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N.M. State Highway & Transp. Dep't v. Gulf Ins. Co. - 2000-NMCA-007, 128 N.M. 634, 996 P.2d 424

Rule:

Part of the purpose of withholding final progress payments and retained funds is to protect the surety. Like the government entity who is entitled to protect itself by using the funds to complete the project or pay lienholders, the surety can assert the right of subrogation to protect itself and may use the same remedies that were available to the government for its protection from the contractor. Thus, by bonding the project, the surety steps into the shoes of not only the contractor, but also of the laborers and materialmen paid by it, and of the government. The equity in recognizing the surety's claim as superior to other creditors lies in the belief that subrogation is a remedy for the benefit of one secondarily liable who has paid the debt of another and to whom in equity and good conscience should be assigned the rights and remedies of the original creditor.

Facts:

Saulsberry Construction bid fence construction projects for the New Mexico State Highway and Transportation Department and was awarded two projects as the successful bidder. A surety issued performance and payment bonds on behalf of Saulsberry pursuant to the New Mexico Little Miller Act. Thereafter, First State made loans to Saulsberry under three separate promissory notes, totaling $ 57,193. The loans were secured by a security agreement, under which First State took an assignment of the "contract proceeds" on the State's projects. First State perfected its security interest by filing under the Uniform Commercial Code. The surety eceived notice that Saulsberry's creditors, including laborers, materialmen, and subcontractors, had not been paid for the labor, goods, and materials they had used on the projects and so it fulfilled these obligations. After the projects were completed, the State owed a total of $ 86,522 by way of final progress payments and retainage for the two projects. The surety and First State both made demands on the State for the funds. The district court dismissed the State from the action and ordered any parties having an interest in the funds to interplead in the action. First State then filed a Complaint to Foreclose Lien against Saulsberry and the surety. The surety filed a motion for summary judgment against First State, claiming priority to the interpleaded funds. On motion for summary judgment, the district court apportioned interpleaded funds between the surety, the contractor's surety, and appellee, the contractor's creditor. Having fulfilled its obligations under the performance and payment bonds it previously issued on behalf of Saulsberry, appellant surety challenged the judgment, contending that it had superior rights under the doctrine of subrogation. 

Issue:

Does a surety that satisfied claims against the contractor by paying laborers and materialmen have superior rights against the contractor's secured creditors to final progress payments and retained funds held by the project owner?

Answer:

Yes

Conclusion:

In reversing the judgment of the lower court, the appellate court concluded that appellant surety had superior rights. It held that federal case law firmly established that a surety's subrogation rights were superior to secured creditors whose interests were perfected under the Uniform Commercial Code, and part of the purpose of withholding final progress payments and retained funds was to protect the interests of the surety. The appellate court ruled that the surety was thus solely entitled to receive the funds.

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