Canter v. Schlager

• Decision Date: 05 March 1971
• Citation: 358 Mass. 789,267 N.E.2d 492
• Parties: , 8 UCC Rep.Serv. 932 Max CANTER, Trustee in Bankruptcy, v. S. Lawrence SCHLAGER et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 492

267 N.E.2d 492

358 Mass. 789, 8 UCC Rep.Serv. 932

Max CANTER, Trustee in Bankruptcy, v. S. Lawrence SCHLAGER et al.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Jan. 19, 1971.

Decided March 5, 1971.

Edwin A. McCabe, Boston (Sydney Berkman and Jeffrey M. Smith, Boston, with him), for plaintiff.

George M. Herlihy, Boston (John F. Gosselin, Boston, with him), for defendants.

Before TAURO, C.J., and CUTTER, SPIEGEL, QUIRICO and BRAUCHER, JJ.

BRAUCHER, Justice.

This is an action of contract brought by the trustee in bankruptcy of Zef Parabicoli & Sons, Inc. (the contractor) against S. Lawrence Schlager, Judith R. Schlager, Alba A. Jameson and Arlene T. Vecchi (the owners) for money owed under a written construction contract. In May, 1963, the contractor agreed with the owners to build a post office on their property in Wellesley for a price later amended to $109,000. By the amendment the work was to be substantially completed by July 1, 1964, and time was to be of the essence. In accordance with the contract, the contractor provided performance and payment bonds, and in its application for the bonds assigned to the surety, Maryland Casualty Company, all payments due or to become due under the contract. No financing statement with respect to the assignment was filed under the Uniform Commercial Code, G.L. c. 106, § 9--101 et seq. The surety appears to be the real defendant in this action, under an agreement to indemnify the owners.

Work began in January, 1964, and by June 26, 1964, the owners had paid the contractor $66,650. On June 26, 1964, an involuntary petition in bankruptcy was filed against the contractor, but by order of the referee in bankruptcy the contractor continued to operate under the supervision of a receiver. On August 1, 1964, the Post Office Department accepted the building and began to pay rent under a lease from the owners. On October 27, 1964, the contractor was adjudicated a bankrupt and the plaintiff, who had been the receiver, was appointed trustee.

The owners refused to pay a requisition in the amount of $27,990 submitted by the contractor on July 1, 1964, for work completed up to that date. On July 21, there was a conference of representatives of the Post Office Department, the surety, the contractor, its receiver and the owners; the attorney for the surety, at the request of the owners and with the approval of the contractor, agreed that the surety would assume responsibility for completion. Late in September, the contractor submitted a final requisition in the amount of $42,850 which the owners refused to pay. In October, 1964, the surety paid more than $60,000 to subcontractors who had furnished labor and materials for the building. On August 30, 1965, the owners paid the balance of the contract price, less more than $5,000 in disputed 'back charges,' to the surety in the net amount of $36,630.11. The owners now contend that payment to the surety discharged any obligation to the plaintiff.

The judge, sitting without a jury, held that the surety's claim to the contract balance was not subject to the Uniform Commercial Code and found for the owners. We agree.

1. If the surety were claiming the balance due under the contract by virtue of the assignment to it in the contractor's bond application, it would be fairly arguable that it was claiming a 'security interest' in a 'contract right.' G.L. c. 106, §§ 1--201(37), 9--102, 9--106. If there were such a security interest, it would be subordinate to the rights of a person who became a lien creditor without knowledge of the security interest and before it was perfected, and a trustee in bankruptcy would ordinarily have the rights of such a lien creditor. G.L. c. 106, §§ 9--301(1)(b), 9--301(3). Bankruptcy Act, § 70, sub. c, 11 U.S.C. § 110(c) (1964). To perfect a security interest, a financing statement must be filed unless the case is within one of several exceptions. G.L. c. 106, § 9--302(1). We do not pass on the question whether the assignment to the surety in this case was excepted as 'a transfer of a contract right to an assignee who is also to do the performance under the contract,' G.L. c. 106, § 9--104(f), or 'an assignment of accounts or contract rights which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts or contract rights of the assignor * * *.' G.L. c. 106, § 9--302(1)(e). See Gilmore, Security Interests in Personal Property, §§ 10.5, 19.6.

