STATE OF MINNESOTA

                                  IN SUPREME COURT

                                       A23-1478


Court of Appeals                                                           Hennesy, J.
                                                           Took no part, Procaccini, J.
In re the Receivership of United Prairie Bank,

                    Respondent,

vs.

Molnau Trucking LLC, et al.,

                    Defendants,

Granite Re, Inc.,                                                  Filed: July 16, 2025
                                                            Office of Appellate Courts
                    Appellant.

                               ________________________


Thomas H. Boyd, Andrew J. Steil, Kyle R. Kroll, Winthrop & Weinstine, P.A.,
Minneapolis, Minnesota, for respondent.

Daniel R. Gregerson, Daniel A. Ellerbrock, Nicholas J. Sideras, Gregerson, Rosow,
Johnson & Nilan, Ltd., Minneapolis, Minnesota, for appellant.

Joseph J. Witt, Teresa E. Rice, Minnesota Bankers Association, Eden Prairie, Minnesota,
for amicus curiae Minnesota Bankers Association.

Patrick J. O’Connor, Jr., POConnor ADR LLC, Minneapolis, Minnesota, for amicus curiae
Surety & Fidelity Association of America.

                               ________________________




                                            1

SYLLABUS

       1.     A performing construction surety need not show any mistake of fact to

exercise its right of equitable subrogation.

       2.     A surety’s right to equitable subrogation is not a security interest subject to

the Uniform Commercial Code (UCC), 

 to 336.9-809 (2022), and

the UCC’s first-in-time priority rule.         Instead, through the doctrine of equitable

subrogation, a performing surety has priority over a secured creditor as to contract funds

created by the surety’s performance on its bond obligations.

       Reversed and remanded.

OPINION

HENNESY, Justice.

       This appeal arises from a dispute between a surety bond company, appellant Granite

Re, Inc. (Granite), and a creditor bank, respondent United Prairie Bank (UPB), regarding

entitlement to funds held by a receiver in a receivership action. Granite issued payment

bonds to Molnau Trucking LLC (Molnau) for public works projects. Molnau defaulted on

the public works projects. Molnau also defaulted on loans from UPB. At issue is whether

Granite or UPB has priority to the bonded contract funds held by the receiver. Granite

argues that it has priority as a performing construction surety under the doctrine of

equitable subrogation because it paid laborers and suppliers for their work on the projects.

UPB argues that it has priority under the Uniform Commercial Code (UCC), 

 to 336.9-809 (2022), because UPB perfected its security interests in

Molnau’s accounts receivable before Granite issued the payment bonds. We conclude that


                                               2
Granite, as the construction surety, has the superior interest in the bonded contract funds

as a matter of law, and we therefore reverse the court of appeals decision affirming the

district court’s grant of summary judgment in favor of UPB and we remand to the district

court.

                                          FACTS

         The relevant events in this receivership action took place between 2020 and 2023.

During this time, Molnau entered into financial relationships with both UPB and Granite. 1

From April to September 2020, UPB issued three loans to Molnau with a total loan amount

of $3,258,400. As collateral for the loans, Molnau granted UPB security interests in

Molnau’s business assets, which included Molnau’s “accounts,” “money,” “rights to

payment,” and “general intangibles,” all “whether now existing or hereafter arising.”

Immediately after issuing each loan, UPB perfected its security interests in Molnau’s

present and future accounts receivable by filing UCC financing statements with the

Minnesota Secretary of State.

         For Molnau to enter into contracts to perform certain public works projects, Molnau

was required to provide bonds to ensure that it would complete the projects and pay the

laborers and suppliers. See 

, subd. 2 (2024). In March 2020, Molnau

executed a general agreement of indemnity in favor of Granite, a surety company, as




1
       Molnau was a party in the district court action UPB filed but is not a party to this
appeal.

                                              3
consideration for Granite issuing these bonds for Molnau as part of a surety relationship. 2

The next year, in the spring of 2021, Molnau entered into construction contracts with

Wright County, the City of Champlin, and the City of Saint Michael (collectively, the

government entities). Granite issued payment and performance bonds for each of these

public works projects. Only the payment bonds are at issue here. Granite issued the

payment bonds several days after the dates of the corresponding contracts. The payment

bonds imposed an obligation on Granite to promptly pay any unpaid claimant for any

undisputed amount, including interest, upon Molnau’s default.

