Opinion ID: 894285
Heading Depth: 2
Heading Rank: 2

Heading: Right to Assert Defenses

Text: Hartford additionally submits that, because it did not receive notice of the actions against its principals, the circuit courts further erred in concluding that it was automatically responsible for paying the default judgments rendered against said principals. Hartford contends that, in the absence of notice, the default judgments are not binding against it and that it is entitled to present any defense that would have been available to its principals pursuant to W. Va. Code § 45-1-3 (1923) (Repl. Vol. 2010). Hartford acknowledges that the case of State v. Myers, 74 W. Va. 488, 82 S.E. 270, created an exception to W. Va. Code § 45-1-3. Nevertheless, Hartford argues that Myers created a narrow exception that should be applied only where the surety explicitly grants the right to recover against the bond 11 (...continued) 2003) (emphasis added). Accord W. Va. Code § 31-17-4(e)(3) (2010) (Supp. 2012) (requiring mortgage lender license applicant to “file with the commissioner a bond . . . in a form and with conditions as the commissioner may prescribe” (emphasis added)); W. Va. Code § 31-17-4(f)(3) (2010) (Supp. 2012) (applying same requirement to mortgage broker license applicant). The foregoing statutes specifying that the Banking Commissioner prepare a bond form places no limitations on the Commissioner’s authority to prescribe the terms applicable to said bonds, and are more specific to the Commissioner’s authority than W. Va. Code § 45-1-3. See Syl. pt. 6, Carvey v. West Virginia State Bd. of Educ., 206 W. Va. 720, 527 S.E.2d 831 (1999) (“The general rule of statutory construction requires that a specific statute be given precedence over a general statute relating to the same subject matter where the two cannot be reconciled.” (internal quotations and citations omitted)). For further treatment of W. Va. § 45-1-3, see Section III. B., infra. 19 immediately upon a judgment against the principal. Respondents argue that the circuit courts properly declined to apply W. Va. Code § 45-1-3, which is a general statute governing sureties, guarantors, indorsers, and others who may be secondarily liable for a debt. Respondents assert that the circuit courts were correct in concluding that they had satisfied the condition of the bond by obtaining default judgments against Hartford and, therefore, that they were entitled to judgment against Hartford. Respondents rely on State v. Myers for the proposition that the protections of W. Va. Code § 45-1-3 do not apply to judgment bonds. According to Respondents, obtaining a judgment in the absence of fraud or collusion is the only requirement for collecting on a judgment bond. Our analysis of this issue is simplified by the fact that we have identified the Hartford bonds as judgment bonds. Thus, the issue for our resolution is whether the surety on a judgment bond who does not receive notice of an action prior to the entry of a default judgment against its principal is obligated to pay the judgment without the opportunity to present defenses that would have been available to its principal. The statute upon which Hartford bases its claim of entitlement to present defenses that would have been available to its principals is W. Va. Code § 45-1-3, which states: 20 Whether the surety, guarantor or indorser (or his committee or personal representative) shall have given notice as provided in the first section of this article or not, no judgment, decree or recovery rendered, entered, or had in any suit, action, prosecution or proceeding, to which the surety, guarantor or indorser (or his committee or personal representative) was not a party regularly served with process, shall be in any wise binding on such surety, guarantor or indorser (or his committee or personal representative), and, notwithstanding such decree, judgment or recovery, the surety, guarantor or indorser (or his committee or personal representative) shall be allowed to make any such defense in any action, suit or proceeding instituted against him, as could have been made in the suit in which such decree, judgment or recovery was had. As Hartford has acknowledged, this Court recognized an exception to W. Va. Code § 45-1-3 in State v. Myers, 74 W. Va. 488, 82 S.E. 270. The Myers Court interpreted an earlier version of W. Va. Code § 45-1-3 that also contained the language requiring notice to a surety before it could be bound by a judgment, and further allowing a surety who had not received notice to assert any defense that could have been made in the suit that resulted in the judgment.12 Based upon its analysis of that statute, the Myers Court concluded that the Legislature had not intended the statute to apply to judgment bonds. In this regard, the Court stated that, [p]rior to this statute, the surety on a bond, conditioned to pay any judgment that might be recovered against his principal, was bound by the judgment when so recovered. The judgment against the principal bound the surety, in the absence of fraud, 12 See Chapter 37, Acts 1907. See also State v. Myers, 74 W. Va. 488, 490-91, 82 S.E. 270, 271 (quoting Chapter 37, Acts 1907). 