A-14478, JUNE 19, 1926, 5 COMP. GEN. 995

A-14478: Jun 19, 1926

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WHERE A CONTRACTOR DEFAULTS AND THE WORK IS COMPLETED BY THE SURETY A RELEASE SHOULD BE FILED BY BOTH THE CONTRACTOR AND THE SURETY. WHERE THE FACTS SHOW THAT THE CONTRACTOR IS DEMANDING AS A CONDITION FOR EXECUTING THE RELEASE THAT PAYMENTS BE MADE TO A BANK FROM WHOM THE CONTRACTOR HAD BORROWED MONEYS FOR CONTRACT PURPOSES. 1926: THERE IS BEFORE THIS OFFICE FOR CONSIDERATION THE CLAIMS OF THE UNITED STATES FIDELITY AND GUARANTY CO. THE GOVERNMENT WAS TO FURNISH EXPLOSIVES AND CERTAIN EQUIPMENT. THE WORK WAS TO BE COMPLETED WITHIN 210 WEATHER WORKING DAYS. A SURETY BOND WAS FURNISHED UNDER DATE OF JANUARY 5. AFTER APPROVAL BY THE DISTRICT ENGINEER PAYMENT OF A SUM EQUAL TO 90 PERCENT WAS TO BE PAID THE CONTRACTORS.

A-14478, JUNE 19, 1926, 5 COMP. GEN. 995

CONTRACTS, DEFAULT - CLAIMS, ASSIGNMENT, RELEASE PAYMENT OF AMOUNTS DUE UNDER A GOVERNMENT CONTRACT MAY NOT BE MADE TO A BANK FROM WHOM THE CONTRACTOR BORROWED MONEYS, IT APPEARING THAT THE CONTRACTOR DEFAULTED AND THE SURETY COMPLETED THE WORK AND CLAIMS THE PAYMENT. A SURETY MAY BE PAID THE AMOUNTS EARNED BY IT IN THE PERFORMANCE OF A CONTRACT AFTER THE DEFAULT OF THE CONTRACTOR, AND WARRANT FOR THE AMOUNTS EARNED BY THE CONTRACTOR MAY BE ISSUED IN THE NAME OF THE CONTRACTOR AND DELIVERED TO THE SURETY, SUCH PROCEDURE GIVING EFFECT TO THE AGREEMENT BETWEEN THE SURETY AND THE CONTRACTOR. AS A GENERAL RULE, WHERE A CONTRACTOR DEFAULTS AND THE WORK IS COMPLETED BY THE SURETY A RELEASE SHOULD BE FILED BY BOTH THE CONTRACTOR AND THE SURETY, BUT WHERE THE FACTS SHOW THAT THE CONTRACTOR IS DEMANDING AS A CONDITION FOR EXECUTING THE RELEASE THAT PAYMENTS BE MADE TO A BANK FROM WHOM THE CONTRACTOR HAD BORROWED MONEYS FOR CONTRACT PURPOSES, THERE BEING NO LEGAL RIGHT TO SUCH PAYMENT, RELEASE NEED NOT BE REQUIRED.

DECISION BY COMPTROLLER GENERAL MCCARL, JUNE 19, 1926:

THERE IS BEFORE THIS OFFICE FOR CONSIDERATION THE CLAIMS OF THE UNITED STATES FIDELITY AND GUARANTY CO. AND THE FIRST NATIONAL BANK OF NORTH BEND, OREG., FOR THE BALANCE DUE UNDER A CONTRACT DATED NOVEMBER 8, 1923, BETWEEN M. W. PAYNE AND IRA PADRICK, A COPARTNERSHIP, AND THE UNITED STATES THROUGH THE DEPARTMENT OF AGRICULTURE.