       Molnau later failed to pay some of the laborers and suppliers on the public works

projects. The laborers and suppliers filed claims against Granite’s payment bonds. Granite

paid a total of $741,998 to discharge its obligations under the payment bonds.

       Molnau also defaulted on its loan agreements with UPB. In December 2021, UPB

sued Molnau for its default and requested that the district court appoint a receiver over

Molnau’s assets, among other relief. The district court appointed a limited receiver to

manage Molnau’s assets.

       During the spring and summer of 2022, the receiver worked to identify Molnau’s

assets that were subject to the receivership, which included accounts receivable owed to




2
        In this agreement, Molnau agreed to indemnify Granite from any loss or liability
resulting from the bonds and agreed that Granite would be subrogated to all Molnau’s
rights in any such bonded contracts, “including deferred and reserved payments, current
and earned estimates and final payments.” This contractual subrogation right is a distinct
remedy from the equitable subrogation right at issue in this opinion.

                                             4
Molnau. The receiver reported on Molnau’s failure to pay laborers and suppliers on the

public works projects, stating:

       A number of the Molnau Trucking projects for local municipalities required
       a performance bond and/or retainage escrow funds to be established as a
       condition of the various contracts. The Receiver is discovering that a number
       of these projects were either not completed, had remaining “punch list”
       issues to address, had unpaid sub-contractors or were generally deficient (per
       the customer) and the retainage funds and/or underlying performance bonds
       have or may be accessed to complete these projects. Therefore, much of the
       accounts receivable asset is either overstated or non-existent.

The receiver contacted Granite and the government entities for information about the

projects. Through this process, the receiver identified certain contract funds in which both

Granite and UPB claimed an interest. These funds would have been due to Molnau under

its contracts with the government entities. Molnau, however, had defaulted on these

contracts, and Granite claimed it was entitled to the funds under the doctrine of equitable

subrogation. At the time the receiver identified the funds, the government entities were

holding some of the funds as retainage 3 and had paid the rest to an escrow company Granite

was using to hold contract funds and disburse payments to claimants. The receiver,

Granite, and UPB all agreed that the funds in dispute should be paid to the receiver, who

would hold them in a segregated account until the dispute was resolved.

       At the end of 2022, the receiver filed a motion requesting that the district court set

a briefing schedule for UPB and Granite to assert their claims to the disputed funds. The



3
       In the construction context, “retainage” refers to the practice of holding back a
percentage of each month’s payment to a contractor until the project has been completed.
1 Alvin L. Arnold & Myron Kove, Construction & Development Financing § 4:58 (3d ed.
2024).

                                             5
receiver did not take a position on these claims. In the meantime, the receiver asked the

court to order the government entities to pay the receiver the amounts allegedly owed to

Molnau, including retainage amounts. The district court granted the receiver’s motion.

The total amount of funds ultimately deposited with the receiver was $456,031 (the bonded

contract funds).

       UPB and Granite then brought cross-motions for summary judgment, each claiming

it was entitled to the bonded contract funds. Granite argued that under the doctrine of

equitable subrogation it has priority as a surety that was required to perform under its bond.

UPB argued that it has priority as a first-in-time secured lender under the UCC.

       The district court granted UPB’s motion for summary judgment and denied

Granite’s. The court recognized that, as a performing surety, Granite has an equitable right

of subrogation to the bonded contract funds. The court ruled, however, that UPB has

priority because UPB had perfected its security interest in Molnau’s accounts receivable

before Granite issued the payment bonds. The district court subsequently issued an order

and judgment, which directed the receiver to pay the bonded contract funds to UPB,

terminated the receivership, and discharged the receiver.

