Argued December 3, 1926. The South Philadelphia State Bank applied for and obtained from defendant, the National Surety Company, a bond in the sum of $50,000, insuring the bank against loss by reason of the dishonesty of its employees. Later it applied for and obtained from the defendant another bond, in the sum of $10,000, in favor of the Commonwealth, insuring the latter that its deposits with the bank would be repaid. The Commonwealth had nothing to do with the application for the latter bond; the bank alone made it, and stipulated therein to indemnify defendant and save it harmless from all loss which could arise by reason thereof. Defendant's business is the furnishing of surety bonds, upon the payment of stipulated *Page 303 premiums, and, in the case of each of those above specified, it received from the bank the premium required.
Through the dishonesty of certain of its employees, the bank suffered a loss far in excess of the $50,000 fidelity bond. By reason thereof, it became insolvent and it and its assets were taken over by the Secretary of Banking of the Commonwealth, as provided by section 21 of the Banking Act of June 15, 1923, P. L. 809, 819. Defendant thereupon paid to the Commonwealth $10,000, the amount of its deposit with the bank, and the then state treasurer gave to defendant an assignment of what had been the Commonwealth's claim against the bank, by reason of the deposit. It is at least gravely doubtful whether the state treasurer had any legal right to make the assignment, but we need not consider the matter, since defendant expressly admits, in its brief, that the fact "is immaterial and has no effect upon the right of set-off" allowed by the court below in this case.
Upon demand made, defendant promised to pay the secretary of banking the amount of the $50,000 fidelity bond, but failed to do it, whereupon he brought the present suit. Defendant then paid $40,000, and claimed that it was entitled to a set-off, to the extent of the $10,000 it had paid to the Commonwealth, alleging that there were "sufficient funds in the hands of the plaintiff [the Secretary of Banking] to pay the claim of the Commonwealth in full." There was no averment that, on settlement of plaintiff's account, as required by the statute, there would, after paying the necessary expenses of the proceedings, still be enough on hand to repay the amount paid by defendant to the Commonwealth. The parties agreed that "no question of fact exists which calls for a trial by jury as respects said set-off," and asked the court below, on the record as then made up, to "enter a final judgment" in favor of one of the parties. *Page 304 This it did by entering judgment for defendant, and therefrom plaintiff prosecuted the present appeal.
In this court, defendant bases its defense upon two grounds: (1) The covenant of indemnity appearing in the bank's application for the $10,000 bond; and (2) Defendant's alleged common law right to be subrogated to the claim of the Commonwealth, to the extent of the deposit which it, defendant, made good.
As to the first of these contentions, it is sufficient to say it probably would not have been made, had the two bonds and the two contentions been treated as separate and distinct each from the other, as in fact and law they were. The covenant of indemnity set forth in the application, was an obligation of the bank and not of the Commonwealth, and a recovery thereon would have resulted only in a general judgment against the bank. Such a judgment would not have affected, however, the preference given to depositors by section 28 of the Act of May 13, 1876, P. L. 161, 170, since it would not have been a judgment for a deposit, but for a breach of covenant. It needs no argument to show that, as well before as after such a judgment, defendant could not use it as a set-off, since it cannot be known, until distribution is ordered of the funds in the hands of the secretary, in the way and at the time prescribed by the statute, whether or not there will be anything applicable on account of defendant's claim under the covenant of indemnity. Certainly this record discloses nothing on the point.
Has defendant a common law right of subrogation, which gives to it a claim preferred over all others, to the extent of the Commonwealth's deposit, which defendant paid? For the reason already suggested, we do not propose to decide that question at this time. We do not know, by this record, what will be the net balance for distribution after the secretary's account has been filed, and the just debits and credits settled by the court, — whether it will be as much, or more, or less than the $10,000 sought to be set off. In view of the elaborate *Page 305 statutory provisions regarding the collection and disbursement of the assets of such banks, as set forth in the Banking Act of 1923, supra, a set-off cannot be allowed, as against a claim admittedly payable to the secretary, if the alleged right of set-off arises in connection with the cause of the failure, or subsequent thereto. Fisher, Commissioner of Banking, v. Davis,278 Pa. 129, does not decide it could be allowed under such circumstances. There the set-off existed long before the failure, and we simply decided that only the net balance due, at the time of the failure, could be claimed by the commissioner. Here, however, defendant's right arose subsequent to the failure, and hence its claim must be presented at the time and in the way prescribed by the statute, exactly as the Commonwealth would have had to present it if the amount of the deposit was still due to it. By payment to the Commonwealth, defendant did not acquire, either expressly or by implication, a greater or a higher right than the Commonwealth herself had.
