Opinion ID: 4777078
Heading Depth: 2
Heading Rank: 1

Heading: Subrogation at Common Law

Text: Under the equitable common-law doctrine “generally known as the right of subrogation,” 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, 137 (1962). The right of equitable “[s]ubrogation is often called an equitable assignment or an 14 assignment by operation of law,” as “[s]ubrogation does not spring from contract although it may be confirmed or qualified by contract.” Restatement (Third) of Suretyship & Guaranty § 27 cmt. a (1996). Here, none of the relevant contracts speaks to the parties’ subrogation rights, other than to broadly reserve those rights. The common-law right of subrogation generally has two limitations that are relevant here. First, a subrogee takes no more rights than the subrogor had. United States v. California, 507 U.S. 746, 756 (1993). Thus, a subrogee “usually ‘cannot acquire by subrogation’” rights that the subrogor did not have. Id. (citation omitted). Second, payment in full is typically required before rights are subrogated. See generally LTC Holdings, 597 B.R. at 574 n.47 (collecting cases). A surety fulfilling an obligation under a performance bond for a government contract is subrogated “to the contractual rights of both the defaulted contractor and the government.” Hartford, 108 Fed. Cl. at 532; see also Universal Bonding Ins. Co. v. Gittens & Sprinkle Enters., Inc., 960 F.2d 366, 376 (3d Cir. 1992) (citing Pearlman, 371 U.S. at 132). Thus, the performing surety “is entitled to the funds in the hands of the government . . . as a subrogee having the same right to the funds as the government.” Hartford, 108 Fed. Cl. at 532 (cleaned up). And “[t]he government has the same right which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him.” United States v. Munsey Trust Co. of Wash., D.C., 332 U.S. 234, 239 (1947) (quotation marks and citation omitted). The Bankruptcy Code 15 generally preserves the right of a creditor to use funds in its possession to set off “a mutual debt ow[ed] by such creditor to the debtor . . . against a claim of such creditor against the debtor.” 11 U.S.C. § 553(a).