Transamerica Ins. Co. v. Barnett Bank of Marion County, N.A.

• Citation: 540 So.2d 113,14 Fla. L. Weekly 107
• Decision Date: 16 March 1989
• Docket Number: No. 72531,72531
• Parties: 14 Fla. L. Weekly 107, 7 UCC Rep.Serv.2d 1356 TRANSAMERICA INSURANCE COMPANY, Petitioner, v. BARNETT BANK OF MARION COUNTY, N.A., Respondent.
• Court: Florida Supreme Court

Page 113

540 So.2d 113

14 Fla. L. Weekly 107, 7 UCC Rep.Serv.2d 1356

TRANSAMERICA INSURANCE COMPANY, Petitioner, v. BARNETT BANK OF MARION COUNTY, N.A., Respondent.

No. 72531.

Supreme Court of Florida.

March 16, 1989.

Robert E. Morris of Morris & Rosen, P.A., Tampa, for petitioner.

Tim D. Haines and Young J. Simmons of Green and Simmons, P.A., Ocala, for respondent.

Frederick B. Karl, Thomas J. Maida and Patricia Hart Malono of Karl, McConnaughhay, Roland & Maida, P.A., Tallahassee, amicus curiae for American Ins. Ass'n.

David T. Knight and Jeanne T. Tate of Shackleford, Farrior, Stallings & Evans, P.A., Tampa, amicus curiae for Reliance Ins. Co., United Pacific Ins. Co. and Planet Ins. Co.

J. Thomas Cardwell of Akerman, Senterfitt & Eidson, Orlando, amicus curiae for Florida Bankers Ass'n.

SHAW, Justice.

We review Transamerica Insurance Co. v. Barnett Bank, 524 So.2d 439 (Fla. 5th DCA 1988), to resolve conflict with Union Indemnity v. City of New Smyrna, 100 Fla. 980, 130 So. 453 (1930); Florida East Coast R.R. v. Eno, 99 Fla. 887, 128 So. 622 (1930); and Phifer State Bank v. Detroit Fidelity & Surety Co., 97 Fla. 538, 121 So. 571 (1929). We have jurisdiction. Art. V, § 3(b)(3), Fla. Const.

Petitioner surety and Turner Construction, Inc., entered into an agreement whereby petitioner would provide surety bonds for construction projects which Turner contracted to perform for various government bodies. As required by section 255.05, Florida Statutes (1983), ¹ Turner obtained payment and performance bonds for the benefit of each government body and for subcontractors and other persons supplying labor, material, and services in the construction projects. An indemnity agreement assigned accounts receivable to petitioner should Turner default. By its terms, the indemnity agreement constituted a security agreement without abrogating, restricting, or limiting the rights of petitioner under the agreement, under law, or in equity. Turner obtained a series of loans from respondent bank to finance its operations, in return for which Turner gave the bank a security interest in accounts receivable from the construction contracts. The bank's security interest was filed under the Uniform Commercial Code (U.C.C.) prior to the filing of petitioner's security interest.

Construction contracts customarily provide for progress payments to be made to contractors by the owner as construction proceeds. Two safeguards have been devised to protect owners against default by the contractor, both of which are involved here. The first is a contractual provision under which the owner retains a percentage of the progress payments for the purpose of curing or mitigating subsequent contractor default. The retainage is paid to the contractor upon satisfactory performance and/or payment, but neither the contractor nor its assignees or creditors have any claim on the funds until the contractor performs. The second safeguard is a requirement that the contractor obtain payment and performance surety bonds. Because of their importance, payment and performance bonds are mandatory under section 255.05 for government projects and are commonly employed by prudent private owners.

This case comes to us from a partial summary judgment which was affirmed in the district court. The trial court ruled that the bank's prior perfection of its security interests in Turner's accounts receivable from the construction contracts gave it priority over the claims of the surety based on equitable subrogation. The trial court order noted that it did "not operate as a determination that Turner was in fact owed any monies as a result of accounts receivable or funds earned but unpaid." Consistent with this disclaimer, it also appears that the trial court treated petitioner's equitable subrogation rights as if these rights arose solely from standing in the shoes of the contractor Turner ² and not from standing in the shoes of the owner/obligee and laborers and materialmen involved in the construction projects. The district court adopted a similar analytical approach in its affirmance by rejecting what it called the "federal view" that sureties had priority by virtue of equitable subrogation arising from owner/obligees, laborers, and materialmen. Accordingly, the district court held: (1) the surety's assignment was a security interest subject to the filing and perfection requirements of the U.C.C.; (2) there is no good faith exception to U.C.C. filing requirements and it matters not whether the secured party who first perfects its interest knows of any other prior interests; and (3) the remedy of equitable subrogation is not available to a surety because of the filing requirements of the U.C.C.

The initial question is whether a surety's equitable subrogation rights are limited to rights it obtains by standing in the shoes of the defaulting contractor. On this point we agree with the court in National Shawmut Bank v. New Amsterdam Casualty Co., 411 F.2d 843, 844-45 (1st Cir.1969).

[T]here is confusion because the tendency is to think of the surety on Miller Act payment and performance bonds as standing in the shoes only of the entity it "insures"--the contractor. So long as this one-dimensional concept prevails, logic compels the surety to be assessed as merely one of the contractor's creditors, and to be subject to the system of priorities rationalized by the Uniform Commercial Code. But the surety in cases like this undertakes duties which entitle it to step into three sets of shoes. When, on default of the contractor, it pays all the bills of the job to date and completes the job, it stands in the shoes of the contractor insofar as there are receivables due it; in the shoes of laborers and material men who have been paid by the surety--who may have had liens and, not least, in the shoes of the government, for whom the job was completed.

The narrow view that a surety acts only for the contractor (principal) is inconsistent with the purpose of a surety bond: to protect the obligees. A surety who performs or pays on behalf of a obligee steps into the shoes of the obligee to the extent of performance or payment.

Traditionally sureties compelled to pay debts for their principal have been deemed entitled to reimbursement, even without a contractual promise such as the surety here had. And probably there are few doctrines better established than that a surety who pays the debt of another is entitled to all the rights of the person he paid to enforce his right to be reimbursed.

Pearlman v. Reliance Ins. Co., 371 U.S. 132, 136-37, 83 S.Ct. 232, 235, 9 L.Ed.2d 190 (1962) (footnote omitted). These rights of the surety as subrogee are not inferior even to the rights of the obligee and may be asserted against the obligee. Trinity Universal Ins. Co. v. United States, 382 F.2d 317 (5th Cir.1967).

The district court held that the surety's assignment was a security interest under the U.C.C. We disagree for two reasons. First, the U.C.C. itself suggests that a surety's assignment from a contractor, should be excluded from the U.C.C. Section 679.104(6) excludes a transfer of a right to payment under a contract to an assignee who is also to do the performance under the contract. A surety's assignment is contingent on performance by the surety in the event the contractor defaults. This contingent assignment based on contractual performance contrasts sharply with the noncontingent assignment to a financier which does not call for performance and which is uncontrovertably a security interest. In this connection, we note that a draft provision of the U.C.C. which would have specifically subordinated a surety's assignment to a later perfected security interest was specifically rejected by the Editorial Board which drafted the U.C.C. See In re J.V. Gleason Co., 452 F.2d 1219, 1221 nn. 5-6 (8th Cir.1971), and National Shawmut Bank, 411 F.2d at 846 n. 4. Contrary to the district court below, we see this rejection as evidence that the drafters of U.C.C. did not intend to upset the well-established rules governing the priority of a surety...