Menorah Nursing Home, Inc. v. Zukov

153 A.D.2d 13, 548 N.Y.S.2d 702, 1989 N.Y. App. Div. LEXIS 15808
CourtAppellate Division of the Supreme Court of the State of New York
DecidedDecember 11, 1989
StatusPublished
Cited by52 cases

This text of 153 A.D.2d 13 (Menorah Nursing Home, Inc. v. Zukov) is published on Counsel Stack Legal Research, covering Appellate Division of the Supreme Court of the State of New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Menorah Nursing Home, Inc. v. Zukov, 153 A.D.2d 13, 548 N.Y.S.2d 702, 1989 N.Y. App. Div. LEXIS 15808 (N.Y. Ct. App. 1989).

Opinion

OPINION OF THE COURT

Bracken, J. P.

The plaintiffs have sued several parties whom they allege to have been responsible for economic losses suffered in connection with a construction project. The plaintiffs seek to impose liability upon the defendant and third-party plaintiff Travelers Indemnity Company (hereinafter Travelers) on the theory that Travelers is legally responsible as a surety for the alleged failure of the project’s general contractor, Blitman Construction Corp. (hereinafter Blitman) to fulfill its contractual obligations. The Supreme Court dismissed the amended third-party complaint brought by Travelers against several of Blitman’s subcontractors whose wrongful conduct allegedly caused the occurrence of Blitman’s default. We now reverse the order under review insofar as appealed from because the law permits Travelers, as the party called upon to pay out damages for Blitman’s default, to obtain indemnification to the extent that the wrongful conduct of any of the subcontractors might have caused that default.

I

On appeal, it is argued that Travelers has no standing to sue Blitman’s subcontractors. The respondents, which have appeared separately and upon separate briefs, argue that as a surety on a performance bond compelled to pay out damages for the default of its principal, Travelers may be subrogated only to the rights of the obligees (the plaintiffs) to whom such damages are paid (see, United States Cas. Co. v Jungreis, 21 AD2d 769). Apparently, the parties to this appeal assume that the plaintiffs themselves would have no valid cause of action against the subcontractors; therefore, if Travelers can be equitably subrogated only to the rights of the plaintiffs (United States Cas. Co. v Jungreis, supra), then the amended third-party complaint was properly dismissed.

[17]*17A

It is true that a surety who answers for the default of his principal pursuant to the terms of a performance bond, either by completing the work required under the principal’s contract with the owner-obligee, or by paying compensation to the owner-obligee, is entitled to be subrogated to the rights of the obligee whom he has paid, or on whose behalf he has completed the contract (see generally, Pearlman v Reliance Ins. Co., 371 US 132; Scarsdale Natl. Bank & Trust Co. v United States Fid. & Guar. Co., 264 NY 159; Kolb v National Sur. Co., 176 NY 233; Lewis v Palmer, 28 NY 271; State Bank v Dan-Bar Contr. Co., 23 Misc 2d 487, affd 12 AD2d 416, affd 12 NY2d 804; American Sur. Co. v Town of Islip, 268 App Div 92; 63 NY Jur 2d, Guaranty and Suretyship, §§ 440, 585; Simpson, Suretyship § 47; McClintock, Equity § 123 [2d ed]). However, the right of a surety under these circumstances to be subrogated to the rights of its obligee is not exclusive of all other equitable subrogation rights. The general rule is that, upon answering for the default of its principal, a surety may be subrogated to any claims which the defaulting principal might have against third parties whose wrongful conduct allegedly was a cause of the default (see generally, Courtney v Commercial Lovelace Motor Frgt., US Ct App, 10th Cir, Oct. 24, 1988, Moore, Barrett and Borby, JJ.; Travelers Indem. Co. v Evans Pipe Co., 432 F2d 211; St. Paul Fire & Mar. Ins. Co. v United States, 370 F2d 870; Sentry Ins. v Lardner Elevator Co., 153 Mich App 317, 395 NW2d 31; Argonaut Ins. Co. v Commercial Std. Ins. Co., 380 So 2d 1066 [Fla]; United States Fid. & Guar. Co. v North Am. Steel Corp., 335. So 2d 18 [Fla]; Maryland Cas. Co. v King, 381 P2d 153 [Okla]; 11A Appleman, Insurance Law and Practice § 6610). Similarly, a surety on a performance bond who completes the contract after a default by the principal is subrogated to the principal’s right to contract payments which may have been retained by the owner-obligee (see, e.g., United States Fid. & Guar. Co. v Triborough Bridge Auth., 297 NY 31; Tri-City Elec. Co. v People, 96 AD2d 146, 149, affd 63 NY2d 969; Scarsdale Natl. Bank & Trust Co. v United States Fid. & Guar. Co., 264 NY 159, supra; 63 NY Jur 2d, Guaranty and Suretyship, § 586; 16 Couch, Insurance § 61:396 [2d ed]).

