Community Bldg. Co. v. Maryland Casualty Co., 8 F.2d 678 (9th Cir. 1925)

Neill & Sanger, of Pullman, Wash., and Post & Russell, of Spokane, Wash., for plaintiff in error.

James A. Williams and E. A. Cornelius, both of Spokane, Wash., and George F. Cushwa, of Baltimore, Md., for defendant in error.

Before GILBERT, RUDKIN, and McCAMANT, Circuit Judges.

GILBERT, Circuit Judge (after stating the facts as above).

Error is assigned to the denial of the motion of the plaintiff in error to remand the case to the state court. The ground of the motion was that the contractor, who was a citizen of the state of California, and who had not appeared or been served with summons, did not join in the petition for removal. He was a necessary party defendant under the terms of the bond. While there are some early decisions and expressions in the text-books to the effect that all the defendants, whether or not they have been served and brought within the jurisdiction of the court, must join in the petition for removal, the weight of authority, and we think the better reasoning, *679 sustains the rule that defendants over whom the court has not acquired jurisdiction may be disregarded in removal proceedings, and that the defendants who have been summoned must of necessity be allowed to exercise their right of removal. 11 Ann. Cas. 963; 23 R. C. L. 732; Tremper v. Schwabacher (C. C.) 84 F. 413; Bowles v. H. J. Heinz Co. (C. C.) 188 F. 937; Hunt v. Pearce (D. C.) 271 F. 498, affirmed on appeal Hunt v. Pearce (C. C. A.) 284 F. 321.

It was expressly stipulated in the bond, as a condition precedent to any right of recovery thereon, that, in the event of any default on the part of the principal, notice should be given the surety within 10 days after the obligee should learn of such default, and the right was reserved to the surety within 30 days thereafter to procure others to proceed with the performance of the contract. The court below, while holding in substance that ordinarily the obligee of such a bond owes no duty of active diligence to take care of the interest of the surety, and that his failure to give notice to the latter of a contractor's default will not have the effect of discharging the surety, held that it is otherwise in cases where, as here, the owner has in the contract of suretyship expressly agreed to give such notice, citing National Surety Co. v. Long, 125 F. 887, 60 C. C. A. 623, and United States Fidelity & Guaranty Co. v. Rice, 148 F. 206, 78 C. C. A. 164.

The plaintiff in error contends that under the contract here involved the failure to give notice of the contractor's default in complying with his agreement to have the sleeping rooms ready for occupancy by September 15, 1922, could have no greater effect than to relieve the surety from liability for the stipulated per diem liquidated damages, and that the trial court should have followed the rule established by the decisions of the Supreme Court of the state of Washington in Lazelle v. Empire State Surety Co., 58 Wash. 589, 109 P. 195, Trinity Parish v. Ætna Indemnity Co., 37 Wash. 515, 79 P. 1097, Monro v. National Surety Co., 47 Wash. 488, 92 P. 280, Parsons v. Pacific Surety Co., 69 Wash. 595, 125 P. 954, and Eilers Music Co. v. Hopkins, 73 Wash. 281, 131 P. 838, which cases hold that the failure to give notice of such a default is a defense to a claim for damages for delay or demurrage only, and constitutes no defense to an action for breach of other covenants of the building contract. The rule so adopted by the Supreme Court of the state of Washington prevails in Minnesota, Lakeside Land Co. v. Empire Surety Co., 105 Minn. 213, 117 N.W. 431; Fitger Brewing Co. v. American Bonding Co., 115 Minn. 78, 131 N.W. 1067; in Missouri, Lackland v. Renshaw, 256 Mo. 133, 165 S.W. 314; in Kansas, School Dist. No. 1 v. Massachusetts Bonding & Ins. Co., 92 Kan. 53, 142 P. 1077, Ann. Cas. 1916B, 238; Hull v. Bonding Co., 86 Kan. 342, 120 P. 544; in Indiana, Illinois Surety Co. v. Huber, 57 Ind. App. 408, 107 N.E. 298; in Georgia, Ætna Indemnity Co. v. Town of Comer, 136 Ga. 24, 70 S.E. 676; and in Oklahoma, American Surety Co. v. Scott & Co., 18 Okl. 264, 90 P. 7. In probably an equal number of states the rule of strict construction, as expressed in National Surety Co. v. Long, supra, is adhered to.

