Introduction

In a significant decision for public construction finance and creditors’ rights, the Minnesota Supreme Court in In re the Receivership of United Prairie Bank v. Molnau Trucking LLC, Granite Re, Inc., 23 N.W.3d 535 (Minn. 2025), resolved a priority dispute between a construction surety and a secured lender over contract funds earned under public works contracts after the contractor’s default. The contractor, Molnau Trucking LLC, had granted blanket security interests to United Prairie Bank (UPB) in its accounts receivable and related assets. Later, Molnau procured payment bonds from Granite Re, Inc. (Granite) to perform municipal projects, as required by Minnesota’s Public Contractors’ Performance and Payment Bond Act.

When Molnau defaulted, Granite paid laborers and suppliers under its payment bonds. A receiver then collected contract funds and holdbacks associated with the bonded projects. UPB claimed priority to the funds under Article 9 of the Uniform Commercial Code based on earlier perfected security interests. Granite asserted priority under the doctrine of equitable subrogation as a performing surety. The district court and court of appeals sided with UPB, applying an equitable subrogation “mistake-of-fact” standard drawn from mortgage cases and treating the UCC’s first-in-time rule as dispositive.

The Supreme Court reversed. It held that a performing construction surety need not prove a mistake of fact to invoke equitable subrogation and that a surety’s equitable subrogation right is not a UCC security interest subject to Article 9 priority rules. As a matter of law, a performing surety has priority over a secured creditor with respect to bonded contract funds created by the surety’s performance.

Summary of the Opinion

• The court expressly rejected the application of the “justifiable or excusable mistake of fact” requirement to a performing construction surety’s equitable subrogation rights. That standard, originating from mortgage priority disputes (e.g., Carl H. Peterson Co. v. Zero Estates), does not govern the suretyship context.
• A surety’s equitable subrogation right is not a “security interest” created by contract and therefore is not governed by Article 9 of the UCC or its first-in-time priority rule (Minn. Stat. § 336.9-322).
• As a matter of law, a performing surety’s equitable subrogation has priority over a secured creditor’s Article 9 security interest in “bonded contract funds” generated by the surety’s performance of its bond obligations (such as retainage and other amounts payable under the bonded contract that would not have been available but for the surety’s performance).
• The narrow historical exception—where a lender acts like a surety by obligating itself to fund labor and materials and those funds are used solely for that purpose—did not apply on the facts presented.
• The court reversed the court of appeals, remanded for entry of judgment in favor of Granite, and authorized redistribution of the bonded contract funds accordingly.

Background and Procedural Posture

• 2020: UPB made three loans to Molnau totaling $3,258,400, taking and perfecting security interests in Molnau’s accounts, money, rights to payment, and general intangibles.
• March 2020: Molnau executed a general agreement of indemnity with Granite in preparation for bonding public works projects.
• Spring 2021: Molnau contracted with Wright County, the City of Champlin, and the City of Saint Michael; Granite issued payment (and performance) bonds as required by Minn. Stat. § 574.26.
• Molnau defaulted on its obligations to laborers and suppliers. Granite paid $741,998 under its payment bonds.
• UPB sued Molnau and obtained appointment of a receiver. The receiver collected $456,031 in disputed “bonded contract funds” (including retainage), previously held by the public entities or an escrow associated with Granite.
• The district court granted summary judgment to UPB, awarding the funds to UPB on the basis of its prior perfected security interests; the court of appeals affirmed, applying a mortgage-style “mistake-of-fact” equitable subrogation test and treating Article 9’s priority rules as controlling.
• The Supreme Court granted review on (1) the correct equitable subrogation standard for a performing surety and (2) the priority between a surety’s equitable subrogation claim and a lender’s earlier perfected Article 9 security interest.

Precedents Cited and How They Shaped the Decision

Suretyship line (equitable subrogation available without mistake-of-fact)