21 and determined his liability. State v. Nutter, 44 W. Va. 385[, 30 S. E. 67 (1898)], and State[, to Use of Beard] v. Abbott, 63 W. Va. 189[, 61 S. E. 369 (1907)]. We think this is still the law. Myers, 74 W. Va. at 491, 82 S.E. at 271. Thus, under the Myers decision, judgment bonds are not subject to W. Va. Code § 45-1-3. If the West Virginia Legislature had disagreed with the opinion, it could have amended the statute to plainly include judgment bonds. The Legislature has made no such amendment. Therefore, the traditional rule stands: A judgment against a principal does not bind the surety conclusively, as a general rule, but it is prima facie evidence of liability and its extent. If, however, the instrument binds its makers to abide the result of certain litigation, or to satisfy any judgment therein, or to indemnify against it, a judgment against the principal is conclusive upon the sureties, so that they cannot contest the liability, in the absence of fraud or collusion. Syl. pt. 4, State v. Nutter, 44 W. Va. 385, 30 S.E. 67 (1898) (second emphasis added). In adopting this rule, the Nutter Court explained that if a bond “undertakes to pay such judgment as may be recovered, that judgment is conclusive, because that judgment is the event on the happening of which the surety agrees to pay.” 44 W. Va. at 389, 30 S.E. at 69. See also State, to Use of Beard v. Abbott, 63 W. Va. 189, 193, 61 S.E. 369, 371 (1907) (“This bond not only covenants for faithful discharge of duties according to the decree, but it contains the additional covenant that the receiver should pay over all moneys that might come to his hands by virtue of the decree as the court shall direct. It contains both covenants. . . . [T]he authorities are overwhelming, and almost without exception, that upon such a bond as we have in hand the judgment is conclusive.”). 22 The foregoing cases are dissimilar from the instant actions insofar as none of them have involved a default judgment. Thus, we must also decide whether the general rule that sureties on judgment bonds are bound by judgments rendered against their principals is applicable to default judgments. While the question is novel for this Court, it has been resolved in other jurisdictions that have concluded that the rule does apply to default judgments. See Axess Int’l, Ltd. v. Intercargo Ins. Co., 183 F.3d at 940 (“Generally, a default judgment obtained by an obligee against a principal obligor does not have preclusive effect in a subsequent action against a secondary obligor. See Restatement (Third) of Suretyship and Guaranty § 67(3). Where a judgment bond is involved, however, such as the one at issue here, a different rule applies: ‘Where the very condition of the bond is the performance of a judgment against the principal, or that the surety will pay all damages that may be awarded in an action brought against the principal, . . . there is no question as to the conclusiveness, as against the surety, of a judgment against the principal, if binding upon the latter and free from fraud and collusion, assuming, of course, that it is the kind of judgment contemplated by the surety’s undertaking.’ 74 Am. Jur. 2d Suretyship § 153 (1974).” (footnote omitted)); Sargeant v. Starr, 102 Ga. App. 453, 459, 116 S.E.2d 633, 637 (1960) (“It is well settled, beginning with Jackson v. Guilmartin, 61 Ga. 544 [(1878)], that the surety is bound by the judgment entered against the principal on the bond. And this is so where the judgment rendered was with the consent of the principal. . . . Such a bail or security takes the fortunes of his principal, and is bound equally with him by the judgment in the main action. . . . The bail can no more go behind the judgment, or attack it, by affidavit of illegality, after it is duly 23 entered up against both, than can the principal.” (internal quotations and citations omitted)); Martiniello v. Robitaille, 293 Mass. 200, 202, 199 N.E. 534, 535 (1936) (“The judgment in the original action against the principals on the bond, though obtained by default, being ‘the final judgment in said action,’ . . . and having been entered in the lawful exercise of the power of the court, . . . was conclusive on the sureties, by reason of their contract with the plaintiffs.” (emphasis added)); R & L Lumber Co. v. Summit Fid. & Sur. Co., 284 Minn. 489, 494, 170 N.W.2d 594, 598 (1969) (“It is clear, however, that where a surety has undertaken to pay ‘any judgment rendered’ in an action, the surety has neither a right to notice of such an action or a right to reopen a judgment entered against