       Granite appealed, and the court of appeals affirmed. United Prairie Bank v. Molnau

Trucking LLC, No. A23-1478, 

 (Minn. App. May 6, 2024).                      In

determining that Granite did not have a right to equitable subrogation, the court of appeals

relied on case law addressing equitable subrogation in the mortgage context. 

 at *2

(citing Carl H. Peterson Co. v. Zero Ests., 

 (Minn. 1977)). The court

of appeals concluded that the district court properly granted summary judgment to UPB


                                              6
because Granite did not satisfy the first prong of equitable subrogation under the test

established in Carl H. Peterson Co. v. Zero Estates, 261 N.W.2d at 348—“that [Granite]

acted under a justifiable or excusable mistake of fact” in paying the laborers and suppliers.

 Additionally, the court of appeals concluded that UPB retained priority over any

interest that Granite could have acquired in the bonded contract funds through equitable

subrogation because the bank had filed its UCC statements and perfected its security

interest in Molnau’s accounts receivable before Granite’s equitable subrogation claim

attached. 

 at *3–4. The court of appeals therefore concluded that the district court

properly awarded the funds to UPB. Id. at *4.

       Granite filed a petition seeking review of two issues. First, what is the appropriate

standard for evaluating whether a surety or other party is entitled to equitable subrogation

after discharging the obligations of another? And second, does a surety making payment

under a payment or performance bond have an equitable right to remaining contract funds

that takes priority over the rights of a third-party lender, regardless of the timing of UCC

filings? We granted review.

                                        ANALYSIS

       On an appeal from summary judgment, we review de novo whether there are

genuine issues of material fact and whether the district court erred in its application of the

law to the facts. Com. Bank v. W. Bend Mut. Ins. Co., 

 (Minn. 2015).

When, as here, a district court determines equitable claims as a matter of law at summary

judgment—rather than by weighing the equities—we apply de novo review. SCI Minn.




                                              7
Funeral Servs., Inc. v. Washburn-McReavy Funeral Corp., 

, 860–61

(Minn. 2011).

      Before we turn to the questions in this case, we briefly review the role of suretyship

in public works projects to provide the legal context in which this conflict arose. Under

the Public Contractors’ Performance and Payment Bond Act, 

.26–.32

(2024), contractors engaging in public works projects must secure bonds to guarantee that

projects are completed and that laborers and suppliers are paid. Specifically, this act

requires performance and payment bonds for public works projects:

      [A] contract with a public body for the doing of any public work is not valid
      unless the contractor gives (1) a performance bond to the public body with
      whom the contractor entered into the contract, for the use and benefit of the
      public body to complete the contract according to its terms, and conditioned
      on saving the public body harmless from all costs and charges that may accrue
      on account of completing the specified work, and (2) a payment bond for the
      use and benefit of all persons furnishing labor and materials engaged under,
      or to perform the contract, conditioned for the payment, as they become due,
      of all just claims for the labor and materials.

, subd. 2. The purpose of the bonds is “to protect laborers and

materialmen who perform labor or furnish material for the execution of a public work to

which the mechanic’s lien statute does not apply.” 4 Ceco Steel Prods. Corp. v. Tapager,

 (Minn. 1940).

      In the public construction context, suretyship involves a three-party relationship

between the surety, the contractor, and the project owner, or obligee. See Peter A. Alces



4
       Under 

 (2024), laborers and suppliers can obtain liens on
property they improve to secure payment for their services. These liens, however, are not


                                            8
& Susan Sieger-Grimm, The Law of Suretyship and Guaranty § 10:1 (2024). By issuing

bonds, the surety guarantees and becomes secondarily liable for the performance of a

promise made by a contractor to the project owner. Charles R. Gossage, A Primer in

Contract Surety Law, in Fundamentals of Construction Law 157, 158 (Carina Y. Enhada

et al. eds. 2001). Sureties have a variety of contractual and common law remedies to recoup

losses, either from contractors directly or from the funds due under bonded contracts. 5 Id.

at 165, 169–70. One of these remedies is the right of equitable subrogation. Nat’l Sur. Co.

v. Berggren, 

, 56–57 (Minn. 1914) (discussing the availability of equitable

subrogation to sureties).