BY THE TERMS OF SAID CONTRACT THE COPARTNERSHIP FIRM OF M. W. PAYNE AND IRA PADRICK, HEREINAFTER DESIGNATED AS THE CONTRACTORS, AGREED TO CONSTRUCT A CERTAIN PORTION OF A ROAD (NIAGARA SECTION) OF THE DETROIT NIAGARA NATIONAL FOREST PROJECT IN MARION COUNTY, OREG., IN ACCORDANCE WITH CERTAIN DRAWINGS AND SPECIFICATIONS MADE A PART OF THE CONTRACT, AT AN APPROXIMATE COST OF $129,220, PAYMENT THEREFOR TO BE MADE IN ACCORDANCE WITH THE UNIT PRICES SHOWN IN THE CONTRACTOR'S PROPOSAL ATTACHED TO AND MADE A PART OF THE CONTRACT. THE GOVERNMENT WAS TO FURNISH EXPLOSIVES AND CERTAIN EQUIPMENT, FOR WHICH THE CONTRACTOR AGREED TO PAY CERTAIN SPECIFIED RATES. THE WORK WAS TO BE COMPLETED WITHIN 210 WEATHER WORKING DAYS. A SURETY BOND WAS FURNISHED UNDER DATE OF JANUARY 5, 1924, IN THE AMOUNT OF $65,000 FOR THE FAITHFUL PERFORMANCE OF THE CONTRACT, WITH THE UNITED STATES FIDELITY AND GUARANTY CO. AS SURETY THEREON. THE CONTRACT PROVIDED THAT THE ENGINEER WOULD EACH MONTH ESTIMATE THE AMOUNT OF WORK DONE AND MATERIALS ACTUALLY PUT IN PLACE DURING THE PROCEEDING MONTH, AND AFTER APPROVAL BY THE DISTRICT ENGINEER PAYMENT OF A SUM EQUAL TO 90 PERCENT WAS TO BE PAID THE CONTRACTORS, RETAINING 10 PERCENT UNTIL COMPLETION OF THE WORK AND ACCEPTANCE THEREOF BY THE UNITED STATES.

IT APPEARS THAT AFTER A PORTION OF THE WORK HAD BEEN PERFORMED THE CONTRACTORS ON JULY 18, 1924, NOTIFIED THE DISTRICT ENGINEER AND THE SURETY THAT THEY WOULD BE UNABLE TO CONTINUE THE WORK UNDER THE CONTRACT AND OF THEIR ABANDONMENT THEREOF, WHEREUPON THE SURETY TOOK CHARGE OF THE WORK AND COMPLETED THE CONTRACT WITHIN 206 WEATHER WORKING DAYS, EXPENDING, IT IS CLAIMED, $50,000 OVER AND ABOVE THE AMOUNT RECEIVED BY IT. IT APPEARS THAT AT NO TIME AFTER JULY 16, 1924, DID THE CONTRACTORS HAVE ANYTHING WHATSOEVER TO DO WITH THE CONTRACT, BUT COMPLETELY AND ABSOLUTELY ABANDONED SAME. IT APPEARS THAT THE SUM OF $108,405.62 HAS BEEN PAID FOR THE WORK COMPLETED AND THAT FINAL SETTLEMENT NO. 17, WHICH WAS SUBMITTED TO THIS OFFICE FOR SETTLEMENT BY THE SECRETARY OF AGRICULTURE, SHOWS A BALANCE DUE BY THE UNITED STATES UNDER THE CONTRACT OF $16,862.80, WHICH IS CLAIMED BY THE UNITED STATES FIDELITY AND GUARANTY CO., SURETY. THE BALANCE NOW DUE BY THE UNITED STATES UNDER THE SAID CONTRACT IS ITEMIZED AS FOLLOWS:

$6,533.84, PERCENTAGES RETAINED PRIOR TO ABANDONMENT BY CONTRACTOR;

5,511.23, PERCENTAGES RETAINED AFTER WORK TAKEN OVER BY THE SURETY;

4,130.71, FINAL ESTIMATE FOR WORK PERFORMED BY THE SURETY; AND

687.02, FOR EQUIPMENT RETURNED TO THE GOVERNMENT BY THE SURETY.

