Golden Eagle Ins. Co. v. First Nationwide Financial Corp., s. A063545

Citation26 Cal.App.4th 160,31 Cal.Rptr.2d 815
Decision Date27 June 1994
Docket NumberA062789,Nos. A063545,s. A063545
PartiesGOLDEN EAGLE INSURANCE COMPANY, Plaintiff and Appellant, v. FIRST NATIONWIDE FINANCIAL CORPORATION, Defendant and Respondent. GOLDEN EAGLE INSURANCE COMPANY, Plaintiff and Appellant, v. GDC/BROADMOOR/VALLEJO ASSOCIATES, Defendant and Respondent.
CourtCalifornia Court of Appeals

Capps, Staples, Ward, Hastings & Dodson and Michael Mee, Walnut Creek, for plaintiff-appellant Golden Eagle Ins. Co.

Lillick & Charles, James J. Ficenec, Sacramento, for defendant-respondent First Nationwide Financial Corp.

Richard Birnholz, Los Angeles, for defendant-respondent GDC/Broadmoor/Vallejo Associates.

Daniel J. Modena, South San Francisco, Edmund L. Regalia, Oakland, for amicus curiae for respondent Mission Development Co.

POLLAK, Associate Justice, Assigned. *

These are consolidated appeals from two summary judgments entered in the same action in favor of different parties with identical legal positions. The common issue presented is whether a surety on a construction payment bond who pays the claim of a subcontractor who had perfected a mechanics' lien on the improved property may by subrogation acquire the right to enforce the mechanics' lien against the property. The trial court, in granting summary judgment against the surety, concluded that "California law is well-settled that absent fraud by the owner in bringing about the issuance of the surety bonds, a surety who has paid the claims of a lien claimant extinguishes the principal obligation and is entitled to reimbursement from its principal but is not subrogated to the rights of such former lien claimants as against the property." 1 We consider this statement of the law to be overbroad, and reverse the judgments.

FACTS

This litigation arises out of the same failed real estate development project that was the subject of this court's recent decision in Vallejo Development Company v. Beck Development Co., Inc. (1994) 24 Cal.App.4th 929, 29 Cal.Rptr.2d 669. This was a project for the development of approximately 1,200 acres in Vallejo, California, into a planned community Under the agreements between VDC and each of the respondents, VDC was obligated to construct the "infrastructure" of the neighborhoods and respondents agreed to pay VDC upon satisfactory performance of that work. VDC subcontracted the grading work to Ghilotti Bros., Inc. ("Ghilotti") and procured statutory payment bonds for the performance of this work from plaintiff and appellant, Golden Eagle Insurance Company ("Golden Eagle"). 2 Ghilotti performed substantial grading on the properties; work for which VDC neither paid Ghilotti nor was paid by respondents.

                to be known as "Northgate."   Without tracing the full history of this project, Vallejo Development Company ("VDC") by assignment became the master developer of six residentially zoned parcels (referred to as "neighborhoods") which were sold to various "merchant builders."   Neighborhood D was sold to the assignor of the respondent in one appeal, First Nationwide Financial Corporation ("FN"), and Neighborhood F was sold to the assignor of the second respondent, GDC/Broadmoor/Vallejo Associates ("GDC").  Respondents therefore are the owners of their respective parcels
                

When all work on the projects came to a halt in September 1991, Ghilotti instituted a variety of remedial measures, including the filing of mechanics' liens against, among other parcels, respondent FN's Neighborhood D for $1,200,773 and respondent GDC's Neighborhood F for $1,382,226. After Ghilotti had filed suit to enforce the mechanics' liens, Golden Eagle entered into an agreement with Ghilotti dated January 29, 1992, under which Golden Eagle agreed to pay Ghilotti a total of $3,023,020, and Ghilotti agreed to release Golden Eagle from all liability under its surety bonds and to assign to Golden Eagle its mechanics' lien rights with respect to Neighborhood D and Neighborhood F. Two days later, Ghilotti did execute an unconditional waiver and release of payment bond rights upon payment and an indemnification agreement, in which it did "fully compromise and settle any and all liability or indebtedness" which Ghilotti had against Golden Eagle or VDC arising out of the surety bonds; about one month later it executed a formal "Assignment of Claim of Lien," purporting to assign its mechanics' lien rights to Golden Eagle pursuant to the terms of the January 1992 agreement.