2. The surety makes an alternative claim, not resting on the assignment to it by the contractor, that it is subrogated to the rights of the contractor to the contract balance, to the rights of the owners, and to the rights of the subcontractors it paid. Such claims are not superseded by the Uniform Commercial Code. Section 1--103 of the Code provides in part, 'Unless displaced by the particular provisions of this chapter, the principles of law and equity * * * shall supplement its provisions.' 'No provision of the Code purports to affect the fundamental equitable doctrine of subrogation.' French Lumber Co. Inc. v. Commercial Realty & Finance Co. Inc., 346 Mass. 716, 719, 195 N.E.2d 507, 510. 'Of basic importance is the general rule of Section 9--102(2) that Article 9 'applies to security interests created by contract.' (Emphasis supplied.) Rights of subrogation, although growing out of a contractual setting and ofttimes articulated by the contract, do not depend for their existence on a grant in the contract, but are created by law to avoid injustice. Therefore, subrogation rights are not 'security interests' within the meaning of Article 9.' Jacobs v. Northeastern Corp., 416 Pa. 417, 429, 206 A.2d 49, 55.

Our conclusion that filing under the Code is unnecessary to preserve the priority of a surety's right of subrogation over the rights of a construction contractor's trustee in bankruptcy is reinforced by decisions of other courts. Jacobs v. Northeastern Corp., supra (receiver against surety, Pennsylvania law). National Shawmut Bank v. New Amsterdam Cas. Co. Inc., 411 F.2d 843 (1st Cir.) (assignee bank against surety on Federal contract, Massachusetts law). Framingham Trust Co. v. Gould-Natl. Batteries, Inc., 427 F.2d 856 (1st Cir.) (assignee bank against surety, Massachusetts law). Home Indem. Co. v. United States, 433 F.2d 764 (Ct.Cl.) (surety on Federal contract against trustee in bankruptcy of assignee finance company, Illinois law). National Sur. Corp. v. State Natl. Bank, 454 S.W.2d 354, 356 (Ky.) (surety against assignee bank, Kentucky law). Aetna Cas. & Sur. Co. v. Perrotta, 62 Misc.2d 252, 308 N.Y.S.2d 613 (surety against assignee finance company, New York law). Contrary decisions in United States v. G. P. Fleetwood & Co. Inc., 165 F.Supp. 723 (W.D.Pa.) (surety on subcontract against trustee in bankruptcy of subcontractor), and Hartford Acc. & Indem. Co. v. State Pub. Sch. Bldg. Authy., 26 D. & C.2d (Pa.) 717 (surety against assignee bank), are not authoritative with respect to Pennsylvania law after the decision in Jacobs v. Northeastern Corp., supra. So far as Maryland Cas. Co. v. Mullett, 295 F.Supp. 875 (W.D.Pa.), is contrary, it also departs from Pennsylvania law. The Uniform Commercial Code is to be 'liberally construed and applied to promote its underlying purposes and policies,' which include a purpose and policy 'to make uniform the law among the various jurisdictions.' G.L. c. 106, § 1--102.

3. The plaintiff here argues that we should 'establish a degree of certainty (indeed, even a degree of sanity) to the determination of priorities among claimants to construction contract proceeds' by enunciating 'an absolute requirement that sureties engaged in bonding construction projects perfect security interests in their assignment by filing.' See Notes, 4 B.C.Ind. & Commercial L.Rev. 748, 755; 65 Col.L.Rev. 927, 933. We find that the draftsmen and sponsors of the Uniform Commercial Code did not overlook the problems of construction contract sureties. The 1952 Official Draft included § 9--312(7), subordinating the surety's interest to a later interest taken by a party who gave new value to enable the debtor to perform his obligation; that provision was deleted in 1953, with an explanation by the editorial board that representatives of the surety companies had complained that it changed settled law and that the problem should be left to agreements for subordination. ¹ See National Shawmut Bank v. New Amsterdam Cas. Co. Inc., 411 F.2d 843, 846, n. 4 (1st Cir.). The 1952 proposal did not include a requirement of filing to perfect rights of subrogation, and we do not believe we should insert a requirement omitted by legislative draftsmen who considered the problem. It is possible for parties dealing with a construction contractor to be ignorant of the existence of a surety bond. See, e.g., Aetna Cas. & Sur. Co. v. Harvard Trust Co., 344 Mass. 160, 164, 181 N.E.2d 673. But it could well be a rational legislative judgment that the practice of furnishing performance and payment bonds in connection with construction contracts is so common and so well known that a requirement of public filing is unnecessary. Compare Aetna Cas. & Sur. Co. v. Harvard Trust Co., supra, at 173, 181 N.E.2d 673.

4. The plaintiff argues that, even if 'the anachronistic doctrine of equitable subrogation still has vitality,' the surety has only the rights of those to whose rights it would be subrogated, and that they had none. Under Pearlman v. Reliance Ins. Co., 371 U.S. 132, 141, 83 S.Ct. 232, 9 L.Ed.2d 190, and similar cases, the surety may stand in the shoes of either (1) the contractor whose obligations are discharged, (2) the owners to whom it was bound, or (3) the subcontractors whom it paid. So far as the trustee in bankruptcy asserts the rights of the contractor, any one of these three bases of subrogation should be sufficient. Regardless of whether the contractor was...