Title: THIRD NAT. BANK, ETC. v. Highlands Ins. Co.
Citation: 603 S.W.2d 730
Docket Number: N/A
State: Tennessee
Issuer: Tennessee Supreme Court
Date: August 25, 1980

603 S.W.2d 730 (1980) THIRD NATIONAL BANK IN NASHVILLE, Appellee, v. HIGHLANDS INSURANCE COMPANY, Appellant. Supreme Court of Tennessee. August 25, 1980. *731 Dan E. McGugin, William P. Sutherland, Watkins, McGugin, McNeilly &amp; Rowan, Nashville, for appellant. I.C. Waddey, Jr., Andrew S. Neely, Waddey, Lundin &amp; Newport, Nashville, for appellee. COOPER, Justice. This is an action to determine the priority of claims against the proceeds of a judgment secured by a contractor against the owner of an improvement built by the contractor. The claimants are (1) the surety of the contractor that advanced monies to pay material and labor claims, who has an assignment from the contractor of the proceeds of the judgment as security for payment of the monies advanced, and (2) a bank holding a security interest in the contractor's inventory, accounts receivable and contract rights. Par-Lac Corporation, a construction company, contracted to erect a building for the Kirby Building Systems, Inc. On April 16, 1973, Highlands Insurance Company issued a Labor and Material Payment Bond in favor of Kirby on behalf of Par-Lac. As a corollary to the issuance of the bond, Par-Lac agreed in writing to indemnify Highlands against any loss resulting from claim on the bond, in the following language: A dispute arose between Kirby and Par-Lac and Kirby withheld approximately $44,000.00 claimed by Par-Lac under the construction contract. Par-Lac then was unable to pay all its materialmen and laborers. The three not paid registered Notices of Liens and filed suits against Kirby and Par-Lac to collect their claims. Kirby made demand on Highlands, as surety of Par-Lac to pay claims totalling $44,249.28. After negotiations, Kirby agreed to pay that part of the withheld funds indisputably due Par-Lac and Highlands advanced the additional $22,191.65 needed to pay the lien creditors. The parties agreed that if Par-Lac recovered from Kirby any part of the monies allegedly due under the contract, those funds would go to reimburse Highlands for the monies it advanced to pay the lien claims. On October 15, 1974, as security, Highlands took an assignment of Par-Lac's judgment against Kirby, which was then on appeal. Highlands did not file a financing statement, nor did it record the assignment. *732 On January 16, 1975, Par-Lac executed an agreement granting the Third National Bank in Nashville a security interest in all of Par-Lac's inventory, accounts receivable and contract rights, together with all proceeds thereof, to secure an indebtedness of approximately $60,000.00. The bank filed a financing statement on January 31, 1975. Judgment was subsequently entered in the Court of Appeals on Par-Lac's action against Kirby. The judgment was satisfied and the proceeds were paid to Highlands. The bank contended that it held a perfected security interest in the proceeds of the judgment and should prevail over Highlands since Highlands had failed to file a financing statement or to record its assignment. In answer, Highlands asserted that "it had priority and a superior right to the contract funds ... as surety and subrogee...," and that it was not necessary for it to file a financing statement to protect the priority of its claim. Both Highlands and the bank moved for summary judgment, with Highlands insisting specifically that T.C.A. § 47-9-104(h) is dispositive of the rights of the parties to the proceeds of the judgment. On considering the motions, the chancellor concluded that the claim of the surety company was prior to that of the bank. The Court of Appeals agreed with the chancellor that an assignment of a security interest in a judgment is specifically excluded from the ambit of Article Nine of the Uniform Commercial Code by Section 47-9-104(h); however, the majority of the court, citing T.C.A. §§ 64-2401 and 64-2603, were of the opinion that an assignment of a security interest in a judgment is an assignment of a security interest in "property" and consequently must be recorded in the county where the assignor "resides and, in case of his nonresidence, where the property is;" otherwise, it has no validity as to subsequent creditors, such as the bank. The Court of Appeals reversed the chancellor and awarded the bank the proceeds of the judgment against Kirby. We concur in the conclusion of the chancellor and the Court of Appeals that the assignment of a right represented by a judgment as collateral for a loan is expressly excluded from the filing provisions of the Uniform Code. See T.C.A. § 47-9-104(h); Law Research Service