U.S. Fidelity & Guaranty Co. v. First State Bank of Salina
| Decision Date | 04 March 1972 |
| Docket Number | No. 46189,46189 |
| Citation | 208 Kan. 738,494 P.2d 1149 |
| Parties | , 10 UCC Rep.Serv. 682 UNITED STATES FIDELITY AND GUARANTY COMPANY, Appellant, v. FIRST STATE BANK OF SALINA, Appellee, and L. R. Foy Construction Co., Inc. |
| Court | Kansas Supreme Court |
1. A surety on a construction contractor's bond who is required to remedy the default of his principal is subrogated to the rights of (a) the contractor, (b) laborers and materialmen whose bills it pays and (c) the owner of the project.
2. The right of subrogation of a performing surety on a contractor's bond dates from the time the bond is executed.
3. A contractor's surety who by reason of his performance is subrogated to the rights of either laborers and materialmen or the owner has an interest in retained funds in the hands of the owner which is superior and prior to the rights of a bank which lends money to the contractor after the bond is executed, even though the bank takes as security an assignment of the contractor's rights in the contract.
4. Under K.S.A. 84-9-102(2), Article 9 of the Uniform Commercial Code applies to security interests created by contract.
5. The right of legal or equitable subrogation arises by operation of law, and does not depend upon contract, assignment or agreement.
6. Subrogation rights are not 'security interests' under the Uniform Commercial Code, and a contractor's surety is not required to file financing statements under the Code to preserve such rights or to preserve the priorities they would otherwise have.
Larry Withers, of Kahrs, Nelson, Fanning, Hite & Kellogg, of Wichita, argued the cause, and Roger Sherwood, Wichita, was with him on the brief for appellant.
James T. Graves, of Clark, Mize, Graves, Linville & Miller, Chartered Salina, argued the cause and was on the brief for appellee.
FOTH, Commissioner:
This case represents another round in the perennial struggle for priority between the surety on the performance bond of a defaulting building contractor and a bank which has advanced money to the contractor on the faith of an assignment of the contract proceeds. The new element here is the presence of the Uniform Commercial Code (UCC), K.S.A. Ch. 84. The primary question we are called upon to decide is the effect, if any, the UCC has on the priorities which would otherwise obtain-although there is some preliminary dispute as to just what those priorities should be.
The facts were stipulated below and are not in dispute.
The L. R. Foy Construction Co., Inc., ('Foy') of Hutchinson, Kansas, was awarded a contract in January, 1967, to construct a student dormitory at Chadron State College, Chadron, Nebraska. (The parties are in agreement that Kansas law should control.) Foy's role in this litigation is that of stakeholder, a role assumed in most cases of this character by the owner.
On January 25, 1967, Foy entered into a subcontract with Mid-Continent Fireproofing and Insulating Co., Inc. ('Mid-Continent') to furnish and install insulation and wall board for a contract price of $13,451.50. The contract called for periodic partial payments on approved estimates, with 10% as the retained percentage pending completion. Mid-Continent agreed to pay for all labor and materials and hold Foy harmless from any claims arising out of its failure to comply with the terms of the contract. In the event there arose any claim for which Foy or the owner 'might become liable,' Foy was entitled to retain from moneys then or thereafter due Mid-Continent enough to indemnify itself. Mid-Continent was required to furnish a bond or bonds 'guaranteeing performance and payment of labor and material bills.'
The required bond was furnished by the appellant United States Fidelity and Guaranty Company (the 'surety') on January 31, 1967. By its contract the surety bound itself to Foy on the condition that Mid-Continent faithfully perform its subcontract, which was incorporated by reference. No question is raised but that the surety's guarantee included Mid-Continent's contractual obligation to pay laborers and materialmen-i. e., that it was a 'payment' bond as well as a 'performance' bond.
The relevant default provision was that, if the surety should be required to remedy a default, so much as might be required to reimburse the surety for its outlays should be paid to the surety out of the balance of the subcontract price then in the hands of Foy 'at the times and in the manner as said sums would have been payable to (Mid-Continent) had there been no default under the subcontract.' This provision is considered by the parties as a contractual assignment of Mid-Continent's interest in its contract with Foy to secure the surety-albeit a conditional assignment. The failure of the surety to file under the UCC the bond containing this 'security agreement' is appellee's most strongly urged claim to priority in this case.
In customary fashion, Mid-Continent went contract-in-hand to the appellee, The First State Bank of Salina (the 'bank') to secure a line of credit to carry out its contract. There, on February 13, 1967, it executed a security agreement, assigning to the bank all its rights under its contract with Foy, to secure any and all obligations it might then or thereafter have to the bank. The bank gave Foy timely notice of the assignment, requesting that Foy make any payments under the contract payable jointly to Mid-Continent and the bank. It is stipulated that the bank's purpose in agreeing to extend credit (apart from its 7% interest) was to enable Mid-Continent to pay for materials and labor needed to fulfill the contract with Foy.
