The surety appealed a district court decision that granted summary judgment to the bank regarding disputed funds held by a receiver in a receivership action. The surety argued it was entitled to account receivable funds held in receivership under an equitable subrogation theory. In March 2020, the bond principal and surety had entered into a surety relationship by executing a General Agreement of Indemnity (the “indemnity agreement”) for public works projects (the “bonded projects”). Earlier, in April 2020, the bank had made three loans to the bond principal. For all three loans, the bank and bond principal executed security agreements that granted the bank a security interest in the debtor’s property, including the debtor’s accounts receivable. That same month, the bank perfected its security interest by filing UCC financing statements with the Minnesota Secretary of State. The bond principal defaulted on the bonded projects, and several subcontractors and suppliers filed claims with the surety for their losses. Later, in April 2021, the surety issued several bonds, noting the bond principal as contractor and itself as surety, and paid a large sum on the bonded projects. In May 2021, the bank provided written notice to the bond principal that it had defaulted on its loans, but the bond principal failed to cure the default. In November 2021, the surety filed a UCC financing statement with the secretary of state, listing the indemnity agreement as collateral. In December 2021, the bank sued the bond principal. The district court entered judgment in the bank’s favor and appointed a limited receiver over the bond principal’s property. The receiver identified over $500,000 in accounts receivable; in February 2023, the bank and the surety filed motions for summary judgment seeking the accounts receivable funds. The district court denied the surety’s motion and granted the bank’s motion.
In Receivership of United Prairie Bank v. Molnau Trucking LLC, No. A23-1478, 2024 WL 1987878, 2024 Minn. App. Unpub. LEXIS 362 (Minn. Ct. App. May 6, 2024) (unpublished opinion), the court affirmed the district court holding that summary judgment for the bank was proper because (1) the doctrine of equitable subrogation was not available to the surety; (2) even assuming the doctrine was available, the bank had perfected its interest in the bond principal’s collateral before the surety’s equitable subrogation claim could have attached; and (3) even if the indemnity agreement gave the surety the obligation to pay, the surety had not executed the agreement to bind itself to it. The doctrine of equitable subrogation provides that “a party ‘who has discharged the debt of another may succeed in substitution to the rights and position of the satisfied creditor.’” Ripley v. Piehl, 700 N.W.2d 540, 545 (Minn. App. 2005). Equitable subrogation is only applicable where “(a) the party seeking subrogation has acted under a justifiable or excusable mistake of fact; and (b) injury to innocent parties will otherwise result.” Peterson v. Zero Ests., 261 N.W.2d 346, 348 (Minn. 1977). The court found that the surety failed to establish any mistake of fact to meet the first requirement for imposing equitable subrogation. The court reasoned that because the bank had filed its UCC statement, the surety was on notice that the bank had perfected its interest in the bond principal’s property. And despite the notice, the surety had paid on the bonds. Therefore, the court could find no mistake of fact. Regardless, even if the surety agreement could meet the required prongs, the court agreed with the district court that the bank’s security interest was first in time. Under Minnesota law, a surety’s equitable subrogation claim attaches when the surety issues a payment bond. Here, the surety company did not issue the bond until the year after the bank had already perfected its security interest. The court noted that the surety company was not required to pay the bonds under the indemnity agreement, and as such, there was no argument that the bank should not retain priority over any interest of the surety company.
By Kristin Meurer [email protected]
Edited By Callighan Ard [email protected]
Edited By Ashley Boyce [email protected]
Edited By Hayden Mariott: [email protected]