• National Surety Co. v. Berggren, 148 N.W. 55 (Minn. 1914): A seminal Minnesota case recognizing that a performing surety “paid under compulsion” is equitably subrogated to the rights of those it paid and the obligee. The court reiterates Berggren’s core principle that a surety is not a volunteer and that its equity is superior to that of a general lender who merely loans money to the contractor.
• Barrett Bros. Co. v. Saint Louis County, 206 N.W. 49 (Minn. 1925); Hartford Accident & Indem. Co. v. Fed. Constr. Co., 209 N.W. 911 (Minn. 1926); First Nat’l Bank of Saint Paul v. McHasco Elec., Inc., 141 N.W.2d 491 (Minn. 1966): These cases recognize and elaborate the surety’s superior equity in the bonded contract context, including the surety’s subrogation to the obligee’s right to withhold funds and to laborers’ and suppliers’ rights to payment.
• Wurtz and Ganley exception: New Amsterdam Cas. Co. v. Wurtz, 177 N.W. 664 (Minn. 1920) and Ganley v. City of Pipestone, 191 N.W. 738 (Minn. 1923) recognize a narrow exception where a lender obligates itself to advance funds expressly and solely for labor and materials—effectively stepping into a surety’s role—and those funds are in fact used for that purpose.
• Pearlman v. Reliance Ins. Co., 371 U.S. 132 (1962): The U.S. Supreme Court’s articulation that a surety who pays the debt of another is subrogated to all rights of those it paid and the obligee; Minnesota’s decision is in harmony with this federal principle in the public construction context.
• In re J.V. Gleason Co., 452 F.2d 1219 (8th Cir. 1971): Persuasive authority that equitable subrogation is not a UCC Article 9 “security interest” because it is a nonconsensual, equitable right; sureties stand differently from ordinary lenders.
• Pa. Nat’l Mut. Cas. Ins. Co. v. City of Pine Bluff, 354 F.3d 945 (8th Cir. 2004): Supports the expectation that sureties will be paid from funds held by the obligee; equitable subrogation secures that expectation.
• Restatement (Third) of Suretyship & Guaranty § 31(2)(b): Reinforces that a secondary obligor’s subrogation rights to the obligee’s return performance take priority over interests claimed through the principal obligor.

Mortgage and other contexts (where a “mistake-of-fact” requirement has been applied)

• Carl H. Peterson Co. v. Zero Estates, 261 N.W.2d 346 (Minn. 1977): Applied a two-part test in the mortgage context requiring a justifiable or excusable mistake of fact and the prevention of injury to innocent parties. The Supreme Court confines Peterson to the mortgage line, emphasizing distinct doctrinal tracks.
• Citizens State Bank v. Raven Trading Partners, Inc., 786 N.W.2d 274 (Minn. 2010): Recognizes that equitable subrogation arises in many settings for varied reasons—mistake being only one among several—and that the doctrine is context-sensitive.

Statutory and policy backdrop

• Public Contractors’ Performance and Payment Bond Act, Minn. Stat. §§ 574.26–.32: Requires performance and payment bonds on public projects to protect laborers and suppliers and to ensure completion; the court’s reasoning draws heavily on the statutory role of sureties in public works.
• UCC Article 9 (Minn. Stat. § 336.9-109(a)(1), § 336.9-203, § 336.9-322): The court explains that Article 9 governs consensual security interests; equitable subrogation is not such an interest and thus is not subject to first-in-time priority rules.

Legal Reasoning

1) No mistake-of-fact requirement for performing sureties

The court squarely holds that the “mistake-of-fact” standard from Peterson does not apply to performing construction sureties. A surety’s payments under a bond are compelled by its secondary obligation, not voluntary acts that require equitable indulgence conditioned on mistake. The court emphasizes Minnesota’s separate doctrinal lines: mortgage cases (where mistake may be required) and suretyship cases (where performance under compulsion suffices). Granite did not need to show any mistake to claim equitable subrogation.

2) Equitable subrogation is not a UCC Article 9 security interest

Article 9 governs consensual security interests created by contract. Equitable subrogation is a nonconsensual, judicially created remedy that “avoids injustice” by placing the economic burden on the party who ought in equity to bear it. Because equitable subrogation is not a security interest, it is not governed by Article 9’s perfection and priority regime. The court adopts the Eighth Circuit’s analysis in Gleason and distinguishes the surety’s equitable posture from a lender’s contractual rights against the debtor.

3) Priority turns on the nature of the parties’ relationships

The court reaffirms the core suretyship principle: the surety that performs is subrogated to the rights of the obligee (including the public entity’s right to withhold payment to ensure completion and payment of claims) and to the rights of laborers and suppliers. Those rights do not depend on the contractor’s residual rights; they often exist irrespective of, or even in conflict with, the contractor’s claims to payment. Conversely, a lender’s Article 9 rights derive solely from the debtor’s rights. Where contract funds are earned or made available only through the surety’s performance—particularly after the contractor’s default—the surety’s subrogation right has superior equity.

4) The narrow “bank-as-surety” exception does not apply

The court reaffirms Wurtz and Ganley: a lender may prevail over a surety only when it undertakes a surety-like obligation to fund labor and materials and those funds are used solely for that purpose, thereby relieving the surety of a duty it otherwise would have had. Mere expectations that loan proceeds will be used for project costs—even when some funds are used that way—do not displace the surety’s superior equity (McHasco). UPB did not meet the Wurtz/Ganley exception.

5) Policy underpinnings

Applying a first-in-time Article 9 rule would contradict the equitable foundation of subrogation and undermine Minnesota’s statutory scheme for public works. Sureties bond with the expectation that—if they must perform—the bonded contract funds will be available to reimburse performance. If lenders could sweep those funds based solely on earlier-filed UCC statements, sureties would increase premiums or collateral requirements, constricting contractors’ access to bonding and increasing public costs. The court also notes that lenders like UPB typically rely on other collateral, as occurred here with substantial recoveries from equipment auctions.

