Joseph A. Burr Appellant, v. The Union Surety and Guaranty Company, Respondent

Joseph A. Burr Appellant, v. The Union Surety and Guaranty Company, Respondent. Surety on a bond to assure the completion of buildings on moi'tgaged premises — notice of a failure to begin work—actual damage must accrue before the obligee may begin suit thereon — damage is not sustained by a second mortgagee until the property is sold under the first mortgage. Joseph. A. Burr who was the owner of certain real estate which was covered by first mortgages held by a trust company and second mortgages held by himself, sold the premises to one Egenberger subject both to the first and to the second mortgages. He also at the same time entered into a contract whereby Egenberger undertook to complete, with diligence and without unreasonable delay, the construction of four unfinished houses then upon the premises. The contract was dated November 11, 1901, and acknowledged November 13, 1901. Such contract required Egenberger within one week from the execution and delivery thereof “to enter upon and thereafter proceed with the erection and construction of the said buildings.” It further provided: "‘If at any time the party of the first part (Edward Egenberger) shall fail to push the work on the said buildings vigorously, of which fact the party of the second part (Joseph A. Burr) shall be the sole judge, and such default and neglect shall continue for ten days after the service of a notice on the party of the first part to that effect, the said bonds and mortgages shall at once become due for the whole amount advanced thereon.” As security for the performance of the contract Egenberger executed to Burr a bond in which a surety joined, which bond contained the following proviso: “ Provided that said surety shall be notified in writing of any act on the part of the said principal or his agent or employees, which shall involve a loss for which the said surety is responsible hereunder, immediately after the occurrence of such act shall have come to the knowledge of the duly authorized representative or representatives of the obligee who shall have the supervision of the completion of said contract * * * ” Such bond also contained a provision entitling the surety, in the event of noncompliance on the part of the principal, to assume the contract and sublet or complete the same, and the further provision that all deferred payments then or thereafter due and payable to the principal should be credited upon any claim that Mr Burr might make against the surety because of a breach. It contained a further provision to the effect that any suit at law to recover any claim thereunder must be instituted within six months after the first breach of the contract. Egenberger entered into possession of the premises on November 13, 1901, but never did any work whatever on the buildings. The evidence established that Burr became aware of the situation on December 14, 1901. On December twentieth Burr notified Egenberger that the latter was in default, and that if such default continued for ten days he should and did elect that the bonds and mortgages sho.uld become due. On the same day he sent a notice to the same effect to the surety on Egenberger’s bond. Thereafter the trust company which held the first mortgages foreclosed the same with the result that the second mortgages were cut off to Burr’s damage in the sum of §3,750. In an action brought by Burr against Egenberger’s surety, it was Held, that the bond did not entitle the surety to immediate notice of Egenberger’s omission to begin work within a week after the execution and delivery of the building contract; That the fair and natural import of the language of the bond, concerning the notice.to the surety of any act on the part of the principal involving a loss for which the surety was responsible, required Burr to .notify the surety whenever such a condition of things arose as showed that Egenberger had violated his covenant to complete the erection and construction of the buildings with diligence and without unreasonable delay; that mere delay on the part of Egenberger in proceeding with the work did not entitle the surety to notice, unless such d^lay became unreasonable; That there being no suggestion of bad faith on the part of Burr, or of collusion between him and Egenberger, it could not be held as a matter of law that the delay existing prior to December 20, 1901, the date on which Burr served notice on the surety to proceed with the work, was unreasonable, and that by failing to serve such notice on the surety prior to that, time Burr had lost his right to proceed against the surety, That the bond constituted a contract of indemnity, and that before Burr could maintain an action against the surety thereon there must not only have been a breach of the building contract, but actual damages to Burr resulting from such breach; That Burr did not sustain any damages from Egenberger’s breach of the contract until the foreclosure sale under the first mortgages, and that .as his action against the surety was begun about a month after such