Opinion ID: 1752024
Heading Depth: 1
Heading Rank: 2

Heading: The Chiwapa Claim

Text: Was Travelers' claim on the Chiwapa contract limited to the ten percent retainage? Upon his appointment, the receiver took over a new and separate bank account belonging to Stigler which included $22,520.24, representing the amount Stigler had received from the owner of the Chiwapa contract on October 10, 1969, for partial work completed. At this time the owner on the Chiwapa contract still owed Stigler the sum of $32,281.70, consisting of $21,974.21 retainage and the balance in progress payments. Travelers had paid out for labor and materials claims on the Chiwapa contract the sum of $23,943.03. The chancellor allowed Travelers' claim only as a general creditor entitled to participate prorate except for the ten percent retainage of $21,974.21, which was allowed and paid to Travelers free and clear of all expenses. In thus limiting Travelers' claim, the chancellor held that Travelers' subrogation rights were limited to the ten percent retainage because its assignment security (in the application for the surety bond) was not perfected by filing as required under the Uniform Commercial Code. The question first stated has two points of inquiry, the first being whether Travelers' subrogation rights are limited to retainage. In arguing for such limitation, the receiver relies upon State for Use of National Surety Corporation v. Malvaney, 221 Miss. 190, 72 So.2d 424 (1954); Southern Surety Company v. Greenville Bank & Trust Co., 154 Miss. 412, 122 So. 529 (1929); Canton Exchange Bank v. Yazoo County, 144 Miss. 579, 109 So. 1 (1926), and First National Bank of Aberdeen v. Monroe County, 131 Miss. 828, 95 So. 726 (1923). In the Monroe County and Green ville Bank & Trust Company cases the contest was between an assignee of the contractor and the surety, and the Court held that the surety's subrogation rights were inferior to the Bank's right to the progress funds arising out of the assignment. These cases did not, however, involve a surety's right to be indemnified from unassigned progress funds and, therefore, are no authority for the proposition that unassigned progress funds are not available to indemnify the surety for its losses. The other two cases relied on by the receiver likewise offer no authority for the present question inasmuch as those cases involved only retainage funds. The unassigned funds in the amount of $32,281.70 still in the hands of the owner of the Chiwapa contract at the time of default and at the time the receiver was appointed were ample to indemnify the surety for its losses on that project. It was not only the right but the duty of all parties to use the full amount of the funds to pay suppliers of materials and laborers. Travelers paid these obligations and was therefore entitled to be indemnified for the sums so paid out. We hold that there is no reason to limit the surety's equitable right of subrogation to the ten percent retainage and that all funds in the hands of the owner at the time of the appointment of the receiver were available to Travelers to the extent necessary to indemnify it for losses sustained on that project. [1] The second point of inquiry is whether the filing requirements of the Uniform Commercial Code apply to the equitable right of Travelers to be indemnified for its losses. We are of the opinion that it does not. The rights of the surety to subrogation for its losses are founded on equitable principles independent of any assignment of contract proceeds in the application of the contractor. The assignment in a bond application is in aid of an equitable right; it does not create that right. Farmers' Bank v. Hayes, 58 F.2d 34 (C.A. 6, 1932). Upon what appears to be the soundest reasoning and the weight of authority, we hold that a surety's right of subrogation is unaffected by the filing requirements of the Uniform Commercial Code. Home Indemnity Co. v. United States, 433 F.2d 764 (Ct.Cl., 1970); National Shawmut Bank of Boston v. New Amsterdam Casualty Co., 411 F.2d 843 (C.A. 1, 1969); National Surety Corp. v. State National Bank, 454 S.W.2d 354 (Ky. 1970); Aetna Casualty & Surety Co. v. Perrotta, 62 Misc.2d 252, 308 N.Y.S.2d 613 (N.Y. 1970); Jacobs v. Northeastern Corp., 416 Pa. 417, 206 A.2d 49, 11 A.L.R.3d 1220 (1965); Gilmore, Security Interests in Personal Property, Vol. 1, § 11.1, pp. 336-337 (1965).