
    The People of the State of New York, Plaintiff, v. The Metropolitan Surety Company, Respondent. R. Grant Johnston, Appellant.
    Third Department,
    December 28, 1911.
    Guaranty and suretyship—charter party — breach — right of owner to collateral deposited with surety — reference — offsets to fund by surety — insolvency ■— trust fund — tracing money — party — execution—when proceeding maintainable by creditor.
    Where the charterer of a steamship gave a bond for the faithful performance of the contract of leasing and deposited collateral therefor with the surety company, and where, after breach of the contract, the lessor having been defeated in an action against the surety company not on the merits, brought an action against the charterer and attached the fund deposited as collateral, and subsequently levied on it under an execution, he is entitled to have the money paid over to him by the receiver of the surety company, which had become insolvent subsequent to the levy, less such legitimate offsets as the surety company may have against it.
    This, although on breach of two other bonds executed by the surety company for the charterer the surety had been compelled to pay a greater sum than the charterer had placed in its hands as collateral for all three bonds.
    Where the surety company claims to have paid out a certain part of the fund in defending the lessor’s unsuccessful action against it, and also claims to hold certain notes of the lessor’s which are proper offsets against, the fund, the -coraart may appoint a referee to take proof odr the fasts. in. regard to such, offsets..
    Where collateral security is placed by a principal in the hands of his surety to secure performance of a contract, or to provide a fund for the payment- of damages' occasioned by its1 breach, the law implies a trust in- favor of the, creditor, which, he may enforce: on. the maturity ©ff Ms . debt whether the surety has been damnified or not, and irrespective of whether either the surety or principal is insolvent.
    If. the court finds that a receiver appointed by it holds a trust fund belonging- to another it will', upon motion, compel' him to pay it over to the rightful owner.
    It is immaterial that the receiver does not hold the identical money deposited as indemnity with the surety company, or even that the surety company had paid it out to discharge the other obligations.
    
      As the lessor is entitled to; relief;, irrespective off Ms attachment and execution, the fact that he instituted the proceeding-to reach the fund in bis: own name instead of in behalf of the sheriff is unimportant.
    Kellogg, J., dissented, with opinion.
    Appeal by B.. Grant Johnston, pótitioner, from an order of the Supreme Court,, made at the Albany Special Term and entered in the office of the clerk of the county of Albany on the 13th day of July, 1911, denying a motion that certain moneys he paid over to he applied upon an execution, and directing that the matter he referred to a referee to take testimony and report to the court.
    
      G. D. B. Hasbrouck and Amos Van Etten, for the appellant.
    
      Edward R. Finch, for the respondent.
   Houghton, J.:

The- appellant leased! to the Jamestown Exposition Excursion and! Steamboat Company a steamship for the period of seven months, beginning the 1st day of May* 190J, at a rental of $9-00 per month, payable monthly, and the lessee also agreed to pay certain charges'- and keep- the vessel in repair. The lease contained a clause that the charterer should furnish a bond in the sum of $2,500 to guarantee the faithful performance of the- contract of leasing; Thereupon the defendant, The Metropolitan Surety Company, executed such bond at the request of the exposition company, which deposited $1/250 as collateral thereto. The bond so furnished bound the principal and surety to pay such sum and secured appellant,, named as obligee, from any pecuniary loss restating from the breach of any of the terms, covenants and conditions of the contract of hiring, and further provided that the surety company should he informed of any breach of the terms of such contract within thirty days, and should not be liable for any greater sum than the penalty mentioned in fee bond, nor at all unless proceedings thereon were instituted not.later than the 1st day of January, 1908.

The exposition company breached its contract and the appellant brought suit .against the surety company after the 1st day of January, 1908, and his complaint was dismissed because the action was brought after that date. Thereupon the appellant brought suit against the exposition company, and it being a foreign corporation the plaintiff obtained .an .attachment, and the sheriff attached, as is claimed, the fund which the exposition company had deposited with the surety company on the giving of the bond. Judgment was finally obtained against the .exposition company for $2,951.26, and execution thereon issued to the sheriff, who levied the .attachment, which execution is presumably outstanding.