Impact and Practical Implications

For Minnesota law

• Clear doctrinal boundary: The Peterson “mistake-of-fact” rule is limited to mortgage-related equitable subrogation; it does not apply to performing construction sureties.
• Priority rule clarified: A performing surety’s equitable subrogation right has priority over a secured lender’s earlier perfected Article 9 interest in bonded contract funds created by the surety’s performance.
• Article 9 inapplicable: Equitable subrogation is not a security interest; perfection and first-in-time under the UCC do not control priority disputes over such funds.
• Receivership guidance: Receivers holding retainage and bonded contract proceeds must recognize the surety’s superior equity and distribute accordingly, absent the narrow Wurtz/Ganley scenario.

For lenders

• Underwriting adjustments: Do not assume priority in bonded retainage or contract funds just because of earlier UCC filings. Treat bonded receivables as contingent and potentially unavailable if the contractor defaults and the surety performs.
• Structuring options: To approach the Wurtz/Ganley exception, a lender would need a binding undertaking to advance funds expressly and solely for labor and materials, coupled with controls ensuring actual use for that purpose (e.g., controlled disbursements, joint check arrangements), recognizing that this is a narrow and fact-intensive path.
• Alternative collateralization: Emphasize non-bonded assets and collateral that are not subject to surety subrogation claims; negotiate intercreditor or subordination agreements with sureties where feasible.

For sureties

• Strengthened recovery expectations: Performing sureties can more confidently rely on subrogation to bonded contract funds in Minnesota, even when lenders have earlier perfected security interests in accounts receivable.
• Claims administration: Maintain clear tracing and documentation showing that funds are “bonded contract funds” created by the surety’s performance (e.g., satisfy retainage release conditions, document payments of claims).
• Distinguish remedies: The court expressly limits its ruling to equitable, not conventional (contractual), subrogation; sureties should continue to preserve both equitable and contractual claims.

For public owners and receivers

• Withholding and release: Public entities’ rights to withhold payment to secure completion and payment of claims are among the rights to which a surety is subrogated. Coordinate with receivers and sureties to ensure proper disposition.
• Receivership practice: When bonded projects are in receivership, treat retainage and related proceeds as impressed with surety subrogation interests; avoid distributing such funds to Article 9 creditors unless the Wurtz/Ganley criteria are met.

Open questions and boundaries

• Scope of “bonded contract funds”: The opinion uses the funds assembled by the receiver (including retainage) that would not exist but for surety performance; future disputes may address mixed funds or tracing issues.
• Private projects: While the reasoning is rooted in public works bonding statutes, courts may confront analogous issues on private projects with statutory or contractual bonds; the decision’s logic is likely influential but technically centered on public projects.
• Conventional subrogation: The court expressly leaves open how purely contractual subrogation rights interact with secured creditors’ interests.

Complex Concepts Simplified

• Equitable subrogation: A fairness doctrine that lets a party who paid someone else’s debt step into the legal shoes of the person who had the right to be paid or to withhold payment. In construction, a performing surety steps into the shoes of laborers/suppliers and the public owner to access funds promised under the contract.
• Payment vs. performance bond: A payment bond guarantees payment to laborers and suppliers; a performance bond guarantees completion of the work. This case concerns payment bonds.
• Retainage: A portion of each progress payment withheld until satisfactory completion; it protects the owner against defects and unpaid claims.
• UCC Article 9 security interest: A creditor’s contract-based interest in a debtor’s personal property (like accounts receivable), enforceable upon default. Priority among such interests typically follows first-in-time rules—but only for consensual security interests, not equitable rights like subrogation.
• Why the surety’s right comes first here: The contract funds at issue would not be available but for the surety’s performance after the contractor’s default. Because the surety is subrogated to the obligee’s withholding rights and to laborers’/suppliers’ rights, it has a superior claim to those funds over a lender whose claim derives only from the defaulting contractor.
• Wurtz/Ganley exception: A lender that truly acts like a surety—binding itself to pay labor and material costs and ensuring funds are used only for that purpose—may achieve priority over a surety in narrow circumstances.

Conclusion

The Minnesota Supreme Court’s decision establishes a clear and practical rule: in the public construction context, a performing surety need not show a mistake of fact to invoke equitable subrogation, and its equitable claim to bonded contract funds is superior to a secured lender’s earlier Article 9 security interest. By decoupling equitable subrogation from Article 9 and anchoring priority in the nature of the parties’ relationships and the source of the funds, the court reinforces longstanding suretyship doctrine, aligns with federal authority such as Pearlman, and preserves the statutory purpose of payment bonds—to protect laborers and suppliers and ensure completion of public projects.

For lenders, the opinion is a cautionary directive to recalibrate risk assessments and collateral strategies for bonded receivables. For sureties, it is an affirmation of core subrogation rights. For public owners and receivers, it provides clear distribution guidance. Above all, the decision underscores that in Minnesota, equity—not Article 9’s filing order—controls who should be paid first when a surety steps in to protect the public and pay those who built the work.