          As a general matter, “subrogation” refers to the “substitution of one party for

another whose debt the party pays, which entitles the paying party to step into the shoes,

or be substituted to all the rights, priorities, remedies, liens, and securities of, the other

party.”     Melrose Gates, LLC v. Chor Moua, 

 (Minn. 2016).

“Equitable subrogation has its origins in common law, and its purpose is to place the

responsibility for the payment of the debt upon the one who in equity ought to pay it.” 

.




available on public property. Burlington Mfg. Co. v. Bd. of Courthouse & City Hall
Comm’rs, 

 (Minn. 1897).
5
       A key difference between suretyship and insurance is that sureties do not expect to
bear the risk of loss. See William Schwartzkopf, Practical Guide to Construction Contract
Surety Claims § 1.02 (3d ed. 2018) (explaining that “[i]n suretyship . . . losses are not
calculated into the premium” and that “when a surety makes a payment, the principle and
any indemnitors are expected to repay the surety’s losses”).

                                              9
         In the construction surety context, the United States Supreme Court has noted that

“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.” Pearlman v. Reliance Ins. Co., 

, 136–37 (1962). We have a

long line of cases, dating back over 100 years, recognizing the right of a construction surety

to equitable subrogation when the surety has performed the obligations of a contractor to

pay laborers and suppliers. See, e.g., First Nat’l Bank of Saint Paul v. McHasco Elec., Inc.,

 (Minn. 1966); Hartford Accident & Indem. Co. v. Fed. Constr. Co.,

 (Minn. 1926); Barrett Bros. Co. v. Saint Louis County, 

 (Minn. 1925); Berggren, 

; Cassan v. Maxwell, 

 (Minn.

1888).

                                                I.

         Granite, the surety, first challenges the court of appeals’ conclusion that it does not

have a right to the bonded contract funds under the doctrine of equitable subrogation

because it did not act “under a justifiable or excusable mistake of fact” in paying on the

bonds. United Prairie Bank, 

, at *2. In reaching this conclusion, the

court of appeals relied on our decision in Peterson, which involved a mechanic’s lien

foreclosure action in which a bank claimed priority through its mortgage under the doctrine

of equitable subrogation. 261 N.W.2d at 347–48. We held in Peterson that equitable

subrogation was available “where one party has provided funds used to discharge another’s




                                               10
obligations if (a) the party seeking subrogation has acted under a justifiable or excusable

mistake of fact and (b) injury to innocent parties will otherwise result.” 

.

       Granite does not argue that it made payments on the bonds based on a mistake of

fact. Rather, Granite argues that the “mistake of fact” standard we articulated in Peterson

is not “a requirement for equitable subrogation in the context of a performing construction

surety.” UPB, on the other hand, argues that the court of appeals properly applied the

“mistake of fact” standard here, asserting that “[t]he ‘mistake of fact’ element embodies

the maxim that ‘equity aids the vigilant, and not the negligent.’ ” See, e.g., Citizens State

Bank v. Raven Trading Partners, Inc., 

 (Minn. 2010). UPB notes that

Granite was on notice of UPB’s interest in Molnau’s accounts receivable at the time it

issued its bonds, and that Granite could have declined to issue the bonds or otherwise

attempted to protect its interests, for example, by negotiating a subordination agreement.

       We hold that the “mistake of fact” standard does not apply in the context of a

performing construction surety. We have applied the doctrine of equitable subrogation in

a wide variety of contexts beyond construction sureties, including cases involving

insurance, mortgages, and taxes. E.g., RAM Mut. Ins. Co. v. Rohde, 

, 10–14

(Minn. 2012) (discussing an insurer’s right to pursue an equitable subrogation claim against

an insured’s negligent tenant); First Nat’l Bank of Menahga v. Schunk, 

, 292–

93 (Minn. 1937) (discussing the right of a lender who paid off a senior mortgage on a

property to be equitably subrogated to the rights of the senior mortgagee); Sucker v.

