1. Upon default after partial performance of a building
contract, the measure of damages recoverable by a mortgage-obligee
on a bond guaranteeing completion, is the difference between the
value, at the
Page 290 U. S. 48
time of default, of the property with the building uncompleted
and the value it would have had with the buildings completed, not
exceeding, however, either the amount due on he mortgage or the
amount of the bond. Pp. 290 U. S. 53
290 U. S.
although the value of the property with the
buildings uncompleted at the time of the guarantor's default,
exceeded the sum of the mortgage and all prior liens, it appearing
that the mortgage-obligee, because its mortgage was not then due,
was unable to protect itself by foreclosure; that thereafter the
property steadily declined in value, and that its interest was
subsequently wiped out by foreclosure of a prior lien.
2. This is the settled rule in Pennsylvania. P. 290 U. S.
3. Even though the federal court, in determining questions of
general law, may exercise an independent judgment, yet, for the
sake of harmony and to avoid confusion, they will lean, where the
question is balanced with doubt, towards an agreement of views with
the state courts. A fortiori
where the decisions of the
state courts are plainly right. P. 290 U. S.
62 F.2d 487 reversed.
Certiorari, 289 U.S. 718, to review a judgment affirming a
judgment of the District Court, 49 F.2d 769, awarding nominal
damages in a suit on a guaranty bond.
Page 290 U. S. 51
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
On October 13, 1927, petitioner conveyed to a building company a
tract of real estate consisting of fifty-two lots, with the result
that the building company became indebted to petitioner in the sum
of $28,000, being part of the purchase price. The building company,
in order to finance its operations, borrowed sums of money from two
different corporations, to one of which it gave a first mortgage
upon the real estate, and to the other a second mortgage. The
building company then gave to petitioner its note for $28,000, and
assigned as collateral security therefor
Page 290 U. S. 52
its equity in the second mortgage. Petitioner accepted this
security -- in effect, a third mortgage -- upon the representation
and warranty of the building company that a building and certain
improvements would be erected, in accordance with plans and
specifications, upon each of the fifty-two lots. The performance of
this obligation was guaranteed by a bond in the sum of $220,000,
executed by respondent, conditioned, among other things, to become
void if, within ten months from the date thereof, October 13, 1927,
each of the fifty-two lots should be fully improved with a
building, together with certain other improvements, in keeping
with, and as shown by, the plans, specifications, etc., otherwise
to remain in full force and effect. The property is located in
Pennsylvania, and the contract and the obligations of the bond were
to be performed within that state.
Suit was brought in a Federal District Court for the Eastern
District of Pennsylvania to recover damages for a breach of the
bond. A jury was waived, and after a hearing, the trial judge found
that, on August 13, 1928, the date fixed for the completion of the
buildings and improvements, twenty-four of the houses had been
completed and twenty-eight had not been fully completed. The value
of the lots with the twenty-eight uncompleted houses, as of the
date last mentioned, was $6,700 each, an amount slightly in excess
of the sum of petitioner's mortgage on each and of all prior liens.
Completed, they would, on that date, have been worth $7,950 each.
It is not disputed that, at the time of the breach of the bond,
petitioner, under the terms of the mortgages, was powerless to
protect itself by foreclosure, and the court found that thereafter
the value of real estate generally and in the locality, had
steadily declined. On January 25, 1930, the first mortgage was
foreclosed and the property bought in for the sum of $50, thus
wiping out the second mortgage and the equity of petitioner
therein. Petitioner has
Page 290 U. S. 53
received on account of the indebtedness of $28,000 the sum of
$13,026.02 only, leaving $14,973.98 still owing on the
Upon these facts, the trial court held that, while the owner of
property, in case of a default after partial performance of a
building contract, would be entitled to recover from the surety the
difference between the value of the property with the uncompleted
buildings and its value with the buildings completed, the rule is
otherwise in the case of a mortgagee-obligee. Following this view,
that court concluded that the measure of damages in the instant
"is so much of the difference between the value of the property
as of August 13, 1928, with the houses uncompleted, and the value
it would have had on that date had the houses been completed as
would have been necessary to pay the plaintiff's mortgage debt as
well as all prior liens. Since the value of the property as of
August 13, 1928, was more than the sum of the plaintiff's mortgage
and prior liens, the plaintiff is not entitled to any substantial
The court therefore awarded nominal damages only. 49 F.2d 769.
