Argonaut Ins. Co. v. C and S Bank of Tifton, 52533

CourtUnited States Court of Appeals (Georgia)
Citation140 Ga.App. 807,232 S.E.2d 135
Decision Date03 December 1976
Docket NumberNo. 3,No. 52533,52533,3

Mills & Chasteen, Ben B. Mills, Jr., Fitzgerald, Smith, Currie & Hancock, Aubrey L. Coleman, Jr., Atlanta, for appellant.

Jessee, Ritchie & Duncan, C. James Jessee, Jr., George E. Duncan, Jr., Atlanta, Jay, Garden & Sherrell, Clayton Jay, Jr., Fitzgerald, for appellees.

WEBB, Judge.

There seems to be no dispute about the material facts in this case. Castle Construction Company as general contractor had contracts with Delco-Remy Division, General Motors Corporation, for the construction in Fitzgerald of an office and battery manufacturing plant and also a waste treatment facility for slightly more than $3,000,000 each. Castle subcontracted with Southeastern Electric Contractors, Inc. (SECO) to complete the electrical system in the two construction projects for $679,500 and $295,000, respectively. Argonaut wrote performance and payment bonds on SECO in favor of Castle when the subcontracts were made on January 8, and June 4, 1974, for the respective amounts involved. SECO began with the work called for in the two subcontracts.

On January 28, 1975 Argonaut and Castle were notified by U.S. Steel that SECO owed $20,000 for materials furnished for the battery plant, the last of such having been supplied on October 23, 1974. With past due accounts totaling $906,618 SECO on February 20, 1975 made an 'Agreement of Sale' with Gibson Electric, Inc. by which SECO sold to Gibson assets and contracts yet to be performed in return for the guarantee by Gibson and Dynalectron Corporation of payment of a loan of $300,000 to SECO from C & S Bank of Tifton. Gibson was to receive two-thirds of the profits from certain new contracts, and SECO's one-third was to be held in escrow for payment to Gibson in the event SECO defaulted on the bank loan. Eight days thereafter the closing of the loan was completed, and SECO assigned to C & S Bank as part of the security for the loan some nine contract retentions, including those contract retainages for work performed or to be performed by SECO for Castle. A financing statement to Gibson covering all assets including accounts receivable, which stemmed from the February 20 agreement, was filed by Gibson on March 18.

SECO's subcontracts with Castle provided: 'Subcontractors shall not sublet, assign or transfer this subcontract, or any part thereof, without the written consent of contractor.' Article XVI(a). The contracts provided for the accumulation of contract retainages by the general contractor's withholding 10% each pay period from the payment request submitted by the subcontractor. 1

Castle was first notified of the assignments on March 24, and Argonaut learned about the C & S loan and assignment on or about March 31. Castle never gave written consent to the purported assignment to C & S Bank. The record does not disclose what SECO did with the $300,000 loan proceeds.

On June 17, almost three months later, SECO notified Argonaut in writing that it was unable to proceed further on any of the jobs for which Argonaut had furnished performance and payment bonds. Argonaut as surety on the bonds thereupon discussed with Castle arrangements for completion of the two projects. C & S Bank, Gibson and Dynalectron instituted this action against Argonaut, Castle and other contractors 2 for recovery of the contract retainages and contract payables held by Castle, contending their priority existed by virtue of duly filed financing statements. The Bank and Gibson obtained on July 10, 1975, an ex parte temporary order against Castle and Argonaut restraining Castle from disbursing or disposing of any retainages or contract balances then held by them for the account of SECO. Castle thereby could not pay off SECO's job obligations. This restraining order was continued in effect and an interlocutory injunction was granted. Castle did complete the remaining electrical work on the two projects, however, and with the trial court's acquiescence charged the money so expended against the unexpended contract balances.

Because Castle was restrained from paying unpaid suppliers and subcontractors of SECO, liens were filed against Delco-Remy's projects. Argonaut, pursuant to the payment and performance bonds it had provided to Castle, satisfied these claims in excess of $340,000.

Both the bank and Gibson as plaintiffs and Argonaut as defendant moved for summary judgment on the issue of who was entitled to the monies.

C & S and Gibson contended that the procedure under the Uniform Commercial Code for protecting security interests is applicable to their assignments and to the surety on the performance and payment bond, and that since the bank and Gibson perfected their security interests under the Code, and Argonaut did not, their rights to the fund withheld by Castle are superior to the rights of Argonaut as surety.

