Dole Company v. Aetna Casualty and Surety Company

• Decision Date: 03 May 1967
• Docket Number: Civ. No. 1556.
• Parties: The DOLE COMPANY, Plaintiff v. The AETNA CASUALTY AND SURETY COMPANY, Defendant.
• Court: U.S. District Court — District of Maine

269 F. Supp. 72

The DOLE COMPANY, Plaintiff v. The AETNA CASUALTY AND SURETY COMPANY, Defendant.

Civ. No. 1556.

United States District Court D. Maine, N. D.

May 3, 1967.

Gerald E. Rudman, Gene Carter, Bangor, Me., for plaintiff.

Bradford H. Hutchins, Waterville, Me., Elmer W. Beasley, Hartford, Conn., for defendant.

OPINION AND ORDER OF THE COURT

GIGNOUX, District Judge.

This is an action under the Federal Declaratory Judgments Act, 28 U.S.C. §§ 2201, 2202 (1964), seeking a declaration of the rights of the parties with respect to a fund of $19,000 now in the possession of the defendant.

The essential facts have been stipulated and are as follows. Plaintiff, The Dole Company, is a Maine corporation engaged in the electrical contracting business, with its principal place of business at Bangor, Maine. Defendant, The Aetna Casualty and Surety Company, is a Connecticut corporation engaged in the insurance business and authorized to transact business in the State of Maine. On October 24, 1962 Dole entered into a subcontract with William A. Berbusse, Jr., Inc., a general contractor, by which Dole agreed, for the contract price of $197,500, to furnish the labor and materials necessary to complete the electrical work required for the construction by Berbusse of an addition to the Thayer Hospital, Waterville, Maine. Aetna became the surety on the performance and payment bond furnished by Dole to Berbusse as required by the terms of the subcontract. As part of the transaction by which Aetna became surety on this bond, Dole executed and delivered to Aetna the standard form of bond application and indemnity agreement which gives rise to the issues presented by this case. In this application and indemnity agreement Dole agreed to indemnify Aetna against any loss sustained by reason of its suretyship on the Berbusse bond and on any other bonds furnished by Aetna for Dole. As security for this indemnity undertaking, Dole further agreed that Aetna should be subrogated, as of the date of the agreement, to all Dole's rights under its contract with Berbusse, and Dole assigned to Aetna all sums due and to become due under the contract upon the happening of any one of several contingencies, including Dole's failure to pay bills incurred on the work when they became due and payable and the filing by or against Dole of any proceeding alleging its insolvency.¹

Between June 1, 1961 and November 2, 1962, Dole entered into three other subcontracts for electrical work on unrelated projects in Vermont and Massachusetts with H. I. Lewis Construction Company, Inc., Cass-Warner Corporation and Scaldini, Inc., and entered into two prime contracts with the United States Government for electrical work at Dow Air Force Base, Bangor. Aetna became surety on the performance and payment bond furnished by Dole under each of these contracts, and in each instance Dole executed an indemnity agreement which was identical in terms to that furnished by it in connection with the Berbusse contract.²

On January 17, 1963 Dole filed in this Court a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. §§ 701-799 (1964), and on the following day Dole was authorized by the referee in bankruptcy to remain in possession of its property and to operate its business, as debtor in possession, under the jurisdiction of the bankruptcy court. Bankruptcy Act §§ 342, 343, 11 U.S.C. §§ 742, 743 (1964). As of the date of the petition, Dole had unpaid bills for labor and materials under its contracts amounting to more than $36,000, for which Aetna was exposed to liability under the payment provisions of its bonds.³ As of the same date, the uncompleted work under Dole's contracts with the general contractors and the United States Government amounted to approximately $339,000.

On January 29, 1963, after it received notice of the Chapter XI proceeding, Aetna for the first time notified Berbusse and the other general contractors of the assignments to Aetna of the proceeds of the subcontracts between each of them and Dole. These notices demanded that each of the general contractors make all further payments under its contract with Dole directly to Aetna.