What we have said above, obviates the necessity for now considering the able opinion of the court below and the astute arguments of counsel at the bar of this court. As, however, we are satisfied that there are other considerations than those expressed therein, which are important and may be controlling, we have concluded to call attention to them briefly, so that, when the question is properly before the court, we may have the aid which such counsel can always give. These matters are not necessarily exclusive of those set forth in the existing briefs, but are presented as additional considerations to be properly weighed when the question involved is to be finally decided.
The relation between the Commonwealth and defendant was not that of principal and surety in the ordinary sense of those terms, but that of insurer and insured. We said in Young v. American Bonding Co., 228 Pa. 373, 379: "In all essential particulars the appellee here is an insurance company, and its obligation in this particular *Page 306 instance was that of an insurer. It was paid for its undertaking; the amount of its compensation being based on the calculation of risk assumed. The trend of all our modern decisions, federal and state, is to distinguish between individual and corporate suretyship where the latter is an undertaking for money consideration by a company chartered for the conduct of such business. . . . . . While such corporations may call themselves 'surety companies' their business is in all essential particulars that of insurance. Their contracts are usually in the terms prescribed by themselves, and should be construed most strictly in favor of the obligee: 32 Cyc., p. 306, and the authorities there cited in support." This statement has been approved in Phila. v. Fidelity Deposit Co., 231 Pa. 208; Brown v. Title Guaranty Surety Co., 232 Pa. 337,341; Butz Clader v. U.S. Metal Products Co., 255 Pa. 53; Phila. v. Ray, Receiver, et al., 266 Pa. 345; Donaldson v. Hartford Accident Indemnity Co., 269 Pa. 456; and Sokoloff v. The Fidelity Casualty Co. of New York, 288 Pa. 211.
It must always be remembered, also, that the bank, and not the Commonwealth, applied for the $10,000 bond. All the covenants and agreements set forth in that application are the covenants and agreements of the bank only. The provisions for indemnification and subrogation appearing therein are the bank's and not the Commonwealth's; the subrogation growing thereout must, therefore, be of the bank's rights or remedies against third parties, to wit, the wrongdoers who caused the loss. So, also, the clause in the application which stipulated that defendant should "have every right and remedy which the individual surety acting without compensation would have," can only refer to the rights and remedies of the bank. Whether defendant acquired any right of subrogation, except to the extent specifically provided for in the application, is the real question to be decided on the adjudication of the secretary's account. *Page 307
Subrogation is not a matter of right, but of pure equity, and is never allowed when inequity would result: Gring's App.,89 Pa. 336; Forest Oil Co.'s Apps., 118 Pa. 139, 145. Here defendant was paid a premium on $60,000 of insurance, and seeks, through subrogation, to escape liability beyond $50,000, though the actual loss exceeded twice that amount. According to defendant's theory, had the Commonwealth's deposit been $50,000, and the fidelity bond remained $50,000, then defendant would have received a premium for $100,000 of insurance and could never have been ultimately liable in excess of $50,000, unless the failure of the bank had been practically total, leaving little or nothing for the preferred depositors. The difference between this assumed case and the present is one of degree only, and not of kind. Surely neither of the parties could have thought, when the second bond of $10,000 was given, that payment under it would defeat pro tanto a claim on the earlier bond of $50,000, should the bank be looted by the employees whose fidelity was insured: see Annotated Cases 1917 B., page 1137, note; Annotated Cases 1918 A, page 834, note.
In conclusion we decide that the court below erred in entering judgment for defendant on this record; and, as the parties have stipulated for a final judgment, we reverse and enter judgment for plaintiff, but without prejudice to defendant's right to present its claim on the settlement of the account of the secretary of banking.
The judgment of the court below is reversed and judgment is here entered for plaintiff, for the amount of $10,000 still unpaid with interest; but without prejudice to defendant's right to present its claim on the settlement of the account of the secretary of banking. *Page 308