Unpublished Disposition, 881 F.2d 1084 (9th Cir. 1988)

MEMORANDUM^* 

Rainier National Bank¹  appeals the district court's affirmance of the bankruptcy court's judgment that the St. Paul Fire & Marine Insurance Company has a prior right to a debtor's accounts receivable. The court held that Rainier had contractually subordinated its prior secured interest to St. Paul by means of a written subordination agreement. We affirm.

* The Roderick Timber Company purchased standing timber from landowners, logged the tracts, and sold the logs. St. Paul was in the surety business and wrote payment and performance bonds to guarantee logging contracts. In 1977, Roderick and St. Paul entered into an indemnity agreement under which Roderick assigned all of its property to St. Paul in the event of a default on any of St. Paul's bonds issued to secure Roderick's contracts, up to the amount of St. Paul's obligation. At about this time, Rainier loaned several million dollars to Roderick, secured by a properly filed and perfected security interest in Roderick's property.

In 1979, St. Paul and Rainier entered into a subordination agreement by which Rainier subordinated its priority interest in Roderick's accounts receivable to St. Paul. St. Paul wanted additional protection for continued bonding, and it was in Rainier's interest that St. Paul provided the bonding necessary to Roderick's continued operation.

On May 16, 1986, Roderick filed for chapter 11 reorganization. The case was converted to chapter 7 liquidation on February 3, 1987. The trustee, Steven R. Levy, collected over $800,000 of Roderick's accounts receivable. Both Rainier and St. Paul claimed priority interests in this fund; Rainier by virtue of its secured unpaid loans, and St. Paul because it had had to cover its bonds in the amount of some $870,000 paid to the State of Washington for defaulted timber contracts between Roderick and the state, and had further claims pending.

In late 1986, Rainier filed a complaint in the bankruptcy court asking that the court declare Rainier's security interests to be the valid first liens on the fund, and disburse it to Rainier. On June 30, 1987, the bankruptcy judge issued findings of fact and conclusions of law holding that the subordination agreement was intended as a subordination of all of Rainier's interest in the accounts receivable to any of St. Paul's claims against Roderick arising out of St. Paul's bonding operations. The court's judgment gave St. Paul a prior right to the accounts receivable fund.

On March 9, 1988, the district court affirmed the findings of fact, conclusions of law and judgment of the bankruptcy court without further comment. Rainier timely appeals. Fed. R. App. P. 4(a) (1). We have jurisdiction. 28 U.S.C. § 158(a) (Supp. V 1987); 28 U.S.C. § 1291 (1982).

We review findings of fact for clear error, and conclusions of law de novo. In re Pizza of Hawaii, Inc., 761 F.2d 1374, 1377 (9th Cir. 1985). As the district court affirmed without independent findings, we review the judgment of the bankruptcy court. See Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir. 1986). Although bankruptcy is a matter of federal law, the contract law questions raised in this case are questions of Washington law. See Butner v. United States, 440 U.S. 48, 54-55 (1979).

II

We must consider two questions: 1) do both parties have an interest in the property? and 2) whose interest comes first? There is no disagreement as to the fact that Rainier has an interest because of its perfected security interests. Although Rainier contests the nature and extent of St. Paul's interest under its indemnity agreement with Roderick, the bank admits that St. Paul has an interest in the accounts receivable, although an unsecured one.

The subordination agreement states in its entirety:

WHEREAS, RAINIER NATIONAL BANK, Grays Harbor Office ("Rainier"), lends monies to RODERICK TIMBER COMPANY ("Roderick"), and is secured and perfected in, among other properties, the accounts receivable ("Accounts") of Roderick; and

WHEREAS, ST. PAUL FIRE & MARINE INSURANCE CO. ("St. Paul"), provides performance and payment bonding for Roderick;

NOW THEREFORE:

1. Rainier subordinates its interest in the Accounts (excluding proceeds in the form of inventory) to any claim St. Paul may have in the Accounts which claim arises out of or in connection with such bonding.

2. St. Paul may not assign directly or indirectly, its position hereunder.

3. Rainier makes no representation with respect to any priority it may now or hereafter have regarding the Accounts.

The parties do not contest the fact that the subordination agreement is a valid contract between Rainier and St. Paul.²  Nor do they disagree on the applicability of the agreement to a determination of these creditors' relative priorities. See In re Holiday Mart, Inc., 715 F.2d 430, 432 (9th Cir. 1983) (per curiam) (power of bankruptcy court to subordinate claims); 11 U.S.C. § 510(a); Wash.Rev.Code Ann. 62 A. 9-316 (1966) (subordination agreements legal under Washington U.C.C.).

In Washington, contract interpretation starts with the text. See McGary v. Westlake Investors, 99 Wash. 2d 280, 286, 661 P.2d 971, 974 (1983). Language in the document is given its ordinary meaning. Public Util. Dist. No. 1 v. Washington Pub. Power Supply Sys., 104 Wash. 2d 353, 373, 705 P.2d 1195, 1209 (1985), modified, 713 P.2d 1109 (1986).

Rainier argues, contrary to the bankruptcy court's finding of fact, that the parties intended to limit St. Paul's priority interest to accounts receivable arising out of the same timber contracts from which the bonding claim arose. Examination of the plain text of the agreement reveals this argument to be meritless. We have no reasonable basis upon which to hold that the bankruptcy court erred in holding that this contract means what it says. The subordination agreement refers generally to Roderick's accounts receivable, without limiting them in any way. It then refers generally to St. Paul's bonding of Roderick. Rainier then "subordinates its interest in the Accounts (excluding proceeds in the form of inventory) to any claim St. Paul may have in the Accounts which claim arises out of or in connection with such bonding." (Emphasis added).

This language is clear as a bell. Rainier has subordinated its interest in any accounts receivable to any claim arising out of St. Paul's bonding. St. Paul's claim to these accounts receivable arises out of its bonding of Roderick.

AFFIRMED.