Delaware Court Holds Completing Surety’s Right of Equitable Subrogation Arises Before Completion of Contract

Travelers Cas. and Sur. Co. of Am. v. Colonial Sch. Dist. et. al.
No. 18167, 2001 Del. Ch. LEXIS 31 (Del. Ch. Mar. 16, 2001)

Travelers Casualty and Surety Company of America (“Travelers”) served as surety of contractor Healy Management Services, Inc. (“Healy”) on a project for the Colonial School District (“Colonial”). Traveler’s also served as surety of Healy on a project for Electra Arms Senior Associates, L.P. (“Electra Arms”). Casey Electric, Inc. (“Casey”) and I.D. Griffith, Inc. (“Griffith”) were subcontractors of Healy on separate unbonded projects, unrelated to the projects which were bonded by Travelers.

After Healy failed to make payments to both Casey and Griffith, both parties filed praecipes for attachment against Colonial, garnishing payments allegedly due Healy.

Healy subsequently defaulted on its obligations under its contracts with Colonial and Electra Arms. As required by the payment and performance bonds, Travelers undertook to perform Healy’s obligation to complete the contracts and to pay the subcontractors and materialmen on both projects.

After receiving notice of the writs of attachment in favor of Casey and Griffith, Travelers filed an action in equity seeking a declaratory judgment that, as a performing surety, it had the primary right to the money held by Colonial for Healy.

The Delaware Chancery Court agreed. The Court first declared that Travelers had a right to the funds pursuant to Travelers’ right to equitable subrogation. This right arose on the date the suretyship agreement was executed. Accordingly, Travelers’ claim to the withheld funds obtained priority over the defendants’ subsequent claims to those funds. The fact that the Project had not yet been completed had no bearing on its holding. As noted by the Court, a surety’s right to subrogation requires completion of the project as a condition precedent to exercising this right only when (1) it is “necessary to prevent the surety from competing with the owner’s rights against the contractor-principal” or (2) the subcontractors obtained their lien claims with the knowledge and the consent of the surety and where such liens were contemplated by the surety bond. Here, neither exception applied. Thus, Traveler’s claim was superior.

The Court also supported its position based on the specific language of the bonds and construction contract at issue. Finally, the Court determined that it would be inequitable to strip Travelers of its priority position. Accordingly, it granted summary judgment in Travelers’ favor, and issued a judgment establishing Travelers’ priority to the funds.

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