Court Opinion

ID: 9753114
Source: CourtListenerOpinion
Date Created: 2023-08-28 18:57:56.148017+00
Date Added: 2024-06-11T07:27:30.028871
License: Public Domain

Schettiko, J.
(dissenting in part). I am in accord with the majority view that the cost of reconstructing the records is an expense for which the surety became liable when Hawthorne failed to discharge his duties with respect to the books entrusted to his care. However, I cannot agree that the surety here is liable for the expenses incurred by the Borough in determining the amount of the shortages where they are independent of the restoration costs.
Expenses incurred in auditing (Museum of Fine Arts v. American Bonding Co., 211 Mass. 124, 97 N. E. 633 (Sup. Jud. Ct. 1912)) or investigating (United States Fidelity & Guaranty Co. v. Douglas’ Trustee, 134 Ky. 374, 120 S. W. 328 (Ct. App. 1909)) the accounts of a defaulting principal cannot be charged to a surety, unless the contract so provides. It is no answer to say, as does the majority, that the expenses were within the contemplation of the parties. “[A] surety is chargeable only according to the strict terms of its undertaking and its obligation cannot and should not be extended either by implication or by construction beyond the confines of its contract * * Monmouth Lumber Co. v. Indemnity Ins. Go., 21 N. J. 439, 452 (1956).
The surety did not promise to indemnify the Borough against any and all loss arising from Hawthorne’s failure to perform his duties; the essence of its obligation was to make good whatever duty he failed to perform, be it (1) remitting moneys that came into his hands, (2) issuing correct tax search certificates, or (3) keeping accurate records. By fail*352ing in (1), the Borough was entitled to the amount embezzled; in (2), to the money lost because of N. J. 8. A. 54:5-17; and in (3), to the cost of restoring the integrity of the Borough records. The cases cited by the majority, Ninth Federal Sav. & Loan Ass’n v. United States Fidelity & Guaranty Co., 50 N. Y. S. 2d 273 (Sup. Ct. 1944), and Edmunds-Bouvier Savings & Loan Ass’n v. New Amsterdam Casualty Co., 389 Pa. 79, 132 A. 2d 181 (Sup. Ct. 1957), are distinguishable; the bonds covered “any loss” and “all such losses as the insured may sustain.” Furthermore, those cases were struggling primarily with the question of whether restoration costs were covered by the bonds, a question with which we have no difficulty.
Of course, as the majority points out with the example of the X-ray, certain expenditures may produce two results — add to the recoverable damages and advance one’s case in court. This can be said of some of the auditing work connected with reconstructing the records. But the majority opinion does not so limit the Borough’s right to recover, despite the fact that in Judge Pashman’s oral opinion he disallowed, inter alia, an item of $559 for work done on withholding taxes which the auditor testified had nothing to do with the restoration of the records, and an item of $1,945 for an informational report he found unconnected with restoration work.
Nor can I agree with the majority view that the surety is chargeable with interest from the date of each of Hawthorne’s defaults (as computed by the trial court, such interest amounts to $10,926.96). There are two lines of authority on this point, 57 A. L. R. 2d 1317 (1958). Those authorities which allow interest against the surety from the-time the municipality serves the surety with notice of the breach of the condition of the' bond or makes demand for payment appear to follow the more equitable view. For example, in Clark County v. Howard, 58 S. D. 457, 237 N. W. 561 (Sup. Ct. 1931), the county treasurer embezzled money over a four-year period. Neither the county nor the surety knew of the *353defalcations until almost two years after Howard’s term had expired, at which time formal demand was made upon the surety company. The trial court found the defalcations to be about $2,000 less than claimed and awarded interest from the date of each act of embezzlement. The surety appealed, claiming it was not liable for interest before the date of formal demand. The condition of the bond sued upon was in language almost identical to that in the case before us. After extended research of those cases that computed interest from date of default and those from date of demand, the court found both lines unsatisfactory — the latter factually distinguishable and the former without discussion or authority. Yet those holding that interest should be allowed only after demand offered one underlying reason that appealed to the court: the surety should pay interest only for its own default in unjustly withholding payment after being notified.
A similar situation arose in State v. American Surety Co., 37 N. M. 411, 24 P. 2d 267, 89 A. L. R. 1314 (Sup. Ct. 1933). Eive years after the county treasurer relinquished his office, demand was made upon the surety for shortages due to the treasurer’s bookkeeping errors, rather than any intentional fraud. The state sought interest from the date the treasurer left office, but the trial court computed it from the date of demand. The surety did not know of the shortages until the demand was made. As in Howard, the court examined both lines of authority and, after discussing Hoivard, went on to say:
“Interest such as is sought in this ease is an element of damages for wrongfully depriving the plaintiff of the money due him. It cannot be justly argued that where the surety in good faith is ignorant of the principal’s defalcation, and no demand has been made by the obligee, the detention of the money due the obligee is wrongful and interest as an element of damages should under the circumstances be allowed from the date of the principal’s defalcation. * * *
On reason and logic, even without precedent, it seems right that demand in this case would appear to be necessary, for it is not a case where the surety would be likely to know of the default in the absence ’of notice of that fact, and the surety ought not to be held *354for more than the amount accrued from their own default in unjustly withholding payment after being notified of the default of the principal.” 24 P. 2d, at 269.
The most-persuasive opinion is Banking Comm. v. National Surety Corp., 243 Wis. 542, 11 N. W. 2d 171 (Sup. Ct. 1943). Plaintiff appointed one Buttrick as special deputy commissioner of banking to assist in liquidating and distributing assets of delinquent banks. Buttrick held this post until June of 1937, at which time he was supposed to turn over all assets in his hands to his successor. Shortages were discovered in 1941 and these were paid by the surety a year later. Plaintiff sought interest damages in consequence of ButtricFs failure to discharge his duties claiming that the measure would be the legal rate of interest from the date each item was converted. The surety denied liability for interest prior to the date of demand.
Relying on section 183 of the Restatement of Security, the court distinguished the type of interest for which the surety is liable and that for which he is not:
“* * * the surety is liable for the interest earned by the legal use of public funds only where the principal is authorized to invest these funds. * * * In such oases the interest attaches as an accretion to the public funds for which the principal is liable to account and the liability for interest is a part of the principal obligation. Where, however, as here, there is no power or duty to invest, and the only duty of the liquidator or receiver is to hold the funds, the principal has no liability for interest as such. It follows that upon an embezzlement of the principal in' such a case the surety’s liability is for the principal sum and not for interest.” 11 N. W. 2d, at pp. 173-174. (Emphasis added.)
In discussing the imposition of interest as damages for the detention of funds, the court distinguished the obligation of the surety and that of the principal. From the time Buttrick was required to account and failed to do so, he was liable upon his defalcations. But since the surety knew nothing of the-, default and was in no position to find out, it was not liable for interest until demand or notice.
*355My view is consistent with the cases discussed above and with the tendency of our courts to charge and allow interest “in accordance with principles of equity.” Jardine Estates, Inc. v. Donna Brook Corp., 42 N. J. Super. 332, 340-341 (App. Div. 1956).
For modification — 'Chief Justice Weintbaub, and Justices Jacobs, Ebaitcis, Peootoe, Hall and Haneman — 6.
Dissenting in part — Justice Schettino — 1.