1937. In his report, filed February 28, 1939, the special master recommended that the Broad Street Trust Company be directed to deliver to the plaintiffs all the securities on deposit with it. This appeal is by the City of Philadelphia from the decree of the district court dismissing its exceptions and confirming the special master's report.

The agreement of November 30, 1929, provided that the bonds deposited thereunder should not be returned by Broad Street Trust Company to Consolidated without the consent of the city and while there were in existence any outstanding obligations of Consolidated. The city has not given its consent to the return of the securities by Broad Street Trust Company. On the contrary it actively opposes transfer of the securities on the ground that some of the claims covered by bonds of Consolidated for which the securities are collateral are in fact outstanding and that since the time for bringing suit for property damages has not yet expired additional claims, indefinite as to number and amount, may still be outstanding. The city contends that the bonds deposited with broad Street Trust Company constitute a trust fund set up to secure it for any loss which it may suffer by reason of the failure of Consolidated to fulfill its obligations and that this trust continues until all the obligattions outstanding upon the surety bonds have been fulfilled or the statutory limitation period against claims has elapsed.

The terms of the original deposit agreement substantiate the claim that the intent of the parties was to create an active trust for the benefit of the City of Philadelphia. Among the active duties imposed upon the Broad Street Trust Company are those of collecting and paying the interest on the deposited securities to Consolidated, selling deposited securities sufficient to pay any unpaid final judgments recovered by the City of Philadelphia against Consolidated, and holding the remaining deposited securites so long as the City of Philadelphia holds bonds for outstanding obligations of Consolidated and until the City Solicitor consents to the return of the securities to Consolidated. The last two provisions were beyond dispute for the benefit of the City of Philadelphia. The terms of this trust were formally approved by the plaintiffs, who, in their official capacity as ancillary receivers and as an act of administering the affairs of Consolidated, entered into the 1934 supplemental agreement to which the City of Philadelphia was a party whereby the securities originally deposited were taken out and others substituted for them.

It was upon the strength of the deposit of the securities thus placed in trust beyond the control of Consolidated that the City of Philadelphia permitted that company to transact municipal bonding business and accepted surety bonds issued by Consolidated. The city clearly has a contractual right to the continuation of the trust, so long as any of the obligations for which the surety bonds were executed are outstanding. Such a right may not be impaired by a court of equity. Galey v. Guffey, 248 Pa. 523, 94 A. 238, Philadelphia Trust Co. v. Northumberland County T. Co., 258 Pa. 152, 101 A. 970.

The decree of the district court does impair the city's contractual rights, for by ordering the transfer of the securities to the receivers it takes away from the city the protection of a trust fund which it had the foresight to require to be put in the hands of an independent trustee for its own protection. It is settled that a receiver of an insolvent corporation is not entitled to possession of securities lawfully held in trust. In re Voluntary Dissolution Home Provident S. F. Ass'n., 129 N.Y. 288, 29 N.E. 323; Risk v. Kansas Trust & Banking Co., C.C., 58 F. 45; Brackett v. Middlesex Banking Co., 89 Conn. 645, 95 A. 12; Hendrie & B. Bolthoff Mfg. & Supply Co. v. Beck, 72 Colo. 387, 211 P. 365, 28 A.L.R. 406.

This leaves for our consideration the question whether the trust has in fact terminated The answer to this question depends upon whether there are actually any obligations outstanding at the present time. The special master determined that there could be no outstanding liabilities for which the bonds would be security. We do not think that this finding can be supported by the record. On the contrary we find ample evidence in the record that there were obligations outstanding. For example: On December 6, 1930 Mandes Golder, trading as Golder Construction Company, and the City of Philadelphia signed a contract under seal for the construction of subway stations and trackage at Eighth and Locust Streets in Philadelphia. Part of this undertaking reads: "It is understood and agreed that the party of the second part [i.e. the contractor] shall be considered an independent contractor in respect of the work covered by this agreement and that the party of the second part shall alone be answerable for any loss or damage caused by the party of the second part or by the servants, agents or employees of the party of the second part; and the party of the second part agrees to fully indemnify, protect and save harmless the party of the first part [i.e. the city] from all loss, damage or expense from claims and liability resulting from accident, negligence or other cause during the prosecution of the work covered by this contract. The party of the second part further contracts and agrees to be responsible for and pay all loss or damage to either person or property which may, in any manner arise by reason of the prosecution of the work covered by this contract during the progress of the same, and, in the case of the happening of such loss or damage, the amount thereof may be retained by the party of the first part out of any payments due or to grow due to the party of the second part under this or any other contract." The condition of the bond which was executed under seal by Mandes Golder as te principal obligor and Consolidated and others as sureties, in the sum of $2,400,000 reads: "That if the said Principal Obligor shall and do well and truly, in all respects, comply with all the terms, conditions and covenants contained in the above mentioned contract, and shall and do pay unto the City of Philadelphia upon demand, any and all loss, damage and expenses which the said city may or shall sustain by reason of the failure of the said Principal Obligor to comply with the terms of the said contract * * * then this obligation to be null and void; otherwise, to be and remain in full force and virtue."

This bond and its accompanying contract were offered in evidence by the city because they were either identical or substantially similar to sixteen other undertakings of Consolidated. The undertaking of the principal obligor and the surety was clearly one of indemnity. In Williston and Thompson on Contracts, ยง 2004, the authors state the general rule to be that "on an obligation to indemnify against loss there must be damage before the statutory period begins, for by the nature of such a contract there is no breach until there is damage."

The Pennsylvania cases differentiate between indemnity against liability and indemnity against loss but for the purposes of our discussion it is not necessary to determine whether the limitation period begins to run when there is a claim against the city or when a loss actually occurs. Ardesco Oil Co. v. N.A. Mining & Oil Co., 66 Pa. 375; Ruzyc et ux. to Use, Aplnts., v. Brown et ux., 320 Pa. 213, 181 A. 783. What is of importance is that the limitation period does not begin to run at the completion of the work, as seems to have been assumed by both parties, but when there is a breach of the covenant to indemnify, which under the Pennsylvania sauthorities cannot be earlier than when a claim is made against the obligee. The action by the obligee is not for the damages arising by reason of injuries to the person or damages to property but upon the contract.

Had the instruments been simple contracts the statutory period would be six years from the breach of the undertaking, a period which obviously has not run. However, the contracts are under seal. The statute of limitations has no application to an action for breach of a covenant therein. Parsons Trading Co. v. Dohan et al., ...

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