Inc. v. Martin Lutz Appellate Printers, Inc., 498 F.2d 836 (2d Cir.1974); McIlroy Bank v. First National Bank, 252 Ark. 558, 480 S.W.2d 127 (1972). We question, however, that the assignment in this case was an assignment of a right represented by a judgment, but rather think that it properly should be classified as an assignment of a chose in action or an account. At the time the assignment was executed, the decree of the chancery court that was the predicate of the assignment was on appeal to the Court of Appeals. Under the appellate rules then in effect, an appeal completely vacated the decree of the chancery court. See T.C.A. § 27-301. See also, Southland News Company v. McDade, 60 Tenn. App. 351, 447 S.W.2d 29 (1968), wherein it is pointed out that However, as we view the circumstances of this case, the priority of Highlands' claim does not turn upon the classification of the subject matter of the assignment, but rests on the doctrine of subrogation. "Legal subrogation [as distinguished from conventional and statutory subrogation] arises out of a condition or relationship by operation of law where a person having a liability or a right or a fiduciary relationship in the premises pays a debt due by another under such circumstances that he is in equity entitled to the security or obligation held by the creditors whom he has paid." 83 C.J.S. Subrogation § 3a. See also, Shelby Mutual Insurance Company v. Clark-Holmes, Inc., 57 Tenn. App. 42, 414 S.W.2d 650; Finance Company of *733 America v. U.S. Fidelity and Guaranty Co., 277 Md. 177, 353 A.2d 49 (1976). Generally, where a surety under a contractor's performance bond is compelled by reason of the contractor's default, to complete the contract or to pay materialmen and laborers, the surety is subrogated to the rights of the contractor and the laborers and materialmen whose claims were paid to monies earned by the contractor before default, and this is so independently of assignments. See 83 C.J.S. Subrogation, §§ 46 and 59d (1953); 17 Am.Jur.2d, Contractor's Bonds, §§ 42 and 107 (1964). Cf. Miller Bros. Co. v. Plumbing &amp; Heating Co., 15 Tenn. App. 102 (1931); Farmer's Bank v. Hayes, 6th Cir., 58 F.2d 34, cert. den. 287 U.S. 602, 53 S. Ct. 8, 77 L. Ed. 524 (1932). Under this general rule as pointed out in Finance Co. of America v. U.S. Fidelity and Guaranty Co., 277 Md. 177, 353 A.2d 249 (1976), "The surety, in a sense, is `secured' by its right of subrogation, which relates back to the issuance of the bond to defeat intervening creditors. See Henningsen v. United States Fid. &amp; Guar. Co., 208 U.S. 404, 28 S. Ct. 389, 52 L. Ed. 547 (1908); Prairie State Nat. Bank v. United States, 164 U.S. 227, 17 S. Ct. 142, 41 L. Ed. 412 (1896); Industrial Bank of Washington v. United States, 138 U.S.App. D.C. 19, 424 F.2d 932 (1970); Western Casualty and Surety Co. v. Brooks, 362 F.2d 486 (4th Cir.1966); Gray v. Travelers Indemnity Co., 280 F.2d 549 (9th Cir.1960); Massachusetts Bonding &amp; Ins. Co. v. Fago Construction Corp., 82 F. Supp. 619 (D.Md. 1949); Canter v. Schlager, 358 Mass. 789, 267 N.E.2d 492 (1971)." The right of subrogation, being created by operation of law and not by written instrument, is not subject to recordation under T.C.A. § 64-2401. Neither is it within the scope of § 9-302 of the Uniform Commercial Code, which requires the filing of a financing statement to perfect a security interest. Finance Co. of America v. U.S. Fidelity &amp; Guaranty Co., 277 Md. 177, 353 A.2d 249 (1976), and numerous cases there cited. As is pointed out in Finance Co. of America v. U.S. Fidelity &amp; Guaranty Co., supra 353 A.2d at 253. In this case, there is no question but that the judgment proceeds sought to be recovered from Highlands by the bank represent money due Par-Lac by Kirby under the construction contract for which Highlands was surety on a Labor and Material Payment Bond. Neither is there any question but that Highlands advanced the money needed to satisfy labor and material liens against the Kirby property, nor that the payment of the lien claims was made only after demand by Kirby based on the Labor and Material Payment Bond. Under these circumstances, in equity, Highlands became subrogated to the rights of the lien claimants and of Par-Lac to money owed by Kirby under the construction contract. Highlands, standing in the shoes of Par-Lac and the lien claimants, is entitled to the proceeds of the judgment against Kirby to the extent of the monies advanced to pay the lien claims. Judgment of the Court of Appeals is reversed. Judgment will be entered in this court dismissing the bank's action, with costs being adjudged against the bank and its surety. BROCK, C.J., and FONES and HARBISON, JJ., concur.