Transamerica Ins. Co. v. Barnett Bank of Marion County, N.A.
| Citation | 13 Fla. L. Weekly 774,524 So.2d 439 |
| Decision Date | 24 March 1988 |
| Docket Number | No. 86-1328,86-1328 |
| Parties | 13 Fla. L. Weekly 774, 5 UCC Rep.Serv.2d 879 TRANSAMERICA INSURANCE COMPANY, Appellant, v. BARNETT BANK OF MARION COUNTY, N.A., Appellee. |
| Court | Florida District Court of Appeals |
Robert E. Morris of Morris & Rosen, P.A., Tampa, for appellant.
Tim Haines and Young J. Simmons of Green, Simmons, Green, Hightower & Gray, P.A., Ocala, for appellee.
This case involves the question of priority between a bank which financed a contractor, and a surety company which guaranteed the contractor's payment or performance, as to earned but unpaid sums due from an owner to a contractor when the contractor defaults on a construction contract 1.
To place this case in proper perspective, a general discussion of the relationship between owners, contractors, surety companies, and financing banks is in order. To meet conditions often imposed by owners in construction contracts, the contractor pays a surety company to enter into payment and performance surety bonds in which the surety company guarantees to the owner that in the event the contractor fails to pay laborers, material suppliers, and subcontractors, or fails to complete performance, the surety will make such payments and complete such performance for the benefit of the owner. As a condition of issuing such bonds, the surety normally requires the contractor to agree in writing (1) to indemnify the surety for any sums expended on its guaranty and (2) to assign to the surety as security for the indemnity agreement all sums the contractor is entitled to receive from the owner under the construction contract. This assignment to the surety may provide that it constitutes a "security interest," but it may also expressly provide that such security interest is in addition to all of the surety company's legal and equitable remedies. 2 Peculiarly, the surety customarily does not file its assignment as a security interest under Article 9 of the Uniform Commercial Code (U.C.C.), section 679.302(1), Florida Statutes.
The contractor may already have an established line-of-credit financing agreement with a bank, giving the bank a security interest in proceeds under future construction contracts. If not, however, after the construction contract and surety bonds have been negotiated, 3 the contractor usually seeks to finance his performance of the construction contract by making some loan arrangements with a bank. As collateral for the bank's loan, the contractor also gives the financing bank an assignment of the payments to become due the contractor under the construction contract. The bank usually perfects its security interest 4 by filing under U.C.C. § 9-302(1) (§ 679.302(1), Fla.Stat.).
Construction contracts usually provide for the owner to make progress payments as the work advances; these payments When the contractor defaults, or becomes unable to pay labor and material claims, and the surety learns that it will probably incur expense in performing its guarantee, controversy arises between the surety and the financing bank.
may be made to the contractor, or directly to the bank if the owner has been notified of the bank's assignment. It is also customary for the construction contract to permit the owner to hold back a certain percentage, usually ten percent, of the money earned by the contractor until satisfactory completion of the entire work under the construction contract. This is referred to as "retained percentages" or retainage. If the contractor fails to complete the job, the owner may hire a second contractor to complete the job, apply to the cost of completion the unpaid balance of the construction contract price still in the owner's hands, and collect from the performance bond surety any cost of completion in excess of the original contract price; or the owner may merely call on the performance bond surety to come in and complete the job. The original contractor, whether or not it completed the job, may also leave labor and material claims unpaid for which the payment bond surety is liable.
In this case, the bank argues that the surety's assignment, like the bank's assignment, constitutes a security interest in the construction contract payments, the perfection of which requires filing under U.C.C. § 9-303 and § 9-302(1) (§ 679.303 and § 679.302(1), Fla.Stat.). The bank further urges that while the surety's assignment may be first in point of time, because it was not filed, the bank's later acquired but perfected security interest has priority over the surety's security interest under U.C.C. § 9-312(5) (§ 679.312(5)(a), Fla.Stat.), which provides that conflicting security interests in the same collateral rank according to priority in time of filing or perfection.
The surety has three primary arguments: (1) its assignment is prior to that of the bank and its assignment is not subject to the U.C.C. filing requirement because it is a transaction within U.C.C. 9-104(f) (§ 679.104(6), Fla.Stat.), which excludes from U.C.C. coverage "a transfer of a right to payment under a contract to an assignee who is also to do the performance under the contract ..."; (2) that the U.C.C. filing requirement is merely to give notice or knowledge, that under general statutory and common law, a prior right is good against a subsequent "purchaser" or claimant if the subsequent claimant has actual knowledge of the earlier interest, and that when the construction contract requires a bond the financing bank knows, or should know, that the contractor is obligated to a surety and that the surety has a security interest (a classical "good faith" exception argument); and (3) that aside from its written assignment from the contractor, the surety has an equitable remedy of subrogation which a long line of federal cases has held to be superior to the bank's assignment.
The legal controversy between financing banks and sureties has existed for over eighty years; the great bulk of the litigation being in federal courts and involving United States government contracts and payment of performance bonds required by federal statutes 6 on federal government jobs. Commencing in 1894, a series of federal cases established federal precedent To support its equitable subrogation argument, the surety in this case relies on federal decisions. However, as to the issue in this case, we do not feel persuaded to follow the federal cases for the following reasons, among others:
to the effect that a surety which has completed performance of a federal construction contract, or which has paid for labor and materials, had subrogation rights that were generally superior to those of banks and others who had assignments from the defaulting contractor. 7 It would serve little purpose to analyze here all of the factors influencing the federal courts in each case. It is important to note, however, that the early cases were decided during a time when assignments of claims against the federal government were almost all prohibited, and were decided in the absence of any applicable statute providing a system of filing of claims and directing that priority be based on the date of filing of competing claims. Even after a federal Assignment of Claims Act 8 was enacted in October, 1940, later federal cases 9 largely relied on earlier precedent, and regularly held for the surety except when the surety's claim came up against interests of the federal government. 10 The federal Court of Claims especially ruled consistently in favor of the surety 11. However, the Fifth Circuit Court of Appeals recognized that the new federal Assignment of Claims Act should change the result of prior precedent and, in the absence of a controlling recording statute, that court undertook to balance the equities between the financing bank and the surety. In doing so, that court often held in favor of the bank. 12
(1) The position of the United States as owner, and often as a party litigant, may make the determination of the priorities between the financing bank and surety a matter of federal law, but when the United States, the federal Assignment of Claims Act, and the federal Miller Act are not involved, the priority question is a matter of state law, and state decisional and statutory law, such as the U.C.C. in Florida, should control.
(2) The federal cases developed the equitable subrogation theory in favor of the surety in cases involving federal construction contracts, with the United States as the owner, during the pre-1940 period when neither the bank nor the surety could acquire an assignment "valid" against the United States. The federal Assignment of Claims Act of 1940 validated assignments to banks but not to sureties, thereby motivating the federal courts to continue to apply the equitable subrogation theory in order to continue to give the surety a remedy.
(3) In ruling in favor of the surety, the federal cases stressed various factors and viewpoints which are not especially relevant to doing justice between civil litigants in a state judicial system. One such viewpoint is that the surety ought to win because (4) The federal cases held that the surety in paying labor and materialmen became subrogated to their rights but did not recognize that those laborers and materialmen had no legal rights against the United States as owner and, under the Miller Act, had rights only against the payment bond surety and against the contractor, whose payment the surety had guaranteed. The federal cases also held that by completing the performance of a defaulting contractor, the surety became subrogated to the contractor's rights but these cases did not recognize that the defaulting contractor had only the conditional right to receive from the owner sums earned under the contract and that the contractor may have made an assignment of those sums valid under state law. The ...
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