Cranmer, 

 (Minn. 1914) (discussing the rights of a purchaser at a

foreclosure sale who paid taxes on a property during the redemption period to be equitably


                                             11
subrogated to the State’s right to collect taxes from the original property owners after they

exercised their right of redemption). We have declined to apply the doctrine of equitable

subrogation uniformly across these different contexts. As we pointed out in Citizens State

Bank v. Raven Trading Partners, Inc., there are a variety of reasons that a party may be

entitled to equitable subrogation—for example, “when a party satisfies a lien in order to

protect that party’s interest, when a party is under a legal duty to satisfy a lien, or when

there is a misrepresentation, mistake, duress, undue influence, or deceit.” 786 N.W.2d at

284–85. Thus, mistake can be one, but is not the only, reason that a party may be entitled

to equitable subrogation.

       In the suretyship context, a surety that performs its obligations under a bond it has

issued does not need to establish mistake to assert the right of equitable subrogation.

Berggren, 

; Barret Bros., 165 N.W. at 49; McHasco, 

.

Our case law in this context is clear that a performing construction surety is entitled to

equitable subrogation when the surety pays a contractor’s debt to a third party, because the

surety “paid such debt on compulsion, and not as a mere volunteer.” Berggren, 

. In National Surety Co. v. Berggren, for instance, a surety company issued a payment

bond for a contract to install an electric switchboard in a state hospital. 

. After

work on the contract had begun, the contractor assigned its right to the contract funds to a

third party. 

. When the contractor failed to pay one of its suppliers, the surety paid

the supplier according to the terms of the surety bond and sought reimbursement through

the contract fund. 

 We explained that when a surety is compelled to pay a contractor’s

debt due to a third party, “the right of the surety to assert the equitable doctrine of


                                              12
subrogation is elementary.” 

 (citing Prairie State Nat’l Bank of Chicago v. United

States, 

 (1896)).

       In the mortgage context, on the other hand, we have required lenders to show a

justifiable or excusable mistake of fact to claim the right of equitable subrogation. In

Peterson, for instance, a bank held both first and second mortgages on a property.

. At the time the second mortgage was filed, visible construction of a

barn was taking place on the land. 

 When labor and material suppliers later attempted

to foreclose on mechanic’s liens they held on the barn, the bank claimed that because the

second loan was used in part to pay off the first mortgage, its second mortgage should be

equitably subrogated to its first mortgage, and therefore take priority over the mechanic’s

liens. 

. We held that the bank was not entitled to subrogate its second mortgage

to its first mortgage to receive priority over the mechanic’s lien, noting that the bank was

a professional lender and should have known that the construction of the barn could give

rise to liens. 

 In that context, we held that equitable subrogation “will be applied in the

interest of substantial justice” when “one party has provided funds used to discharge

another’s obligations if (a) the party seeking subrogation has acted under a justifiable or

excusable mistake of fact, and (b) injury to innocent parties will otherwise result.” 

       In reaching our conclusion in Peterson, we relied on a line of cases addressing

equitable subrogation in the mortgage context. Id.; see Sucker, 

; Elliott v.

Tainter, 

 (Minn. 1903); Emmert v. Thompson, 

 (Minn.

1892). We did not cite Berggren or any other case from our long line of cases addressing

equitable subrogation in the surety context. See, e.g., Berggren, 

; Barrett


                                             13
Bros., 

; McHasco, 

. These cases, all of which remain

good law, have developed as two distinct lines with different rules for their respective

contexts. The rules in our mortgage line of cases do not apply when equitable subrogation

is available in the suretyship context, just as the suretyship line of cases does not govern

the availability of equitable subrogation in the mortgage context.

       Because Granite, as the surety, was contractually obligated to pay Molnau’s debts

to laborers and suppliers under the bond agreements, we hold that Granite is entitled to

assert the right of equitable subrogation here. The court of appeals erred by applying the

Peterson rule requiring Granite to show an excusable or justifiable mistake of fact.

                                            II.

       Having determined that Granite, as surety, has the right of equitable subrogation,

we now consider the question of priority: whether UPB, as a secured creditor, has priority

over Granite, a performing surety, with respect to the bonded contract funds. We begin by

explaining why the UCC’s priority rules do not govern this situation. We then discuss our

case law on the relative priority of sureties and secured lenders. Finally, we comment on

the policy concerns that underlie our case law.

