## Facts

- MacMillan Company (MacMillan), a publisher, sold books through a dealer/bookseller under a contract requiring periodic (quarterly) statements and remittances to MacMillan.
- In 1924, Southern Surety Company (Southern) issued a $20,000 surety bond guaranteeing the dealer’s performance of its contract with MacMillan.
- The bond included a clause requiring MacMillan to notify Southern if the dealer defaulted on its contractual obligations, including default in payments.
- Beginning in 1926, the dealer repeatedly fell behind in its quarterly remittances and accumulated a growing unpaid balance owed to MacMillan.
- MacMillan treated the continuing shortfalls as temporary and did not notify Southern while the arrearages were mounting; MacMillan continued to do business with the dealer.
- In 1929, MacMillan discovered that an employee’s embezzlement meant the dealer could not make up the shortages, and MacMillan then gave Southern notice that the dealer was in default.
- Southern denied liability, asserting that MacMillan’s failure to give the contractually required notice of the earlier, repeated defaults relieved Southern of responsibility under the bond.
- MacMillan sued Southern on the bond; the district court entered judgment for MacMillan (in the amount sought under the bond as tried), and Southern appealed.

## Issues

1. Whether MacMillan’s failure to give Southern notice of the dealer’s earlier, repeated payment delinquencies—despite a bond clause requiring notice of default—released Southern from liability on the bond.
2. Whether the dealer’s ongoing failures to make required quarterly remittances constituted “defaults” that triggered MacMillan’s duty to notify the surety.

## Decision

- The Tenth Circuit reversed the judgment for MacMillan.
- The court held that the dealer’s recurring, substantial arrearages were defaults within the meaning of the bond’s notice provision.
- The court concluded that MacMillan’s prolonged failure to provide notice, while the indebtedness grew, deprived Southern of the protection the notice clause was designed to provide and discharged Southern from liability on the bond.
- Judge Phillips dissented.

## Legal Principles

- When a surety bond makes notice of the principal’s default a contractual requirement for the surety’s protection, the obligee’s failure to give the required notice can release the surety from liability.
- Repeated and material failures to make required periodic payments are defaults that can trigger a notice-of-default clause, even if the obligee believes the problem is temporary.
- A notice condition exists so the surety can act while action can still matter (for example, to investigate, limit additional exposure, or end the relationship); withholding notice while losses accumulate defeats that purpose and may discharge the surety.

## Conclusion

The Tenth Circuit held that MacMillan could not enforce Southern’s bond after allowing years of significant, repeated payment delinquencies to accumulate without the notice the bond required; because that silence prevented the surety from taking timely protective steps, Southern was released from liability and the judgment for MacMillan was reversed.


Southern Surety Co. v. MacMillan Co., 58 F.2d 541 (1932)