Aetna, relying on its asserted status as a secured creditor by virtue of Dole's assignments of the proceeds of its various contracts, did not file a proof of claim in the Chapter XI proceeding and although Dole, as debtor in possession, initiated proceedings before the referee to have Aetna declared to be an unsecured creditor, the bankruptcy court made no determination of Aetna's status. Instead, with the consent of all interested parties, the referee ordered Dole to establish a separate account for each contract, into which all contract payments were deposited and out of which all expenses were paid. Under this arrangement, Dole, as debtor in possession, finished the work required by its contracts, the last of which was completed on November 30, 1964. In the meantime, the Chapter XI arrangement was confirmed by the court on February 19, 1964, the plan proposed by Dole was completed, and the Chapter XI proceeding was terminated.⁴

Following the termination of the Chapter XI proceeding, Aetna, on December 9, 1964, asserted a claim, by virtue of its indemnity agreement with Dole, to the balance of $37,412.56 due Dole upon the completion of the Berbusse contract, and notified Berbusse to pay this amount directly to Aetna as Dole's assignee. Thereafter, Dole, Aetna and Berbusse, with the approval of the bankruptcy court, worked out an agreement by which Berbusse paid over to Aetna the sum of $19,000 here in dispute, subject to a subsequent court determination of the rights of the parties with respect thereto, and Berbusse paid to Dole the balance of the funds due under the contract.

In the present proceeding, Dole seeks a declaration by this Court that Aetna had no security interest in the proceeds of the Berbusse contract when the Chapter XI proceeding was commenced; that Aetna was therefore an unsecured creditor of Dole at that time; and that under the applicable provisions of the Bankruptcy Act any claim Aetna might have had to the contract proceeds was discharged upon confirmation of the Chapter XI arrangement. Bankruptcy Act § 371, 11 U.S.C. § 771 (1964).⁵ Aetna, on the other hand, contends that it had, by virtue of the assignment in its indemnity agreement with Dole, a security interest in the proceeds of the Berbusse contract as of the date of filing of the Chapter XI petition; that its security interest in the contract proceeds was unaffected by the Chapter XI proceeding; and that it is entitled to retain such portion of the $19,000 fund now in its possession as is required to reimburse it for all loss incurred by reason of its suretyship on the various bonds furnished by Aetna for Dole.⁶ The Court agrees with Aetna's position.

Dole makes a three-fold attack upon Aetna's claim to the proceeds of the Berbusse contract. Its principal contention is that, under the law of Massachusetts, which Dole argues is the applicable law, the attempted assignment of the contract proceeds was ineffective to create a security interest in Aetna, because Aetna failed to perfect its assignment by filing the financing statement required by Section 9-302 of the Uniform Commercial Code, which was in effect in Massachusetts at the time, Mass.Gen.Laws Ann. ch. 106, § 9-302 (1963)⁷; and that hence the assignment was ineffective as against the debtor in possession under the provisions of Section 70c of the Bankruptcy Act, 11 U.S.C. § 110(c) (1964).⁸ It is clear, however, that this Court must look to the law of Maine, and not to that of Massachusetts, in this case.

It is axiomatic that in a diversity of citizenship action this Court must follow the substantive law, including the choice of law rule, that would be applied by the courts of the state in which it sits. Erie R. R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Sampson v. Channell, 110 F.2d 754, 760-762, 128 A.L.R. 394 (1st Cir.), cert. denied, 310 U.S. 650, 60 S.Ct. 1099, 84 L.Ed. 1415 (1940); Katz v. Gordon Johnson Co., 160 F.Supp. 126, 129-130 (D.Me.1958).

The parties are in agreement as to the applicable Maine choice of law rule. It has long been the established law of Maine, as elsewhere, that the validity and effect of a contract is to be determined "by the law of the place where it is made" and that "in determining the place where a contract is made, * * * it is deemed to have been executed at the place where the last act necessary to complete it was done." Emerson Co. v. Proctor, 97 Me. 360, 363-364, 54 A. 849, 850-851 (1903); Boscho, Inc. v. Knowles, 147 Me. 8, 83 A.2d 122 (1951); Restatement, Conflict of Laws, §§ 332, 352, 311 (1934).⁹

In the present case, it has been stipulated that the bond application and indemnity agreement was executed and delivered by Dole's president to Aetna's resident agent at Bangor, and forwarded by the latter to Aetna's branch office in Boston. Examination of the application shows that it was subject to acceptance by the act of Aetna in issuing the required bond. Upon receipt of the application, Aetna executed the bond in its Boston office and mailed it to its Bangor agent, in whose office the bond was executed by Dole's president and countersigned by Aetna's agent, as required by Maine law before it could become effective. Me.Rev.Stat.Ann. tit. 24, § 525 (1964).¹⁰ The agent then delivered the bond to Dole, which in turn delivered it to Berbusse. Plainly, on these facts, the "last act" necessary to complete the transaction was the delivery of the countersigned bond by Aetna's agent to Dole in Bangor, for it was only upon the receipt by Dole of the countersigned bond that a binding contract was created. Consequently, there is no question but that, under the Maine choice of law rule, the Maine courts would...