Mid-Continent had had prior dealings with the bank. Almost a year before, on April 13, 1966, the bank had lent money to Mid-Continent in an unrelated transaction, and had duly filed a 'financing statement' under the UCC covering Mid-Continent's 'Accounts receivable for goods sold or for services rendered together with equipment used by the business.' It is agreed that this financing statement was broad enough to include the 'security agreement' (assignment) of February 13, 1967, covering as an 'account receivable' Mid-Continent's interest in the Foy contract.
The bank, relying on its security agreement backed by the filed financing statement, commenced lending money to Mid-Continent on February 28, 1967, taking a series of notes. The trial court concluded that the bank had an 'attached' security interest in Mid-Continent's contract with Foy as of that date, and that conclusion is not contested.
In due course Mid-Continent defaulted; Foy terminated its contract with Mid-Continent and completed the work itself. After deducting its cost of completion from the balance of Mid-Continent's contract price Foy holds $3492.24 which would have been due Mid-Continent had it not defaulted. This is the prize for which the parties here are competing.
The surety was presented with and, on February 2, 1968, paid claims of materialmen who had furnished Mid-Continent with material for the project which, by our calculation, amounted to $7409.19, taking assignments of the materialmen's claims and remedies. The bank lent Mid-Continent money at various times from February 28 to June 23, 1967, and after deducting payments on account, claims a balance due it as of July 9, 1967 of $2647.40.
The surety sued Foy for the balance in Foy's hands, asserting its right of subrogation, and joined the bank as a potential claimant to the fund. Foy tendered the money in its hands into court; the bank in its answer asserted its assignment (security agreement) as a lien with priority over the claim of the surety.
The issues thus joined together with the facts, stipulated in accord with the foregoing recitation, were submitted to the trial court for a decision as a matter of law. In a memorandum of September 24, 1969, it recited:
'This matter is before the Court on a stipulation of facts between the plaintiff, United States Fidelity & Guaranty Company, and the defendant, First State Bank of Salina. The sole issue is whether or not the defendant bank has a prior interest to the funds held by defendant Foy by virtue of its security agreement of February 13, 1967, and financing statement of April 13, 1966, or whether the plaintiff has a prior lien on said funds by virtue of its rights of subrogation to the rights of Mid-Continent Fireproofing and the creditors whose materials were used on the job and paid for by the plaintiff.
'The matter has been ably briefed by both parties to the dispute.
'The court finds as follows:
'1. The financing statement filed with the Secretary of State by the defendant bank is sufficient to include the funds earned by contracts of Mid-Continent and constitutes notice that a security agreement may exist on the funds now in the hands of defendant Foy.
'2. From February 28, 1967, the defendant bank had an attached security interest in the contract rights of Mid-Continent with defendant Foy as amounts became due by virtue of performance by Mid-Continent.
'3. Materialmen are subject to the provisions of the Uniform Commercial Code.
'4. The surety bond of the plaintiff constituted an attached security interest under the Code at the time it paid bills of materialmen which was not perfected by filing of a financing statement.
'5. The materialmen who were paid by plaintiff were general creditors who could not defeat the attached security agreement of the bank.
'The Court concludes that the claim of defendant First State Bank of Salina is first and prior over the claim of plaintiff United States Fidelity & Guaranty Company.'
Nevertheless, the trial court on June 3, 1970,...
To continue reading
Request your trial
-
First State Bank v. Reorganized School Dist. R-3, Bunker
...Nat'l Shawmut Bank of Boston v. New Amsterdam Cas. Co.,411 F.2d 843, 845 (1st Cir. 1969); United States F. & G. Co. v. First State Bank of Salina, 208 Kan. 738, 494 P.2d 1149, 1154--1155(1) (1972); note, supra, 71 Yale L.J. at 1278--1280. We see no reason for reexamination of the existing l......
-
Interfirst Bank Dallas, N.A. v. U.S. Fidelity and Guar. Co.
...(Alaska 1978); Argonaut Ins. Co. v. C & S Bank, 140 Ga.App. 807, 232 S.E.2d 135, 140 (1976); United States Fidelity & Guar. Co. v. First State Bank, 208 Kan. 738, 494 P.2d 1149, 1159 (1972); Finance Co. of America v. United States Fidelity & Guar. Co., 277 Md. 177, 353 A.2d 249, 254 (1976);......
-
Transamerica Ins. Co. v. Barnett Bank of Marion County, N.A.
...6 See National Shawmut Bank of Boston v. New Amsterdam Cas. Co., 411 F.2d 843 (1st Cir.1969); U.S. Fidelity & Guar. Co. v. First State Bank of Salina, 208 Kan. 738, 494 P.2d 1149 (1972); Finance Co. of America v. U.S. Fidelity and Guar. Co., 277 Md. 177, 353 A.2d 249 (1976); Balboa Ins. Co.......
-
Argonaut Ins. Co. v. C and S Bank of Tifton
...(1st Cir., 1969) (Puerto Rico); McAtee v. U.S.F. & G. Co., 401 F.Supp. 11, 14(4) (N.D.Fla.1975); United States F & G Co. v. First State Bank of Salina, 208 Kan. 738, 494 P.2d 1149, 1158 (1972); National Surety Corp. v. State Nat. Bk. of Frankfort, 454 S.W.2d 354, 356 (Ky.1970); French Lumbe......