MEMORANDUM OPINION GRANTING MOTION FOR RELIEF FROM STAY
KAREN S. JENNEMANN, Bankruptcy Judge.
Allied World Specialty Insurance Company ("Allied") provided surety bonds to insure performance and payment for commercial plumbing jobs undertaken by the Debtor, Progressive Plumbing, Inc. ("Progressive"). Two of the bonded projects involved the same general contractor, The Evergreen Construction Corporation.1 One project was located in Atlanta and, due to Progressive's inability to complete the job, Allied paid others to finish the job. Debtor eventually completed the second project in South Carolina, and now is due approximately $70,000.2 Allied filed its motion seeking stay relief3 to collect this balance due arguing legal theories of subrogation and setoff. The Court holds Allied is entitled to relief from stay to pursue the funds.
Progressive and Allied entered into a General Indemnity Agreement ("GIA") where Allied agreed to stand as surety for certain jobs Progressive performed.4 Progressive assigned, transferred, pledged, and conveyed certain collateral to Allied to secure the obligations under the GIA.5 Among other things, this included all contracts referred to in the bonds; all sums that may be due or become due on any of the contracts referred to in the bonds (including all percentages retained); all rights, title, and interest in any subcontracts; and all of the proceeds of these contracts.6 The GIA permitted Allied to enforce its security interests7 if Progressive defaulted by failing to complete a job covered by the bond.8 The GIA also provided that it was "expressly understood" that any rights that Allied may have against Progressive under any "such other or additional agreements of indemnity or collateral will be in addition to, and not in lieu of, the rights afforded to [Allied] under this [a]greement."9
Progressive agrees that it defaulted on at least one of the nine projects bonded (the "Bonded Projects") by Allied—the Hyatt Atlanta.10 Both parties acknowledge, however, that Allied made payments on several of the Bonded Projects.11 In March 2015, Allied demanded $750,000 in collateral from Progressive for its then estimated losses on the Bonded Projects.12 Progressive could not make a $750,000 payment, so it executed a promissory note (the "Note") in favor of Allied and payable over time for approximately $752,000.13 To secure the Note, Progressive and its principals executed a mortgage and security agreement giving Allied a mortgage on Progressive's headquarters and other property owned by non-debtor entities (the "Allied Mortgage").14 In August 2015, Allied then requested an additional $750,000 in collateral for additional losses expected on the Bonded Projects.15 Progressive did not meet this second demand.
Allied then sent letters to the general contractors on the Bonded Projects asking them to pay all amounts due Progressive directly to Allied.16 Progressive in response filed this bankruptcy case17 and an emergency Motion to Compel Compliance with the Automatic Stay.18 The Court granted Progressive's motion and found that the collection letters violated the automatic stay and either had to be retracted or they were void and without effect.19 Progressive got a break in Allied's collection efforts to stabilize its business.
Allied and Progressive admirably worked together during this Chapter 11 case to finish the Bonded Projects and to find a solution to the parties' dispute. Due to their cooperative dialogue, Progressive's Chapter 11 Plan20 was confirmed on June 10, 2016.21 Allied is due approximately $1 million for amounts it expended to finish the Bonded Projects.22 Under the confirmed Plan, Progressive will pay Allied $250,000 and reaffirm the $752,000 Note.23 The only remaining issue is whether Progressive or Allied should receive the $70,000 payable on the completion of the South Carolina project, which is what Allied seeks in this motion for relief from the stay. The Plan contemplates that if the monies are paid directly to Allied, Allied will apply a credit the $70,000 payment to the Note.24 So, the issue really is one of timing: Should Allied get this $70,000 now under theories of subordination or setoff or, instead, can the Debtor use the monies to fund current operations in light of the compromise between the parties in the confirmed Plan and pay Allied over time?
Allied argues causes exists for the Court to grant relief from the automatic stay because the $70,000 is not property of the estate under the doctrine of equitable subrogation. Progressive disagrees primarily arguing Allied has no right to equitable subrogation because all amounts due on the Bonded Projects were rolled into the Note, which constituted a novation or waiver precluding subordination. The Court holds Allied is entitled to the $70,000 and stay relief to pursue collection of the monies.
Equitable Subrogation
Equitable subrogation arises when a subcontractor or contractor defaults on obligations under its contract and the surety steps in to either complete the work or pay bills on the project.25 A surety has a right to the balance due to the contractor to the extent of full reimbursement.26 As Judge Glenn stated in In re Cone Constructors, Inc.,27 "[i]t is well recognized that a surety who has been compelled to pay the debts of its principal possesses a right of equitable subrogation."28
Most cases involving equitable subrogation in the suretyship context cite the United States Supreme Court case Pearlman v. Reliance Ins. Co.,29 for the following general propositions:
Traditionally sureties compelled to pay debts for their principal have been deemed entitled to reimbursement, even without a contractual promise such as the surety here had. And probably there are few doctrines better established than that a surety who pays the debt of another is entitled to all the rights of the person he paid to enforce his right to be reimbursed. This rule [is] widely applied in this country and [is] generally known as the right of subrogation.30 While some modern courts have questioned the applicability of Pearlman post-bankruptcy code,31 the Fourth Circuit noted that the Supreme Court cited Pearlman since the enactment of the Bankruptcy Code and did not question its validity.32
State law governs the application of subrogation principles.33 Because of the different choice of law provisions contained in the GIA (New York), the Note (Florida), and perhaps the contract itself (South Carolina),34 the Court is not easily able to determine which state's law to apply. Fortunately, all three states have similar rules for subrogation.
