May 22, 2009

Surety has right against engineering firm for losses on project; claims not barred by collateral estoppel or res judicata


A surety filed suit against three engineering firms seeking to recover some of the surety’s losses on a project. The trial court granted summary judgment in favor of the engineers. We have concluded that the surety does have a right of action against the engineers based upon equitable subrogration and that the surety’s claims are not barred by res judicata or collateral estoppel. Because the consulting engineer had no contract with the project owner, the trial court did not err in granting summary judgment on contract claims against the consulting engineer. In all other respects, we reverse the trial court’s decision.

Opinion may be found at the TBA website:

“There appear to be no Tennessee cases involving the particular type of surety claim in this case–namely, a surety subrogating to the right’s of the obligee/creditor to seek damages from a third party. The Restatement, however, contemplates such an action: To the extent that the secondary obligor is subrogated to the rights of the obligee, the secondary obligor may enforce, for its benefit, the rights of the obligee as though the underlying obligation had not been satisfied: (a) against the principal obligor pursuant to the underlying obligation; (b) against any other secondary obligor . . . .(c) against any interest in property securing either the obligation of the principal obligor or that of any other secondary obligor . . . . (d) against any other persons whose conduct has made them liable to the obligee with respect to the default on the underlying obligation. RESTATEMENT (THIRD) OF SUR. & GUAR. § 28 (emphasis added).” Id.

“[A] surety or guarantor, by payment of the debt of his principal when he is obligated to make that payment, acquires an immediate right to be subrogated to the extent necessary to obtain reimbursement or contribution to all rights, remedies and securities which were available to the creditor to obtain payment from the person or property of any person who, as to the surety, is primarily liable for the debt. Thus, the surety is entitled to step into the shoes of the creditor. By completing a project on behalf of its defaulting principal, a surety “confer[s] a benefit on the obligee and, therefore, step[s] into the shoes of the obligee.” Id.