Summary
In People v. Metropolitan Surety Co. (211 N.Y. 107), where the claim was based upon one of these bonds, the prevailing opinion states (pp. 114, 116): "His right of action against it through any form of legal proceeding was created by the bond and the statute, and must be enforced pursuant to the terms and conditions of the statute and not otherwise. (Stitzer v. United States, 182 Fed. Rep. 513; United States v. Boomer, 183 Fed. Rep. 726; Baker Contract Co. v. United States, 204 Fed. Rep. 390.)
Summary of this case from Strong v. American Fence Construction Co.Opinion
Submitted February 25, 1914
Decided April 14, 1914
Tallmadge W. Foster for appellant.
Edward R. Finch and Francis X. Brosnan for respondent.
The statute requiring and prescribing the substance and conditions of the bond is as perfectly binding on the principal and surety as if it had been set forth in the bond in its very words. ( McCracken v. Hayward, 2 How. [U.S.] 608.) The bond, conforming to the statute, imposed only such obligations as the statute permits. The statute is in a sense a recognition by Congress of the inability of persons supplying contractors for public works with labor and materials to take liens upon the public property of the United States and a substitute for a mechanic's lien law. ( United States v. Ansonia Brass, etc., Co., 218 U.S. 452; Title Guaranty Trust Co. v. Crane Co., 219 U.S. 24.)
It should be noticed, in order that there may be a true understanding of the relevant decisions, that the statute takes up the entire subject covered by a prior statute (Act of August 13, 1894, ch. 280; 28 U.S. Stat. L. 278), and, therefore, is to be treated as a substitute act.
Obviously the entire liability of the surety company to the claimant for the materials furnished by it under the contract between it and the Church Construction Company arises through the execution of the bond by the surety company as a surety for the construction company. The claimant could reach the surety company through the bond alone, which, with the statute as a part of it, defines and limits the rights of the claimant as against it, and the method and tribunals through which those rights might be enforced. His right of action against it through any form of legal proceeding was created by the bond and the statute, and must be enforced pursuant to the terms and conditions of the statute and not otherwise. ( Stitzer v. United States, 182 Fed. Rep. 513; United States v. Boomer, 183 Fed. Rep. 726; Baker Contract Co. v. United States, 204 Fed. Rep. 390.) It was, however, a qualified and conditional, and not an absolute right or cause of action. An act of Congress, which at the same time and in itself authorizes or creates a new cause of action and prescribes the limitations thereof and of its enforcement, makes those limitations conditions of the liability itself. Such an act is not a statute of limitations, and a compliance with the conditions which it prescribes is indispensable to the enforcement of the right it creates, because they are parts of or elements in the right itself and not limitations of the remedy only. The limitation of the remedy is a limitation to the right. ( The Harrisburg, 119 U.S. 199; Pollard v. Bailey, 87 U.S. 520; Fourth National Bank v. Francklyn, 120 U.S. 747; United States v. Boomer, 183 Fed. Rep. 726; Baker Contract Co. v. United States, 204 Fed. Rep. 390; Eberhart v. United States, 204 Fed. Rep. 884.) The cause of action or the rights acquired by the claimant through the statute and bond could not be enlarged, limited or modified by the insolvency of the surety company or the Supreme Court of the state under its jurisdiction in the present action. The limitation to the right of the claimant and the liability of the surety company was fixed at the execution of the bond and stands unchanged and unchangeable before the court and its receiver. To apply to the right the limitation of the prescribed remedy is not to illegally confuse the remedy and the right; it is to apply the real intention of Congress and its act. While insolvency may under certain conditions affect remedies through equitable rules and procedure, it does not change substantive rights or liabilities. Such cause of action or right as the claimant originally had under the statute and bond has remained to it unaltered.
