B-169420, SEP. 4, 1970

B-169420, SEP. 4, 1970

CONTRACTS - DEFAULT - SURETY BOND - TAKE-OVER AGREEMENT DECISION TO SECRETARY OF THE INTERIOR HOLDING THAT THE CLAIM BY MARYLAND CASUALTY COMPANY AS SURETY FOR CERTAIN REMAINING FUNDS TO BE DISBURSED AFTER DEFAULT BY CONTRACTOR, MAY BE MADE TO COVER EXPENSES BUT NOT TO EXCEED THE PERFORMANCE AND PAYMENT BOND. SURETY COMPANY, WHO ENTERED A TAKE-OVER AGREEMENT WITH THE GOVERNMENT, WHEN CONTRACTOR DEFAULTED BY NOT COMPLETING CONSTRUCTION OF A PROJECT FOR EARTHEN DIKES, WATER CONTROL STRUCTURE AND RELATED WORKS, FOR THE BUREAU OF SPORTS FISHERIES AND WILDLIFE, DEPT., OF INTERIOR, FOR WHICH SURETY WOULD COMPLETE THE WORK FOR CONSIDERATION OF THE PAYMENT OF THE UNEXPENDED BALANCE OF THE CONTRACT PRICE, PLUS ADDITIONAL SUMS, MAY NOT BE PAID ON THE BASIS OF THE EXPENDITURE OF THE PAYMENT BOND, SINCE THE GOVERNMENT RETAINS PRIORITY TO THE RIGHT OF SET OFF FOR THE CONTRACTORS DEBTS. HOWEVER, IN VIEW OF AN ASSIGNEE FOR THE BENEFIT OF CREDITORS, SURETY MAY BE PAID TO THE EXTENT OF ITS EXPENSE UNDER THE PERFORMANCE AND PAYMENT BOND AND ANY AMOUNT IN EXCESS OF THAT WOULD BE PAYABLE TO THE CONTRACTOR OR HIS LEGAL SUCCESSOR IN INTEREST.

TO MR. SECRETARY:

REFERENCE IS MADE TO LETTER DATED JULY 15, 1970, FROM YOUR ASSISTANT SECRETARY FOR ADMINISTRATION, AND ENCLOSURES, CONCERNING THE CLAIM OF THE MARYLAND CASUALTY COMPANY, AS SURETY, TO FUNDS REMAINING TO BE DISBURSED UNDER CONTRACT NO. 14-16-005-3030.

IT IS REPORTED THAT THE CONTRACT WAS NEGOTIATED BETWEEN THE BUREAU OF SPORT FISHERIES AND WILDLIFE OF THE DEPARTMENT OF THE INTERIOR AND GOVERNOR CORPORATION, BOSTON, MASSACHUSETTS, FOR CONSTRUCTION OF EARTHEN DIKES AND WATER CONTROL STRUCTURES AND RELATED WORK AT MISSISQUOI NATIONAL WILDLIFE REFUGE, VERMONT. THE CONTRACT WAS AWARDED ON JUNE 30, 1967, AT A NEGOTIATED PRICE OF $135,836. PAYMENT AND PERFORMANCE BONDS WITH MARYLAND CASUALTY COMPANY AS SURETY WERE FURNISHED BY THE CONTRACTOR.

NOTICE TO PROCEED AS OF JULY 25, 1967, WAS ISSUED WITH A SPECIFIED PERFORMANCE TIME OF 365 CALENDAR DAYS. ON DECEMBER 29, 1967, A WORK SUSPENSION ORDER BECAUSE OF SEVERE WEATHER WAS ISSUED BY THE GOVERNMENT. VALUE OF THE WORK PERFORMED WAS THEN $39,788.40 AND THE CONTRACTOR HAD BEEN PAID $35,809.56 WITH RETENTION OF $3,978.84 BY THE GOVERNMENT. AFTER THE SUSPENSION ON DECEMBER 29, THE CONTRACTOR PERFORMED NO FURTHER WORK.

