The opinion of the court was delivered by: MCVICAR
The facts are fully stated in the Findings of Fact. From the facts found, it appears that the Middle West Construction Company entered into a written contract with the City of Pittsburgh, January 29, 1939, for the construction of a relief sewer in the Columbus Avenue Drainage Basin.
The contractor entered into performance of the aforesaid contract with the City and made default in payment for labor and materials. The City notified the contractor of its default February 13, 1941, and called upon plaintiffs, the sureties, to complete said contract. Thereafter, the contract was completed and the cost of said completion, $ 25,861.21, was paid by the plaintiffs, the surety companies. There is a balance under the contract in the possession of the City of $ 23,834.13. It is conceded that plaintiffs are entitled to judgment for this amount, unless the City is entitled to the set off averred in its counterclaim.
On March 29, 1938, the City entered into a contract with the Middle West Construction Company for the construction of a relief sewer in the Spring Garden Drainage Basin. The Standard Accident Insurance Company became surety on the performance and labor and material bonds, covering said contract. Work was completed October 22, 1938. The City paid the contractor the amount found to be due it. In 1941, the City found that the sewer had not been constructed in accordance with the contract. Neither the City nor the contractor has done the work required to complete said sewer. The City, in 1944, estimated that the cost thereof would be $ 18,240.30, which is ten per cent to fifteen per cent higher than the cost would have been in 1941. This is the set off which it claims. Plaintiffs contend that the City is not entitled to this set off, as against the balance in the hands of the City under the Columbus Avenue sewer contract. The question is whether the City's claim of set off should be sustained or not.
The City contends that the assignment made by the contractor of monies in the hands of the City to the plaintiffs in event of default by the contractor was not effective to defeat defendant's right of set off, also that plaintiffs have no right of subrogation. Plaintiffs contend that the City is not entitled to set off against the balance in its hands under the present contracts, a claimed indebtedness by the City against the contractor under an earlier contract. Plaintiffs also claim that they are entitled to subrogation to the unpaid balance in the hands of the City under the present contract.
In the case: in Re L. H. Duncan & Sons, Appeal of Maryland Casualty Co., 3 Cir., 127 F.2d 640, the contractors entered into a written contract with the Commonwealth of Pennsylvania for the construction and improvement of a section of a State Highway. The contract provided that the contractors would make prompt payment in full for labor and materials used in the work. The contractors were required to furnish performance and labor and material bonds. The contractors made an assignment of all monies due them from the Commonwealth of Pennsylvania in event of default. The contractors performed the contract and defaulted in payment for labor and materials. The surety paid these claims and made claim for the money in the hands of the Commonwealth, which, by agreement, had been paid to the Trustee of the contractors, in bankruptcy; the amount being $ 6,912.27. The payment by the surety was in excess of that amount. The surety claimed that it was entitled to the fund aforesaid by subrogation, and also by reason of the equitable assignment which the contractors made to the surety in event of default by the contractors.
The Court, in an opinion by Judge Biggs, stated that the case was governed by Pennsylvania law. The Court reviewed the Pennsylvania cases, including DuBois v. United States Fidelity & Guaranty Company, 341 Pa. 85, 18 A.2d 802, Sundheim v. Philadelphia School District, 311 Pa. 90, 166 A. 365, and Lancaster County National Bank's Appeal, 304 Pa. 437, 155 A. 859, and in conclusion stated (127 F.2d 644):
'The rights of the surety under the circumstances of the case at bar, however, are paramount to those of the contractor, according to Justice Simpson's statements made in the Lancaster County National Bank case, made so by the statute, contract and bond. The surety is subrogated in the case at bar to the rights of the laborers and materialmen and not to those of the contractor. It follows that the surety's right to subrogation in the fund is paramount to the right of the trustee in bankruptcy to that fund.'
This case is like the present case in that the contract provides that the contractor shall make prompt payment of claims for labor and materials; that the contractor failed to make such payments; that the surety paid for the same and the surety had an assignment from the contractor for monies due the contractor in event of his default. The decision was in favor of the surety.
In Wells v. City of Philadelphia, 270 Pa. 42, 112 A. 867, 868, the plaintiff, a surety company, was a surety on bonds for the performance of contract and for the payment of labor and material. The contractor did not complete the contract but the surety, on demand, did at a cost exceeding the balance in the hands of the City. The question involved was whether the plaintiff, a surety company, was entitled to the balance in the hands of the City. It was held that it did have that right.
The Court in an opinion by Justice Kephart said: ' * * * When default on the contract was declared against Wells and those under him, the surety was called upon to complete the contract in accordance with the obligation assumed by it with the city; the surety, on electing to complete, stood in a new relation to the contract. It was in direct relation to defendant as a party contracting to complete the work, becoming so on the contractor's default. In agreeing to finish the work, it exercised its rights under the contract and bond, stepping into the shoes of the contractor, operating under the contract as though a party originally alternately bound by its terms. See Philadelphia v. Harry C. Nichols Co., 214 Pa. 265, 273, 63 A. 886. It was not a new engagement, but a continuation of the old one, wherein the surety succeeded to all rights of the contractor under the contract, as well as liabilities to the owner thereunder. As to any money retained, the surety then stands to that fund in the same position as the owner of the property to which the contract relates. The surety's relation, through compulsion (default), dated even with the owner's relation. From this fund and the unpaid contract price it is entitled to sufficient to save itself from loss on its suretyship engagement; nor can the contractor, by assignment or otherwise, deprive it of this right. * * * .'
