Finance Co. of America v. U.S. Fidelity & Guaranty Co.

• Decision Date: 03 March 1976
• Docket Number: No. 100,100
• Citation: 277 Md. 177,353 A.2d 249
• Parties: , 19 UCC Rep.Serv. 267 FINANCE COMPANY OF AMERICA, Assignee of Crest Investment Trust, Inc. v. UNITED STATES FIDELITY AND GUARANTY COMPANY.
• Court: Maryland Court of Appeals

Page 177

277 Md. 177

353 A.2d 249, 19 UCC Rep.Serv. 267

FINANCE COMPANY OF AMERICA, Assignee of Crest Investment Trust, Inc. v. UNITED STATES FIDELITY AND GUARANTY COMPANY.

No. 100.

Court of Appeals of Maryland.

March 3, 1976.

Sidney Kaplan, Baltimore (Irving Bowers and Arthur Guy Kaplan, Baltimore, on the brief), for appellant.

William F. Mosner, Towson, for appellee.

Argued Dec. 8, 1975, before MURPHY, C. J., and SMITH, LEVINE, ELDRIDGE and O'DONNELL, JJ.

Reargued Feb. 3, 1976, before MURPHY, C. J., SMITH, LEVINE, ELDRIDGE and O'DONNELL, JJ., and CHARLES E. ORTH, Jr., and THOMAS HUNTER LOWE, Special Judges.

MURPHY, Chief Judge.

Mega Marine Engineering Service Co. (Mega) entered into a contract for shore erosion work with the Maryland Department of Natural Resources (the Department), dated January 17, 1973, for the sum of $22,780; as a statutory condition precedent to the award of the contract, Mega was required to provide payment and performance bonds in accordance with Maryland Code (1974) Real Property Article, § 9-112. ¹ The United States Fidelity and Guaranty Company (the surety) executed the required bonds on Mega's behalf, which were dated February 1, 1973.

Mega subsequently defaulted on its contract with the Department. On June 21, 1973, the Department filed a Bill for Interpleader in the Circuit Court for Anne Arundel County; it averred that $6,708.76, 'due and owing' from the Department to Mega upon completion of the contract, had been claimed both by the surety required to fulfill its bonded obligations upon Mega's default, and by Crest Investment Trust, Inc. (Crest), a creditor of Mega holding a security interest in its accounts receivable and contract rights pursuant to the provisions of Title 9 (Secured Transactions) of the Maryland Uniform Commercial Code (the UCC), Maryland Code (1975) Commercial Law Article.

Prior to filing the interpleader action, the Department had been notified of Crest's claim by letter dated May 7, 1973 which instructed it, as 'account debtor' under § 9-502 of the UCC, to make payment to Crest of all monies due Mega under the contract. The surety had notified the Department by letter dated May 10, 1973-the same day it learned of Mega's default-that in view of its obligation under the payment and performance bonds, it claimed all funds due Mega pursuant to 'the surety's equitable rights of subrogation.'

The court designated the surety as plaintiff, and Crest as defendant, in the interpleader proceeding and directed that the parties interplead to settle the dispute between them. Thereafter, the surety filed a bill of complaint alleging that on May 10, 1973, the Department had called upon it 'to complete the job under the performance bond and to satisfy labor and material claims under the . . . (payment bond)'; and that in fulfillment of its obligations, the surety had paid $5,775.22 upon its payment bond and $10,439.97 upon its performance bond, the latter representing the excess amount over the original contract with Mega that the Department was required to pay to complete the work. The surety moved for summary judgment, asserting that it was entitled to the $6,708.76 which the Department 'was holding but never paid to Mega . . . on the bais that the surety, having paid for the completion of the contract, was entitled to receive as partial reimbursement all sums owed by . . . (the Department) to . . . (Mega).' Answering the surety's bill, Crest alleged that it was a secured party having a perfected security interest in the funds that the Department owed to Mega, and that its interest was superior to that of the surety. In its affidavit in opposition to the surety's motion for summary judgment, Crest asserted that it had loaned $14,400 to Mega on November 28, 1972; that as security for the loan, Mega had executed a security agreement and financing statement covering all its accounts receivable and 'rights to payment under contracts of any nature whatsoever'; that the financing statement was recorded at the office of the Clerk of the Circuit Court for Anne Arundel County on November 30, 1972 and at the State Department of Assessments and Taxation on December 18, 1972, pursuant to § 9-401 of the UCC; and that Mega had defaulted on its loan obligations and owed Crest $10,625 which was past due.

At the hearing below on the surety's motion for summary judgment, Crest maintained that the 'whole point' of the case was that since it was a prior creditor with a perfected security interest in Mega's accounts receivable as of December 18, 1972, and in the proceeds of the contract with the Department as of January 17, 1973, its interest was superior to the surety's equitable subrogation claim. The court (Childs, J.) granted the surety's motion for summary judgment; it held that Title 9 of the UCC applied only to security interests created by contract, that the doctrine of subrogation was not founded upon contract, but was equitable in nature, that the UCC excluded the doctrine of equitable subrogation from its operation, and that the surety's equitable claim to the funds was superior to Crest's perfected security interest.