sale, it was not barred by the provision in the bond that any suit at law thereunder must be instituted within six months after the first breach of the building contract. Appeal by the plaintiff, Joseph A. Burr, from a judgment of-the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of Kings on the 10th day of August, 1904, upon the decision of the court, rendered after a trial before the court without a jury at the Kings County Trial Term, dismissing the complaint upon the -merits. ■Robert H. Wilson, for the appellant. Wilson B. Brice, for the respondent. [MAJORITY — Willard Bartlett, J.:] Willard Bartlett, J.: This suit is brought against the defendant as surety upon a bond executed by Edward Egenberger as principal, conditioned for'.his faithful performance of a written contract with the plaintiff for completing the construction of four unfinished houses in the borough of Brooklyn. These houses had belonged to the plaintiff. They were subject to four first mortgages to the Williamsburgh Trust Company, upon which there had been advanced $13,250, and also to four second mortgages to Samuel H. Coombs, upon which $3,750 had been advanced. Mr. Coombs had assigned these four second mortgages to Mr. Burr. Under these circumstances, Mr. Burr sold the premises to Mr. Egenberger, subject to the four first mortgages to the Williamsburgh Trust Company, and subject to the four second mortgages which had been transferred to him by assignment. At the same time he entered into the contract already mentioned for the completion of the houses by Mr. Egenberger, whereby the latter undertook to complete their construction with diligence, and without unreasonable delay, and whereby Mr. Burr agreed to loan Mr. Egenberger $11,944 (the balance of the first mortgages) for the purpose of finishing the buildings. The bond in suit was given to insure the performance of this contract on the part of Mr. Egenberger. Mr. Egenberger failed to perform; the Williamsburgh Trust Company foreclosed the first mortgages; there was a deficiency ; Mr. Burr’s second mortgages were cut off by the foreclosure, to his damage in the sum of $3,750, the amount which had "been advanced thereon, and he brought the present action to recover that sum, upon the allegation (which was sustained by the proof) that if Mr. Egenberger had completed the houses in accordance with his contract their value would have sufficed to" pay all that was due upon the second mortgages as well as the first. The case turned upon the proper answer to be given to two questions: First. Whether the plaintiff notified the defendant, as he was required to do by the terms of the bond, of the first act on the part of Mr. Egenberger which involved a loss for which the defendant was responsible thereunder, immediately after acquiring knowledge of the occurrence of such act; and Second. Whether the action was brought in time, in view of the provision in the bond to the effect that any suit at law to recover any claim thereunder must be instituted within six months after the first breach of the building contract. The learned trial court answered both these questions in the negative, and directed a dismissal of the complaint on the merits. First. As to the first question, the provision of tfie bond necessary to be considered reads as follows: “ Provided that said surety shall be notified in writing-of any act on the part of the said principal, or his agent or employees, which shall involve a loss for which the said surety is responsible hereunder, immediately after the occurrence of such act shall have come to the knowledge of the duly authorized representative or representatives of the obligee, who shall have the supervision of the completion of said contract * * The contract between Hr. Egenberger and Hr. Burr for the completion. of the houses was dated November 11 and acknowledged November Í3, 1901. The property was conveyed to Hr. Egenberger by a deed acknowledged on the latter date, and it is not disputed that he then entered into possession of the premises. The contract required him within one week from the execution and delivery thereof “to enter upon and thereafter proceed with the erection and construction ■ of the said building's.” It further provided as follows: “ If at any time the party of the 'first part (Edward Egenberger) shall fail to push the work on the said buildings vigorously, of which fact the party of the second part (Joseph A. Burr) shall be the sole judge, and such default and neglect shall continue for ten days after the service of a notice on the party of the first part to that -effect, the said bonds and mortgages shall at once become due for the whole amount advanced thereon.” Hr. Egenberger never did any work whatever upon the buildings. The proof does not show clearly when the plaintiff became aware that nothing was being done toward the execution of the contract, but the testimony of his representative, Hr. John T. Bladen, an attorney in his office, indicates that he was chargeable with knowledge of the fact by the 14th of Decembér, 1901. On the twentieth he notified. Hr. Egenberger that he