In Maryland Casualty Co. v. United States, 100 Ct.Cl. 513; Id., D.C., 53 F.Supp. 436, the contractor defaulted in his contract with the United States and as a result the surety on his bond was required to make payment of monies due materialmen and laborers. The surety sought in that proceeding to recover money due the contractor, in the possession of the United States. The United States set up a set off by reason of taxes and other debts due it from the contractor. The question arose whether the United States had a right to such a set off. The Court of Claims held that it did not have the right.
In the opinion of Judge Madden, it is said:
'In the first situation suggested above, the surety would have paid the original contractor's taxes or other debts to the Government. In the second, it would not. We think that in no case is it intended that the surety transaction should work out in such a way that the surety has paid the contractor's taxes or unrelated debts to the Government.'
In Sundheim v. Philadelphia School District et al., 311 Pa. 90, 166 A. 365, 368, the question involved was the right of a surety, who paid the claims of labor and materialmen, to funds in the hands of the owner as against the claims of other creditors. The decision was adverse to the surety on the ground that the surety did not have an assignment from the contractor. The contract in that case differed from the contract in the present case in that it did not require the contractor to make payment for labor and materials. The Court stated 'there was no obligation in the construction bonds or the construction contracts to pay labor and materialmen.' The contract in that case was different from the contract in the present case in that the contractor made no assignment to the surety in event of default by the contractor. The Court, on this point, stated in its opinion: (311 Pa.at page 103, 166 A.at page 370): 'We have no doubt that an express executory contract in writing whereby the contracting parties sufficiently indicate an intention to make some particular property or fund therein described the security for a debt or other obligation creates an equitable lien on the property so indicated ( Hurley v. Ashbridge, 55 Pa.Super. 523); but there must be such an identification of the fund and such a transfer of it as would clearly indicate that intention. There is nothing in the contract which measures to this requirement.'
The Court stated in regard to subrogation (311 Pa.at pages 99 and 100, 166 A.at pages 369): ' * * * Assuming that the construction obligation was a completion bond and the surety had been called in to complete (which it had not been in this case), if the surety completed the building it would have been entitled to be reimbursed for its outlay in completing the contract whatever that outlay may have been. * * * .' (311 Pa.at page 101, 166 A.at page 369) 'The subrogation rights extend to the rights of the party whose claim the surety is compelled to pay. 'When a party is required to pay a debt for which he has made himself legally liable, as surety, for which another is liable, as principal, and which that other in good conscience ought to pay, such payment operates to invest the party paying with the creditor's rights and remedies against the principal debtor. * * * ."
In City of Philadelphia, to Use of Warner Co., v. National Surety Corporation (National Surety Corporation v. City of Philadelphia), 3 Cir., 140 F.2d 805, 807, an action was brought for the use of Warner Company, a subcontractor, against the National Surety Corporation, surety on a paving contract by the Municipal Construction Company and the City of Philadelphia, to recover for material furnished, which entered into the paving contract between the Municipal Construction Company and the City of Philadelphia. The National Surety Corporation, defendant, summoned the City of Philadelphia as a third-party-defendant. The City moved for the dismissal of this claim against it on the ground that it did not set forth a cause of action. The proceeding was under Rule 14(a), Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c. In this case, it appeared that Municipal was a defaulting contractor with the City of Philadelphia, prior to 1938. In the year mentioned, the City entered into five more contracts, with the Municipal Construction Company for paving, etc., of city streets. Municipal furnished performance bonds. The National Surety Corporation became surety thereon. Upon completion of the work by Municipal, the City withheld $ 13,281.47 to reimburse it by reason of default made by Municipal on its prior contracts. Warner Company furnished materials for the 1938 contracts. Municipal did not pay Warner Company $ 12,479.94, which was due it for said materials. Demand was made on the National Surety Corporation, surety on Municipal's bond, who refused to pay the same. Thereupon, Warner Company, subcontractors, brought suit in the name of the City of Philadelphia to its use against the National Surety Corporation, to recover upon the additional bonds. Municipal, the contractor, made assignment to National Surety Corporation, the surety on its bonds, of monies due Municipal in event of default. National Surety Corporation claimed the right to recover against the City for several reasons; one of them being the assignment by Municipal, the contractor, to the City. The Court, in its opinion, stated that this proceeding being under Rule 14(a) of the Rules of Civil Procedure -- 'It follows that in order for National Surety to avail itself of the benefits of the rule it is necessary that the City be liable either to National Surety or to the Warner Company for all or part of Warner Company's claim against National Surety.', and in disposing of this question, the Court, in an opinion by Judge Biggs said:
'As we have stated Warner Company was a materialman who furnished materials to the five jobs covered by the contracts let to Municipal on or after September 30, 1938. Under the law of Pennsylvania a municipal corporation such as the City of Philadelphia has no obligation to pay materialmen. A municipality is liable to the contractor but not to a subcontractor, a materialman or a laborer. City of Philadelphia v. Stewart, 201 Pa. 526, 532, 51 A. 348, 350; City of Philadelphia to Use of McFarland v. McLinden et al., 205 Pa. 172, 176, 54 A. 719, 720; Lesley v. Kite, 192 Pa. 268, 43 A. 959. The 'additional' bonds covering the five contracts were executed by National Surety pursuant to the provisions of the two Pennsylvania statutes of June 22, 1931, P.L. 880 and P.L. 881, 53 P.S.Pa. §§ 523 et seq. and 525 et seq., as well as of an ordinance of the City of Philadelphia approved July 11, 1932, Ordinances of the City of Philadelphia and Opinions of the City Solicitor, 1932, p. 109. It is well settled that such so-called 'additional' bonds are for the benefit of materialmen and laborers. City of Philadelphia v. Stewart, supra; City of Phildelphia to Use of McFarland v. McLinden et al., supra. Moreover, if the surety upon an 'additional' bond pays the claim of materialmen it can acquire no right of subrogation against the municipality for the surety's rights rise no higher than those of the materialman who himself has no right to money in the owner's hands as retained percentages or a claim against the owner. DuBois v. United States Fidelity & Guaranty Co., 341 Pa. 85, 90-93, 18 A.2d 802, 804, 805. National Surety therefore cannot bring itself within the provisions of Rule 14(a). Even if it pays the claims due to Warner Company it acquires no right against the City of Philadelphia by subrogation. It could receive no more by the assignments which Municipal assertedly executed in its favor, for all that Municipal gave or could give to National Surety by these assignments was its right to collect from the City the sum withheld. This could not include Warner Company's claim against National Surety or any part of it. Thus, on any theory, National Surety fails to meet the test laid down by Rule 14(a).'
The Court held that the City was not liable to the National Surety Corporation, surety on the contractor's bonds, or to Warner Company, the subcontractor, for material furnished for all or part of Warner Company's claim.
In Maryland Casualty Company v. City of Pittsburgh, et al., D.C.W.D. Pa., 51 F.Supp. 459, 461, the contractors, Tavares Brothers, entered into a contract with the City for the repaving of a street. They furnished both performance and labor and material bonds with the plaintiff as surety. The contract with the City made the bonds a part of the construction contract. The contractor assigned to the surety all percentages retained in event of default by the contractor. The construction contract gave the City the right to terminate the contract for failure of performance or to pay for labor and material and provided also that the contractor should not receive further payments until the work was finished. The contractor failed to perform the contract. The surety, on demand, completed the contract and paid for labor and materials. The contractor also made an assignment to a bank of all monies due him under the contract as security for a loan. The contract in Section 26 provided that the City may withhold from the contractor, in addition to retained percentages, such an amount as may be necessary to pay the claims for labor and materials furnished, and that the City shall have the right to apply such retained amount to the payments of such claims. This Court held that the surety was entitled to priority in payment over the bank which had received the assignment aforesaid. Judge Gibson, in his opinion, stated: 'In view of this section the City might have retained the entire fund of $ 4,126.17, and devoted it to payment of labor and material men, and then made claim against the Surety Company, under its bond guaranteeing payment for materials furnished and labor performed, in the amount of $ 5,975.64, instead of the amount actually received, $ 10,101,81. True, the City did not thus apply the fund in its hands, but the ability to make such application throws a strong light upon the equities in the instant matter.'
In the present case, the contractor was required by contract to pay promptly for all labor and material required in the performance of the contract. The City had the right to withhold money due the contractor, to insure prompt payment. If default was made by the contractor, the City had the right to complete the work, pay all claims for labor and materials and the balance, if any, to the contractor. If the cost of completion by the City was more than it had in its hands, then the contractor and the surety were required to pay the excess. The performance and labor and material bonds were made a part of the construction contract. The contractor defaulted in the performance of the construction contract. The City notified the plaintiffs, sureties on the bonds, to complete the contract. The contract was completed. The sureties paid more for the completion of the contract than the balance in the City's hands. The plaintiffs, sureties, had an assignment of all monies due the contractor in event of default. If the City had completed the contract, it would not have any money in its possession to reimburse itself for loss on the contract for which it now claims a set off.
Under the facts and the law, the claim of set off by the City should not be allowed and the claim of the plaintiffs should be sustained, by reason of the assignment and their rights to subrogation.
Let an order for judgment be prepared and submitted in accordance with the foregoing findings of fact, conclusions of law and this opinion.
1. Continental Casualty Company is a corporation organized and existing under and by virtue of the laws of the State of Indiana, having its principal office or place of business in Chicago, Illinois, and is engaged, inter alia, in the business of writing fidelity and surety bonds.
2. Massachusetts Bonding & Insurance Company is a corporation organized and existing under and by virtue of the laws of the Commonwealth of Massachusetts, having its principal office or place of business in Boston, Massachusetts, and is engaged in ...