In brief, there are two lines of decisions in cases of this kind, one holding that the parties have the right by contract to make such conditions precedent as they may agree upon, and such agreements are enforceable strictly according to the letter thereof; others holding that an insurer for hire is not a favorite of the law, and is not entitled to a literal interpretation of the contract, if it works a practical injustice and that if it appears that the surety has not been injured by lack of notice, it is not thereby absolved from all obligation under the contract. While we are referred to no decision of the Supreme Court of the United States on the question we find that some color is lent to the liberal rule by what is said in Guaranty Co. v. Pressed Brick Co., 191 U.S. 416, 426, 24 S. Ct. 142, 144 (48 L. Ed. 242): "The rule of strictissimi juris is a stringent one, and is liable at times to work a practical injustice. It is one which ought not to be extended to contracts not within the reason of the rule, particularly when the bond is underwritten by a corporation, which has undertaken for a profit to insure the obligee against a failure of performance on the part of the principal obligor."

So in Mauran v. Bullus, 16 Pet. 528, 10 L. Ed. 1056, it was held that "generally all instruments of suretyship are construed strictly, as mere matters of legal right; but the rule is otherwise where they are founded on a valuable consideration." We find, also, that the trend of modern decision, both state and federal, is that in construing guaranties the rule of strictissimi juris, applicable to undertakings by individuals as a personal favor and without remuneration, does not apply to surety companies executing bonds for a stipulated compensation and as a *680 strictly business transaction. Atlantic Trust & Deposit Co. v. Laurinburg, 163 F. 691, 90 C. C. A. 274, U. S. Fidelity & Guaranty Co. v. United States, 178 F. 692, 102 C. C. A. 192; City of Topeka v. Federal Union Surety Co., 213 F. 958, 130 C. C. A. 364; American Bonding Co. v. United States, 233 F. 364, 147 C. C. A. 300; United States v. George F. Pawling Co. (C. C. A.) 297 F. 65.

We are not unmindful of the rule that in dealing with a question of commercial law, such as that which is here presented, a federal court is not controlled by state decisions, but is required to exercise its independent judgment. But the decisions of the court of last resort of the state in which the federal court is held are persuasive, and should be followed in all cases where the question seems to be "balanced with doubt." Burgess v. Seligman, 107 U.S. 20, 2 S. Ct. 10, 27 L. Ed. 359. Following that rule, this court has deferred to decisions of the state courts, even in cases where those decisions were not expressive of public policy or declaratory of a rule of property. Columbia Digger Co. v. Sparks, 227 F. 780, 142 C. C. A. 304; American Surety Co. v. Bellingham Nat. Bank, 254 F. 54, 165 C. C. A. 464.

In Lubriko Co. v. Wyman, 290 F. 12, 17, the Circuit Court of Appeals for the Third Circuit said: "While the contract in suit was signed in Canada, it was made with a corporation whose principal place of business is in Pennsylvania. Its performance involves the sales management of that corporation. Suit was brought in the District Court of the United States for the Eastern District of Pennsylvania. What law should the District Court have followed in allowing recovery the law of Pennsylvania, or federal law? Broadly speaking, the rule is that when the decision in a federal court involves no federal question, the case being there solely by reason of diversity of citizenship, and when the law invoked, whether common law or statutory law, is of local character, and has become established as a part of the law of the state, a federal court will follow the decisions of the state court of last resort when decisions of that court exist." So in Sturtevant Co. v. Fidelity & Deposit Co., 285 F. 367, the Circuit Court of Appeals for the Second Circuit, in dealing with a bond given by a school contractor, said: "Although the question is one of general law, * * * yet, under well-settled principles, this court should, if possible, be in harmony with the New York courts in respect of a question of this character."

From the foregoing considerations we reach the conclusion that, in determining the rights of litigants arising out of a contract of suretyship such as this, made and to be performed in the state of Washington, a federal court should follow the rule established by the highest court of that state. In a similar case (Equitable Surety Co. v. Board of Com'rs, 256 F. 773, 168 C. C. A. 119) it was said: "The requirement of the exertion of all reasonable diligence and activity was for the benefit of the defendant in error, which it had the election to insist upon or wave. If the defendant in error failed to treat a less amount of diligence on the part of the contractors as a default, it thereby waived the default arising therefrom, and was not required to give the plaintiff in error notice of what was not in that event a default, within the meaning of the contract. The record shows that the defendant in error first claimed a default only when the contractors gave notice that they would no longer proceed with the contract, and of this default the required notice is conceded to have been given."

The judgment is reversed, and the cause is remanded, with instructions to enter judgment for the plaintiff in error in accordance with the finding of that court as to the damages recoverable.