BY LETTER DATED FEBRUARY 8, 1968, THE CONTRACTOR SUBMITTED ELEVEN CLAIMS FOR ADDITIONAL COMPENSATION IN THE AGGREGATE SUM OF $92,466.45 AND FOR 390 ADDITIONAL DAYS OF PERFORMANCE TIME.

ON APRIL 30, 1968, GOVERNOR CORPORATION EXECUTED AN ASSIGNMENT OF ITS REAL AND PERSONAL PROPERTY AND CHOSES IN ACTION FOR THE BENEFIT OF CREDITORS. NO NOTICE OF THIS ASSIGNMENT WAS SENT TO THE CONTRACTING OFFICER, BUT BY LETTER DATED JUNE 12, 1968, THE CONTRACTOR ADVISED THE BUREAU'S REGIONAL ENGINEER IN BOSTON THAT IT WAS "UNABLE TO CONTINUE TO CARRY OUT ITS OBLIGATION IN CONNECTIONS WITH THE SUBJECT CONTRACT."

THE SURETY, MARYLAND CASUALTY COMPANY, WAS NOTIFIED OF THE CONTRACTOR'S DEFAULT AND ELECTED TO COMPLETE THE CONTRACT WITH ANOTHER CONTRACTOR, CASS WARNER CORPORATION, ESSEX JUNCTION, VERMONT. ON AUGUST 9, 1968, MARYLAND CASUALTY COMPANY AND THE GOVERNMENT ENTERED INTO A TAKE-OVER AGREEMENT WHEREIN THE SURETY AGREED TO COMPLETE THE WORK IN CONSIDERATION OF THE PAYMENT TO IT OF THE UNEXPENDED BALANCE OF THE CONTRACT PRICE "PLUS ADDITIONAL SUMS, WHICH MAY HEREAFTER BE DETERMINED TO BE DUE UNDER CLAIMS FOR EXTRAS PRESENTLY CLAIMED."

CASS WARNER CORPORATION COMPLETED THE WORK SEVEN DAYS IN ADVANCE OF THE PERFORMANCE TIME OF 365 DAYS. THE SURETY WAS PAID $105,006.44, FOLLOW UP ON THE CLAIMS SUBMITTED BY GOVERNOR CORPORATION. HE WAS WHICH INCLUDED $4,980 FOR AN OVERRUN IN THE ACREAGE CLEARED AND GRUBBED, $3,978.84 PREVIOUSLY RETAINED FROM THE PROGRESS PAYMENTS TO GOVERNOR CORPORATION, AND THE UNEXPENDED BALANCE OF $96,047.60. MARYLAND CASUALTY COMPANY ADVISES THAT THE COST OF COMPLETING THE CONTRACT, INCLUDING PAYMENT OF CLAIMS, WAS $134,110 OR A DEFICIT OF $29,103.56, AND THAT ANY ADDITIONAL SUMS ALLOWED ON GOVERNOR CORPORATION'S CLAIMS SHOULD BE PAID TO MARYLAND CASUALTY COMPANY UP TO THE AMOUNT OF THE DEFICIENCY.

