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Great Am. Indem. Co. v. State to Use of Mills

Supreme Court of Delaware

May 7, 1952

STATE to use of MILLS.

Page 427

Stewart Lynch and Florence E. Freeman, of Wilmington, for appellant.

John S. Walker and Frank J. Miller, of Wilmington, for appellees.

SOUTHERLAND, C. J., and WOLCOTT and TUNNELL, JJ., sitting.

WOLCOTT, Justice.

This appeal involves the construction of the provisions of a lost securities bond. The precise question at issue is the right of the appellees (hereinafter referred to as plaintiffs) to recover from the appellant (hereinafter referred to as defendant) reasonable attorneys' fees in connection with litigation arising from the withdrawal of funds representing distribution dividends in a receivership due the plaintiffs.

The facts giving rise to the filing of the bond are as follows:

The plaintiffs are the heirs-at-law of two stockholders of record of a Delaware corporation liquidated in receivership proceedings. Upon the termination of the receivership, funds were ordered deposited in the registry of the Court of Chancery representing distribution dividends due stockholders of record who had not filed claims in the receivership. [32 Del.Ch. 565] Thereafter, on March 6, 1940, on the petition of a firm of New York stock brokers, an order was entered by the Chancellor authorizing the withdrawal from the registry of the court, inter alia, the amounts on deposit to the credit of the plaintiffs' predecessors in title. The amount due the plaintiffs is $225.85.

The petition of withdrawal alleged the certificates representing the shares upon which the dividends had accrued were lost. Purported assignments of the shares to the petitioners executed in the names of the owners of record were attached to the petition. In compliance with the practice of the Court of Chancery, the petitioners also submitted a lost securities bond with the defendant as surety. Upon these circumstances, the order of withdrawal was entered and the sum of $225.85 ordered paid to the petitioners, the brokerage firm of Steelman and Birkins.

Early in 1949, the plaintiffs presented the stock certificates registered in the names of their predecessors in interest to the Register in Chancery, and requested payment of the distribution dividend on said shares. Payment to the plaintiffs was refused because of the prior withdrawal. After efforts to locate the brokers who had withdrawn the fund in 1940 had failed, the plaintiffs instituted suit against the defendant, the surety on the lost securities bond.

The Chancellor conducted a hearing to determine ownership of the shares of stock entitled to payment of the distribution dividend and held that the plaintiffs were the rightful successors in interest to the shares concerned.

The question of whether or not the defendant, as surety in the bond, was liable for reasonable attorneys' fees for the plaintiffs' attorneys was argued before the Chancellor who, on January 4, 1952, entered judgment against the defendant in favor of the plaintiffs in the amount of $1,257.77, representing the amount due the plaintiffs as successors in interest to the stock entitled to the distribution dividend, interest [32 Del.Ch. 566] on that sum, out-of-pocket expenses, and the sum of $1,000 as a fee to the plaintiffs' attorneys.

The sole question sought to be reviewed by this appeal is the correctness of the Chancellor's award of attorneys' fees to the plaintiffs' attorneys. The defendant

Page 428

The determination of this appeal requires consideration of the pertinent provisions of the bond to which the defendant is a party. The pertinent provisions are in the following language:

'This is in all respects a joint and several obligation and is for the benefit of each and all of the Obligees named or referred to herein, with the right of each of such Obligees severally to sue hereon in his own name and recover hereunder to the extent of any damage suffered by him under the conditions hereof.

* * *

* * *

'Now, Therefore, The Condition Of This Obligation Is Such, that if the said Principal shall well and truly indemnify and keep indemnified each and all of the Obligees named herein, jointly and severally, from and against any and all loss, costs and expenses of whatsoever kind or nature by reason of the payment to the Principal of the aggregate amount due to the individuals, firms or corporations whose names appear in the left hand column of the said Schedule hereto attached, and the amounts due to whom, respectively, are set forth in the right hand column of said Schedule, without the presentation by the Principal, for cancellation, of the stock certificates and/or receipts evidencing the claims of such individuals, firms or corporations as stockholders and/or partly paid stockholders of Commonwealth Hotel Construction Corporation, then this obligation shall be null and void; otherwise to be and remain in full force and effect.

'Provided, However, that this bond is executed upon the following express conditions:

'(1) That the Surety shall be liable only for the aggregate of the actual financial losses suffered severally by the Obligees herein whose names appear in the left hand column of the Schedule hereto [32 Del.Ch. 567] attached, by reason of the payment unto the Principal of said aggregate amount without the presentation for cancellation by the Principal of said stock certificates and/or receipts. * * *'

It is the general rule that a court may not order the payment of attorneys' fees as a part of the costs to be paid by the losing party unless the payment of such fees is authorized by some provision of a statute or of the bond sued upon. In re Equitable Trust Co., 27 Del.Ch. 60, 30 A.2d 271; 50 Am.Jur., Suretyship, § 218; 20 C.J.S., Costs, § 218.a., and see an annotation in 126 A.L.R. 1451. It may be observed that there is no statute of the State of Delaware specifically authorizing the Court of Chancery to make an award of attorneys' fees in cases of this type as part of the costs to be paid by a party to the litigation.

The defendant argues that because the penalty clause of the bond before us is in approximately the exact amount of the total amount of money due the stockholders whose names and the respective amounts due them appear in the schedule attached to the bond, attorneys' fees may not be allowed as a part of the liability of the defendant under the bond because such allowance might result in imposing a greater total liability upon the defendant than the amount set forth in the penalty clause. Plaintiffs contend that if such is the case, then the provisions of 1935 Code, § 4964, relating to the recovery of damages under recognizances and bonds, authorize the application of a 'first come, first served' rule to the exhaustion of the penalty amount. As we view the matter, however, this section of the Code is inapplicable to the type of bond before us. By reason of 1935 Code, § 4954, which is incorporated by reference into § 4964, it is clearly apparent that the 'first come, first served' rule is applicable only in suits upon recognizances and bonds required by law to secure the payment of

Page 429

money required for the faithful execution of an office, duty or trust imposed upon the obligor of the bond. The bond before us does not fall within this category.

Furthermore, the penalty clause being in the almost [32 Del.Ch. 568] exact aggregate of the amount due some twenty-eight individual stockholders seems conclusively to establish that primarily the bond was required for the protection of the actual moneys due the stockholders whose names appear in the schedule to the bond. If a 'first come, first served' rule is to be followed and recovery allowed to the first litigants in amounts in excess of the principal due them, then it is obvious the fundamental purpose of indemnification of all the stockholders at least up to the amounts due them will have been defeated, if the total liability of the defendant is confined to the amount of the stated penalty. The application of such a rule would defeat the very purpose of requiring the bond and, certainly, could not have been in the contemplation of either the Chancellor or the parties at the time the bond was given.

The fact, however, that the first litigant may not exhaust the penalty amount to an extent greater than the principal amount due him does not, however, necessarily mean that the defendant may not be held liable to a total amount greater than the penalty amount. The exact measure of the defendant's total potential liability is to be found in the ...

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