The surety company became the surety for the Church Construction Company as expressed in the bond. The contract between the United States and the Construction Company was completed and finally settled September 28, 1908. Within the six months from that date, terminating March 27, 1909, the United States had not instituted any action upon the bond. The statute contemplated that the rights and claims of all claimants under the bond should be adjudicated in a single action brought upon the bond. ( United States v. Congress Construction Co., 222 U.S. 199; Eberhart v. United States, 204 Fed. Rep. 884; Baker Contract Co. v. United States, 204 Fed. Rep. 390; United States Fidelity Guaranty Co. v. Kenyon, 204 U.S. 349; Stitzer v. United States, 182 Fed. Rep. 513.) As we have already stated, the cause of action of the claimant here was given him by the statute and the means and manner of its enforcement as provided by the statute was an essential part of it. The statutory prescription of the remedy was likewise a prescription as to the liability of the surety company. It would not be seriously asserted that the claimant here could have had the liability of the surety company determined in an action or proceeding in the Supreme Court of the state between March 28 and September 28, 1909, in case the surety company had remained solvent. A manifest answer would have been that the liability was subject to the proviso that it be completed and matured by the action to that end prescribed by the statute. Under the statute and the bond, this in essential effect was the contract of the surety company: In case the Church Construction Company failed to promptly make payment to laborers or materialmen employed in the construction of the work, the surety company would be liable, within the penalty of the bond, for the unpaid claims upon the following and the exclusive conditions: (a) That the claimants be made parties to an action brought by the United States upon the bond, by intervention or directly, in order that all rights and claims might be adjudicated; (b) that during the second six months' period from the completion and final settlement of the contract, in case the United States had not brought an action, a claimant should bring suit in the name of the United States in the Southern District of New York, where the contract was to be performed, and not elsewhere; (c) that only one action should ever be brought upon the bond, in which the requisite notice should be given to all known creditors and all creditors should be permitted to file their claims in such action and be made parties thereto within one year from the completion of the work under the contract, and not later; if the recovery upon the bond should be inadequate to pay the amounts found due to all of said creditors, judgment should be given to each creditor pro rata of the amount of the recovery. Until these conditions were exercised the liability of the surety company was not certain and absolute.
The liability of the surety company to the claimant did not become absolute and direct when, after it had supplied the materials to the original contractor, their price became due, or when the contract between the original contractor and the United States was completed and finally settled. It remained qualified and conditional. Its certainty or absoluteness depended upon the possibility that, by means of the only method provided or permitted by the statute and not then instituted, the validity and enforceability of the claim be adjudicated. A judgment for it in an action prescribed by and conducted in accordance with the requirements of the statute could alone render it complete and absolute. The means of enforcement define both the right of the claimant and the liability of the surety which it was the intention of Congress to create.
It is unnecessary to consider whether or not the presentation of the claim to the receiver and the subsequent proceeding is a suit or action brought by the claimant. We are not required to pass beyond the fact that the claimant has no right of action and the surety company no liability cognizable in this action or proceeding. Whatever right of action was in the claimant or liability on the part of the surety was conditioned upon the use of the statutory remedy. Divorced from that remedy the right and the liability are non-existent. The claimant should have conformed with the provisions of the statute and obtained in the statutory action and presented to the receiver a judgment establishing the validity and amount of his claim. His claim as presented was conditional and not absolute, and its allowance was error. ( People v. Metropolitan Surety Co., 205 N.Y. 135.)
For the reason stated the order of the Appellate Division should be affirmed, with costs. The first question should be answered in the negative and the second question remain unanswered.
The condition of the bond was that the principal, the Church Construction Company, "shall promptly make full payments to all persons supplying it labor and materials in the prosecution of the work provided for in said contract." Indisputably, that condition was broken before the commencement of this action to dissolve the surety for its insolvency. The principal had not only failed to make payments as stipulated in the bond but had itself been dissolved for insolvency. The contract, for the performance of which the bond was given, was completed on September 28th, 1908, more than three months before this suit was brought. The full extent of the principal's default was fixed and determinable on that date. The liability of the surety was no longer contingent. The event upon which it had been contingent, a breach, had happened. Its liability may not have been liquidated, but there is a vast difference between a contingent, and an unliquidated liability or claim. If the surety's liability was contingent when this suit to dissolve it was brought, then every claim not reduced to judgment is contingent. In People v. Metropolitan Surety Co. ( 205 N.Y. 135) there had been no breach of the condition of the bond when the surety was dissolved. The liability was, therefore, contingent upon an event which might never happen, and the court applied the rule that a claim arising on a subsequent breach was not provable. That rule is applied ex necessitate because the assets of dissolved corporations have to be distributed sometime. But no case has yet decided that an unliquidated claim, or one not due, is not provable or that the recovery of a judgment is a condition precedent to the proving of a claim against such assets. The surety could have determined and paid all claims arising on the bond before this suit was brought. It did not have to wait to be sued. Its liability arose on the default of its principal. A suit against it would be based on its default in failing to discharge that liability. The mere fact that an exclusive remedy was provided for its default in not paying as agreed did not make its liability contingent on the event of such a suit. To be sure, the claimant could not sue for six months after the final completion of the contract. A suit may not be brought on a debt not due, but the debt is none the less a fixed liability. In this case the debt was due. For obvious reasons an independent right of action on it was suspended or not given for six months. If the United States had brought suit within that time, the debt or the "claim" would have been provable in that suit; but the claim was in no sense contingent upon the bringing of such a suit. The statute plainly recognizes the claim as existent, not contingent, during the six months. It merely provides in effect that nothing can be done to enforce it during that time unless the United States sees fit to bring a suit.
