
    William T. Emmet, Superintendent of Insurance of the State of New York, Appellant, v. The Sanitary Water Still Company, Respondent.
    First Department,
    March 6, 1914
    Guaranty and surety — contract of suretyship construed — right of principal on default of contractor to set off damages against amount due surety.
    In an action by the receiver of a surety company on an agreement by which the company became surety for the defendant’s performance of a contract with the United States government, and under which the defendant agreed “to save harmless and indemnify” the surety company from “any and all * * * liabilities, losses * * * of whatsoever kind, name, nature or description,” which the surety company “ shall or may, for any cause, at any time sustain or incur, by reason of” any bond or undertaking given in defendant’s behalf, it appeared that the defendant, having failed to perform its contract, the government refused to pay and deducted from moneys due by it to the surety company on account of other transactions the amount of damages caused by the defendant’s default.
    Held, that the act of the government in appropriating the moneys due the surety company constituted a “liability” within the meaning of the agreement, and that an order denying plaintiff's motion for judgment on the pleadings should be reversed.
    Lau&hlin and Clarke, JJ., dissented, with opinion.
    Appeal by the plaintiff, William. T. Emmet, as superintendent of insurance, etc., from an order of the Supreme Court, made at the Hew York Special Term and entered in the office of the clerk of the county of Hew York on the 18 th day of Hovember, 1913, denying plaintiff’s motion on the pleadings for judgment overruling the demurrer to the complaint.
    
      
      Albert Reese, for the appellant.
    
      E. Ormonde Power, for the respondent.
   Hotchkiss, J.:

By the instrument on which this action is brought the defendant agreed “ to save harmless and indemnify ” the surety company, of which plaintiff is the receiver, from “any and all * * * liabilities, losses * * * of whatsoever kind, name, nature or description” which the surety company “shall or may, for any cause, at any time sustain or incur, by reason of ” any bond or undertaking given by the surety company in defendant’s behalf; also, that the defendant would at its own expense defend the surety company from any action brought bn any such bond or undertaking and would pay “ upon demand, any and all damages, charges and expenses ” for which the surety company “ shall become responsible.”

Under a claim that the defendant had failed to perform its contract with the United States government in the manner agreed, to the damage of the government in the sum of $1,600, being the amount for which the surety company had executed its bond to the government for the faithful performance by defendant of the contract in question, the government authorities refused to pay and deducted said sum from moneys due by it to the surety company on account of other transactions. This act of the government in thus appropriating the money of the surety company under a claim of right constituted a liability if not a loss within the meaning of the agreement. Hot only was it a liability but it was one which had been actually enforced. Whether such appropriation was or was not justifiable is of no importance. If the government had paid over the money without prejudice and had then brought an action against the surety company on its bond, that company would certainly have been compelled to defend the action at its own cost and to pay the amount of any recovery. The situation cannot be different where the government has assumed to be its own paymaster and without bringing suit has exercised the right possessed by any creditor to determine for himself and at his own risk whether or not one is indebted to him and whether in payment of such indebtedness he shall appropriate moneys of the debtor in his hands and leave the debtor to sue.

The order appealed from should be reversed, with ten dollars costs and disbursements, and the motion granted, with «ten dollars costs, with leave to defendant to withdraw the demurrer and to answer on payment of said costs.

Ingraham, P. J., and Scott, J., concurred; Laughlin and Clarke, JJ., dissented.

Laughlin, J. (dissenting):

The surety company, of which the plaintiff is the receiver, agreed to become surety for defendant on proposals and contracts, and became surety for its performance of a contract with the government of the United States. In addition to paying the premium for the insurance the defendant agreed in writing “to save harmless and indemnify” the surety company from “any and all * * * liabilities, losses * * * of whatsoever kind, name, nature or description,” which it should “for any cause, at any time sustain or incur, by reason of ” any bond or undertaking given by it in behalf of defendant, and that the defendant would at its own expense defend the surety company against any action brought on any such bond or undertaking and pay “upon demand, any and all damages, charges and expenses ” for which the surety company “shall become responsible.” The government claimed that the defendant failed to perform the contract for the performance of which the insolvent company represented by the plaintiff became surety. It appears that at that time the government was, or thereafter became, indebted to the surety company on account of transactions in no manner connected with its contract with the defendant, and the government appropriated from the moneys due from it to the surety company the sum of $1,600, under the claim that it was entitled to do so on account of the defendant’s failure to perform its contract for which the surety company was surety.

The receiver of the surety company brings this action alleging merely these facts, and the question presented by the motion for' judgment on the pleadings was whether the amended complaint, to which a demurrer on the ground of insufficiency of facts was interposed, states a cause of action. I am of opinion that it does not. The liability of the defendant cannot be affected by the fact that the government happened to owe the surety company and asserted a right to withhold part of the moneys thus owing on account of its claim that the defendant failed to perform the contract. There is no allegation in the complaint to the effect that the defendant failed to perform its contract with the government; nor is there any allegation from which such failure may legitimately be inferred. The contract between the surety company and the defendant was not made in the light of a situation by which the government might have it in its power to withhold funds due from it to the surety company. It was merely contemplated that the surety company might be called upon to respond in damages for a breach of contract on the part of its principal, and that it should be reimbursed by the defendant for any liability established against it in an action, suit or other proceeding, including “counsel fees and eipenses of whatsoever kind, name, nature or description,” and for any valid claim of liability asserted against it as surety for the defendant which it settled without litigation. The decision about to be made by this court proceeds upon the theory that the surety company was at liberty to settle any claim asserted against it, whether valid or not, and to recover of the defendant the amount thus paid. To that doctrine I cannot subscribe. The amended complaint, in my opinion, is fatally defective in that it fails to allege any facts tending to show that the United States government had a just or valid claim against the surety company as surety for the defendant.

I, therefore, vote for affirmance.

Clarke, J., concurred.

Order reversed, with ten dollars costs and disbursements, and motion granted, with ten dollars costs, with leave to defendant to withdraw demurrer and to answer on payment of costs in this court and in the court below.  