National Shawmut Bk. of Boston v. New Amsterdam Cas. Co., 7260.

• Decision Date: 10 June 1969
• Docket Number: No. 7260.,7260.
• Citation: 411 F.2d 843
• Parties: The NATIONAL SHAWMUT BANK OF BOSTON, Plaintiff, Appellant, v. NEW AMSTERDAM CASUALTY CO., Inc., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

411 F.2d 843 (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, 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 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 surety's problem.³ To begin with, we have the exculpatory general principle that "Unless displaced by the particular provisions of this chapter, the principles of law and equity * * * shall supplement its provisions." M.G.L.A. § 1-103. As we shall see, the Massachusetts Supreme Judicial Court gives impressive weight to this canon in French Lumber Co., Inc. v. Commercial Realty & Finance Co., Inc., 346 Mass. 716, 719, 195 N.E. 507 (1964).

Going on to specifics, we note the definition of "security interest" in M.G. L.A. § 1-201(37) as "an interest in personal property or fixtures which secures payment or performance of an obligation * * * and which includes any interest of a buyer of accounts * * * or contract rights * * *." Neither clause seems to fit the construction contract surety. What secures its payment is really the opportunity, on default, to finish the job and apply any available funds against its cost of completion. This kind of right does not readily settle under the rubric of "personal property" or "fixtures". Nor does the surety easily fit the description of a "buyer of * * * contract rights". We make a similar comment about M.G.L.A. § 9-102(1) (a) which applies the Code "to any transaction * * * which is intended to create a security interest in personal property or fixtures including * * * contract rights; and * * * (b) to any sale of * * * contract rights". While one may strain to say that the right to finish a job in an emergency and thus minimize damages is a contract right, we think it is not the kind of independently valuable asset that such synonyms as "goods, documents, instruments, general intangibles, and chattel paper" suggest.

There are other hurdles. Section 9-102(2) requires "security interests" to be "created by contract". In this case the real security is not the assignment of accounts receivable — which could be, failing the completion of performance, set off by the government — but the eventual right to be in the shoes of the government upon job completion. This is not "created by contract" but rather by the status, resulting from a contract, inhering in a surety, quite independently of the expressed terms of the contract. See Memphis & L. R. R. Co. v. Dow, 120 U.S. 287, 301-302, 7 S.Ct. 482, 30 L.Ed. 595 (1887).

We add to this our difficulties with § 9-106 which defines "account" as "any right to payment * * * not evidenced by an instrument" and "contract right" as "any right to payment under a contract not yet earned by performance". As to the former, when the contractor defaults, there is no right to payment, see infra. As to the latter, we think of a right to receive payments from one who continues with the performance (as rents receivable by a landlord), rather than a right conditioned on performance by the transferee of the "right".

We have, finally, the historic fact of the rejection of a proposed § 9-312(7) to the Code which would have provided that "A security interest which secures an obligation to reimburse a surety * * * secondarily obligated to complete performance is subordinate to" a later lender which perfects its security interest. We report the comments of the Editorial Board in the margin.⁴ Contrary to appellant's argument, we do not feel that this signalized an admission by surety companies that theirs was a "security interest" within the meaning of the Code, but simply that they had won the battle to defend the preserve of subrogation. The cases...