Alaska State Bank v. General Insurance Co. of America , 579 P.2d 1362 ( 1978 )

RABIN OWITZ, Justice,

with whom CONNOR, Justice, joins, concurring.

I agree with the court’s holding that the bonding company’s claim based upon equitable subrogation has priority over the claim of a secured creditor even where the secured creditor has filed under Article Nine of the Uniform Commercial Code, as adopted in Alaska, and the surety has not.¹ However, the court’s opinion formulates the issue before us as whether “the unperfected assignment by Gilman’s to its bonding company of earned progress payments was a security interest governed by the Uniform Commercial Code, as adopted in Alaska.”² I think some additional observations are appropriate. In my view it is necessary to distinguish between an equitable subrogation analysis of the issues at bar and an analysis which focuses upon the assignment of monies due or to become due under bonded contracts and upon the priority of such assignments where there has been no filing under Article Nine of the Uniform Commercial Code.

In National Shawmut Bank of Boston v. New Amsterdam Casualty Co., 411 F.2d 843, (1st Cir. 1969), the contractor’s application for payment and performance bonds contained an express assignment to the surety of “earned monies that may be due or become due under said contract.”³ On default, the surety completed the project. Suit was thereafter instituted by a secured party, the Bank, challenging the surety’s right to earned but unpaid progress payments. The court held that the doctrine of subrogation had survived passage of Article Nine; therefore, no filing by the surety was necessary in order to protect its priority as against perfected security interests. However, the First Circuit did not address the question whether express assignments should be treated in a different manner than claims based upon subrogation.

Commentators have criticized this failure to differentiate⁴ and have suggested that case law illustrates two separate rules for sureties.⁵ Although judicial decisions have recognized the difference between equitable subrogation and express assignment,⁶ none of the decisions studied has addressed their potentially different treatments under Article Nine. In Canter v. Schlager, 358 Mass. 789, 267 N.E.2d 492 (1971), Justice Braucher articulated the assignment problem in the following manner:

If the surety were claiming the balance due under the contract by virtue of the assignment to it in the contractor’s bond application, it would be fairly arguable that it was claiming a ‘security interest’ in a ‘contract right.’ ... To perfect a security interest, a financing statement must be filed unless the case is within one of several exceptions, (citations omitted)⁷

Despite this recognition, the court in Canter did not deal with the problems created where the surety has obtained an express assignment.

The drafters of the Uniform Commercial Code rejected proposed § 9-312(7) which provided that “[a] security interest which secures an obligation to reimburse a surety . secondarily obligated to complete performance is subordinate to” a later lender that perfects its security interest.⁸ The official comments show the drafters’ concern with protecting the priority position of subrogation claims.⁹ If the drafters of the ■UCC intended to leave subrogation unaffected by Article Nine, it should make no difference whether there also exists an un-filed express assignment of the same funds. The surety should prevail in order to carry out the legislature’s intent. However, if the surety’s claim is grounded solely upon an express assignment there is no reason why it should not be subject to the same perfection and priority requirements as other security interests.¹⁰

In the case at bar, the State of Alaska would have been entitled to apply the earned, undisbursed payments to completion of its project when Gilman’s failed to perform fully — regardless of the Bank’s perfected security interest. The bonding company was placed in the position of the state once it had completed performance and had paid all those whom the contractor owed in connection with the job. However, the surety is subrogated only to the extent of reimbursement or indemnification. The Bank stipulated that the cost to the surety of completing the Tok Cut-off project was substantially greater than the contract proceeds. The bonding company apparently incurred a deficit of approximately $700,-000. Accordingly, I agree that the bonding company should prevail as to the $169,-895.00 of earned, undisbursed progress payments — whether or not a prior filing of the indemnity agreement would have been required in order for the bonding company to prevail against the Bank’s security interest in the absence of a subrogation claim.

1 . See AS 45.05.690-794.

2 . Majority Opinion at 1364. The bonding company obtained from Gilman’s a “General Agreement of Indemnity for Contractors.” Under this agreement Gilman’s assigned to the bonding company Gilman’s right to monies earned under bonded contracts. The indemnity agreement provided, in part, that Gilman’s assigned to the bonding company:

Monies due or to become due Contractor on any Contract, including all monies earned or unearned which are unpaid at the time of notification by [the bonding company] to the Obligee of [the bonding company’s] rights hereunder.