considered him in default, and that if such default continued for ten days he should and did elect that the bonds and mortgages should become due. On the same day, notice to the same effect was sent by the plaintiff to the defendant. In the opinion of the learned trial judge, which appears in the appeal book in the form of a letter addressed to the attorney for the plaintiff, the first ground stated for the dismissal of the complaint is “ that the evidence does not show the giving of a notice of the failure of Egenberger to enter upon the erection of the building immediately after the same came to the knowledge of the duly authorized representative of the plaintiff.” This ground was sufficient if the bond entitled the defendant to immediate notice of the contractor’s omission to begin work within a week after the execution and delivery of the building contract. It seems to me, however, that the bond cannot fairly be construed so strictly. The fair and natural import of the language employed was to require Mr. Burr immediately to notify the surety whenever such a condition of things arose as to show that the contractor had violated his covenant to complete the erection and construction of the building with diligence and without unreasonable delay. There is no suggestion anywhere of bad faith on the part of the plaintiff or of collusion with the contractor, and it cannot be held as matter of law upon the proof in this record that the delay was unreasonable up to the time when Mr. Burr addressed his letter to Mr. Egenberger announcing his election to deem the mortgages presently due in case the contractor’s default continued more than ten days longer. Mere delay did not entitle the surety to notice; it was only when such delay became unreasonable and, therefore, violative of the builder’s contract with the plaintiff that the surety was entitled to be notified, to the end that it might take means, if so advised, to protect itself against further inaction by the principal which would render it liable upon its bond. In my opinion, the trial court erred in holding that the plaintiff was precluded from a recovery by reason of having waited too long to inform the defendant of Mr. Egenberger’s failure to go to work. Second. The opinion of the learned trial judge bases the dismissal “ secondly, upon the ground that the action was not instituted within six months after the first breach of the contract.” This ground, in my judgment, is equally untenable. The bond is a contract of indemnity. It plainly manifests the intent of the parties that the surety should become liable not merely m the event of the failure of the contractor to complete the building, but only in case his failure to do so resulted in pecuniary damage to Mr. Burr. This is made particularly evident by the provision entitling the surety, in the event of non-compliance oh the part of the principal, to assume the contract and sublet or complete the same, and the further provision that all deferred payments then or thereafter due and payable to the principal should be credited upon any claim that Mr. Burr might make against the surety because of a breach. Upon a contract of this nature there must be not only a breach of the agreement but proof of actual damage to the plaintiff before he can maintain an action against the surety. Upon a covenant for indemnity, damages must be sustained before a recovery can be had. (Aberdeen v. Blackmar, 6 Hill, 324; Gilbert v. Wiman, 1 N. Y. 550, 561 ; National Bank of Newburgh v. Bigler, 83 id. 51, 61, 62.) Although the bond in the case at bar undertakes to make a short Statute of Limitations between the parties by providing that any suit at law thereunder must be instituted within six months after the first breach of the building contract, it seems unreasonable to suppose that the parties could have had in mind an act or omission by the builder which, even if it were technically violative of his contract, was not such a breach as would entitle Mr. Burr to maintain an action against the surety. It could make no difference to the surety how many breaches there were unless they resulted in pecuniary damage to Mr. Burr, and the consequent right on his part to sue the surety-company. The purpose of this' provision in the bond must have been only to-limit the period within which an action might be brought -after the right to bring an action had accrued'; and if, as I think, the bond was a contract of indemnity only, that right did not come into existence until the foreclosure of the first mortgages resulted in a deficiency. The sale under the first mortgages took place on or about July 2, 1902, and this action was commenced on the fourth day of August in the same year. If the view which has been expressed in regard to the character- of the contract and the meaning and purpose of the clause of limitation therein contained be correct, the suit was begun in time. For the foregoing reasons I think the plaintiff is entitled to a reversal of this judgment. Hirschberg, P. J., Rich and Miller, JJ., concurred. Judgment reversed and new trial granted, costs to abide the event.