NEW MEXICO STATE HWY. v. GULF INS.

• Decision Date: 09 August 1999
• Docket Number: No. 19,489.,19,489.
• Citation: 2000 NMCA 7,128 N.M. 634,996 P.2d 424
• Parties: The NEW MEXICO STATE HIGHWAY AND TRANSPORTATION DEPARTMENT, Interpleader, v. GULF INSURANCE COMPANY, a Missouri Corporation, Claimant-Appellant, First State Bank of Socorro, a New Mexico Corporation, Claimant-Appellee.
• Court: Court of Appeals of New Mexico

996 P.2d 424

128 N.M. 634

2000 NMCA 7

The NEW MEXICO STATE HIGHWAY AND TRANSPORTATION DEPARTMENT, Interpleader, v. GULF INSURANCE COMPANY, a Missouri Corporation, Claimant-Appellant, First State Bank of Socorro, a New Mexico Corporation, Claimant-Appellee.

No. 19,489.

Court of Appeals of New Mexico.

August 9, 1999.

Paul Maestas, Wayne R. Suggett, Silva, Rieder & Maestas, P.C., Albuquerque, for Appellant Gulf Insurance Company.

Jerry A. Armijo, Socorro, for Appellee First State Bank.

OPINION

BUSTAMANTE, J.

{1} Having considered Gulf Insurance Company's motion for rehearing of our opinion filed June 24, 1999, we deny such motion. In doing so, we withdraw our original opinion and substitute the following.

{2} This case requires us to address an issue of first impression in New Mexico: whether a surety that issues performance and payment bonds and then satisfies claims against the contractor by paying laborers and materialmen has superior rights as against the contractor's secured creditors to final progress payments and retainage funds held by the project owner. On a motion for summary judgment, the district court apportioned the interpleaded funds between Gulf Insurance Company (Gulf), the surety, and First State Bank of Socorro (First State), the contractor's creditor. Gulf appeals the district court's judgment arguing that it has superior rights to the interpleaded funds under the doctrine of subrogation. We agree and reverse and remand to the district court for entry of an amended judgment.

I. FACTS

{3} In 1994, Leburt Saulsberry, doing business as Saulsberry Construction (Saulsberry), bid fence construction projects for the New Mexico State Highway and Transportation Department (State) and was awarded two projects as the successful bidder. Gulf issued performance and payment bonds on behalf of Saulsberry pursuant to the New Mexico Little Miller Act, NMSA 1978, §§ 13-4-18 to -20 (1923, as amended through 1987). Thereafter, First State made loans to Saulsberry under three separate promissory notes, totaling $57,193.04. The loans were secured by a security agreement, under which First State took an assignment of the "contract proceeds" on the State's projects. First State perfected its security interest by filing under the Uniform Commercial Code (U.C.C.), NMSA 1978, §§ 55-9-101 to -507 (1961, as amended through 1997).

{4} Later that year, Gulf received notice that Saulsberry's creditors, including laborers, materialmen, and subcontractors, had not been paid for the labor, goods, and materials they had used on the projects. Saulsberry was in fact unable to pay its creditors and thus defaulted under its obligations with the State. Gulf investigated the claims submitted by Saulsberry's creditors and determined them to be valid and within the scope of the Little Miller Act. Gulf's bonding company satisfied the claims of Saulsberry's creditors and lien claimants by paying claims totaling $80,278.73 for both projects.

{5} After the projects were completed, the State owed a total of $86,522.07 by way of final progress payments and retainage for the two projects. Gulf and First State both made demands on the State for the funds. The State filed an interpleader action against Gulf, First State, and Saulsberry, interpleading the total sum of $86,522.07 into the court registry. The district court dismissed the State from the action and ordered any parties having an interest in the funds to interplead in the action.

{6} First State then filed a Complaint to Foreclose Lien against Saulsberry and Gulf. Gulf filed a cross-claim against First State and Saulsberry and a third-party complaint against Linda Saulsberry, Leburt Saulsberry's wife. Before the merits of the interpleader action were decided, the district court entered default judgments in favor of Gulf against Saulsberry and against third-party defendant Linda Saulsberry on the Complaint to Foreclose Lien.

{7} Gulf filed a motion for summary judgment against First State, claiming priority to the interpleaded funds. Gulf and First State submitted a pretrial order in which they stipulated to certain facts. The parties' stipulation of facts was adopted by the district court, and those findings are not challenged on appeal.

{8} After the district court entered judgment on the Complaint to Foreclose Lien, it heard oral argument on Gulf's motion for summary judgment in the interpleader action. Having fulfilled its obligations under the performance and payment bonds it previously issued on behalf of Saulsberry, Gulf claimed to have priority to the interpleaded funds pursuant to the doctrine of subrogation. First State responded by claiming it had a superior right to the interpleaded funds as a secured creditor under an assignment of rights. The district court entered an order denying Gulf's motion for summary judgment on the issue of Gulf's priority to the interpleaded funds. Instead, the district court entered judgment apportioning the funds between Gulf and First State, and dismissing the case with prejudice. Gulf received 55.123 percent, or $47,693.58, of the interpleaded funds, and First State received 44.876 percent, or $38,828.49. Gulf appeals from this judgment.