3 . National Shawmut Bank of Boston v. New Amsterdam Cas. Co., 411 F.2d 843, 844 (1st Cir. 1969).

4 . See Note, National Shawmut Bank: Another Step Toward Confusion in Surety Law, 64 Nw. U.L.Rev. 582 (1969).

5 . One commentator characterizes these rules as follows:

First, if the surety elects to take an express assignment from the contractor, the filing requirements of article 9 apply, as they do any other assignment. . . . Secondly, if an express assignment was not made to the surety, the surety will probably prevail under its rights of subrogation, which are not subject to the priority rules of article 9.

Clark, Suretyship in the Uniform Commercial Code, 46 Texas L.Rev. 453, 476 (1968).

6 . See, e. g., In re Gleason Co., 452 F.2d 1219, 1221-22 (8th Cir. 1971); Jacobs v. Northeastern Corp., 416 Pa. 417, 206 A.2d 49, 54 n. 8, 55 (1965).

7 . Canter v. Schlager, 358 Mass. 789, 267 N.E.2d 492, 494 (1971). Justice Braucher further stated:

We do not pass on the question whether the assignment to the surety in this case was excepted as ‘a transfer of a contract right to an assignee who is also to do the performance under the contract,’ ... § 9-104(f), or ‘an assignment of accounts or contract rights which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts or contract rights of the assignor . . . ’ ... § 9-302(l)(e).

Id.

8 . Uniform Laws Annotated, Uniform Commercial Code § 9-312(7) (1952).

Professors White and Summers note the pragmatic origins of that decision: “The issue of Article Nine coverage was fought out at the drafting stage, and the surety companies prevailed in their efforts to remain outside the Article.” J. White & R. Summers, Uniform Commercial Code § 22-5, at 771 (1972). Professor Gilmore observes: “[The sureties] protested immediately, violently and effectively: in the next draft the offending provision disappeared, without official explanation.” G. Gilmore, Security Interests in Personal Property § 36.7, at 973 (1965). However, Gilmore argues that the deletion of § 9-312(7) merely meant that priorities between a surety’s assignment and a bank’s assignment must be resolved by reference to § 9-312(5) if Article Nine applies at all. Id. While acknowledging that the language of § 9-104(f) “might be read to exclude an assignment to a surety who will, on the contractor’s default, become liable to perform or complete the contract,” id. § 10.5 at 309, he insists:

The transaction meant to be excluded was the total assignment of a contract under which the assignee is to take over performance and receive payment — not the situation where a financing assignee (who may be a surety company . . .) takes over performance of a defaulted contract because of liability under a bond or simply in order to protect its investment, (emphasis added)

Id. at 309-10.

That the draftsmen had no intention of excluding the surety assignment is entirely clear from the fact the 1952 draft, which included the provision subordinating the surety’s security interest to the bank’s later interest taken for new value, also included, in the same language, § 9-104(f) of the final draft, (emphasis added)

Id. § 36.7, at 974.

Professor Gilmore’s view of the interaction between assignments subject to § 9-312(5) and subrogation claims is summarized at note 10, infra.

9 . Uniform Laws Annotated, Uniform Commercial Code, Changes in Text and Comments, at 25-26 (1953).

10 . Professor Gilmore, a principal drafter of Article Nine, has also suggested that the UCC may affect sureties’ express assignments differently than their subrogation claims. While arguing that Article Nine priority among assignments is governed by § 9-312(5), Gilmore recognizes that subrogation theory retains vitality:

No doubt a provision of the Code, like § 9-312(7) of the 1952 Draft, which dealt specifically with the issue, would properly be held to have superseded prior law and to state an exclusive rule. It is much less clear that a general provision like § 9-312(5) should be so taken. . . . The surety has always had both the assignment string and the subrogation string to his bow; he may still have, despite § 9-312(5)(a).

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. . . When the bank, by first filing, has the § 9-312(5)(a) priority, subrogation may come in, as an overriding principle, to aid the surety, (footnotes omitted)

Gilmore, Security Interests in Personal Property § 36.7, at 977-78 (1965).