A/C Electric Co. v. Aetna Insurance

Singley, J., delivered the opinion of the Court. A/C Electric Co. (A/C), an electrical subcontractor, entered into an oral contract to do certain electrical work on the remodeling of a restaurant in Washington, D. C. The general contractor was Capitol Construction Co. (Capitol), a proprietorship conducted by Albert Berkman. Berkman, as principal, and Aetna Insurance Company (Aetna), as surety, had provided the owner of the restaurant with a labor and material payment bond in the penal sum of $8,500.00. The parties have stipulated that A/C did $9,734.00 worth of work on the restaurant.

Sometime in May of 1965, Capitol sent ⁴¹² A/C a check for $5,000.00, which was intended to be a partial payment on account. Capitol’s bank declined to honor the check, however, and on 24 June 1965, Capitol gave A/C a confessed judgment note, guaranteed by Albert Berkman. The note was in the amount of $10,068.81, maturing in 60 days and providing for interest at 6%, and was designed to cover not only the restaurant job, but other amounts owed A/C by Capitol. On 9 July 1965, A/C filed notice of its intention to assert a mechanic’s lien against the restaurant, but for some reason not clear to us, this was not pursued.

On 12 July, A/C wrote to Aetna: “Confirming our telephone conversation of Wednesday, July 7, 1965. “Since you people furnished a payment and performance bond on the above job, we are notifying you of our interest in same. “The amount of our bill is $9734.62. After many attempts, even through the National Bank of Rosslyn, Virginia (Mrs. Hayes) to collect same, we have only a 60 day note which we are holding until August 23, 1965. “If we do not receive payment that day, appropriate legal action will commence at once.” Capitol failed to honor its note on 25 August, and on the following day, Aetna wrote to Berkman: “We have been put on notice of a mechanics’ lien, filed by the A/C Electric Co. Inc. in the amount of $9,734.62 on the above captioned bond. “As indemnitor under this bond, we are looking to you to satisfy this claim or put us in funds, in order that we might satisfy the claim. “We would appreciate your prompt reply concerning your intentions on this matter.” On 3 September 1968, Aetna wrote to A/C: “This will acknowledge your letter of August 30th, 1 ⁴¹³ addressed to the attention of Mr. Wm. Haggerty of this office. “We are presently checking into this matter and you should be hearing from us within ten days to two weeks concerning our status in this matter.” When neither Capitol nor Aetna paid A/C’s bill, on 20 May 1966 suit was instituted against Capitol, Berkman and Aetna. On motion of the plaintiff, summary judgment was entered against Capitol and Berkman, and the case proceeded to trial against Aetna.

At the close of A/C’s case, Aetna’s motion for a directed verdict was granted. From the judgment entered for Aetna, this appeal was taken. Problems arising from surety arrangements are as old as recorded history. 2 As presented to us in the briefs and on argument, the case involves a head-on collision between two principles of the law of suretyship, both too well recognized to require extensive elaboration. On the one hand, A/C argues that a creditor’s acceptance of additional collateral security, even though it has a maturity date later than that of the original debt, does not amount, in the absence of an agreement, to an extension of time of payment which will release a surety from his obligation and cites Hayes v. Wells, 34 Md. 512, 517 (1871).

To the same effect, see Asbell v. Bldg. & Loan Ass’n, 156 Md. 106 , 143 A. 715 (1928); Berman v. Elm Loan & Savings Ass’n, 114 Md. 191 , 78 A. 1104 (1910); American Iron & Steel Mjg. Co. v. Beall, 101 Md. 423 , 61 A. 629 (1905); Warner v. Williams, 93 Md. 517 , 49 A. 559 (1901); Oberndorff v. Union Bank, 31 Md. 126 (1869); Stearns, Suretyship (5th ed. 1951) § 6.27 at 149; and Brandt, Suretyship md Guaranty (3d ed. 1905) § 403 at 767. On the other hand, Aetna contends that, by taking the note, A/C substituted a wholly new obligation for the debt which had existed on open account, thus extending time of payment, and that this released the surety under the rule of Dixon v. Spencer, 59 Md. 246 (1883) and Berman v. Elm Lom & Savings Ass’n, supra. These cases hold that when a creditor and ⁴¹⁴ the principal alter the terms of an obligation without the consent of the surety, the surety is discharged.

