In re Eastern Marine, Inc.
| Decision Date | 09 August 1989 |
| Docket Number | Bankruptcy No. 87-02010. |
| Citation | 104 BR 421 |
| Parties | In re EASTERN MARINE, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Florida |
William M. Barley, Tallahassee, Fla., for IINA.
William M. Atkinson, Panama City, Fla., for debtor.
THIS MATTER came on to be heard upon Indemnity Insurance Company of North America's ("IINA") motion objecting to a joint stipulation and order approving settlement, payment of settlement amounts and for discharge1 of the debtor, Eastern Marine, Inc. ("EMI").
The underlying facts relevant to the resolution of this case revolve around two contracts with the United States Navy and may be summarized as follows:
Lighter Vessel Contract
The first contract ("lighter vessel contract") is between the debtor, EMI, and the United States Navy for the construction of covered lighter vessels. In 1985, IINA provided two bonds guaranteeing EMI's performance and payment for all labor and materials furnished by others for work required to complete said vessels. In connection with these bonds, EMI executed an agreement of indemnity. This agreement contained a "dragnet" clause which purportedly assigned to IINA an ownership interest in all of EMI's contracts whether or not bonded by IINA to secure IINA's undertaking. No UCC financing statement was ever recorded by IINA with respect to this assignment.
According to IINA, in early 1986, EMI defaulted on its obligations to timely pay amounts due others for materials involved in the construction of the lighter vessels. As a result, IINA, as surety, began discharging EMI's obligations under the labor and materials bond and incurred other costs and expenses incidental to the discharges.
In June 1987, IINA was sued in two separate actions under the labor and materials bond. The suit by Industrial Welding Supply Company, Inc., sought approximately $100,000.00 but was settled in August 1988, for $15,000.00. The suit by Jeffreys Steel Company, Inc. (Jeffreys), is seeking approximately $500,000.00 to compensate for steel allegedly furnished to EMI for use in the construction of the covered lighter vessels. IINA has counterclaimed against Jeffreys for allegedly failing to perform as agreed and furnishing non-conforming steel to EMI. This case remains pending, but IINA believes the damages suffered by EMI may exceed the $500,000.00 claim made by Jeffreys.
The second contract ("Empress II contract") is between EG & G Washington Analytical Services ("EG & G") and the United States Navy. The debtor, EMI, became involved with the Empress II contract as a subcontractor who was to construct the Empress II steel barge ("vessel"). IINA is not a surety on this contract nor is it connected with it in any other capacity.
On January 16, 1987, EG & G terminated EMI's right to proceed under the subcontract contending EMI defaulted for various reasons. On January 21, 1987, EMI filed a voluntary Chapter 11 petition in this Court. Subsequently, after obtaining relief from the automatic stay of 11 U.S.C. § 362, EG & G filed suit in the United States District Court seeking a declaration that title to the vessel was in the United States Navy and that EG & G was entitled to possession pursuant to the Empress II contract. EMI counterclaimed for an equitable adjustment to its subcontract alleging wrongful default termination. In addition, two intervenors, L.F. Gaubert & Co., Inc., and International Marine, Inc. ("IMI"), claimed interests in the vessel.
On April 24, 1989, a final judgement was rendered by the United States District Court granting the relief requested by EG & G. However, EMI's counterclaim was not dismissed and is still pending. In an effort to resolve this dispute, a settlement agreement was submitted to this court.
IINA, as EMI's surety on the lighter vessel contract, is the only party which has objected to the settlement agreement which would dispose of the Empress II contract litigation. The agreement calls for EG & G to pay a total of $130,000.00 to certain entities in exchange for full satisfaction of any and all claims EMI may have with respect to the Empress II vessel against the United States Navy and/or EG & G. The entities and amounts to be paid are as follows:
The agreement also would have this court order that the $20,000.00 retainage on the lighter vessel contract presently held by the United States Navy be paid over to Bay Bank if and when such retainage is paid to EMI. Bay Bank is EMI's largest secured creditor with a properly perfected security interest in virtually all of EMI's assets.
IINA's first contention is it has an ownership interest in all of EMI's assets, including EMI's counterclaim against EE & G, pursuant to the agreement of indemnity executed by EMI in 1985. This theory is rooted in the concept of conventional subrogation. IINA's second contention is it has an equitable interest in EMI's assets by operation of equitable subrogation.
"Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right." Boley v. Daniel, 72 Fla. 121, 123, 72 So. 644, 645 (1916). Florida has long recognized two types of subrogation. Dixie Nat'l Bank v. Employers Commercial Union Ins. Co. of America, 463 So.2d 1147, 1151 (Fla.1985).
The concept of equitable subrogation is "a legal fiction which arises by operation of law where one having a liability, a right, or a fiduciary relationship pays a debt owed by another under circumstances in which he is in equity entitled to the security or obligation held by the creditor whom he has paid." Matter of Munzenrieder Corp., 58 B.R. 228 (Bankr.M.D.Fla. 1986); See also, Dixie, 463 So.2d at 1151; Boley, 72 Fla. at 123, 72 So. at 645. Even though the right to remedies is not enforceable until the surety has discharged their principal's obligation, the equitable right or lien relates back to the making of the suretyship. In re Ward Land Clearing & Drainage, Inc., 73 B.R. 313, 315 (Bankr.N. D.Fla.1987); Phifer State Bank v. Detroit Fidelity & Surety Co., 97 Fla. 538, 543-44, 121 So. 571, 573 (1929). Moreover, an equitable subrogation claim or right is not a security interest under the Uniform Commercial Code. Thus, compliance with the requirements of Article 9 is unnecessary to preserve a dominant right. Ward, 73 B.R. at 316; See also, McAtee v. United States Fidelity and Guaranty Co., 401 F.Supp. 11, 14-15 (N.D.Fla.1975); Transamerica Ins. Co., v. Barnett Bank of Marion County, 540 So.2d 113, 116-17 (Fla.1989). Finally, a surety's equitable subrogation rights are not limited to those obtained by standing in the shoes of the defaulting contractor, but the rights extend to those obtained by stepping in the shoes of laborers and materialmen who have been paid by the surety and into the shoes of the obligee itself. Ward, 73 B.R. at 316 (citing National Shawmut Bank of Boston v. New Amsterdam Casualty Co., 411 F.2d 843, 845 (1st Cir.1969)); See also, Transamerica, 540 So.2d at 116 ().
On the other hand, conventional subrogation is a right flowing from contract. It occurs where "one having no interest in or relation to the...
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