its principal, even though it was obtained by consent or default.”); Valencich v. TMT Homes of Oregon, Inc., 193 Or. App. 47, 55, 88 P.3d 300, 303 (2004) (holding surety liable for default judgment against principal obtained in an action in which the surety was neither named as a party nor served, and commenting that “Oregon endorses the traditional rule followed by a majority of jurisdictions, discussion of which is found in Suretyship, 74 Am. Jur. 2d 115–16, §§ 129, 130 (2001): ‘Generally, where the liability of a surety is dependent on the outcome of litigation in which his principal is involved, a judgment against the principal is binding and conclusive on the surety, who may not interpose defenses which should have been set up in the action in which the judgment was recovered. When the obligation of the principal has been determined, the extent of the liability on the bond becomes fixed; the sureties on the bond are not entitled to relitigate, separately, the question of the principal’s obligation, at least in the absence of a charge of fraud or collusion.’”); Ward v. Federal Ins. Co., 233 S.C. 561, 24 564-65, 106 S.E.2d 169, 170 (1958) (finding default judgment conclusive against surety and observing that, “‘[a]s a general rule, in all cases where the liability of a surety is dependent on the outcome of litigation in which his principal is or may be involved, a judgment against the principal is binding and conclusive on the surety, and the surety may not interpose defenses which should or might have been set up in the action in which the judgment was recovered, or require proof of the facts on which the judgment rests, or attack the validity of the judgment, except for fraud or collusion or want of jurisdiction. The rule is applicable even though the surety had no notice of the suit or opportunity to defend[.]’” (quoting 72 C.J.S. Principal and Surety § 261 at 706)); Old Republic Sur. Co. v. Bonham State Bank, 172 S.W.3d at 214 (“Whether a default judgment is conclusive of the surety’s liability or only prima facie evidence depends on what type of bond is at issue. . . . [I]f the bond is a judgment bond, the Texas Supreme Court has held that a surety is bound by the default judgment against the principal even if the surety did not have notice of the prior suit against the principal absent proof of collusion or fraud.” (footnote omitted)). With regard to the fairness of the rule, the Supreme Court of Minnesota has observed that [t]his rule is not unfair to the surety. Assuming a surety pays a judgment pursuant to its bond under a contract to pay any judgment upon default by its principal, it is subrogated to whatever rights the judgment creditor had against its principal. Carr Hdwe. Co. v. Chicago Bonding & Surety Co., 190 Iowa 1320, 181 N.W. 680 [(1921)]; Western Cas. & Surety Co. v. Meyer, 301 Ky. 487, 192 S.W.2d 388, 164 A.L.R. 769 [(1946)]. 25 See, Anchor Cas. Co. v. Bird Island Produce, Inc., 249 Minn. 137, 82 N.W.2d 48 [(1957)]; Hartford Acc. & Ind. Co. v. Dahl, 202 Minn. 410, 278 N.W. 591 [(1938)]. Consequently, the surety, upon payment of the judgment, may seek reimbursement from its principal. It is only equitable that the surety which has contracted to pay any judgment, rather than the judgment creditor who relied on the bond, should be burdened with the expense and risk of such an action. To protect itself against an insolvent principal, a surety can and usually does require the principal to post collateral up to the full amount of the bond. In this case, defendant took [its principal’s] stock as collateral. Obviously this was not a prudent choice in view of the fact that [its principal] is now insolvent and the stock is quite likely worthless. It is not because of any act of plaintiff that defendant is not fully protected and finds itself in no better position than a general creditor of [its principal] on its subrogation claim. Had defendant required [its principal] to post sufficient collateral, its effort to intervene in [its principal’s] dispute with plaintiff would have been unnecessary. R & L Lumber Co. v. Summit Fid. & Sur. Co., 284 Minn. at 495-96, 170 N.W.2d at 598-99. Based upon the foregoing discussion, we now expressly hold that the surety on a judgment bond is conclusively bound by a default judgment entered against its principal, even when the surety did not have notice of the prior suit against the principal, so long as the judgment is the type of judgment contemplated by the bond and the surety cannot establish collusion or fraud. Applying this holding to the instant consolidated cases, we conclude that Hartford, as surety on the two judgment bonds at issue, is conclusively bound by the default 26 judgments entered against its principals. Accordingly, the circuit courts in both of these cases properly granted summary judgment in favor of the respective plaintiffs as to this issue.