Argonaut contended that by statute and by subrogation its rights are superior to those of C & S and Gibson, and its failure to file under the Code does not affect those rights.

The learned trial judge granted C & S and Gibson's motions, and denied Argonaut's, on the issue of liability and priority only as to the funds in question, asserting that the issue of priority under Georgia law is the major, if not the only, contested issue in the case. The trial court ruled that C & S and Gibson each had perfected its security interest in contract retentions and contract balance by recording their respective security interests in the county (Fulton) of the home office of SECO: that Argonaut had failed to perfect its security interest; that C & S has a right to the contract retentions superior to the rights asserted by Gibson and Argonaut; that Gibson has a right to the contract retentions subordinate to the right asserted by C & S but superior to the right asserted by Argonaut; that Gibson has a right to contract balances superior to Argonaut; that Argonaut is not entitled to subrogation to any rights of Castle, 'but only to the rights of SECO and (those) of materialmen and laborers whose claims (and liens were) satisfied by Argonaut since Argonaut has paid as primary obligor and has paid no item ripe for payment by Castle.'

Thus we have the issue on appeal, whether the surety on the subcontractor's bond, by virtue of its subrogation, or the bank and the subcontractor's note endorser, by virtue of having filed financing statements, had superior rights to the funds withheld by the prime contractor.

Subrogation is a legal as well as an equitable right. Hull v. Myers, 90 Ga. 674, 682, 16 S.E. 653 (1892). 'Subrogation is the substitution of another person in the place of the creditor . . . It is of equitable origin . . . and its object is the prevention of injustice. The courts incline rather to extend than restrict the principle . . .' Cornelia Bank v. First National Bank of Quitman, 170 Ga. 747(1, 2), 154 S.E. 234 (1930); Southern Railway Co. v. Overnite Transp. Co., 223 Ga. 825, 830, 158 S.E.2d 387 (1967).

In Fulton National Bank v. Fulton County, 144 Ga. 691, 693, 87 S.E. 1023, 1024 (1916), ante UCC, a contractor provided a bond to the owner, during performance borrowed money from the bank for use in the work, defaulted in its performance of the construction contract, and the surety had to complete the project. The Court ruled for the surety, holding: '1. The assignment to the bank by the contractor of amounts alleged to be due under the contract was subject to the terms of the contract between the county and the contractor, with notice of which the assignee was chargeable. 2. Under the contract the county might have completed the work itself; and had it done so, the contractor would not have been entitled to receive any further payments until the work was wholly finished, and then only if the balance to be paid under the contract should exceed the expense incurred by the county for finishing the work. If the expense should be more than such unpaid balance, the contractor would be liable to the county for the difference. (a) Where instead of itself completing the work the county permitted the surety on the contractor's bond to do so, which was done at a necessary expense exceeding the balance of the contract price after deducting payments made to the contractor before default, and including the sums sought to be recovered in this suit, such surety became subrogated as to the right which the county would have had to the balance of the contract price had it completed the work itself; and where such balance was paid by the county to the surety, its right thereto was superior to the claim of the assignee of the contractor before his failure. Title Guaranty Co. v. Dutcher, 203 F. 169, 9 Cir.; First National Bank v. City Trust etc. Co., 114 F. 529, 9 Cir. (52 C.C.A. 313); Henningsen v. United States Fidelity etc. Co., 143 F. 810, 9 Cir., s.c. 208 U.S. 404, 28 S.Ct. 389, 52 L.Ed. 547; Prairie State Bank v. U.S., 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412.' Certainly the assignee has no more rights under the contract than the assignor would have in dealings with the other contracting party. Algernon Blair, Inc. v. National Surety Corp., 222 Ga. 672, 673, 151 S.E.2d 724 (1966).

' A surety who has paid the debt of his principal shall be subrogated, both at law and in equity, to all the rights of the creditor, and, in controversy with other creditors, shall rank in dignity the same as the creditor whose claim he paid.' Code Ann. § 103-501. 'A surety who has paid the debt of his principal shall be entitled also to be substituted in place of the creditor as to all securities held by him for the payment of the debt.' Code Ann. § 103-502. Subrogation is not founded upon contract, express or implied, but upon principles of equity and justice. The doctrine was not limited or abrogated...

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