                                            A.

       The court of appeals held that even if Granite is entitled to equitable subrogation,

Granite would not prevail because UPB takes priority under a first-in-time analysis under

the UCC. United Prairie Bank, 

, at *3–4. For the following reasons,

we disagree.




                                            14
       This case presents the first occasion for us to address the relative rights of sureties

and secured lenders when a lender’s rights predate a surety’s. 6 In some of our prior cases,

we have mentioned the surety’s earlier interest, among other considerations, in deciding

that the surety had priority. E.g., Berggren, 

; Barrett Bros., 

. We hold here that timing is not dispositive in determining priority in this specific

context.

       Under Article 9 of the UCC, priority among secured creditors is typically

determined by a first-in-time analysis. See 

(a)(1). A surety’s right

to equitable subrogation, however, is not a security interest governed by the UCC. See

(a)(1) (stating that “this article applies to . . . a transaction,

regardless of its form, that creates a security interest in personal property or fixtures by

contract” (emphasis added)). We find the Eighth Circuit’s conclusion that a surety’s

equitable subrogation claim is not a UCC “security interest” persuasive. See In re J.V.

Gleason Co., 

 (8th Cir. 1971). In In re J.V. Gleason Co., the court

first noted that Article 9 of the UCC was intended to apply to consensual security

agreements. 

 The right of equitable subrogation is not created by consent of the parties

through a contract; it is created by law to avoid injustice. 

 Second, the Eighth Circuit

reasoned that sureties are in a very different position from commercial lenders, noting that,

while sureties extend their credit to contractors “as the ultimate guarantee that the job will



6
        The right of equitable subrogation takes effect “as of the date of the contract creating
the relation of principal and surety; that is, the bond.” Berggren, 

. Granite
issued the relevant bonds in the spring of 2021, after UPB perfected its security interest.

                                              15
be done, this is a credit that may either never have to be drawn upon or, if it is drawn upon

at all, will in all likelihood be overdrawn.” 

 at 1222–23 (citation omitted) (internal

quotation marks omitted). Finally, the Eight Circuit rejected the argument that the right of

equitable subrogation should be subject to Article 9 to provide notice to a contractor’s

creditors because, as is often the case, the contract funds at issue were never available to

those creditors, given the contractor’s default. Id. at 1223. 7

       We agree that a surety’s right to equitable subrogation is not a security interest

subject to Article 9 of the UCC. Rather, equitable subrogation is an equitable principle

that avoids injustice by allowing a surety to stand in the shoes of another party and assert

that party’s rights. Id. at 1222, 1224; see also Melrose Gates, 875 N.W.2d at 817–18. A

surety’s rights are different from those of a secured creditor, whose rights are limited to

those of the debtor. See 

 (“[A] security interest is enforceable

against the debtor and third parties . . . only if . . . the debtor has rights in the

collateral . . . .”); see also U.C.C. § 9-203 cmt. 6 (A.L.I. & Unif. L. Comm’n 2022) (“[T]he

baseline rule is that a security interest attaches only to whatever rights a debtor may have,

broad or limited as those rights may be.”) A surety, on the other hand, is not limited to the

defaulting contractor’s rights. It is subrogated to the rights of the parties that benefit from

its performance, including laborers’ and suppliers’ rights to be paid, as well as a

government entity’s right to withhold payment in the event of a contractor’s default.


7
       We also note that secured lenders, like UPB, may be able to rely on other collateral
to mitigate their losses when construction companies default on their loans. In this case,
UPB recovered over a million dollars from auctioning off Molnau’s equipment and
vehicles.

                                              16
Pearlman, 371 U.S. at 141–42; McHasco, 

. Because the right of

equitable subrogation is not a security interest under the UCC, it is not subject to the UCC’s

first-in-time priority rule.

                                              B.

