In re Ward Land Clearing & Drainage, Inc.
| Decision Date | 25 March 1987 |
| Docket Number | Bankruptcy No. 86-02078. |
| Parties | In re WARD LAND CLEARING & DRAINAGE, INC., Debtor(s). |
| Court | U.S. Bankruptcy Court — Northern District of Florida |
E. Thomas Brushwood, Tallahassee, Fla., for U.S.F. & G.
Jerry W. Gerde, Panama City, Fla., for 1st Nat. Bank.
Clinton E. Foster, Panama City, Fla., for debtor.
THIS MATTER came before the court upon a motion by United States Fidelity and Guaranty (USF & G), the surety of the debtor, for disbursement to it of the sum of $311,740.57, presently being held by the Town of Cross City (Cross City) pursuant to this court's order dated July 30, 1986. The funds being held represent proceeds on a construction contract between Ward Land Clearing & Drainage, Inc. (Ward), the debtor herein, and Cross City. An Objection and Traverse to USF & G's motion was filed by First National Bank of Panama City (FNB), a secured creditor of the debtor.
The essential facts in this case are as follows:
On August 4, 1981, a Master Surety Agreement was executed creating a relation of suretyship between USF & G as surety and Ward as principal "in connection with all bond(s) heretofore or hereafter executed . . . in any penal sum and in favor of any obligee(s). . . ." As a contractor, Ward was required by Florida law (F.S. § 255.05) to execute a payment and performance bond with a surety insurer authorized to do business in Florida as surety prior to commencing work under any "formal contract with the state or any county, city, or political subdivision thereof, or other public authority, for the . . . completion of public work."
On November 30, 1983, Ward Land Clearing & Drainage, Inc., its President, Robert P. Ward, and its Secretary, Rose C. Ward, wife of Robert P. Ward, executed a loan with FNB for working capital in the amount of $398,000.00. As security for the loan, Ward assigned to the bank and granted a security interest in: ". . . (a) all accounts and inventory owned by Ward at the date of this agreement; (b) all accounts and inventory at anytime hereafter acquired by Ward; (c) all Ward's existing contract rights which come into existence at anytime hereafter; and (d) all proceeds of all such accounts, contract rights and inventory." The bank perfected its security interest by filing a UCC-1 with the Secretary of State on December 5, 1983.
On August 8, 1985, Ward entered into a construction contract with Cross City for a partially federally financed sewer project. On August 12, 1985, performance and payment bonds were furnished by USF & G for the Cross City project.
On or about May 20, 1986, Ward ceased work on the sewer system project and filed a Chapter 11 petition in this Court on May 29, 1986. By letter to USF & G on or about June 13, 1986, Ward advised it would be unable to complete performance. USF & G, as surety, was thus called upon by Cross City to complete the contract. Under its payment and performance bonds, USF & G subsequently expended $449,316.10. The Town of Cross City is currently holding $311,740.57 in escrow in an interest bearing account pursuant to Order of this Court dated July 30, 1986 representing the amount due for work completed under Ward's contract with Cross City.
74 Am.Jur.2d, Suretyship, § 1 (1974) defines suretyship as a contractual relation resulting from an agreement whereby one person, the surety, assumes liability at the request of and for the benefit of another, the principal. A surety may be bound on the same instrument with his principal or on a separate instrument. Id, § 7. "The relationship between the parties need not appear from the instrument evidencing the debt." Nelson v. Commissioner, 281 F.2d 1 (5th Cir.1960). The equitable principle of suretyship is that when one, pursuant to obligation — not a volunteer, fulfills the duties of another, he is entitled to be subrogated to the rights of that other against third persons. National Shawmut Bank of Boston v. New Amsterdam Casualty Co., 411 F.2d 843 (1st Cir. 1969).
In the words of the Florida Supreme Court, the right of subrogation attaches ". . . at the time the contract of surety was made, and is one of the valuable rights which accrued to the surety upon its becoming obligated as such, and these rights could not be defeated by an assignment of the fund in the hands of the owner to secure a loan of money." Union Indemnity Co. v. City of New Smyrna, 100 Fla. 980, 130 So. 453, 456 (1930).
In the case of Prairie State National Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed 412 (1896), the Supreme Court addressed the doctrine of subrogation holding that the right relates back to the making of the contract and is superior to any equitable lien asserted by the bank for monies advanced to the contractor without the surety's knowledge before he began to complete the work.
The Florida case of Phifer State Bank v. Detroit Fidelity & Surety Co., 97 Fla. 538, 121 So. 571 (1929), followed the principles set forth in Prairie State, supra, citing additionally Labbe v. Bernard, 196 Mass. 551, 82 N.E. 688 (1907) as follows:
"While it is true that the rights of the sureties to the remedies of the principal do not become complete and are incapable of present enforcement, until they shall have discharged their principal\'s obligation, yet their right became an inchoate one as soon as they had entered into the relation of suretyship; and their equitable assignment of their principal\'s rights and remedies, when completed by their performance of his obligation, relates back as against each other and their principal, to that earlier time."
The surety on the facts before us was bound by the terms of the Master Surety Agreement to the payment of all claims arising out of the performance of contracts in connection with which bonds were executed. An equitable right or lien existed, therefore, in favor of USF & G from the date it entered into the relation of suretyship.
USF & G relies upon the theory of equitable subrogation to establish its rights to the funds. It contends that because its equity arose at the time it entered into the contract of suretyship under the Master Surety Agreement of August 4, 1981, its right is prior in date and paramount to that of the bank. However, under circumstances of this case, FNB challenges the priority of the surety's right vis a vis its...
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