On January 6, 1909, the .above-entitled action was brought by fee People to dissolve the surety company on the ground feat it was insolvent, and .a temporary receiver was appointed who has since been made permanent receiver, and is now engaged in marshaling fee assets of such corporation, and has in his hands a sum greater than $1,250,

At the time fee surety company gave its bond to the appellant it executed for fee exposition company two other bonds, and fee exposition company demanded and received in cash fifty per cent of the total of those bonds. Breach of these two latter bonds was made, and fee surety company was compelled, to pay a sum greater than the exposition company had placed in its hands on all three of fee bonds which it had given.

The appellant demanded from fee receiver the $1,250 which had been deposited wife the surety company by fee exposition company as collateral security for the bond which had been given, and, upon payment being refused, made a motion to compel such receiver to pay the same over to him. Instead of directing the receiver so to do the court appointed the referee to take proof and report. From such order Johnston appeals, claiming that he was entitled to have the money paid over to him as matter of law, and that the reference is a useless and unnecessary expense. .

We are of opinion this would be so except for the fact that the defendant claims to have paid, out $275 of the fund in defending the action which the appellant brought against it, and in which the complaint was dismissed because the action was not brought within the proper time, and also except for the fact that the surety company claims that it holds certain notes of the appellant which are proper offsets to the appellant’s claim.

In view of the fact that we are about to affirm the order directing a.reference, we deem it our duty to give our views with respect to the appellant’s rights in the fund to the end that the reference may be properly confined and as expeditiously terminated as may be.

The contract of suretyship which the surety company entered into was clearly one guaranteeing performance of the contract by the principal, the exposition company, to the appellant, the obligee therein. (Belloni v. Freeborn, 63 N. Y. 383; National Bank of Newburgh v. Bigler, 83 id. 51.) The moneys deposited by the principal with the surety were deposited to secure performance of the contract between the appellant and the exposition company and to provide a fund for payment of the damages occasioned by its breach, and a breach having occurred the law raised an implied trust with respect to the fund in favor of the creditor. Where collateral security is placed by the principal in the hands of his surety to secure performance of a contract or to provide a fund for the payment of damages occasioned by its breach the law raises an implied trust in favor of the creditor which on maturity of his debt he may enforce whether the surety has been damnified or not and irrespective of the question whether the surety or principal or. either is insolvent. (National Bank of Newburgh v. Bigler, supra; Vail v. Foster, 4 N. Y. 312; Crosby v. Crafts, 5 Hun, 327; affd. on opinion below, 69 N. Y. 607; Clark v. Ely, 2 Sandf. Ch. 166; Pratt v. Adams, 7 Paige, 615, 627.) Learned, P. J., in Crosby v. Crafts (supra), in applying the rule uses the following language particularly apt to the present situation: “ The ground of that principle is, that the security given by the principal debtor to the surety is a quasi trust fund for the payment of the debt; that the principal debtor has appropriated it for the security of the debt, and that the creditor has an equitable right to have it thus applied. (Vail v. Foster, ut supra.) That case illustrates this view. The surety had become insolvent. But he held a bond and mortgage, executed by the principal debtor to indemnify him for his liability. As he was insolvent and could not pay, he could not practically be damnified by reason of his debt. And as to him the creditor was in the . same condition as if the surety had been discharged by death, instead of insolvency. But although the creditor could not, in fact, collect anything out of the surety, and although for this reason the surety had never been damnified by his obligation, yet it was held that the .creditor was entitled to have the benefit of the securities which had been executed to the surety for his indemnity.”

