Court Opinion

ID: 3849984
Source: CourtListenerOpinion
Date Created: 2016-07-06 08:28:39.762345+00
Date Added: 2024-06-11T13:47:39.032197
License: Public Domain

My objection to the majority opinion relates solely to the rule relating to the measure of damages which is there adopted and based on Mechanics Trust Co. v. Fidelity Casualty Co.,304 Pa. 526, as controlling.
While there is a distinction between indemnity and guaranty bonds, it is not important where only the measure of damages is involved. Under either contract the rule as to damages is compensation for the loss suffered. In one it is payable only when the insured actually sustains and has paid a loss; in the other, the compensation is recoverable immediately when a loss occurs; but the rule or standard for the ascertainment of the amount of liability is the same under both contracts. In other words, the nature of the bond will not affect the measure by which damages or loss is to be ascertained.
The majority opinion states: "The condition of the bond is performance of a specific thing . . . . . . and the only alternative for performance is the bond itself." This cannot be correct if it means that in case the building is not completed, no matter to what extent, the surety will be liable for the penal sum of the bond; the penal sum merely limits the surety's obligation, which is to reimburse the obligee for the actual damage which he has suffered or may suffer: Keck v. Bieber,148 Pa. 645; Montgomery Co. v. Ambler-Davis Co., 302 Pa. 333; or compensate him for actual loss. The opinion further states: "It is obvious . . . . . . that the intent of all concerned was to give plaintiff in lieu of her first mortgage the enhanced value of the real estate by the addition of the building, or failing that, its equivalent in money." It may be and no doubt was the intention to enhance the value of the real estate by the addition of the building, *Page 298 
but it does not follow that the value of the land plus the completed building would equal or surpass the indebtedness on the first and second mortgage and thus afford adequate security for the second mortgagee; nor does the completion bond undertake that it will be tantamount to "its equivalent in money." The only logical inference is that of an intention to strengthen her security by the addition of the building.
The value of mortgagee's security is not to be arrived at, as appellee seems to think it was bound to be, by treating the property as in a completed state, and separating the various parts of the land, i. e., the lot and this building, placing a value on the latter. Nor was the agreement to construct the building additional security beyond insuring or guaranteeing payment of the full amount of the secured mortgage, if the cost of completion equaled that sum. Suppose the completion bond covered both contracts, what would be the rule as to damages when, as here, the property sold for less than the first mortgage? But in any event the first mortgage might require for its satisfaction the entire value of the property with the building in a completed state, and thus utterly destroy the property's value as a security to the second mortgage. The bond, under such circumstances, would be for the protection of a nonexistent interest; and no injury could possibly be said to have resulted from the contractor's default, so as to give rise to a claim for more than nominal damages.
The rule of cost of completion as a measure of damage is undoubtedly correct where the obligee of the bond is the owner and not the mortgagee. The owner is, of course, entitled absolutely to the premises in the state in which it has been agreed they should be placed, viz. a lot with a completed building. In this situation, there is considerable authority supporting the rule: Union Indemnity Co. v. Vetter,40 F.2d 606; Boise City v. National Surety Co., 165 Pacific 1131; Haney v. Ferch, 150 Minn. 323, 185 N.W. 397; Elmohar Co. v. People's *Page 299 
Surety Co. of New York, 217 N.Y. 289; Watters v. London 
Lancashire Ind. Co., 76 Pittsburgh L. J. 605; Gleason v. Smith, 9 Cushing 484.
In this case, however, the obligee of the surety's undertaking is not the owner of property, but a mortgagee, and a different rule is and should be applied, as the mortgagee's interest is different, and his loss occasioned by a failure to complete is likewise different. The owner is entitled to have his building as contracted for, but the mortgagee has no such contract as will entitle him to enforce such liability. The mortgagee has no interest in the property as such, (it is only security for his debt); and the fact that a bond is given guaranteeing completion of a certain building upon it, adds nothing to this status nor does it alter or increase the holder's rights under his mortgage with respect to that property, though it may add to his security. The mortgagee has an interest in the property only in so far as the property stands as security for his debt, beyond this, he has no further interest. All he is entitled to in any case is full and adequate security for the sum he has advanced, and it is difficult to see how he can become entitled to anything more than this by virtue of the surety's undertaking as noted in the completion bond under consideration. The court below having taken as the measure of damages the cost of completion was, in my opinion, in error. It may often be that an incompleted structure will be of sufficient security value to protect the mortgagee, or that the land itself may be sufficient for this purpose. It seems plain that in such a case it could not be laid down as a rule that the mortgagee, who is adequately protected, would, by virtue of his bond, be entitled to collect what it would cost to construct the building in its entirety no matter to what extent it might be incompleted.
The correct measure of damage is the loss on the security value of the mortgage caused by the failure to complete. Here appellee's measure of damage is the difference *Page 300 
between the value of the land without the building or the building in any state of completion, and the value with the completed building thereon, less the first mortgage; recovery being, of course, limited to the loss thus established on appellee's mortgage. See German-American Title  Trust Co. v. Citizens' Trust  Surety Co., 190 Pa. 247, where the owner of ground rents (a party with an interest quite similar to that of a mortgagee) brought suit for breach of a completion bond. The lower court allowed him as damage, not the cost of the completion of the building, but rather the loss in the value of his ground rents. In affirming that decision, Justice FELL said: "The jury were limited to the actual loss in the value of the ground rents, not exceeding the amount of the insurance, and were instructed that that loss would be represented by the difference in the market value of the ground rents if the buildings had been completed as provided by the agreement, and their value with the buildings in the uncompleted state in which they were left. We know of no better rule than this in such a case, and of none more just to the defendant." Wheeler v. Equitable Trust Co., 221 Pa. 276, supports this view. The contract in that case was held to be one of indemnity, but as explained above the rule for ascertainment of damages should be the same whether the contract is one of indemnity or guaranty.
This question has been admirably discussed and this conclusion reached by Judge KIRKPATRICK in Trainor Co. v. Ætna Casualty  Surety Co., 49 F.2d 769. So too, in Province Securities Corp. v. Md. Casualty Co., 269 Mass. 75,168 N.E. 252, the conclusion is, "The measure of damages is to be based on the difference in the value of the property as security arising from failure to comply with the conditions of the bond." See also Norway Plains Savings Bank v. Moors,134 Mass. 129; and Longfellow v. McGregor, 61 Minn. 494, to the same effect.
In the light of the foregoing discussion and on the authority of the cases cited, I would reverse the lower court. *Page 301