Friends, underwriters, bond claim managers: lend me your eyes, and behold the saga of a surety that accepted collateral security from a financially unstable principal as an inducement for the issuance of new Miller Act performance & payment bonds. The drama unfolds when the principal files for bankruptcy protection within 90 days of the collateral transfer and the bankruptcy trustee — that most formidable of foes! — seeks to avoid the transfer as preferential. Fear not, dear readers! Our hero fights gallantly in In re ESA Environmental Specialists, Inc., and is richly rewarded in this Fourth Circuit Court of Appeals production.
Tag Archives: surety salvage
4th Circuit Stages “The Collateral Battle” Between A Contract Surety & Its Principal’s Trustee in Bankruptcy
It was an honor and pleasure to speak at last week’s surety and fidelity claims conference in Philadelphia hosted by the American Conference Institute. Mark Oertel, a surety attorney from Los Angeles, and I closed out the conference on Thursday, October 18 with a presentation entitled “The Interplay Between Equitable Subrogation and the General Agreement of Indemnity’s Assignment Clause.”
Our remarks focused on two of the tools sureties use to minimize loss after satisfying claims made under payment and performance bonds. One of those tools, equitable subrogation, allows the surety to step into the shoes and assert the rights of those entities to whom or on whose behalf the surety has performed or made payment. That means after it performs its bond obligations, a surety becomes “subrogated” to the owner’s right to apply contract funds to completion costs, to the bond principal’s right to recover against poor-performing and/or late-performing subcontractors, and to the subs’ and suppliers’ rights to payment. Since the courts have held that the surety’s equitable rights trump the rights of bankruptcy trustees, lenders and taxing authorities, equitable subrogation is undoubtedly the most powerful weapon in the surety’s salvage arsenal.
That’s MOST powerful. Not ALL powerful.