Golden Eagle subsequently substituted itself in as the plaintiff in the actions to enforce the mechanics' liens which Ghilotti had earlier filed, alleging its right to enforce the liens as the assignee from Ghilotti. Thereafter, respondents successfully moved for summary judgment. These appeals were timely taken from the judgments dismissing Golden Eagle's amended complaint.

DISCUSSION
1. Golden Eagle Acquired No Right to Enforce the Mechanics' Liens by Virtue of the Assignments.

Golden Eagle first contends that summary judgment was improper because its payment to Ghilotti did not extinguish Ghilotti's claim for payment, as the trial court held, but called for the assignment of Ghilotti's claim to Golden Eagle. At a minimum, appellant contends, there was a triable issue of fact as to whether Golden Eagle's payment was in exchange for the release or for the assignment of the underlying claim. The dichotomy on which Golden Eagle relies traces back to Merner Lumber Co. v. Brown (1933) 218 Cal. 136, 21 P.2d 590. There, under closely analogous circumstances, the California Supreme Court restated the "well-settled law in this state that when a surety pays a debt for which he is liable as such surety, he thereby extinguishes the debt and his remedy is against the principal upon the implied obligation of the principal to reimburse him." 3 (218 Cal. at p. 140, 21 P.2d 590.) In responding The court there found that the record supported the trial court's finding that the surety had in fact paid and therefore discharged the debt, so that there was no claim for it to pursue by virtue of the purported assignment.

to the surety's argument that the evidence in that case reflected a purchase, rather than a payment, of the underlying claim, the court observed: "The surety either paid these claims or it purchased them [26 Cal.App.4th 166] from the two lumber companies. It could not do both. If it paid them, it could not have bought them, for upon their payment they were extinguished and there was then nothing to purchase. On the other hand, if it bought the claims it could not thereafter pay them without paying itself and this it does not claim to have done." (Merner Lumber Co. v. Brown, supra, 218 Cal. at p. 140, 21 P.2d 590.)

The distinction that the Supreme Court drew in Merner between payment and purchase is somewhat ephemeral and, as can be discerned from that very decision, not particularly significant. There, as in the present case, the uncontradicted evidence established that the surety fully paid the materialmen and at the same time took back a purported assignment of the underlying claims. Other than for possible testimony concerning the subjective intentions or motivations of the participants--irrelevant under basic principles of contract interpretation--there was nothing to be added to the terms of the agreement. 4 Whether payment of the lienors' claims under these circumstances discharges the claims is a question of law. There was thus no factual controversy in the present case precluding summary judgment.

While the Supreme Court in Merner held that the surety could not enforce the lienors' claims by virtue of the purported assignment, it did acknowledge the potential for a subrogation claim. The court went on explicitly to "assume" that the surety, "by paying the two lien claimants, was subrogated to all rights of these claimants to foreclose their respective liens." (Id., at p. 142, 21 P.2d 590.) The court held, however, that since the property owner already had paid the full contract price for the improvements made by the lien claimants, it would have been inequitable to have permitted the surety, as their subrogee, to enforce the mechanics' liens. Since the owner had already paid for the improvements, requiring it to pay a second time for the same work would hardly have been equitable.

Merner implicitly established that the rights which the surety acquires when making payment under a statutory payment bond are defined not by the terms of any assignment it may take back but by the equitable doctrine of subrogation. "[A]ssignment of an assignable cause of action is but one of the recognized forms of subrogation, and ... when one is entitled to substitution in the "[T]he conclusion seems inevitable that one who asserts a right of subrogation, whether by virtue of an assignment or otherwise, must first show a right in equity to be entitled to such subrogation, or substitution, and that where such right is clearly shown by the application of equitable principles, an assignment adds nothing to his right thereto. Otherwise stated, where by the application of equitable principles, a surety has been found not to be entitled to subrogation, an assignment will not confer upon him the right to be so substituted in an action at law upon the assignment. His rights must be measured by the application of equitable principles in the first instance, his recovery being dependable upon a right in equity, and not by virtue of an asserted legal right under an assignment." (Id., at pp. 96-97, 77 P.2d 1084) see also, e.g., Fidelity and Deposit Co. of Maryland v. De Strajman (1963) 215 Cal.App.2d 10, 12, 29 Cal.Rptr. 855.) Thus, whether or not there is a formal assignment, the nature and extent of the rights against third parties of the surety who pays a mechanics' lien claim are determined by the law of subrogation.

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