The .surety company being insolvent and its funds in the custody of a receiver appointed by this court, an action was not necessary, as is urged by the respondent, or even proper. If the court found that its officer held a trust fund belonging to another, it could upon motion compel him to pay it over to the rightful owner. (Riggs v. Whitney, 15 Abb. Pr. 388; Tyler v. Hildreth, 77 Hun, 580.) 17or would it be any answer to the application to say that the receiver did not have the identical money which was deposited as indemnity with the surety company, or even that the surety company had paid it out to discharge its other obligations. The receiver would be compelled to make the fund good from such moneys as had come to his hands. (Standard Oil Co. v. Hawkins, 74 Fed. Rep. 395.) The receiver stands in place of the surety company. It would be no answer by the company to say that it had misappropriated the fund and did not have it on hand, for it would be compelled to make it good. Besides, the general creditors have no right to have the fund swelled by moneys rightfully belonging to another, and it would be a travesty upon justice if the court could not direct its own officer to restore to another a fund to which he was entitled.

The .situation is unlike that of an executor -of am executor, for .in that case the last -executor is accountable, -only for such funds .-as came to his hands -belonging to the estate-;of which Ms testator was the -executor.

The appellant, after mafcingisueh deductions as shall be found -proper, is entitled to -relief .irrespective of Ms ¡attachment -or execution, ,-aaad it is unimportant that the proceeding was not instituted in behalf of the ¡sheriff;, as urged- by the respondent.

The .reference ordered would, therefore, be improper except for the fact that the surety company claims to have rightly paid out a portion of the fund delivered to it ami. to have an oEset against some portion of it. A reference is proper to ascertain the facts in this regard, to the end- that the court may -determine whether -ah or part should be paid over to the appellant.

The -order must, therefore,, beaffirmed, but without -costs.

All concurred, except Kellogg, J., dissenting in opinion.

Kellogg, J.

(dissenting):

This is an appeal hy R. Grant Johnston, the petitioner, from an order made at the- Albany County 'Special Term July 13, 1911, denying his motion asking that certain-moneys be applied upon a judgment held by him against the Jamestown Exposition Excursion and Steamboat Company, which order appointed a referee to take proof of the facts and report them to the court, with his opinion thereon.

April 5, 190% the exposition company applied to the surety company for the issuance of three contract bonds, one of '$1,500 to Fred S. Jenks -on account of the propeller Ossining, -one of $2,500 to R. Grant Johnston on account of the propeller Verona, and one of $5, 000 to Edward T). Booz on account óf the steamboat Gen: J. A. Dumorib. in consideration of the issuance of the bonds it paid the premium or fee of $90 in advance, and also one-half the amount of said bonds, namely, '$4,500, as an indemnity to the said surety company. The application was granted April 19, 1907, and the contract bonds were given. They were of substantially equal tenor except as to the name of the obligee and of the boats and the amounts. By the Johnston bond the exposition company as principal, and the surety company as -surety, became held and bound unto ‘him in the-sum. of $2:,500:. The bond' recited that whereas the principal had entered inte a contract for the hiring of the propeller Verona for seven months from May 1, 1907,. as provided in the charter party thereto annexed, the condition of the bond was that if the principal would well and truly indemn ify and save harmless the said obligee from all pecuniary loss resulting from the breach of any of the- terms, covenants and conditions of the said contract on the part of the principal to be performed, then the- obligation, to be void, otherwise to remain in full force and effect in law,, arid provided that the bond was issued subject to conditions therein named, one of which was “ That in no event shall the surety he liable for a- greater- sum than the penalty of this bond, or subject to any suit, action or other proceeding: thereon that is instituted later than the 1st day of January,, 1908.”

The exposition company defaulted in the-performance of each of the charter parties and bonds,, and on account thereof the surety company was required to pay April 29, 1907, $850 in settlement of the Id-ability on the Jenks bond, and about August 21,. 1908,. $3,250 .on account of the Booz bond, together with $279-.60' costs: and expenses thereon,, an action having- been timely brought in Virginia against said company thereon.

