A-22658, JULY 27, 1928, 8 COMP. GEN. 36

A-22658: Jul 27, 1928

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CONTRACTS - DEFAULT - SUBROGATION OF SURETY - PAYMENTS IN CASE OF SUBSEQUENT BANKRUPTCY OF CONTRACTOR WHERE A CONTRACTOR DEFAULTS IN THE PERFORMANCE OF HIS CONTRACT FOR THE CONSTRUCTION OF A POST-OFFICE BUILDING AND THE WORK IS COMPLETELY AND SATISFACTORILY PERFORMED BY THE SURETY ON HIS PERFORMANCE BOND. THE SURETY IS ENTITLED TO BE SUBROGATED. TO ALL THE RIGHTS WHICH THE GOVERNMENT MIGHT HAVE ENFORCED AGAINST THE CONTRACTOR IF IT HAD DECLARED THE CONTRACT FORFEITED AND COMPLETED THE WORK ITSELF. THE SURETY'S RIGHT OF SUBROGATION IS SUPERIOR TO THE CLAIMS OF THE CONTRACTOR. FOR ANY BALANCES DUE UNDER THE CONTRACT WHICH ARE NECESSARY TO PROTECT THE SURETY FROM LOSS IN THE COMPLETION OF THE WORK.

A-22658, JULY 27, 1928, 8 COMP. GEN. 36

CONTRACTS - DEFAULT - SUBROGATION OF SURETY - PAYMENTS IN CASE OF SUBSEQUENT BANKRUPTCY OF CONTRACTOR WHERE A CONTRACTOR DEFAULTS IN THE PERFORMANCE OF HIS CONTRACT FOR THE CONSTRUCTION OF A POST-OFFICE BUILDING AND THE WORK IS COMPLETELY AND SATISFACTORILY PERFORMED BY THE SURETY ON HIS PERFORMANCE BOND, THE SURETY IS ENTITLED TO BE SUBROGATED, SO FAR AS NECESSARY TO PROTECT IT FROM LOSS, TO ALL THE RIGHTS WHICH THE GOVERNMENT MIGHT HAVE ENFORCED AGAINST THE CONTRACTOR IF IT HAD DECLARED THE CONTRACT FORFEITED AND COMPLETED THE WORK ITSELF. THE SURETY'S RIGHT OF SUBROGATION IS SUPERIOR TO THE CLAIMS OF THE CONTRACTOR, OR HIS ASSIGNS, FOR ANY BALANCES DUE UNDER THE CONTRACT WHICH ARE NECESSARY TO PROTECT THE SURETY FROM LOSS IN THE COMPLETION OF THE WORK, AND THE SUBSEQUENT BANKRUPTCY OF THE CONTRACTOR WOULD NOT AFFECT THE SURETY'S RIGHT OF SUBROGATION, INASMUCH AS THE SURETY'S RIGHT TO THE MONEYS NECESSARY TO COMPLETELY REIMBURSE IT FOR EXPENDITURES IN PERFORMANCE OF THE CONTRACT IS SUPERIOR IN LAW AND EQUITY TO THAT OF THE BANKRUPT'S ESTATE, THE LATTER HAVING NO GREATER RIGHTS THAN THOSE OF THE CONTRACTOR AS AGAINST EITHER THE GOVERNMENT OR THE SURETY.

COMPTROLLER GENERAL MCCARL TO THE SECRETARY OF THE TREASURY, JULY 27, 1928:

I HAVE YOUR LETTER OF APRIL 23, 1928, AS FOLLOWS:

UNDER DATE OF MARCH 19, 1927, THE TREASURY DEPARTMENT ENTERED INTO A CONTRACT WITH JOHN P. CURLEY, OF BOSTON, MASSACHUSETTS, FOR THE CONSTRUCTION OF THE POST-OFFICE BUILDING AT WINCHESTER, MASSACHUSETTS (TLSA-154), FOR THE AMOUNT OF $71,111.00.

THE DETROIT FIDELITY AND SURETY COMPANY IS THE SURETY ON THE BOND UNDER THIS CONTRACT. IN DECEMBER, 1927, THE CONTRACTOR DEFAULTED, AND ON THE DATE OF JANUARY 10, 1928, THE SURETY COMPANY ELECTED TO TAKE OVER THE CONTRACT AND COMPLETE THE WORK. THE SURETY COMPANY IS SATISFACTORILY PROCEEDING WITH THE COMPLETION OF THE CONTRACT.