We believe that the statement made by the Appellate Division, First Department, in United States Cas. Co. v Jungreis (21 AD2d 769, supra), to the effect that a surety on a performance bond may not be subrogated to the rights of any [18]*18party other than the obligee, constitutes an incidental remark rather than an accurate summary of the court’s holding. In any event, we do not believe that the obiter dictum in question is a correct statement of the law, nor does there appear to be any conceivable rationale to support such a rule. The doctrine of subrogation is an equitable one which the court should be inclined to extend rather than restrict (see generally, 23 NY Jur 2d, Contribution, Indemnity, and Subrogation, § 25). It seems only equitable to permit Travelers, which is potentially liable to the plaintiffs as a result of its principal’s default, to seek indemnification from the third-party defendants whose misconduct allegedly caused the default. Thus, Travelers is a contingent subrogee not only of the plaintiffs, but also of its principal Blitman.

Furthermore, Travelers does not lack standing simply because it has not yet been called upon to pay any money pursuant to its bond. While it is true that the remedy of subrogation is generally available to a surety only when the claim of the creditor obligee has been paid (see generally, 63 NY Jur 2d, Guaranty and Suretyship, § 435), "[t]he Court of Appeals has already sustained the viability of a contingent third-party claim based on subrogation” (American Home Assur. Co. v Flushing Sav. Bank, 68 AD2d 170, 174 [Murphy, P. J., concurring], affd 52 NY2d 1010, citing Krause v American Guar. & Liab. Ins. Co., 22 NY2d 147; Consolidated Edison Co. v Royal Indem. Co., 41 AD2d 37; see also, Town of Wappinger v Republic Ins. Co., 89 AD2d 621, 622). In the interest of judicial economy, Travelers should be permitted to assert third-party causes of action which might be considered technically premature.

B

The Supreme Court dismissed Travelers’ amended third-party complaint insofar as it was asserted against National Bonding and Accident Insurance Company (hereinafter National) on an additional ground. Travelers’ claim against National is based on allegations that National is legally responsible to answer for the default of the subcontractor Mopal Contracting Corp. (hereinafter Mopal), on whose behalf National had issued a performance bond. National argued, and the Supreme Court held, that pursuant to the terms of its bond National may not be held liable to any party except its obligee (Blitman) or a "successor” of its obligee.

[19]*19The court in Argonaut Ins. Co. v Commercial Std. Ins. Co. (380 So 2d 1066, supra) considered and rejected essentially the same argument as is now being made by National in connection with the scope of the term "successor” as that term is used in a performance bond. In that case, the surety on a performance bond was held to have been subrogated to the rights of its principal, a general contractor. That surety was also held to be a "successor” of the general contractor, so as to have standing to sue the surety for one of the subcontractors. The court stated

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153 A.D.2d 13, 548 N.Y.S.2d 702, 1989 N.Y. App. Div. LEXIS 15808, Counsel Stack Legal Research, https://law.counselstack.com/opinion/menorah-nursing-home-inc-v-zukov-nyappdiv-1989.