IT APPEARS THAT SHORTLY AFTER THE AWARD OF THE CONTRACT THE CONTRACTORS MADE AN ARRANGEMENT WITH THE FIRST NATIONAL BANK OF NORTH BEND, OREG., WHEREBY THE SAID BANK WAS TO FURNISH FINANCIAL BACKING IN CONNECTION WITH THE PERFORMANCE OF THE CONTRACT; THAT ON FEBRUARY 16, 1924, A POWER OF ATTORNEY WAS EXECUTED BY THE CONTRACTORS AUTHORIZING THE SAID BANK TO INDORSE THE CONTRACTORS' NAME AND COLLECT MONEY DUE ON CHECKS DRAWN BY THE DISBURSING OFFICER OF THE UNITED STATES IN PAYMENT OF THE AMOUNTS DUE UNDER THE CONTRACT; THAT PAYMENT IN THIS MANNER WAS AGREED TO BY THE LOCAL MANAGER OF THE UNITED STATES FIDELITY AND GUARANTY CO. (SURETY) UNDER DATES OF FEBRUARY 20, APRIL 2, AND APRIL 9, 1924, WITH THE UNDERSTANDING THAT OUTSTANDING LOANS TO THE SAID CONTRACTORS WOULD NOT EXCEED $25,000 AT ANY TIME; THAT AGGREGATE LOANS OF $52,000 AT 8 PERCENT INTEREST WERE MADE TO THE CONTRACTORS BY THE SAID BANK OVER THE PERIOD FEBRUARY 1, 1924, TO JULY 10, 1924; THAT ALL LOANS FROM FEBRUARY 1, 1924, TO MAY 13, 1924, HAVE BEEN REPAID, WITH THE EXCEPTION OF A LOAN OF $5,000 UNDER DATE OF MAY 9, 1924; THAT LOANS FROM MAY 9 TO JULY 10, 1924, WITH INTEREST, HAVE NOT BEEN PAID, AND THE BANK IN ITS LETTER OF JANUARY 30, 1926, STATES THAT THERE IS DUE IT AS A BALANCE ON ACCOUNT OF MONEYS ADVANCED THE SAID CONTRACTORS THE SUM OF $11,681.59, AND MAKES CLAIM FOR THE ENTIRE AMOUNT OF THE FINAL ESTIMATE DUE UNDER THE CONTRACT, BASING ITS CLAIM THEREFOR ON THE ASSIGNMENT OF FEBRUARY 16, 1924, AND THE AGREEMENT AND CONSENT OF THE SURETY TO THE ASSIGNMENT AND LOANS.

THE SITUATION THUS PRESENTED, BRIEFLY SUMMARIZED, APPEARS TO BE THAT M. W. PAYNE AND IRA PADRICK, COPARTNERS, WITH THE UNITED STATES FIDELITY AND GUARANTY CO. AS SURETY, CONTRACTED WITH THE UNITED STATES TO PERFORM CERTAIN WORK; THAT THE CONTRACTORS WITH THE KNOWLEDGE AND CONSENT OF SURETY BORROWED MONEY FROM THE FIRST NATIONAL BANK OF NORTH BEND, OREG., WITH WHICH TO PERFORM THE WORK AND AGREED AS TO THE APPLICATION OF PAYMENTS BY THE UNITED STATES TO THE CONTRACTORS; THAT THE CONTRACTORS ABANDONED THE WORK AND THE SURETY TOOK OVER THE WORK AND COMPLETED IT WITHIN THE CONTRACT PERIOD, EXPENDING AN AMOUNT IN EXCESS OF THE BALANCE DUE UNDER THE CONTRACT; THAT THE SURETY CLAIMS THE ENTIRE AMOUNT DUE UNDER THE RIGHT OF SUBROGATION; THAT THE BANK CLAIMS THE ENTIRE AMOUNT UNDER ITS ASSIGNMENT OF FEBRUARY 16, 1924.

WITH REFERENCE TO THE CLAIM OF THE BANK, SECTION 3477, REVISED STATUTES, PROVIDES:

ALL TRANSFERS AND ASSIGNMENTS MADE OF ANY CLAIM UPON THE UNITED STATES, OR OF ANY PART OR SHARE THEREOF, OR INTEREST THEREIN, WHETHER ABSOLUTE OR CONDITIONAL, AND WHATEVER MAY BE THE CONSIDERATION THEREFOR, AND ALL POWERS OF ATTORNEY, ORDERS, OR OTHER AUTHORITIES FOR RECEIVING PAYMENT OF ANY SUCH CLAIM, OR OF ANY PART OR SHARE THEREOF, SHALL BE ABSOLUTELY NULL AND VOID, UNLESS THEY ARE FREELY MADE AND EXECUTED IN THE PRESENCE OF AT LEAST TWO ATTESTING WITNESSES, AFTER THE ALLOWANCE OF SUCH A CLAIM, THE ASCERTAINMENT OF THE AMOUNT DUE, AND THE ISSUING OF A WARRANT FOR THE PAYMENT THEREOF. SUCH TRANSFERS, ASSIGNMENTS, AND POWERS OF ATTORNEY, MUST RECITE THE WARRANT FOR PAYMENT, AND MUST BE ACKNOWLEDGED BY THE PERSON MAKING THEM, BEFORE AN OFFICER HAVING AUTHORITY TO TAKE ACKNOWLEDGMENTS OF DEEDS, AND SHALL BE CERTIFIED BY THE OFFICER; AND IT MUST APPEAR BY THE CERTIFICATE THAT THE OFFICER, AT THE TIME OF THE ACKNOWLEDGMENT, READ AND FULLY EXPLAINED THE TRANSFER, ASSIGNMENT, OR WARRANT OF ATTORNEY TO THE PERSON ACKNOWLEDGING THE SAME.

IN CONSIDERING A CASE INVOLVING SIMILAR CIRCUMSTANCES AS HERE PRESENTED, WITH THE EXCEPTION THAT THERE WAS NO KNOWLEDGE OF OR CONSENT ON THE PART OF THE SURETY TO THE TRANSACTION BETWEEN THE BANK AND THE CONTRACTOR, THE UNITED STATES SUPREME COURT HELD IN THE CASE OF THE PRAIRIE STATE NATIONAL BANK V. UNITED STATES, 164 U.S. 227, THAT A CLAIM AGAINST THE GOVERNMENT WAS NOT TRANSFERABLE AND THAT THE POWER OF ATTORNEY GIVEN THE BANK BY THE CONTRACTOR AUTHORIZING THE SAID BANK TO RECEIVE FROM THE UNITED STATES CERTAIN MONEYS DUE IT WAS VOID AS BEING IN CONTRAVENTION OF SECTION 3477, REVISED STATUTES, SUPRA. SEE ALSO FIRST NATIONAL BANK OF SEATTLE V. CITY TRUST, SAFE DEPOSIT AND SURETY COMPANY OF PHILADELPHIA, 114 FED.REP. 529; HENNIGSEN V. U.S. FIDELITY AND GUARANTY CO., 208 U.S. 405; HARDAWAY V. NATIONAL SURETY COMPANY, 211 U.S. 552.

THE FACT THAT THE SURETY HAD KNOWLEDGE OF THE AGREEMENT BETWEEN THE BANK AND THE CONTRACTORS DOES NOT CHANGE THE SITUATION IN SO FAR AS THE UNITED STATES IS CONCERNED, FOR THE REASON THAT THE BANK HAS NO CLAIM AGAINST THE UNITED STATES FOR THE AMOUNTS PAYABLE UNDER THE CONTRACT OTHER THAN BY REASON OF THE INVALID AND VOID ASSIGNMENT MADE IN CONTRAVENTION OF SECTION 3477, REVISED STATUTES, CITED. WHILE NOT MATERIAL TO THE DETERMINATION OF THE MATTERS PRESENTED, IT WOULD APPEAR THAT THE MATTER OF THE CLAIM OF THE BANK IS FOR ADJUSTMENT BETWEEN THE BANK, THE CONTRACTORS, AND THE SURETY, IN WHICH THE UNITED STATES HAS NO INTEREST OR CONCERN. THE CLAIM OF THE BANK FOR THE BALANCE DUE UNDER THE SAID CONTRACT IS THEREFORE DISALLOWED.