I quite agree that the statute and the bond are to be construed together. My brother COLLIN construes the contract of the surety as one to become liable for the default of its principal but only after a judgment has been procured against it in the manner specified. I construe its contract as one to be liable absolutely within the sum named in the bond for the default of its principal upon the condition, however, that that liability, in case of its failure to discharge it, shall be enforced only as provided by the statute. There is a vital distinction between a condition of liability and a condition of the enforcement of that liability. It will introduce a novel and dangerous doctrine in the law of suretyship, especially in view of the extent to which that has become a business, to hold that the liability of a surety on a statutory bond does not arise until resort has been had to the statutory method of enforcement. The contract of the surety is to pay on the default of its principal, and it should not be construed as one to pay only after a judgment has been recovered against it. The rule applied in People v. Metropolitan Surety Company ( supra) would be doubly harsh if applied to a case like this. The necessity for its application in that case and in the many cases cited therein by Judge VANN does not exist in this case, because in this case the event, upon which liability depended, had happened and was no longer contingent and uncertain.
The question whether the claim must first be adjudicated in a suit brought in the Circuit Court of the United States for the Southern District of New York requires a closer analysis of the statute. (Chap. 778, 33 Stat. at L. 811; U.S. Comp. Stat. Supp. 1909, p. 948.) It is entitled, "An Act for the protection of persons furnishing materials and labor for the construction of public works." It is to be liberally construed to accomplish that purpose. ( Hill v. American Surety Co., 200 U.S. 197; Title Guaranty Trust Co. v. Crane Co., 219 U.S. 24.) I agree that it is to be construed as a substituted act for the act of August 13, 1894 (Chap. 280, 28 Stat. 278; U.S. Comp. Stat. 1901, p. 2523); but, in determining the purpose of the changes, the earlier act and the decisions under it are entitled to consideration. The earlier act did not provide for the priority of the claims of the United States and contained no limitations with respect either to the number or the time of commencement of actions or to the place where, or the court in which, they could be brought. Under that statute, it was held that the action might be brought in any proper state court ( United States v. Henderlong, 102 Fed. Rep. 2), that the United States was not entitled to priority, and that in case of a large number of actions at law by claimants the surety might bring an ancillary suit in equity to prevent a multiplicity of actions and to secure an equitable distribution. ( American Surety Company v. Lawrenceville Cement Company, 96 Fed. Rep. 25.) It is plain that the purpose of the change was to secure priority of claim to the United States, to prevent a multiplicity of suits and to provide an orderly way of enforcing all claims in one suit and of equitably distributing the recovery among claimaints.
The statute, then, requires a bond to be given for the benefit of those supplying labor and materials. If it stopped there, as the earlier statute did, a claimant could have brought suit in any court having jurisdiction of the parties. Recognizing that, on a breach of the condition of the bond, persons furnishing labor and materials had "claims" against the surety, the statute provided in effect that they could be adjudicated in a suit brought by the United States within six months after the final completion of the contract, or, in case the United States did not sue, in a single suit brought within a year in the Circuit Court in the district in which the contract was to be performed. Undoubtedly, the remedy provided is exclusive. Undoubtedly, the Circuit Court for the Southern District of New York had exclusive jurisdiction of a suit against the surety on a claim arising on the bond. But I insist that this is not such a suit, and that the claim and the exclusive remedy provided for its enforcement are distinct.
The appellant was enjoined from bringing any action against the insolvent corporation or the receiver, the corporation became civiliter mortuus, and the Supreme Court took possession of its assets to distribute them, not among creditors whose claims had been adjudicated, but "among its stockholders and its fair and honest creditors." An officer of the court took the place of the dissolved corporation, and the duty, theretofore resting on the corporation to pay its debts, without putting creditors to a suit to recover them, devolved on the receiver to the extent that he had assets. The remedy provided for the recovery of a claim against the corporation before it was dissolved can have no application to a proceeding in an action like this to determine the claims of creditors. I grant that a suit is a proceeding in a court of justice for the enforcement of a right. ( Drake v. Gilmore, 52 N.Y. 389, 394.) But this is a suit to dissolve a corporation, and this is a proceeding in that suit to enable the court completely to exercise the jurisdiction which it has assumed. The nature of the action, not of the particular proceeding in the action, determines the extent of the court's jurisdiction. The jurisdiction to dissolve the corporation and distribute its assets draws with it the jurisdiction to determine every question necessary to make a proper distribution. The appellant here is in no sense a plaintiff; if left to itself it could have pursued the exclusive remedy provided for the enforcement of its claim. But the Supreme Court intervened, enjoined it from pursuing that remedy, dissolved its creditor and took possession of the latter's assets for the purpose of distributing them. No other court in any other jurisdiction could thereafter interfere or exercise the slightest control over those assets or their distribution. Pursuant to the invitation of the court — the advertisement for claims — the appellant presented its claim. It was not a voluntary suitor, pursuing an independent remedy for the enforcement of a right. It was virtually a defendant, forced to come in and prove its claim to the only court which could direct the payment to it of a single dollar of its debt. The action to dissolve the corporation and distribute its assets was not thus converted into a suit on the bond by the appellant against the dissolved corporation.
