A-76618, OCTOBER 6, 1937, 17 COMP. GEN. 309

A-76618, OCTOBER 6, 1937, 17 COMP. GEN. 309

BONDS - SURETY - SUBROGATION - CLAIMS OF LABORERS AND MATERIALMEN SUBROGATION BEING AN EQUITABLE DOCTRINE WITH NO LEGAL RIGHT TO PAYMENT UNDER THE PRINCIPLES OF SUCH DOCTRINE EXISTING INDEPENDENTLY OF A JUDICIAL DETERMINATION, AND THERE BEING NO STATUTE OR GENERAL PRINCIPLE OF LAW REQUIRING THE ACCOUNTING OFFICERS OF THE GOVERNMENT TO SETTLE CLAIMS OTHERWISE, THERE IS NEITHER REQUIREMENT NOR JUSTIFICATION FOR THE RECOGNITION BY THE ACCOUNTING OFFICERS OF AN ASSERTED RIGHT OF SUBROGATION WHERE THERE IS ANY BASIS FOR REASONABLE DOUBT THAT THE COURTS WOULD RECOGNIZE SUCH RIGHT. COMPLETING SURETY OF DEFAULTING CONTRACTOR IS NOT ENTITLED, UNDER THE DOCTRINE OF SUBROGATION, TO AMOUNTS OTHERWISE DUE CONTRACTOR UNLESS ALL CLAIMS OF LABORERS AND MATERIALMEN AGAINST THE CONTRACTOR HAVE BEEN PAID, EITHER BY THE SURETY OR OTHERWISE, IN ACCORDANCE WITH THE HEARD ACT OF AUGUST 13, 1894, 28 STAT. 278, AS AMENDED, 40 U.S.C. 270, AND THE GENERAL ACCOUNTING OFFICE IS NOT REQUIRED OR AUTHORIZED TO DISTRIBUTE FUNDS DUE AN INSOLVENT CONTRACTOR AMONG THE CONTRACTOR'S CREDITORS OR TO PAY ANY AMOUNT DUE AN INSOLVENT CONTRACTOR TO ITS SURETY WHERE SUCH PAYMENT MIGHT IN ANY DEGREE IMPAIR THE CLAIM OF ANY UNPAID LABORER OR MATERIALMAN AGAINST THE ESTATE OF THE INSOLVENT CONTRACTOR.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE MARYLAND CASUALTY CO., OCTOBER 6, 1937:

THERE WAS RECEIVED YOUR LETTER OF AUGUST 18, 1937, IN EFFECT REQUESTING RECONSIDERATION OF DECISION A-76618, AUGUST 5, 1937, 17 COMP. GEN. 97, HOLDING THAT NO ALLOWANCE COULD BE MADE ON YOUR CLAIM UNDER THE DOCTRINE OF SUBROGATION FOR AN AMOUNT OTHERWISE DUE YOUR DEFAULTING INSOLVENT PRINCIPAL, MURCH BROS. CONSTRUCTION CO., UNDER CONTRACT T1PW-389, AUGUST 30, 1934, FOR THE CONSTRUCTION OF A POST OFFICE BUILDING AT ASHEBORO, N.C., IN THE ABSENCE OF SATISFACTORY EVIDENCE THAT THE CLAIM OF THE COX AND LEWIS HARDWARE CO. FOR MATERIALS FURNISHED YOUR PRINCIPAL IS NONEXISTENT OR HAS BEEN PAID AND RELEASED.

CAREFUL CONSIDERATION HAS BEEN GIVEN THE ARGUMENTS ADVANCED IN YOUR LETTER BUT THEY DO NOT WARRANT ANY MODIFICATION OF THE DECISION. THE QUESTION IS NOT WHETHER THE HARDWARE COMPANY HAS OR HAS NOT AN ENFORCEABLE CLAIM AGAINST YOU AS SURETY ON THE PRINCIPAL'S BOND UNDER THE HEARD ACT OF AUGUST 13, 1894, 28 STAT. 278, AS AMENDED, 40 U.S.C.A. 270, BUT WHETHER YOUR RIGHT UNDER THE DOCTRINE OF SUBROGATION TO PAYMENT OF THE BALANCE OTHERWISE DUE YOUR PRINCIPAL IS SO CLEARLY ESTABLISHED AS TO JUSTIFY RECOGNITION BY THE ACCOUNTING OFFICERS WITHOUT REQUIRING SUCH ASSERTED RIGHT BY SUBROGATION TO BE ESTABLISHED IN JUDICIAL PROCEEDINGS.