THE ONLY REMAINING QUESTION FOR CONSIDERATION IS WHETHER OR NOT PAYMENT OF THE BALANCE DUE UNDER THE SAID CONTRACT MAY BE MADE TO THE SURETY. THE SURETY APPEARED AND COMPLETED THE WORK WHICH IT HAD BOUND ITSELF TO SEE THAT THE PRINCIPAL PERFORMED. IT THUS WAS PROTECTING ITS INTERESTS AS SURETY. THERE IS NO QUESTION THE SURETY IS ENTITLED TO BE PAID FOR THE WORK DONE BY IT AND ALSO TO BE PAID THE RETAINED PERCENTAGES UPON AMOUNTS PAID FOR SUCH WORK. THE MAIN QUESTION IS WHETHER THE SURETY IS ENTITLED TO BE PAID SUCH UNPAID AMOUNTS, IF ANY, AS RELATE TO WORK PERFORMED BY THE CONTRACTORS BEFORE ABANDONING THE WORK. THE AMOUNTS THUS IN QUESTION APPEAR TO BE ONLY THE RETAINED PERCENTAGES UPON WORK PERFORMED BY THE CONTRACTORS.

IT APPEARS THAT AS A PART OF THE CONSIDERATION WHICH INDUCED THE UNITED STATES FIDELITY AND GUARANTY CO. TO BECOME SURETY ON THE CONTRACT IT WAS PROVIDED IN THE APPLICATION BY THE CONTRACTORS TO THE SURETY, DATED NOVEMBER 5, 1923---

THAT THE SAID COMPANY, AS SURETY ON SAID BOND, AS OF THIS DATE, SHALL BE SUBROGATED TO ALL OUR RIGHTS, PRIVILEGES, AND PROPERTIES AS PRINCIPAL AND OTHERWISE IN SAID CONTRACT, AND SAID PRINCIPAL DOES HEREBY ASSIGN, TRANSFER, AND CONVEY TO SAID COMPANY ALL THE DEFERRED PAYMENTS AND RETAINED PERCENTAGES, AND ANY AND ALL MONEYS AND PROPERTIES THAT MAY BE DUE AND PAYABLE TO SAID PRINCIPAL AT THE TIME OF SUCH BREACH OR DEFAULT, OR THAT MAY THEREAFTER BECOME DUE AND PAYABLE TO SAID PRINCIPAL ON ACCOUNT OF SAID CONTRACT, OR ON ACCOUNT OF EXTRA WORK OR MATERIALS SUPPLIED IN CONNECTION THEREWITH, HEREBY AGREED THAT ALL SUCH MONEYS AND THE PROCEEDS OF SUCH PAYMENTS AND PROPERTIES SHALL BE THE SOLE PROPERTY OF THE SAID COMPANY, AND TO BE BY IT CREDITED UPON ANY LOSS, DAMAGE, CHARGE, AND EXPENSE SUSTAINED OR INCURRED BY IT AS ABOVE SET FORTH UNDER ITS BOND OF SURETYSHIP.

THE LOANS BY THE BANK WERE SUBSEQUENT TO THE AGREEMENT BETWEEN THE SURETY AND THE CONTRACTORS, AND THUS SUBORDINATE THERETO; AND SO, ALSO, THE CONSENT OF THE SURETY TO PAYMENTS TO THE BANK WOULD EXTEND NO FURTHER THAN TO PAYMENTS PROPERLY TO BE MADE TO THE CONTRACTORS, AND WOULD NOT EMBRACE THE RETAINED PERCENTAGES WHICH WOULD NOT BECOME PAYABLE EXCEPT UPON COMPLETION OF THE CONTRACT; AND TO THE CONTRACTORS ONLY IF THE CONTRACT WAS COMPLETED BY THE CONTRACTORS, WHICH IS NOT THE FACT IN THE PRESENT CASE.

WITH RESPECT TO THE VALIDITY OF THE SURETY-CONTRACTOR AGREEMENT IT MAY BE WELL TO QUOTE FROM THE OPINION OF THE COURT IN THE CASE OF THE AMERICAN SURETY COMPANY V. FINLETTER, 274 FED.REP. 152, AT PAGE 156, WHEREIN IT WAS SAID:

WE ARE INCLINED RATHER TO THE VIEWS OF THE SAME COURT EXPRESSED IN INGERSOLL V. CORAN, 211 U.S. 335; 29 S.CT. 92; 53 L.ED. 208, ACCEPTING THE RULE STATED IN WALKER V. BROWN, 165 U.S. 654; 17 S.CT. 453; 41 L.ED. 865, TO THE EFFECT THAT AN EXPRESS EXECUTORY CONTRACT IN WRITING, WHEREBY THE CONTRACTING PARTIES SUFFICIENTLY INDICATE AN INTENTION TO MAKE SOME PARTICULAR PROPERTY OR FUND THEREIN DESCRIBED OR IDENTIFIED A SECURITY FOR A DEBT OR OTHER OBLIGATION, CREATES AN EQUITABLE LIEN ON THE PROPERTY SO INDICATED. BARNES V. ALEXANDER, 232 U.S. 117, 120, 121; 34 S.CT. 276; 58 L.ED. 530; HURLEY V. ASHBRIDGE, 55 PA.SUPER.CT. 523, 526, 527; STEHLE V. UNITED SURETY CO., 107 MD. 470, 68 A. 600. APPLYING THIS RULE TO CASES WHERE A CONTRACTOR, SEEKING SURETY, PLEDGES DEFERRED PAYMENTS--- MONEYS CERTAIN TO BE DUE AND CLEARLY INDICATED--- AS AN INDUCEMENT FOR THE BOND, THE COURTS HAVE VERY GENERALLY RECOGNIZED SUCH A PLEDGE AS A VALID CONSIDERATION MOVING TO THE SURETY, FIRST, TO INDUCE IT TO ENTER INTO THE BOND, AND, SECOND, AT A REDUCED PREMIUM BECAUSE OF THE REDUCED RISK.

THE SURETY IS NOT ENTITLED TO ANY PROFIT UNDER THE CONTRACT AND THE FACT THAT IT COMPLETED THE WORK AT A COST IN EXCESS OF THE CONTRACT PRICE EVIDENCES THAT NO PROFIT HAS RESULTED UNDER THE CONTRACT. THE EQUITIES BETWEEN THE SURETY AND THE CONTRACTORS ARE INVOLVED WITH THE LEGAL RIGHTS OF THE PARTIES, AND IN THE SETTLEMENT OF SUCH MATTERS IT HAS BEEN THE PRACTICE OF THIS OFFICE TO REQUIRE A RELEASE EXECUTED BY THE CONTRACTOR AND THE SURETY RELEASING THE UNITED STATES OF ALL CLAIMS, LEGAL OR EQUITABLE, ARISING OUT OF OR BY VIRTUE OF THE CONTRACT. HOWEVER, IT APPEARS THAT IN THIS PARTICULAR INSTANCE THE CONTRACTORS REFUSE TO EXECUTE SUCH A RELEASE UNLESS THE BALANCE DUE UNDER THE CONTRACT IS PAID TO THE BANK. THE REFUSAL OF THE CONTRACTORS TO EXECUTE A RELEASE EXCEPT UNDER THE CONDITIONS NAMED DOES NOT PREVENT PAYMENT BEING MADE TO THE SURETY OF THE AMOUNT DUE IT FOR THE WORK PERFORMED BY IT AFTER THE CONTRACTORS' DEFAULT.

THE CERTIFICATE OF SETTLEMENT WILL BE MADE WITH DIRECTION TO ISSUE WARRANT IN FAVOR OF THE UNITED STATES FIDELITY AND GUARANTY CO., THE SURETY, IN THE SUM OF $9,641.94, REPRESENTING THE PERCENTAGES RETAINED AFTER WORK WAS TAKEN OVER BY THE SURETY AND FINAL ESTIMATE FOR WORK PERFORMED BY THE SURETY; AND THE OTHER IN FAVOR OF PAYNE AND PADRICK, CONTRACTORS, IN THE SUM OF $7,220.86, REPRESENTING PERCENTAGES RETAINED PRIOR TO THE ABANDONMENT OF THE CONTRACT BY THEM AND FOR EQUIPMENT RETURNED TO THE GOVERNMENT BY THE SURETY, WHICH APPARENTLY WAS CHARGED TO THE CONTRACTORS. THE WARRANT FOR THE AMOUNT IN FAVOR OF THE CONTRACTORS WILL BE TRANSMITTED TO THEM IN CARE OF THE UNITED STATES FIDELITY AND GUARANTY CO., SURETY.