On the 24th day of July,. 1908-,. said Johnston brought an action against the surety company on. account of the breach of said charter party and bond, claiming that there was due him thereon. $2,814.72. December 1, 1907,. in which action, among- other defenses,, the surety company interposed the defense that under the conditions of the bond no action or proceeding could be brought against it after January 1, 1908, and that the said action is- barred by that provision in the bond, and that no recovery can he had against the defendant on said bond, which action was duly tried and the complaint dismissed on the ground that the action could mot be maintained, not having been brought prior to January 1,1908,. as provided in the bond, with S64-..41 costs against the surety company., Thereafter said Johnston, April 2:8, 1908, brought action, against the exposition company and served the proper papers purporting- to attach the $1,250 paid on account of the Johnston bond, and in said action recovered judgment December 10,1908,. against said exposition company for $2,951.26, and issued execution therefor to the sheriff of New York county. In the proceedings entitled above an order was duly made declaring the surety company insolvent on the 6th day of January, 1909, and in marshaling the assets of said company the said Johnston has filed his petition asking that the' $1,250 deposited by the exposition company with the surety company to indemnify said surety company on account of the issuance of said bonds, be paid to him or applied on such judgment and execution in his behalf, upon which the order, appealed from was made. " The appellant upon this appeal urges that as matter of law he is subrogated to the said fund and entitled to its payment without a reference, the respondent claiming that the $4,500 was received by it on account of the issuance of the three bonds and that it has paid on account thereof more than the said $4,500, and that there are no funds in its hands in which the appellant is interested, but that if there are the order of reference is proper to determine the amount.

The condition in the bond that an action or proceeding to enforce it must be brought before January 1, 1908, has been adjudged by a decision remaining unreversed to prevent' a recovery against the surety company on the bond, and by this proceeding it is sought by indirection to accomplish what the appellant failed to recover by direct action. The filing of his petition must be deemed the commencement of an action to enforce the bond, and the condition of the bond referred to is as fatal to this application as it was to the action. The fair meaning of the bond is that if January 1, 1908, lapses without the bringing of an action or the taking of some proceeding to enforce it, that the obligee has no further benefits therefrom. If the surety company was not liable to him upon the bond he cannot be subrogated to its rights as to the $1,250 which it retained to indemnify it under the bond, so long as the surety company has any valid claims against said fund.

There is nothing mysterious about the doctrine of subrogation; “it is purely an equitable right, and being an equity it is subject to the rules governing equity.” (6 Pom. Eq. Juris. § 9220.)

“ Subrogation is an equitable right, and not a legal one, and can be enforced only in equity. It will not be enforced when it would be inequitable to do so, or where it would work injustice to others having equal equities.” (Makeel v. Hotchkiss, 190 Ill. 311; 83 Am. St. Rep. 131.)

This money was received by the surety company to indemnify it, and while there is an indebtedness due it arising out of the same transaction in which the money was received, it would not be equitable to turn it over to the petitioner who was not a party to it and for whose benefit it was not taken. Such action would be most inequitable to the surety company and its creditors, and that is a sufficient reason why equity will not apply the doctrine of subrogation in the premises.

It is evident that if the fund remained in the hands of the surety company and belonged to the exposition company it was subject to attachment; but the attachment was subject to any claims which the surety company had against the moneys. And it is apparent that at the time the attachment was issued claims had accrued against the surety company greater in amount than the moneys in its hands on account of the exposition company. Viewing the appellant, therefore, as merely an attaching creditor, without any claim against the moneys superior to the rights of the surety company as a creditor of the exposition company, it is apparent that he is not entitled as against it to these moneys. While three bonds were issued to different parties, they were issued under one contract and practically for one consideration. The $4,500 was received as a result of one transaction and the three parts of the transaction formed such a whole that the surety company could not be required by the exposition company to deliver up any of the money while the exposition company was in default upon any of the bonds in an amount which might use up the entire amount. In my judgment the appellant has no claim upon the fund by attachment or otherwise superior to the rights of the surety company therein. While this attachment was levied before the termination of the litigation in Virginia, it is evident that the breach of the bond occurred before the issuance of the attachment, as it is fair to assume that the breach of the Booz bond occurred about the time the other two were breached. The appellant had the right to have his motion detenzáneá according to his legal rights. He could not be chargeable with the expense of a reference if Ms motion had no-merits, and! is^ therefore,, aggrieved by the order of reference.

The order should, therefore, be' modified! by striking therefrom the provision as- to- a reference, and asso-modified affirmed, without costs to either party.

Order affirmed, without costs.  