South Carolina law provides equitable subrogation is applicable and appropriate when: "(1) the party claiming subrogation has paid the debt; (2) the party was not a volunteer but had a direct interest in the discharge of the debt or lien; (3) the party was secondarily liable for the debt or for the discharge of the lien; and (4) no injustice will be done to the other party by the allowance of the equity."35 Under Florida law, the elements of subrogration are: (1) subrogee made the payment to protect its interests; (2) subrogee was not a volunteer; (3) subrogee was not primarily liable for the debt; (4) subrogee paid debt in full; (4) subrogation would not prejudice any third party.36 Under New York law, "the equitable doctrine of subrogation is applicable to cases where a party is compelled to pay the debt of a third person to protect his own rights, or to save his own property."37 New York law provides that the principles of equitable subrogation should be liberally applied to protect those parties who are its natural beneficiaries.38 Under any of these rules, Allied is entitled to subrogation and receipt of the $70,000.
Allied paid approximately $121,000 on the South Carolina project.39 Allied was obligated, pursuant to the GIA, to pay these subcontractors. Had Allied not paid those subcontractors, Evergreen would have had to pay them, perhaps resulting in no funds available for distribution.40 Allied was not primarily liable for this debt but paid on account of the GIA. Allied paid the two subcontractors in full. Allied was not a volunteer. Further, no injustice will be done to any third parties by allowing Allied the opportunity to pursue these funds. Allied is entitled to relief from stay to collect the $70,000 from the South Carolina project.
Novation or Waiver
Progressive argues that Allied either has waived this subrogation right by the terms of the confirmed Plan or, alternatively, that the $752,000 Note constituted a novation precluding subrogation. The Court disagrees finding no waiver by Allied and no novation.
Progressive argues that the Note acted as a novation so that Allied's subrogation rights under the GIA are now not available.41 The Eleventh Circuit Court of Appeals lists the four elements to effectuate novation of a binding contract under Florida law: "(1) a previously valid contract; (2) agreement of the parties to cancel the contract; (3) a new valid and binding contract; (4) agreement of the parties that the new contract will replace and extinguish the old one."42 The Court may infer intent from the totality of the circumstances.43 When the terms and conditions of the new written agreement are not in doubt, the question of whether that new agreement effects a novation is one of law.44 Progressive has failed to establish each of these four traits.
The previously valid contract is the GIA. The new contract is the Note. True, the Note has specific payment terms.45 However, it is not clear that there was an agreement of the parties to cancel the GIA or an agreement that the Note would replace and extinguish the rights and remedies under the GIA. In fact, the demand letters Allied sent to the general contractors on the Bonded Projects when this bankruptcy case was filed would posit an exact opposite intent—that Allied intended the Note and the GIA to remain simultaneously valid. This conclusion is bolstered by the fact, known in hindsight, that Allied's losses exceed the amount of the $752,000 Note.
Allied always preserved its right to demand more money as its losses accrued or its reserves increased.46 The Note references the GIA only once—"The Note is further secured by the [GIA] dated March 20, 2013."47 The Note also provides that the remedies of Allied in the Note or the other "Loan Documents shall be cumulative and concurrent and may be pursued singularly, successively or together, at the sole discretion of [Allied.]"48 The "Loan Documents" are defined as the Note, the Mortgages, the Security Agreements, and all other documents and instruments executed in connection with the Note.49 The Court finds that one of the Security Agreements, and therefore one of the Loan Documents, is the GIA. All remedies stemming from the relationship created by the GIA are cumulative with the remedies under the Note. The Note does not mention equitable subrogation—the Court will not infer and extinguish Allied's equitable subrogation rights absent an express indication that was what the parties intended.50 No novation occurred.
Nor did Allied waive its subrogation rights. The Supreme Court of Florida generally defines waiver as an intentional voluntary relinquishment of a known right or conduct that implies intentional voluntary relinquishment of a known right.51 The Court may consider the totality of the circumstances.52 Here, considering the language contained in the GIA, the Note, the demand letters, and the conduct of the parties, the Court holds that Allied did not waive its equitable subrogation rights by accepting the Note.
Conclusion
Allied is entitled to relief from stay to pursue the funds due under the South Carolina project under the doctrine of equitable subrogation. The Note did not act as a novation, and Allied did not waive its equitable subrogation rights. A consistent order will be entered simultaneously with this memorandum opinion.