IN 1969, PRIOR TO THE COMPLETION OF THE WORK, THE ASSIGNEE FOR THE BENEFIT OF THE GOVERNOR CORPORATION CREDITORS, APPRISED THE CONTRACTING OFFICER OF THE EXISTENCE OF THE ASSIGNMENT AND OF HIS INTENTION TO ADVISED THAT A FINDINGS OF FACT AND DECISION WITH RESPECT TO THE CLAIMS WOULD BE ISSUED BY THE CONTRACTING OFFICER UPON COMPLETION OF THE WORK AND ITS ACCEPTANCE BY THE GOVERNMENT. ON MARCH 3, 1970, THE CONTRACTING OFFICER TRANSMITTED COPIES OF HIS FINDINGS OF FACT AND DECISION TO THE SURETY, MARYLAND CASUALTY COMPANY, AND TO THE ASSIGNEE. THE DECISION ALLOWED TWO CLAIMS IN THE AGGREGATE AMOUNT OF $3,010.72, AND DENIED THE REST. IN HIS TRANSMITTAL LETTER, THE CONTRACTING OFFICER STATED THAT THE MATTER WOULD BE PRESENTED TO THE GENERAL ACCOUNTING OFFICE FOR A DECISION AS TO THE PROPER PAYEE. HE FURTHER ADVISED THE SURETY AND ASSIGNEE OF THEIR RIGHT TO APPEAL HIS DECISION TO THE INTERIOR BOARD OF CONTRACT APPEALS ON THE MERITS. NO PAYMENT OF THE AWARD OF $3,010.72 HAS BEEN MADE.

ON MARCH 16, 1970, GOVERNOR CORPORATION FILED A NOTICE OF APPEAL WITH THE INTERIOR BOARD OF CONTRACT APPEALS (BCA-833-3-70). WE ARE INFORMALLY ADVISED THAT THE APPEAL IS STILL PENDING BEFORE THE BOARD.

BY LETTERS DATED MARCH 23, 1970, WITH ENCLOSURES, AND MAY 13, 1970, THE MARYLAND CASUALTY COMPANY STATED THAT SINCE IT HAD COMPLETED THE CONTRACT AND PAID OFF THE COMPLETING CONTRACTOR AND PAID ALL OUTSTANDING BILLS, IT IS ENTITLED TO AND IS CLAIMING ALL SUMS DUE ON THE CONTRACT INCLUDING SUMS DUE ON PRESENTLY ALLOWED EXTRAS AND ON CLAIMS FOR ADDITIONAL EXTRAS. IN A LETTER DATED AUGUST 18, 1970, THE MARYLAND CASUALTY COMPANY STATES:

"IN ANY EVENT, MR. FRIEDMAN, AS ASSIGNEE FOR THE BENEFIT OF CREDITORS AND MR. GOVONI, AS THE DEFAULTING CONTRACTOR ARE ONE IN THEIR RECOGNITION OF THE PRIORITY OF THE MARYLAND CASUALTY COMPANY'S INTEREST UP TO THE AMOUNT OF THE MARYLAND'S LOSS. WE HAVE AGREED WITH MR. FRIEDMAN THAT, IN THE EVENT THAT RECOVERY FROM THE GOVERNMENT IN EXCESS OF THE AMOUNT OF OUR LOSS, AS OF MARCH 4, 1970 STANDS AT $29,103.56, TAKING INTO CONSIDERATION ALL CREDITS, THE MARYLAND WILL PAY SUCH EXCESS OVER TO MR. FRIEDMAN AS ASSIGNEE FOR THE BENEFIT OF CREDITORS."

ENDORSED ON SAID LETTER IS A STATEMENT OF THE ASSIGNEE FOR THE BENEFIT OF CREDITORS, AS FOLLOWS:

"I, HENRY FRIEDMAN, AS ASSIGNEE FOR THE BENEFIT OF CREDITORS, FOR THE GOVERNOR CORPORATION, DO HEREBY ASSENT TO AND SUBSCRIBE TO THE STATEMENTS MADE IN PARAGRAPH TWO (QUOTED ABOVE) OF THE WITHIN LETTER."

THE ASSISTANT SECRETARY, IN HIS LETTER REQUESTS OUR DETERMINATION AS TO WHETHER OR NOT THE SURETY IS ENTITLED TO THE MONEYS SINCE THERE IS AN APPEAL PENDING REGARDING OTHER CLAIMS FOR PAYMENT FOR ALLEGED EXTRA WORK AND OUR DETERMINATION WOULD HAVE A BEARING ON PAYMENT OF ANY SUMS THAT MIGHT BECOME PAYABLE AS A RESULT OF THAT APPEAL.