       We determine priority to bonded contract funds by the nature of the parties’

financial relationships, rather than a first-in-time rule. As we said in Berggren:

       [T]he equity of the surety who had been compelled to pay, and had paid,
       claims against the principal was superior to that of one who loaned money to
       the contractor to be by him used as he saw fit, either in the performance of
       his contract or in any other way.

. A lender like UPB has a relationship with only the debtor, and the lender’s

rights are limited to those of the debtor. See 

; see also U.C.C.

§ 9-203 cmt. 6 (A.L.I. & Unif. L. Comm’n 2022). Sureties, on the other hand, have

relationships with the government entities that hold contracts with the principal, and with

the lenders and suppliers who file claims against the sureties’ bonds.

       We applied this reasoning in First National Bank of Saint Paul v. McHasco Electric,

Inc., 

. In that case, a contractor assigned all payments that would come

due on a set of bonded contracts to a bank as security for a loan. 

. When the

contractor failed to pay laborers and suppliers for the relevant projects, the surety paid their

claims according to the bond. 

 In deciding that the surety that issued the bond had

priority to the bonded contracts, we explained that it was the surety, rather than the

contractor, who “render[ed] the necessary performance requisite to compel final payment”

of the bonded contracts. 

. By performing “under compulsion of the bond,” the



                                              17
surety “became subrogated to the rights of the laborers and materialmen and to the rights

of the municipalities to withhold payment to insure completion of the contracts and to pay

unpaid laborers and materialmen.” 

 We held that these rights were superior to the rights

of the bank, which derived from the rights of the defaulting contractor. 8 

.

       There are, however, certain circumstances in which we have concluded that a bank

has priority over a surety, even if the surety’s rights predate the bank’s. When a bank acts

like a surety in obliging itself to pay for costs that a surety would otherwise be obliged to

pay, we have held that the bank has the superior right to reimbursement from contract

funds. New Amsterdam Cas. Co. v. Wurtz, 

 (Minn. 1920); accord

Ganley v. City of Pipestone, 

 (Minn. 1923). In Wurtz, after a surety

issued a bond, a contractor agreed to deposit with the bank all the money it had received

for constructing a school. 

. In exchange, the bank agreed that it would

advance any additional money that the contractor needed to pay for labor and materials for

the project. 

 In that case, we noted that the bank was obligated to advance the necessary

funds and did not do so as a mere volunteer. 

 at 665–66. Similarly, under the agreement,

the contractor was obligated to use any advanced funds for the sole purpose of paying for

labor and materials for the school building. 

. In other words, the bank acted like

a surety by obligating itself to pay for labor and materials. In determining that the bank



8
       This reasoning is consistent with the Restatement position that “[t]o the extent that,
through subrogation, the secondary obligor has rights to the obligee’s return
performance . . . the right of any person claiming an interest in return performance through
the principal obligor is subordinate to the secondary obligor’s right to that performance.”
Restatement (Third) of Suretyship & Guar. § 31(2)(b) (A.L.I. 1996).

                                             18
had priority to the bonded contract funds, we reasoned that by advancing money for the

sole purpose of paying for labor and materials, the bank relieved the surety of the obligation

it would have had to pay those laborers and suppliers if the contractor had not been able to

do so. Id. at 665. Under those circumstances, we concluded it would be inequitable for

the surety to recoup its losses at the expense of the bank. Id.; accord Ganley, 191 N.W. at

741–42 (concluding that a lending bank had the superior right to contract funds for the

reasons expressed in Wurtz).

       In McHasco, we reaffirmed this exception to the general rule, noting that “the surety

prevails unless the bank is previously obligated to advance money for the express purpose

of paying for labor and material and the funds advanced are in fact used solely in paying

such claims for which the surety would have been liable.” 

. We

concluded that the fact that a bank loaned money to a contractor with the “expectation that

the proceeds would be used for payment of costs of materials and payroll” associated with

a public construction project, and that some of those funds were used for the project, was

not enough to make the bank’s equity superior to the surety’s. 

 (“[T]he equity of

the surety through subrogation is superior to the bank even though a substantial part of the

loaned funds were used in the performance of the contracts.”).

