Case Name: PEOPLE v. METROPOLITAN SURETY CO.
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1911-12-28
Citations: 132 N.Y.S. 829
Docket Number: 
Parties: PEOPLE v. METROPOLITAN SURETY CO.
Judges: 
Reporter: West's New York Supplement
Volume: 132
Pages: 829–835

Head Matter:
PEOPLE v. METROPOLITAN SURETY CO.
(Supreme Court, Appellate Division, Third Department.
December 28, 1911.)
1. Principal and Surety (§ 5 ) — Contracts — Construction.
A surety company’s bond, conditioned for payment to the obligee named therein of a rental reserved by the obligee in a written lease of a steamboat, and to secure him from any pecuniary loss resulting from a breach of any of the terms, covenants, or conditions of the lease, in a sum not greater than a penalty named in the bond, was a contract guaranteeing performance of the lease by the principal, or charterer, to the obligee.
[Ed. Note. — For other cases, see Principal and Surety, Dec. Dig. § 5. ]
2. Principal and Surety (§ 147 ) — Surety Company — Remedies of Credi-
tor-Recourse to Indemnity to Surety.
The owner of a steamboat leased it at a monthly rental and required the charterer to give bond. The charterer, as principal, deposited money to indemnify a surety company, which thereupon executed a bond to the owner to secure performance of the lease by the charterer. After a breach, the owner’s suit against the surety company was dismissed because not brought within the time provided by the bond, and he thereafter attached the principal’s indemnity to the surety and recovered judgment against the principal for a greater sum. Held, that the law raised an implied trust in the indemnity given to the surety in favor of the creditor, which, on maturity of his debt by judgment, he might enforce whether the surety had been damnified or not, and irrespective of whSther the surety or principal or either were insolvent.
[Ed. Note. — For other cases, see Principal and Surety, Cent. Dig. §§ 402-412; Dec. Dig. § 147. ]
3. Principal and Surety (§ 147 ) — Remedies of Creditors — Recourse to
Indemnity to Surety — Parties.
Where a creditor attaches the principal’s indemnity to a surety and obtains judgment against the principal, he may, upon motion, compel the receiver of the insolvent surety to pay over the part of the fund covered by the judgment; no action in the name of the sheriff making the attachment being necessary or proper.
[Ed. Note. — For other cases, see Principal and Surety, Cent. Dig. §§ 402 — 412; Dec. Dig. § 1407. ]
4. Principal and Surety (§ 147 ) — Remedy of Creditors — Defenses by .
Surety.
In a creditor’s proceeding to enforce a claim, aided by attachment of the principal’s indemnity to the surety, in an action resulting in judgment against the principal, it is no answer for the surety to say that it had misappropriated the indemnity fund and did not have it on hand, nor is it any answer for the surety’s receiver to say that he did not have the identical money which was deposited with the surety as indemnity.
[Ed. Note. — For other cases, see Principal and Surety, Dec. Dig. § 147. ]
5. Reference (§ 11 ) — Counterclaim.
Where a creditor, in dissolution proceedings against a surety company, is entitled to compel the receiver to pay over to him on the maturity of his debt the indemnity given by the principal to the surety company, and where the surety has sustained costs in the creditor’s action against it and counterclaims against the creditor therefor, a reference to ascertain the sum payable to the creditor is proper.
[Ed. Note. — For other eases, see Reference, Cent. Dig. § 27; Dec. Dig.
§ 11. ]
Kellogg, J., dissenting.
Appeal from Special Term, Albany County.
Action by the People of the State of New York against the Metropolitan Surety Company, in which R. Grant Johnson became a party and moved to compel the company’s receiver to pay a claim presented by him. From an order of the Supreme Court appointing a referee to take proof and report to the court, Johnson appeals. Affirmed.
Argued before SMITH, P. J., and KELLOGG, SEWELL, HOUGHTON, and BETTS, JJ.
G. D. B. Hasbrouck, for appellant.
Edward R. Finch, for the People.
For other cases see same topic & § number in Dec. & Am. Digs. 1907 to date, & Rep’r Indexes

Opinion:
HOUGHTON, J.
The appellant leased to the Jamestown Exposition Excursion & Steamboat Company a steamship for the period of seven months, beginning the 1st day of May, 1907, at a rental of $900 per month, payable monthly, and the lessee also agreed to pay certain charges and keep the vessel in repair. The lease contained a clause that the charterer should furnish a bond in the sum of $2,500 to guarantee the faithful performance of the contract of leasing. Thereupon the defendant the Metropolitan Surety Company executed such bond at the request of the Exposition Company, which deposited $1,250 as collateral thereto. The bond so furnished bound the principal and surety to pay such sum and secured appellant, named as obligee, from any pecuniary loss resulting from the breach of any of the terms, covenants, and conditions of the contract of hiring, and further provided that the surety company should be informed of any breach of the terms of such contract within 30 days, and should not be liable for any greater sum than the penalty mentioned in the bond, nor at all unless proceedings thereon were instituted not later than the 1st day of January, 1908.
The Exposition Company breached its contract, and the appellant brought suit against the surety company after the 1st day of January, 1908, and his complaint was dismissed because the action was brought after that date. Thereupon the appellant brought suit against the Exposition Company, and, it being a foreign corporation, the plaintiff obtained an attachment, and the sheriff attached, as is claimed, the fund which the Exposition Company had deposited with the surety company on the giving of the bond. Judgment was finally obtained against the Exposition Company for $2,951.26, and execution thereon issued to the sheriff who levied the attachment, which execution is presumably outstanding. On January 6, 1909, the above-entitled action was brought by the people to dissolve the surety company on the ground that it was insolvent, and a temporary receiver was appointed, who has since been made permanent receiver, and is now engaged in marshaling the assets of such corporation and has in his hands a sum greater than $1,250.