II. DISCUSSION

{9} The only issue before us is whether Gulf, as surety, has priority to the interpleaded funds against First State's rights as a secured creditor. In the district court, First State responded to Gulf's motion for summary judgment by arguing that Gulf was required to perfect its rights under the U.C.C. in order to obtain priority to the interpleaded funds under the doctrine of subrogation. On appeal, however, First State has abandoned that position and now essentially argues that the district court, sitting in equity, properly exercised its inherent powers in fashioning a remedy protective of the interests of both parties claiming the funds. In addition, First State asserts that because subrogation is based on principles of fairness, and is not constrained by common law precedent, this Court must affirm the district court's decision absent an abuse of discretion.

A. Standard of Review

{10} Where a district court grants relief, an appellate court reviews for an abuse of discretion. See Nearburg v. Yates Petroleum Corp., 1997-NMCA-069, ¶ 9, 123 N.M. 526, 943 P.2d 560; see also Wolf & Klar Cos. v. Garner, 101 N.M. 116, 118, 679 P.2d 258, 260 (1984). "Absent a clear abuse of discretion, the trial court's [decision] will not be disturbed on appeal." Wolf & Klar Cos., 101 N.M. at 118, 679 P.2d at 260. We look to see whether "the court exceeded the bounds of reason[ in] all circumstances before it being considered." Id.

B. Subrogation

{11} Although New Mexico has recognized the doctrine of subrogation in the suretyship context, there appears to be no New Mexico case law directly addressing the issue of whether a surety has a superior interest in the funds retained by the State against the rights of a secured creditor. See, e.g., Bank of New Mexico v. Romero, 1996-NMCA-065, ¶¶ 1-5, 121 N.M. 837, 918 P.2d 1337 (holding that subcontractor's surety could recover subrogation claim directly from the judgment secured by the subcontractor against the prime contractor); Employment Sec. Comm'n v. Big 4 Paving, Inc., 81 N.M. 26, 27-28, 462 P.2d 611, 612-13 (1969) (quoting Trinity Universal Ins. Co. v. United States, 382 F.2d 317, 320 (5th Cir.1967), regarding a surety stepping into the shoes of the government, for which the contracted work was to be completed); State Farm Mut. Auto. Ins. Co. v. Foundation Reserve Ins. Co., 78 N.M. 359, 363, 431 P.2d 737, 741 (1967) (recognizing subrogation as a remedy in the context of a secondary insurer seeking reimbursement from primary insurer for providing a defense to the insured). In Romero, this Court recognized that case law from other jurisdictions supported the surety's claim for subrogation and held that the claim could be paid directly from the judgment secured by the subcontractor against the contractor for breach of contract. See 1996-NMCA-065, ¶ 5, 121 N.M. 837, 918 P.2d 1337 (citing Pearlman v. Reliance Ins. Co., 371 U.S. 132, 138, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962); In re J.V. Gleason Co., 452 F.2d 1219, 1221 (8th Cir.1971); Transamerica Ins. Co. v. Barnett Bank, 540 So.2d 113, 115-16 (Fla.1989)). However, the competing rights of a surety and secured creditor were not at issue.

{12} According to the weight of federal authority, a surety who is called upon to complete a contract or to pay laborers and materialmen has an interest, superior to the interest of the contractor's assignee, in any funds retained by the government entity on the contract. See, e.g., Pearlman, 371 U.S. at 136-37,83 S.Ct. 232; Henningsen v. USF & G Co., 208 U.S. 404, 28 S.Ct. 389, 52 L.Ed. 547 (1908); cf. Transamerica Ins. Co.,540 So.2d at 115-16 (adopting "`federal view' that sureties ha[ve] priority [over other creditors] by virtue of equitable subrogation"). In Pearlman, the United States Supreme Court firmly established the surety's superior subrogation rights. See371 U.S. at 136-37, 141,83 S.Ct. 232. The contractor in Pearlman entered into a construction contract with the United States government. See id. at 133, 83 S.Ct. 232. Because of the contractor's financial difficulties, the parties both agreed to terminate the contract, and another contractor completed the project. See id. at 134, 83 S.Ct. 232. However, several laborers and materialmen remained unpaid by the original contractor. See id. The payment bond surety for the original contractor satisfied those debts. See id. Thereafter, the contractor was adjudicated bankrupt, and the United States government turned over the retainage to the bankruptcy trustee. See id. The surety sued to recover the retainage from the trustee, claiming a superior right to the funds. See id. The referee in bankruptcy held that the surety had no superior right to the funds and ordered that the surety's claim be equated to ...