Crest's assignee, the Finance Company of America (the appellant) appealed to the Court of Special Appeals. We granted certiorari prior to argument in that court. Code (1974) Courts and Judicial Proceedings Article, § 12-203.

(1)

Appellant contends that because the surety failed to perfect a security interest in Mega's accounts receivable or contract rights in accordance with the requirements of the UCC, ² its equitable right of subrogation is necessarily subordinate to Crest's perfected security interest. ³ We cannot agree.

Subrogation is a long-standing equitable doctrine in Maryland whereby one who is secondarily liable for a debt, and has paid it, stands in the place of the creditor (in this case, the satisfied obligee) and is entitled to the benefit of all the securities and remedies which could have been resorted to for the payment of the debt. Blair v. Baker, 196 Md. 242, 76 A.2d 129 (1950); Embrey v. Embrey, 163 Md. 162, 161 A. 153 (1932); Poe v. Philadelphia Casualty Co., 118 Md. 347, 84 A. 476 (1912). The doctrine is recognized and enforced in both law and equity actions, Gov't Employees Ins. v. Taylor, 270 Md. 11, 310 A.2d 49 (1973); it arises out of the operation of law and does not depend on contract. Schnader, Inc. v. Cole Build. Co.,236 Md. 17, 202 A.2d 326 (1964); Maryland Trust Co. v. Poffenberger, 156 Md. 200, 144 A. 249, 62 A.L.R. 546 (1929); Orem v. Wrightson, 51 Md. 34 (1879).

There are three separate categories of subrogation in Maryland. Legal subrogation (as distinguished from conventional and statutory subrogation) arises by operation of law when there is a debt or obligation owed by one person which another person, who is neither a volunteer nor an intermeddler, pays or discharges under such circumstances as in equity entitles him to reimbursement. Maryland Title Co. v. Kosisky, 245 Md. 13, 225 A.2d 47 (1966).

The general rule with respect to the right of the surety of a building or construction contractor, who completes the contract upon the contractor's default, to monies in the hands of the contractee-obligee, earned by the contractor before default, is that upon completion of the contract the surety is entitled to be subrogated to the rights which the contractee-obligee had to, or could assert against, such funds upon the contractor's default, to the extent necessary to reimburse himself for the outlay made to complete the contract. 17 Am.Jur.2d Contractors' Bonds §§ 42 and 107 (1964). ⁴ The surety, in a sense, is 'secured' by its right of subrogation, which relates back to the issuance of the bond to defeat intervening creditors. See Henningsen v. United States Fid. & Guar. Co., 208 U.S. 404, 28 S.Ct. 389, 52 L.Ed. 547 (1908); Prairie State Nat. Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412 (1896); Industrial Bank of Washington v. United States, 138 U.S.App.D.C. 19, 424 F.2d 932 (1970); Western Casualty and Surety Co. v. Brooks, 362 F.2d 486 (4th Cir. 1966); Gray v. Travelers Indemnity Co., 280 F.2d 549 (9th Cir. 1960); Massachusetts Bonding & Ins. Co. v. Fago Construction Corp., 82 F.Supp. 619 (D.Md.1949); Canter v. Schlager, 358 Mass. 789, 267 N.E.2d 492 (1971).

That the surety need not file a financing statement under § 9-302 of the UCC to protect its subrogation rights is clear. Section 1-103 of the UCC provides that '(u)nless displaced by the particular provisions of . . . (the UCC), the principles of law and equity . . . shall supplement its provisions . . ..' Nothing in the provisions of Title 9 regarding secured transactions expressly or implicitly refutes the application of subrogation; in fact, § 9-102 implicitly recognizes the continued vitality of the doctrine. That section, entitled 'Policy and scope of title,' refers to security interests created by contract. This Official Comment states in part:

'The purpose of this section is to bring all consensual security interests in personal property and fixtures . . . under this Title . . ..

'. . . (T)he principal test whether a transaction comes under this Title is: Is the transaction intended to have effect as security? . . .'

As heretofore indicated, the right of subrogation does not depend on contract, nor is it intended to have effect as a security interest. Section 1-201(37) of the UCC defines 'security interest' as 'an interest in personal property or fixtures which secures payment or performance of an obligation . . . (including) any interest of a buyer of accounts . . . or contract rights. . . .' Plainly, the surety is secured by the opportunity to complete the contract and apply any available funds to its costs, not by an interest in personal property or fixtures. Neither is the surety a buyer of accounts or contract rights. See § 9-106; National Shawmut Bk. of Boston v. New Amsterdam Cas. Co., 411 F.2d 843 (1st Cir. 1969)...