Florida Bankruptcy Court Holds Completing Surety Has No Claim on Funds Contractor Earned Before Default

In re: Steve A. Clapper & Assoc. of Fla.,
265 B.R. 460 (Bankr. M.D. Fla. 2001)

Capital Indemnity Corporation (“Capital”) was the surety of Steve A. Clapper & Associates of Florida (“Clapper”) on a project for Manatee County. Clapper submitted a payment application to Manatee County on September 30, 1999, seeking payment of $95,702.04 for work performed, which Manatee County accepted. On October 21, 1999, Manatee County terminated Clapper for default, and Capital assumed performance of the Project in accordance with the surety bonds.

Capital also served as surety of Clapper on a project for Charlotte County. Clapper submitted a payment application to Charlotte County on September 24, 1999, seeking payment in the amount of $78,990.53 for work performed, which Charlotte County accepted. On October 8, 1999, Charlotte County terminated Clapper’s contract for default. Again, Capital, as required by the surety bonds, assumed performance of the Project.

Prior to these events, Clapper filed a voluntary petition for relief under the Bankruptcy Code. On November 17, 1999, this matter was converted into a liquidation case under Chapter 7 of the Code.

On March 31, 2000 Manatee County paid to the Bankruptcy trustee the $95,702.04 previously requested by Clapper on September 30, 1999. On January 24, 2000, Charlotte County paid to the Bankruptcy trustee the $78,990.53 previously requested by Clapper on September 24, 1999.

In an effort to recover the amounts paid to the Bankruptcy trustee by Manatee and Charlotte Counties, Capital initiated a cause of action against the trustee, claiming that the funds were not properties of the estate, and thus not subject to turnover pursuant to Section 542 of the Bankruptcy Code. Both parties filed motions for summary judgment. After denying both motions, the Bankruptcy Court agreed to reconsider its decision.

The Bankruptcy Court concluded that Capital had no right to the funds. While relevant precedent did suggest that the surety is “entitled to the unpaid monies of the contract proceeds where the surety completes the construction job of the debtor after the debtor defaults,” the court was not faced with such circumstances. Here, the monies paid by Manatee County and Charlotte County were fully earned by Clapper before it was declared to be in default. Thus, the payments were property of the estate – not the performing surety. The doctrine of equitable subrogation did not alter the Court’s conclusion. Assuming without conceding that the doctrine was applicable, the Court noted that “one who seeks subrogation must first establish that the right matured only after the contractor defaulted and the surety made payments thereafter on a performance bond.” Because it was not faced with such facts, the Court determined that the case formed no basis for application of the doctrine. Consequently, it awarded the Trustee summary judgment.

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