Prudence Co., Inc. v. Fidelity & Deposit Co.Annotate this Case
297 U.S. 198 (1936)
U.S. Supreme Court
Prudence Co., Inc. v. Fidelity & Deposit Co., 297 U.S. 198 (1936)
Prudence Co., Inc. v. Fidelity & Deposit Company of Maryland
Argued January 8, 9, 1936
Decided February 3, 1936
297 U.S. 198
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE SECOND CIRCUIT
1. In an action by the maker of a building loan, secured by a mortgage on the building, to recover on a bond indemnifying him from loss due to the failure of the borrower to complete the building in time and manner as specified in the loan contract, the measure of damages should be such as will place the lender in the same position as if the building had been completed as stipulated. P. 297 U. S. 205.
2. Where the lender, in such a case, was obliged by the borrower's defaults in construction of an apartment building to foreclose his mortgage, buy in the unfinished structure for less than the loan, and take a deficiency judgment, it was error to limit recovery on the indemnity bond to the cost of completing the building in accordance with the contract; in the estimation of damages, there should be considered also the rents that might have been impounded in the foreclosure proceedings had the building been ready for use, and the reduced value of the building at the foreclosure sale because of its unfinished state. P. 297 U. S. 206.
3. The difference between the value of the unfinished building at the foreclosure sale and the value it would have had if completed as per contract may be considered as made up of two elements, the cost of completion and the carrying charges meanwhile. These may
be proved by expert testimony; or where, as in this case, the building was completed by the lender, the actual cost of that may be shown, and the other element may be established by expert proof of the rental value of such a building (finished) at the date of default and later. P. 297 U. S. 206.
4. In this case, in proof of damages due to delay in completing the building, evidence was received, without objection, of payments for taxes and insurance and of loss of interest on investment during the time required for its completion. Held that an objection that such carrying charges may have exceeded the rents that might have been received if the building had been finished as agreed came too late, it not having been made at the trial. P. 297 U. S. 207.
5. In an action for damages caused by impairment of a mortgage security, through the borrower's failure to complete the mortgaged building as agreed, loss of rents is to be classed not as special, but as general, damage, and may be proved without having been specifically alleged. P. 297 U. S. 207.
77 F.2d 834 modified and affirmed.
Certiorari, 296 U.S. 566, to review a judgment reversing one recovered in the District Court, 7 F.Supp. 392, in an action on an indemnity bond.
MR. JUSTICE CARDOZO, delivered the opinion of the Court.
We are to determine the measure of damages upon a bond conditioned against loss through the failure to complete a building at the time and in the manner called for by the building contract.
In September, 1929, petitioner, the Prudence Company, Inc., undertook to make a mortgage loan of $6,650,000 in aid of the construction of Essex House, an apartment hotel in the city of New York. The borrower covenanted that the building would conform to plans and specifications, and would be completed not later than December 16, 1930. As part of the same transaction, two surety companies, the respondents in this Court, signed a bond in the sum of $3,000,000, indemnifying the lender against loss through the failure of the borrower to construct and pay for a building conforming to the contract, and complete it by the stated time. The bond also provided that, in the event of the borrower's default, the lender, if it so elected, should be at liberty to go forward with the work, and charge the cost against the sureties. Other conditions are believed to be immaterial to any question now before us.
On December 16, 1930, the borrower made default under the mortgage, abandoning the work with the building then unfinished. At that time, the petitioner's advances under the building loan agreement were $6,575,000, the full amount promised, less $75,000 retained by agreement. On December 18, 1930, petitioner, through its nominee, brought suit in the state court for the foreclosure of the mortgage. On January 6, 1931, it went into possession with the mortgagor's consent. On January 19, 1931, there was a judgment of foreclosure, followed by a sale on March 17, 1931, at which the mortgagee was the buyer, the bid of $6,000,000 being applied upon the mortgage. A deficiency judgment of $716,215.02 was entered the next month.
Petitioner in possession of the building went on with the unfinished work, bringing it to completion in October, 1931. An action on the bond was then begun against the sureties. The trial court gave judgment for damages in the sum of $798,416.81, made up of three classes of items:
the cost of completion; the loss from omissions and inferior substitutions, and the interest on investment, together with taxes and insurance charges, while the building was idle because unready for its occupants. 7 F.Supp. 392. The Circuit Court of Appeals for the Second Circuit found this award to be excessive. In the view of that court no award should have been made for interest, taxes, or insurance during the period of idleness. Payments necessary to complete the building were properly allowed, for they were evidence of the difference in value between an incomplete and a completed structure. Reparation was also to be made for omissions and substitutions to the extent that they diminished value, unless strict compliance had been waived by the lender or its agents. However, the extent of the recovery was not susceptible of ascertainment without the aid of a new trial. This was so because evidence of waiver had been offered by the surety and erroneously excluded. A remand was thus necessary to elicit all the facts. 77 F.2d 834. Before a second trial was had, a writ of certiorari issued at the instance of petitioner to resolve a claim of conflict between the decision to be reviewed and a decision of this Court. Trainor Co. v. Aetna Casualty & Surety Co.,290 U. S. 47. The writ states that it is "limited to the question of the measure of damages," thus excluding from our consideration the ruling of the court below as to the effect of waiver of performance.
Limiting our review accordingly, we think the extent of the recovery upon the new trial that will be necessary has been too narrowly confined.
The petitioner should be placed in the same position it would have occupied if the building had been completed on December 16, 1930. Trainor Co. v. Aetna Casualty & Surety Co., supra, at pp. 290 U. S. 54-55; Kidd v. McCormick, 83 N.Y. 391, 398; Province Securities Corp. v. Maryland Casualty Co., 269 Mass. 75, 94, 168 N.E. 252. To give
it nothing but the cost of doing the unfinished work, plus the loss resulting from omissions and substitutions, would be a scant measure of reparation, allowing nothing for delay. Ruff v. Rinaldo, 55 N.Y. 664; C. W. Hunt Co. v. Boston Elevated R. Co., 199 Mass. 220, 233, 235, 85 N.E. 446; Sedgwick, Damages (9th Ed.)