Doubtless the Supreme Court might have permitted an action to be brought in the Federal court for the purpose of determining the amount of the claims arising on the bond, but it was not bound to do so. "The court which appoints a receiver of the property of a corporation itself holds and administers the estate, through the receiver as its officer, and must decide whether it will determine for itself all claims of or against the receiver or allow them to be litigated elsewhere." ( Porter v. Sabin, 149 U.S. 473, 479.) "When the object of the action requires the control and dominion of the property involved in the litigation, that court which first acquires possession, or that dominion which is equivalent, draws to itself the exclusive right to dispose of it, for the purposes of its jurisdiction." ( Heidritter v. Elizabeth Oil Cloth Company, 112 U.S. 294, 305.) It is a familiar principle of equity that when a court acquires jurisdiction it will retain it for the purpose of completely determining the matters in controversy. ( Douglass v. Ferris, 138 N.Y. 192.) While the Supreme Court of this state has no jurisdiction to entertain a suit on a bond given pursuant to the Federal statute, it does have jurisdiction to determine the rights and obligations arising on such bond when incidentally brought in question in a suit of which it has jurisdiction, especially when it is necessary to determine those rights and obligations in order to distribute a fund in its custody. The principle applicable in patent cases is analogous. If a suit arises on a contract the state courts have jurisdiction even though the validity of a patent be incidentally involved, and vice versa, if it arises under the patent laws, the Federal courts have jurisdiction even though the construction of a contract be incidentally involved. ( Littlefield v. Perry, 21 Wall. [U.S.] 205; Pratt v. Paris Gaslight Coke Company, 168 U.S. 255; Excelsior Wooden Pipe Company v. Pacific Bridge Company, 185 U.S. 282.) The principle is that jurisdiction of the subject-matter draws with it the whole case, even of matters which standing alone the court would not have jurisdiction to decide. Having jurisdiction of the fund and the distribution of it, the court necessarily had jurisdiction to determine the validity of all claims upon it, even of those arising perforce of the laws of another jurisdiction and by themselves cognizable only by the courts of that jurisdiction. This is not the case of a lien to preserve which it may be necessary to take certain statutory proceedings as was the case of Clifton v. Foster ( 103 Mass. 233). But in such a case there could be no interference with the proceedings of the court first acquiring jurisdiction of the property, and it is even doubtful whether it would be necessary for a lienor to take the statutory proceedings in some other jurisdiction necessary to preserve a lien in order to prove to the court having jurisdiction of the property his right to a share on its distribution.
Having acquired jurisdiction, the Supreme Court could determine the priority of claims arising on the bond and whether a pro rata deduction was necessary because of an excess of claims over the liability of the surety, precisely as that could have been determined in a suit in the Circuit Court of the United States. There is no difficulty on that head, as the total claims are less than that liability. It would have served no useful purpose to require the claimant to bring a suit in the Federal court, and the exclusive remedy provided for the enforcement of a claim against the defendant corporation ceased to apply the moment the Supreme Court dissolved the corporation, took possession of its assets and enjoined all creditors from bringing suits against the corporation or its receiver.
The cases of Fourth National Bank of N.Y. v. Francklyn ( 120 U.S. 747), cited by my brother COLLIN, and Flash v. Conn ( 109 U.S. 371) illustrate the distinction between a condition of liability and a condition of the enforcement of that liability. The former case arose on a statute of the state of Rhode Island similar to an earlier statute of the State of Massachusetts under which stockholders could be charged by execution or action upon a judgment against the corporation, and it was held that a judgment against the corporation was essential to liability of the stockholder. The latter case arose on a statute of the state of New York imposing an original liability upon stockholders and allowing a suit to be brought to enforce that liability, but only after obtaining a judgment against the corporation and the return of an execution unsatisfied; and it was held on the authority of Shellington v. Howland ( 53 N.Y. 371) that the bankruptcy of the corporation excused compliance with the condition requiring suit to be first brought against it. In this case the claim, the liability, arose on the breach of the condition of the bond. The statute imposed conditions on the maintenance of an action to enforce the claim, but when the Supreme Court dissolved the corporation and took possession of its assets to distribute them among its creditors, it was no longer necessary or practical, if indeed it was possible without leave of the court, to bring such an action.
In my opinion, the decision of the Special Term was right.
WERNER, CHASE and HOGAN, JJ., concur with COLLIN, J.; WILLARD BARTLETT, Ch. J., and HISCOCK, J., concur with MILLER, J.
Order affirmed.