Stearns, op. tit., § 6.22 at 143-44. The lower court rejected A/C’s contention and accepted Aetna’s argument. As we see it, under the facts of the case, neither contention is controlling. Capitol was sued as a corporation; service of process was made on Albert Berkman as its “secretary-treasurer”; and judgment was entered against it as a corporation.

The stenographic transcript of arguments on the motion for directed verdict indicates that counsel for both Aetna and A/C were under the impression that Capitol was a corporation. In fact, as the trial judge pointed out, Capivol Construction Company was an individual proprietorship, but counsel for both parties readily conceded that this should not affect the result. We think it was of considerable significance. The record shows that Aetna’s bond identified the principal as “Albert Berkman t/a Capitol Construction Company.” The bond application was signed “Capitol Const.

Co. by Albert Berkman”, as was the note which Capitol gave A/C. A/C’s dealings were with Berkman, who traded as Capitol Construction Company. When A/C took Capitol’s note, guaranteed by Berkman, it got nothing more than Berkman’s promise to pay, the same promise which Berkman had made when A/C extended Capitol credit on open account. What A/C accepted, however, was an obligation having a different due date from that created by the extension of credit on open account: the note called for payment 60 days from date, with interest at 6%. The obligor and obligee of the note were precisely the same as the parties who had dealt on open account, and in this respect, Brengle v. Bushey, 40 Md. 141 (1874), where additional and better security was given by one of two joint and several obligors, is distinguishable.

When it took the notes, A/C not only failed to improve the quality of its security, but converted an indebtedness which was immediately due to one where payment could not be enforced for 60 days. It cannot be successfully maintained that the note was collateral security for the payment of a prior debt or that payment of the open account could have been enforced, once the note was accepted. In es ⁴¹⁵ sence, the note was given and accepted in substitution for and in satisfaction of a pre-existing and different obligation. However, Aetna’s reliance on the rule of Dixon v. Spencer, supra-, is misplaced, under all the circumstances.

In that case, Spencer agreed to furnish ale, beer and porter to Houck on credit, payable in 30 days. Dixon guaranteed the payment of the account. When Houck’s indebtedness to Spencer aggregated $263.53, Spencer took two promissory notes for the amount due, payable in 60 and 90 days. Judge Robinson, speaking for our predecessors, said: “The main question is whether the taking of these promissory notes by the appellees discharges the appellant from his liability as guarantor. “It can hardly be necessary to cite authorities in support of the general principle, that where the time of payment is, without the consent of the surety, extended for a definite time, by a valid contract between the creditor and the principal, the surety is thereby discharged.

The subject and the many decisions in regard to it, are fully considered and discussed in 2 Amer. Lead. Cas. 431. See also Brandt on Surety. & Guar. 401. “The surety, by his contract, merely guarantees the payment by his principal of a certain sum of money at a stipulated time.

This he engages to do and no more. Upon the default of the principal he has the right to pay the money and to proceed at once against him for indemnity. If the creditor, however, makes a new contract with the principal—takes his promissory note, payable at another and further time—he is thereby precluded from suing on the original contract until the maturity of the note, and the surety is also deprived of the right to pay the money due on his contract, the payment of which is necessary to enable him to proceed against the principal. By his own act, the creditor has entered into a new contract with the principal, and for the time being has tied his own hands, and the hands of the surety so far as regards the original contract.

In so doing without the consent of the surety, the law ⁴¹⁶ says the latter shall be discharged.”