At the time the surety company gave its bond to the appellant, it executed for the Exposition Company two other bonds, and the Exposition Company demanded and received in cash 50- per cent, of the total of those bonds. -Breach of these two latter bonds was made, and the surety company was compelled to pay a sum greater than the Exposition Company had placed in its hands on all three of the bonds which it had givem
The appellant demanded from the receiver the $1,250 which had been deposited with the surety company by the Exposition Company as collateral security for the bond which had been given, and, upon payment being refused, made a motion to compel such receiver to pay the same over to him. Instead of directing the receiver so to do, the court appointed the referee to take proof and report. From such order Johnson appeals, claiming that he was entitled to have the money paid over to him as matter of law, and that the reference is a useless and unnecessary expense.
We are of opinion this would be so except for the fact that the defendant claims to have paid out $275 of the fund in defending the action which the appellant brought against it, and in which the complaint was dismissed because the action was not brought within the proper time, and also except for the fact that the surety company claims that it holds certain notes of the appellant which are proper offsets to the appellant's claim.
In view of the fact that we are about to affirm the order directing a reference, we deem it our duty to give our views with respect to the appellant's rights in the fund, to the end that the reference may be properly confined and as expeditiously terminated as may be.
The contract of suretyship which the surety company entered into-was clearly one guaranteeing performance of the contract by the principal, the Exposition Company, to the appellant, the obligee therein. Belloni v. Freeborn, 63 N. Y. 383; National Bank of Newburgh v. Bigler, 83 N. Y. 51.
The moneys deposited by the principal with the surety were deposited to secure performance of the contract between the appellant and the Exposition Company and to provide a fund for payment of the damages occasioned by its breach, and, a breach having occurred, the law raised an implied trust with respect to the fund in favor of the creditor. Where collateral security is placed by the principal in the hands of his surety to secure performance of a contract or to provide a fund for the payment of damages occasioned by its breach, the law raises an implied trust in favor of the creditor, which on maturity of his debt he may enforce whether the surety has been damnified or not and irrespective of the question whether the surety or principal or either are insolvent. National Bank of Newburgh v. Bigler, supra; Vail v. Foster, 4 N. Y. 312; Crosby v. Crafts, 5 Hun, 327, affirmed on opinion below 69 N. Y. 607; Clark v. Ely, 2 Sandf. Ch. 166; Pratt v. Adams, 7 Paige, 615, 627.
Learned, P. J., in Crosby v. Crafts, supra, in applying the rule, uses the following language particularly apt to the present situation:
"The ground of that principle is that the security given by the principal debtor to the surety is a quasi trust fund for the payment of the debt, that the principal debtor has appropriated it for the security of the debt, and that the creditor has an equitable right to have it thus applied. Vail v. Foster, ut supra. That case illustrates this view. The surety had become insolvent. But he held a bond and mortgage executed by the principal debtor to indemnify him for his liability. As he was insolvent and could not pay, he could not practically be damnified by reason of his debt. And as to him the creditor was in the same condition as if the surety had been discharged by death, instead of insolvency. But although the creditor could not, in fact, collect anything out of the surety, and although .for this reason the surety had never been damnified by his obligation, yet it was held that the creditor was entitled to have the benefit of the securities which had been executed to the surety for his indemnity."
The surety company being insolvent and its funds in the custody of a receiver appointed by this court, an action was not necessary, as is urged by the respondent, or even proper. If the court found that its officer held a trust fund belonging to another, it could upon motion compel him to pay it over to the rightful owner. Riggs v. Whitney, 15 Abb. Prac. 388; Tyler v. Hildreth, 77 Hun, 580, 28 N. Y. Supp. 1042.
Nor would it be any answer to the application to say that the receiver did not have the identical money which was deposited as indemnity with the surety company, or even that the surety company had paid it out to discharge its other obligations. The receiver would be compelled to make the fund good from such moneys as had come to his hands. Standard Oil Company v. Hawkins, 74 Fed. 395, 20 C. C. A. 468, 33 L. R. A. 739. The receiver stands in place of the surety company. It would be no answer by the company to say that it had misappropriated the fund and did not have it on hand, for it would be compelled to make it good. Besides, the general creditors have no right to have the fund swelled by moneys rightfully belonging to another, and it would be a travesty upon justice if the court could not direct its own officer to restore to another a fund to which he was entitled.
The situation is unlike that of an executor of an executor, for in that case the last executor is accountable only for such funds as came to his hands belonging to the estate of which his testator was the executor.
The appellant, after making such deductions as shall be found proper, is entitled to relief irrespective of his attachment or execution, and it is unimportant that the proceeding was not instituted in behalf of the sheriff, as urged by the respondent.
The reference ordered would therefore be improper except for the fact that the surety company claims to have rightly paid out a portion of the fund delivered to it and to have an offset against some portion of it. A reference is proper to ascertain the facts in this regard, to the end that the court may determine whether all or part should be paid over to the appellant.
The order must therefore be affirmed, but without costs. All concur, except KELLOGG, J., dissenting in opinion.