This judgment the Circuit Court of Appeals affirmed. 62 F.2d 487,
488. With that conclusion we are unable to agree.
It is very clear that the settled rule in Pennsylvania is to the
contrary. In Purdy v. Massey,
306 Pa. 288, 159 A. 545,
where prior cases are reviewed, the court held that, where there is
an absolute undertaking to erect and complete a building, the
surety in case of default is bound to take the place of the
principal and erect the building, and the cost of doing that which
should have been done is the measure of damages for which the
surety is liable, not exceeding the amount of the bond. There, the
owner of a first purchase money mortgage had subordinated her
security to another mortgage in consideration of the giving of a
bond in all substantial respects like the one here under
consideration. The building provided for was not
Page 290 U. S. 54
erected, and the mortgagee brought suit against the surety on
the bond. The court held that the bond was one of guaranty, and
awarded as damages the full cost of completion, such cost not
exceeding the amount due on the mortgage. The applicable rule is
thus stated (p. 295):
"In fixing compensation for damage resulting from breach of a
contract, the general rule is that the injured party should be
placed in the same position as if there had been no breach. The
object of the law is to place such party in as good position as if
the contract had been kept. In the instant case, the bond
guaranteed the completion of the building; if there had not been a
breach of the obligation of the bond, the building would have been
erected. Since this was not done, the plaintiff can only be put in
as good position as if the contract had been carried out by giving
her the cost of construction, not exceeding, of course, the amount
of the bond. The measure of damage on a bond guaranteeing
completion is the cost of completion. . . . And, in a case such as
this, where the work was never begun, this cost will be the whole
cost of construction."
See also Mechanics' Trust Co. v. Fid. & Cas. Co.,
304 Pa. 526, 533, et seq.,
156 A. 146. A like rule obtains
in other states. United Real Estate Co. v. McDonald,
Mo. 605, 612, 41 S.W. 913; Kidd v. McCormick,
83 N.Y. 391.
Compare Wicker v.
6 Wall. 94, 73 U. S. 99
The Circuit Court of Appeals held that the Pennsylvania
decisions merely declared the common law of that state with regard
to suretyship, and, since that law is derived from the principles
of general jurisprudence common to all the states, a federal court,
in determining what it is, might exercise an independent judgment.
We do not deem it necessary to discuss the principle enunciated or
to decide whether the Pennsylvania decisions come within it. It is
enough to say that, even where the principle applies,
"for the sake of harmony and to avoid confusion, the federal
Page 290 U. S. 55
courts will lean towards an agreement of views with the state
courts if the question seems to them balanced with doubt."
Burgess v. Seligman, 107 U. S. 20
107 U. S. 33
And see Sim v. Edenborn, 242 U. S. 131
242 U. S. 135
where the authorities are collected; Community Bldg. Co. v.
Maryland Casualty Co.,
8 F.2d 678, 680. In the present case,
it would not be going far enough to say merely that the question is
"balanced with doubt," for it seems to us that the Pennsylvania
decisions, and those of the other states cited above, are plainly
right. Compare Messinger v. Anderson, 225 U.
, 225 U. S.
The petitioner here, not being willing to accept a third
mortgage on the unimproved land to secure its debt, required the
added security which would be afforded by completed improvements.
These improvements the building company agreed to make within a
definitely fixed time, and for the performance of that undertaking
respondent, for a valuable consideration, stood sponsor. Plainly
the obligation of the bond was one of guaranty, and not indemnity,
and could be fulfilled only by the erection of the buildings or
payment of the penalty in case of default. It is no answer to say
that the value of the property immediately after the default
exceeded the sum of the mortgage, together with all prior liens.
Petitioner was then without remedy against the property, because
its mortgage was not in default. It was therefore obliged to sit by
and await the action of others over which it had no control. In the
meantime, the uncompleted buildings necessarily lay unrented,
subject to expense in the way of taxes, insurance, accumulating
interest, etc., deteriorating in quality, and steadily declining in
value. Petitioner is entitled to be put in as good position in
respect of its debt as it would have occupied if the buildings had
been completed in accordance with the terms of the undertaking, and
this can be done here only by giving it the amount of the
difference between the
Page 290 U. S. 56
value of the unfinished buildings and their value as it would
have been if completed in accordance with the agreement -- see
Kidd v. McCormick, supra,
p. 398 -- but exceeding neither the
amount due on its debt nor the amount of the bond.
It appears from the findings that this difference would be about
$26,000, while the amount now due petitioner is $14,973.98,
together with interest thereon from August 13, 1928. It follows
that the judgments of the courts below must be reversed, and the
cause remanded to the District Court with directions to enter
judgment for the last named sum.