AS YOU KNOW, OF COURSE, SUBROGATION IS AN EQUITABLE DOCTRINE AND NO LEGAL RIGHT TO PAYMENT UNDER THE PRINCIPLES OF SUCH DOCTRINE EXISTS INDEPENDENTLY OF A JUDICIAL DETERMINATION, AND THERE IS NO STATUTE OR GENERAL PRINCIPLE OF LAW REQUIRING THE ACCOUNTING OFFICERS OF THE GOVERNMENT TO SETTLE CLAIMS OTHERWISE. WHERE THERE IS ANY BASIS FOR REASONABLE DOUBT THAT THE COURTS WOULD RECOGNIZE AN ASSERTED RIGHT OF SUBROGATION IN A PARTICULAR CASE, CERTAINLY THE RECOGNITION OF SUCH RIGHT BY THE ACCOUNTING OFFICERS IS NEITHER REQUIRED NOR JUSTIFIED.

IN CASES SUCH AS THE PRESENT ONE THERE IS NOT ONLY BASIS FOR SUCH REASONABLE DOUBT BUT SUBSTANTIAL REASON TO BELIEVE THE COURTS WOULD DENY SUBROGATION, PARTICULARLY IN VIEW OF AMERICAN SURETY COMPANY V. WESTINGHOUSE ELECTRIC COMPANY, 296 U.S. 133--- IN WHICH THE SUPREME COURT OF THE UNITED STATES HELD THAT THE SURETY ON A BOND GIVEN UNDER THE HEARD ACT FOR THE PROTECTION OF MATERIALMEN AND LABORERS WAS NOT ENTITLED, BY SUBROGATION, TO SHARE IN THE DISTRIBUTION OF THE ASSETS OF ITS INSOLVENT PRINCIPAL UNTIL THERE HAD BEEN PAID ALL OUTSTANDING CLAIMS OF THE CLASS OF PERSONS FOR WHOSE PROTECTION THE BOND WAS GIVEN, EVEN THOUGH THE TOTAL OF SUCH CLAIMS EXCEEDED THE AMOUNT OF THE BOND, AND THE SURETY, HAVING PAID THE FULL AMOUNT OF THE BOND, WAS SUBJECT TO NO FURTHER LIABILITY THEREON. TO THE EXTENT THAT THE PRIOR STATE CASE OF U.S.F. AND G. V. PORT OF SEATTLE, 13 PAC./2D) 33, CITED BY YOU, MAY INDICATE A DIFFERENT RULE IT CANNOT BE REGARDED AS CONTROLLING IN MATTERS OF PAYMENTS FROM FEDERAL FUNDS. AS TO THESE THE LAW AS DETERMINED BY THE SUPREME COURT OF THE UNITED STATES IS, OF COURSE, CONCLUSIVE.

YOU SUGGEST THAT THIS OFFICE RETAIN $24.57 TO COVER THE AMOUNT ALLEGED TO BE DUE FROM YOUR PRINCIPAL TO THE HARDWARE COMPANY AND PAY YOU THE BALANCE OTHERWISE DUE YOUR PRINCIPAL. THE CLAIM OF THE HARDWARE COMPANY IS NOT AGAINST THE UNITED STATES BUT IS AGAINST YOUR PRINCIPAL, AND, AS YOU YOURSELF INDICATE IN YOUR LETTER, THIS OFFICE HAS NO AUTHORITY UNDER THE HEARD ACT TO WITHHOLD AN AMOUNT DUE A CONTRACTOR TO COVER THE CLAIM OF AN UNPAID LABORER OR MATERIALMAN. THIS OFFICE IS NOT REQUIRED OR AUTHORIZED TO DISTRIBUTE FUNDS DUE AN INSOLVENT CONTRACTOR AMONG THE CONTRACTOR'S CREDITORS. THAT IS A RESPONSIBILITY OF THE CONTRACTOR'S RECEIVER, BUT, CLEARLY, UNDER THE PRINCIPLES OF AMERICAN SURETY COMPANY V. WESTINGHOUSE ELECTRIC COMPANY, SUPRA, THIS OFFICE MAY NOT PAY ANY AMOUNT DUE AN INSOLVENT CONTRACTOR TO ITS SURETY UNDER THE DOCTRINE OF SUBROGATION--- RATHER THAN TO THE RECEIVER--- WHERE SUCH PAYMENT MIGHT IN ANY DEGREE IMPAIR THE CLAIM OF ANY UNPAID LABORER OR MATERIALMAN AGAINST THE ESTATE OF THE INSOLVENT CONTRACTOR. AS WAS POINTED OUT IN MY DECISION OF AUGUST 5, 1937, THE HOLDING OF THE SUPREME COURT IN THAT CASE WAS IN EFFECT THAT THE EQUITIES IN FAVOR OF THE UNPAID MATERIALMEN FOR WHOSE PROTECTION THE HEARD ACT WAS ENACTED ARE SUPERIOR TO THOSE OF THE SURETY ON A BOND GIVEN PURSUANT TO THAT ACT; THAT THE RIGHT OF AN UNPAID MATERIALMAN TO RECOVER HIS DEBT FROM THE ESTATE OF THE CONTRACTOR, IRRESPECTIVE OF THE BOND, SHOULD NOT BE IMPAIRED BY PAYING ANY PART OF THE ASSETS OF THE ESTATE TO THE SURETY ON THE BOND GIVEN UNDER THE STATUTE FOR THE PROTECTION OF SUCH MATERIALMEN; THAT, THEREFORE, THE CLAIMS OF THE SURETY WERE POSTPONED TO THE CLAIMS OF ALL UNPAID MATERIALMEN AND LABORERS; AND THAT THE SURETY COULD NOT REACH THE ASSETS OF ITS PRINCIPAL, THE CONTRACTOR, UNTIL THE CLAIMS OF ALL UNPAID LABORERS AND MATERIALMEN HAD BEEN SATISFIED, EVEN THOUGH THERE WAS NO LIABILITY ON THE PART OF THE SURETY TO PAY SUCH CLAIMS. SEE, ALSO, IN THIS CONNECTION BARTON V. MATTHEWS, 216 S.W. 693, 9 A.L.R. 1594 (AND ANNOTATION AT 9 A.L.R. 1596) WHERE THE COURT QUOTED WITH APPROVAL THE STATEMENT IN BANK OF FAYETTEVILLE V. LORWEIN, 76 ARK. 245, 88 S.W. 919, THAT---