       The narrow exception that we identified in Wurtz and Ganley v. City of Pipestone

does not apply in this case. We are not persuaded by UPB’s argument that without its loans

“there would be no contractor to do the work and therefore no project to bond.” We

rejected this reasoning in McHasco, where there was a stronger showing that some of the

loaned funds were actually used on the project at issue. In this case, the funds in dispute


                                             19
would not exist if Granite had not issued the bond required to pay Molnau’s laborers and

suppliers. See 

, subd. 2 (requiring a payment and performance bond

for all public works projects over a certain dollar amount). Granite paid the claims against

the bond, as it was obligated to do under its bond agreements. Therefore, Granite has the

right to equitable subrogation, which allows it to assert the rights of the government

entities, laborers, and suppliers that benefited from its performance, as well as the

contractor itself. UPB has not demonstrated that it possesses a superior equity, as the banks

did in Wurtz and Ganley. In the absence of a superior equity, a performing surety’s right

to equitable subrogation has priority over a secured creditor as to the bonded contract

funds. 9

                                             C.

       While precedent compels our holding here, we note that there are also significant

policy reasons not to apply the UCC’s first-in-time priority rule to equitable subrogation in

the construction surety context. Applying the first-in-time rule in this context “would

undermine the equitable principles on which equitable subrogation is founded.” See U.S.

Fid. & Guar. Co. v. APAC–Kan., Inc., 

 (D. Kan. 2001) (noting

no authority requiring that a surety’s interest predate another creditor’s interest for the

surety to have priority under equitable subrogation). Sureties play an important role in

Minnesota’s statutory scheme for public construction projects. As we have commented,



9
      Our decision here is expressly limited to the context of equitable, as opposed to
conventional, subrogation. We express no opinion on how a purely contractual right to
subrogation would interact with the interests of a secured lender like UPB.

                                             20
surety bonds ensure laborers and suppliers are paid for their work. See Nelson Roofing &

Contracting, Inc. v. C.W. Moore Co., 

 (Minn. 1976). Further, surety

bonds ensure that public projects are completed and protect government entities from the

consequences of a contractor’s default. See 

, subd. 2 (requiring a

“performance bond . . . , for the use and benefit of the public body to complete the contract

according to its terms, and conditioned on saving the public body harmless from all costs

and charges that may accrue on account of completing the specified work”).

       Performing sureties reasonably expect to be compensated by bonded contract funds.

See Pa. Nat’l Mut. Cas. Ins. Co. v. City of Pine Bluff, 

 (8th Cir. 2004)

(“[T]he right of . . . the subrogated surety to be paid from funds held by the obligee arises

in equity. Sureties bond projects with these rights in mind and with the legitimate

expectation that the security ensuring discharge of the underlying obligation will be

properly applied.”). Applying a first-in-time rule to sureties would alter this expectation

and could limit the funds available to sureties when they are called upon to perform under

their bonds. This could lead to sureties charging higher premiums or requiring more

collateral from contractors, which could limit contractors’ access to bonding, given, as

amicus curiae Surety and Fidelity Association of America points out, “the tenuous liquidity

posture of many contractors.” Reduced competition for public works projects could

ultimately lead to higher costs for the public.

                                       *      *      *

       We conclude that Granite is entitled to summary judgment because its equitable

subrogation rights as surety have priority as a matter of law over UPB’s rights under the


                                             21
UCC. In the order and judgment directing the receiver to pay the bonded accounts

receivable to UPB, the district court contemplated an appeal and potential reversal of the

judgment. The district court stated that if the distribution award “is later changed in a

subsequent appellate order,” then Granite or “another interested party has the right to

directly request the proceeds from the party in possession of such proceeds after

distribution pursuant to such appellate order.” We remand to the district court for entry of

judgment in favor of Granite and to permit Granite to request redistribution of the bonded

contract funds as contemplated by the district court’s order distributing the bonded contract

funds to UPB.

                                      CONCLUSION

       For the forgoing reasons, we reverse the decision of the court of appeals and remand

to the district court for further proceedings consistent with this opinion.

       Reversed and remanded.



       PROCACCINI, J., took no part in the consideration or decision of this case.




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