COUNSEL FOR SURETY HAS TAKEN THE POSITION THAT THE SURETY IS ENTITLED UNDER ITS TAKE-OVER AGREEMENT TO ALL FUNDS DUE OR TO BECOME DUE UNDER THE CONTRACT. IF THE SURETY'S EXPENSES UNDER ITS PERFORMANCE BOND HAD BEEN IN EXCESS OF ALL AMOUNTS DUE, OR LIKELY TO BECOME DUE, UNDER THE CONTRACT, THIS MATTER COULD EASILY HAVE BEEN SETTLED EARLIER IN FAVOR OF THE SURETY. HOWEVER, THE AMOUNTS NOW DUE PLUS THE AMOUNT OF OUTSTANDING CLAIMS FOR ADDITIONAL COMPENSATION EXCEED THE SURETY'S COMPLETION EXPENSES AND ITS EXPENSES UNDER ITS PAYMENT BOND. THERE IS NO QUESTION AS TO THE SURETY'S RIGHT TO REIMBURSEMENT FOR ITS EXPENSES UNDER THE PERFORMANCE BOND OUT OF ANY MONEYS NOW OR HEREAFTER AVAILABLE. ITS RIGHT TO REIMBURSEMENT FOR ITS EXPENDITURES UNDER ITS PAYMENT BOND IS A MORE LIMITED RIGHT, AND, OF COURSE, IT HAS NO RIGHT TO ANY FUNDS IN EXCESS OF THOSE NECESSARY TO MAKE IT WHOLE UNDER BOTH BONDS.

IN CONNECTION WITH THE SURETY'S CLAIM FOR PAYMENT BOND EXPENDITURES, COUNSEL APPEARS TO HAVE IGNORED THE EXPRESS PROVISION OF THE TAKE-OVER AGREEMENT THAT

" *** PAYMENTS TO THE SURETY TO REIMBURSE IT FOR DISCHARGING ITS LIABILITIES UNDER THE PAYMENT BOND OF THE DEFAULTING CONTRACTOR SHALL BE ONLY ON AUTHORITY OF (1) MUTUAL AGREEMENT BETWEEN THE GOVERNMENT, THE DEFAULTING CONTRACTOR, AND THE SURETY, OR (II) DETERMINATION OF THE COMPTROLLER GENERAL AS TO PAYEE AND AMOUNT, OR (III) ORDER OF A COURT OF COMPETENT JURISDICTION." SURETY'S RIGHT TO CONTRACT FUNDS EARNED BY THE DEFAULTING CONTRACTOR BASED ON PAYMENT BOND EXPENDITURES IS INFERIOR TO THE GOVERNMENT'S RIGHT OF SET-OFF FOR THE CONTRACTOR'S DEBTS TO THE GOVERNMENT. SECURITY INSURANCE COMPANY OF HARTFORD V UNITED STATES, COURT OF CLAIMS NO. 2-67, DECIDED JULY 15, 1970. IN THIS CONNECTION A REPORT SHOULD BE OBTAINED FROM THE INTERNAL REVENUE SERVICE TO DETERMINE WHETHER THERE ARE TAXES DUE FROM THE DEFAULTING CONTRACTOR.

IN THE ABSENCE OF ANY CLAIMS BY THE GOVERNMENT AGAINST THE DEFAULTING CONTRACTOR, AND IN VIEW OF THE ACQUIESCENCE OF THE ASSIGNEE FOR THE BENEFIT OF CREDITORS, PAYMENT MAY BE MADE TO THE SURETY UP TO THE EXTENT OF ITS EXPENDITURES UNDER BOTH THE PERFORMANCE AND PAYMENT BONDS. ANY AMOUNTS BECOMING DUE IN EXCESS OF THAT WOULD BE PAYABLE TO THE CONTRACTOR OR HIS LEGAL SUCCESSOR IN INTEREST.

A COPY OF THIS LETTER IS BEING FURNISHED TO THE MARYLAND CASUALTY COMPANY.