THE RIGHT OF SUBROGATION CANNOT BE ENFORCED UNTIL THE WHOLE DEBT IS PAID, AND UNTIL THE CREDITOR BE WHOLLY SATISFIED THERE OUGHT TO AND CAN BE NO INTERFERENCE WITH HIS RIGHTS OR HIS SECURITES WHICH MIGHT, EVEN BY BARE POSSIBILITY, PREJUDICE OR EMBARRASS HIM IN ANY WAY IN THE COLLECTION OF THE RESIDUE OF HIS CLAIM.

IF ONLY THE AMOUNT OF $24.57 WERE WITHHELD, AS SUGGESTED, AND THE BALANCE OF SEVERAL THOUSAND DOLLARS PAID TO YOU, THE AMOUNT SO WITHHELD COULD NOT BE PAID THE HARDWARE COMPANY BUT AT MOST WOULD BE PAID THE CONTRACTOR'S RECEIVER. SUCH AMOUNT COULD NOT BE EARMARKED FOR PAYMENT BY THE RECEIVER TO THE HARDWARE COMPANY BUT WOULD BE GENERAL ASSETS SUBJECT TO DISTRIBUTION AMONG ALL OF THE INSOLVENT'S CREDITORS ON THE SAME FOOTING. OBVIOUSLY THE PAYMENT OF THE WHOLE SUM TO THE RECEIVER MIGHT RESULT IN THE PAYMENT OF A LARGER AMOUNT TO THE HARDWARE COMPANY ON ITS CLAIM FOR MATERIALS, AND, THEREFORE, THE PAYMENT TO YOU OF ANY AMOUNT OTHERWISE DUE THE CONTRACTOR'S ESTATE MIGHT IMPAIR, IN SOME DEGREE, THE CLAIM OF THE HARDWARE COMPANY AGAINST THE CONTRACTOR'S ESTATE, CONTRARY TO THE PRINCIPLES OF THE CITED CASES. ONE OF THE EXPRESS CONDITIONS OF THE BOND ON WHICH YOU ARE SURETY IS THAT "THE PRINCIPAL * * * SHALL * * * MAKE PAYMENT TO ALL PERSONS SUPPLYING THE PRINCIPAL WITH LABOR AND MATERIALS IN THE PROSECUTION OF THE WORK PROVIDED FOR IN SAID CONTRACT; " AND UNTIL THIS CONDITION IS FULFILLED, YOU, AS SURETY ON THE BOND, CLEARLY HAVE NO STANDING TO RECOUP ANY PART OF THE PAYMENTS REQUIRED FROM YOU THEREUNDER, IN DEROGATION OF THE CLAIMS OF ANY UNPAID LABORERS AND MATERIALMEN AGAINST THE ESTATE OF YOUR INSOLVENT PRINCIPAL. SEE PEOPLES V. PEOPLES BROS. INC., 254 FED. 489. IT FOLLOWS THAT THE SUGGESTED PROCEDURE MAY NOT BE ADOPTED, AND THAT NO PAYMENT MAY BE MADE TO YOU UNDER THE DOCTRINE OF SUBROGATION SO LONG AS IT APPEARS THERE MAY BE ANY UNSATISFIED CLAIMS AGAINST THE CONTRACTOR FOR LABOR AND MATERIALS FURNISHED IN THE PROSECUTION OF THE CONTRACT WORK.

ACCORDINGLY, THE CONCLUSIONS OF THE DECISION OF AUGUST 5, 1937, 17 COMP. GEN. 97, ARE AFFIRMED.