411 F.2d 843 (1st Cir. 1969), 7260, National Shawmut Bank of Boston v. New Amsterdam Cas. Co.

Docket Nº:7260.
Citation:411 F.2d 843
Party Name:The NATIONAL SHAWMUT BANK OF BOSTON, Plaintiff, Appellant, v. NEW AMSTERDAM CASUALTY CO., Inc., Defendant, Appellee.
Case Date:May 05, 1969
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
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411 F.2d 843 (1st Cir. 1969)

The NATIONAL SHAWMUT BANK OF BOSTON, Plaintiff, Appellant,

v.

NEW AMSTERDAM CASUALTY CO., Inc., Defendant, Appellee.

No. 7260.

United States Court of Appeals, First Circuit.

May 5, 1969

Rehearing Denied June 10, 1969.

W. Bradley Ryan, Boston, Mass., with whom Morris I. Bearak, Newton, Mass., Milton Bordwin and Guterman, Horvitz & Rubin, Boston, Mass., were on brief, for appellant.

Samuel H. Cohen, Boston, Mass., with whom Avram G. Hammer, Boston, Mass., was on brief, for appellee.

R. Robert Popeo, Haskell Cohn, Laurence R. Buxbaum and Mintz, Levin,

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Cohn & Glovsky, Boston, Mass., on brief for First Nat. Bank of Boston, amicus curiae.

G. Stanley Lowden, Michael Glazerman and Peabody & Arnold, Boston, Mass., on brief for Hartford Acc. & Indem. Co., amicus curiae.

Before ALDRICH, Chief Judge, McENTEE and COFFIN, Circuit Judges.

COFFIN, Circuit Judge.

In the summer of 1962, Anderson Bros., Inc., a general contractor, entered into three construction contracts with the United States Air Force for work at Otis Air Force Base in Massachusetts and Dow Air Force Base in Maine. As required by the Miller Act, 40 U.S.C. § 270a et seq., Anderson Bros., Inc. applied to the appellee (surety) for payment and performance bonds. Contained in the application for the bonds was an assignment to the surety '* * * of earned monies that may be due or become due under said contract * * *.' This assignment to the surety was not recorded under the Uniform Commercial Code.

Subsequent to the posting of payment and performance bonds on two contracts, Anderson Bros., Inc. obtained a line of credit from appellant National Shawmut Bank (the Bank). 1 As collateral for the loans an assignment of '* * * all monies due and which shall hereafter become due from the United States * * *.' was made to the Bank. A financing statement covering this assignment was filed in compliance with M.G.L.A. c. 106-9, and notice of the assignment was given to the United States as required by the Assignment of Claims Act, 31 U.S.C. § 203 (1964). However, no written notice was given to the surety even though such notice was required by this Act.

In the spring of 1963 the construction contracts were terminated by the United States because of Anderson's default. The surety completed the work as it was obligated to do under the bonds. The cost of completion was approximately $97,000.

As of the date of termination of the contracts, earned progress payments totaled $44,202.05. Both the surety and the Bank seek to satisfy their respective claims from this fund.

In December of 1964 a complaint was filed by the Bank naming the surety as defendant in the District Court for the District of Massachusetts. The case was tried to the court without a jury and on September 27, 1968, the district court dismissed the complaint and ordered judgment for the defendant surety. The Bank brings this appeal. 2

The critical question which this appeal raises is one which has been, and continues to be, the cause of some uncertainty in the wake of enactment of Article 9 of the Uniform Commercial Code (U.C.C.). It is: to what extent, if any, does the doctrine of subrogation survive the passage of Article 9 of the U.C.C.?

Our effort will be to see what subrogation means in the transaction before us, to see what extent Article 9 is devised to deal with such a transaction, and to apply relevant case law. Subrogation is an old term, rooted in equity, and semantically stemming from words meaning 'ask under'. Today we use the parallel phrase, 'stand in the shoes of'. The equitable principle is that when one, pursuant to obligation-- not a volunteer, fulfills the duties of another, he is entitled to assert the rights of that other against third persons.

In this case there is confusion because the tendency is to think of the surety on

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Miller Act payment and performance bonds as standing in the shoes only of the entity it 'insures'-- the contractor. So long as this one-dimensional concept prevails, logic compels the surety to be assessed as merely one of the contractor's creditors, and to be subject to the system of priorities rationalized by the Uniform Commercial Code. But the surety in cases like this undertakes duties which entitle it to step into three sets of shoes. When, on default of the contractor, it pays all the bills of the job to date and completes the job, it stands in the shoes of the contractor insofar as there are receivables due it; in the shoes of laborers and material men who have been paid by the surety-- who may have had liens; and, not least, in the shoes of the government, for whom the job was completed.

This unique accumulation of subrogation rights serves to induce a function that is neither ordinary insurance nor ordinary financing. The business of a construction contract surety is not one of ordinary insurance, for the risk is not actuarially linked to premiums, nor is there a pooling of risks. Pearlman v. Reliance Ins. Co., 371 U.S. 132, 140 n. 19, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962). Neither is the business one of ordinary financing, for while the surety extends its credit to the owner (the government), as the ultimate guarantee that the job will be done, this is a credit that may either never have to be drawn upon or, if it is drawn upon at all, will in all likelihood be overdrawn. That is, if a contractor defaults, 'payment' of the credit depends upon the surety's competence in economically finishing what somebody else has started. In this hermaphroditic situation, the 'security' for the surety is not the fee but a compound of its confidence in the contractor and the opportunity to prevent or minimize its ultimate loss by its right to salvage the debacle by its own performance. Assuming that its confidence is misplaced, the surety receives very little from the contractor but the right to complete the job. Unlike a bank, it does not face specific requests for funds which it is able to link to suitable collateral with subsequent requests determined by assessment of current management and currently available additional security. In case of default, the bank takes its security; the surety must go ahead and perform.

All of this, we think, is relevant background to an interpretation of the Uniform Commercial Code as applied to the kind of security interest at issue. We commence by saying that appellant makes a respectable argument based on the Code. At best, however, we deem the Code not compelling and, on balance, not focused or directed to the...

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