UNDER YOUR DECISION OF JUNE 19, 1926, 5 COMP. GEN. 995, THE DEPARTMENT HAS BEEN PAYING DIRECTLY TO THE DETROIT FIDELITY AND SURETY COMPANY THE EARNED AMOUNTS DUE IT SINCE IT TOOK OVER THE WORK, BUT THE AMOUNTS OF THE RETAINED PERCENTAGE WITHHELD ON ACCOUNT OF WORK PERFORMED BY THE CONTRACTOR, JOHN P. CURLEY, PRIOR TO HIS DEFAULTING, AND THE SUM DUE FOR WORK PERFORMED BY HIM IN DECEMBER, 1927, ARE BEING WITHHELD, AND UPON FINAL SETTLEMENT CHECKS THEREFOR WOULD BE ISSUED IN THE NAME OF THE CONTRACTOR AND TRANSMITTED IN CARE OF THE SURETY COMPANY.

THE SURETY COMPANY HAS NOW SUBMITTED, UNDER DATE OF APRIL 14, 1928, A PETITION IN WHICH IT SETS FORTH REASONS, SUPPORTED BY DECISIONS OF THE UNITED STATES SUPREME COURT, WHY CHECKS FOR THE RETAINED PERCENTAGE AND THE AMOUNT EARNED BY THE DEFAULTING CONTRACTOR IN DECEMBER, 1927, SHOULD BE PAID DIRECTLY TO THE SURETY COMPANY AND REQUESTING THAT THIS MATTER BE SUBMITTED FOR YOUR DECISION.

INASMUCH AS THE FACTS IN THIS CASE INDICATE THAT THE SURETY COMPANY IS ABOUT TO SATISFACTORILY COMPLETE THE CONTRACT; THAT IT IS NOT ONLY PROPERLY CARRYING THE CONTRACT TO COMPLETION BUT IS PAYING ALL JUST CLAIMS AND BILLS FOR MATERIAL AND LABOR CONTRACTED FOR BY THE DEFAULTING CONTRACTOR, AND THAT THE SURETY COMPANY WILL HAVE SPENT APPROXIMATELY $26,000 IN EXCESS OF THE AMOUNT OF THE CONTRACT, IT WOULD APPEAR THAT THE SURETY COMPANY IS CLEARLY ENTITLED TO RECEIVE ALL AMOUNTS NOW WITHHELD FROM THE DEFAULTING CONTRACTOR BY THIS DEPARTMENT.

THE DEPARTMENT, THEREFORE, REQUESTS YOUR DECISION IN THE MATTER IN ORDER THAT IT MAY BE ADVISED OF THE RIGHTS OF THE SURETY COMPANY AT THE TIME OF FINAL SETTLEMENT OF THE CONTRACT.

THERE IS INCLOSED HEREWITH A PETITION OF THE DETROIT FIDELITY AND SURETY COMPANY, TOGETHER WITH A COPY OF THE TRANSMITTING LETTER OF APRIL 14, 1928.

THE PETITION OF THE SURETY COMPANY, WHICH ACCOMPANIED YOUR SUBMISSION, CONTAINS THE FOLLOWING STATEMENT OF FACTS RELATIVE TO THE MATTER:

UNDER DATE OF MARCH 19, 1927, JOHN P. CURLEY ENTERED INTO A CONTRACT WITH THE UNITED STATES OF AMERICA FOR THE CONSTRUCTION OF A POST OFFICE BUILDING AT WINCHESTER, MASSACHUSETTS, AND IN CONNECTION WITH SAID CONTRACT EXECUTED A BOND, AS REQUIRED BY LAW, GUARANTEEING THE FAITHFUL CARRYING OUT OF THE PROVISIONS OF THE CONTRACT AND THE PAYMENT OF PROPER LABOR AND MATERIAL BILLS, THE DETROIT FIDELITY AND SURETY COMPANY BEING SURETY ON SAID BOND. AT OR ABOUT THE DATE OF THE EXECUTION OF SAID BOND THE SAID JOHN P. CURLEY FILED AN APPLICATION FOR SAID BOND WITH THE DETROIT FIDELITY AND SURETY COMPANY, WHICH APPLICATION CONTAINS THE FOLLOWING PROVISIONS:

"AND FOR THE BETTER PROTECTION OF THE SAID COMPANY, THE UNDERSIGNED, AS OF THE DATE HEREOF, HEREBY ASSIGNS, TRANSFERS AND CONVEYS TO IT, THE SAID DETROIT FIDELITY AND SURETY COMPANY, ALL RIGHT, TITLE, AND INTEREST OF THE UNDERSIGNED IN AND TO ALL TOOLS, PLANT, EQUIPMENT, AND MATERIALS OF EVERY NATURE AND DESCRIPTION THAT MAY NOW OR HEREAFTER BE UPON SAID WORK, OR IN, ON, OR ABOUT THE SITE THEREOF, INCLUDING AS WELL ALL MATERIALS PURCHASED FOR OR CHARGEABLE TO SAID CONTRACT WHICH MAY NOW BE IN PROCESS OF CONSTRUCTION, OR STORAGE ELSEWHERE, OR IN TRANSPORTATION TO SAID SITE, HEREBY ASSIGNING AND CONVEYING ALSO ALL RIGHTS OF THE UNDERSIGNED IN AND TO ALL SUBCONTRACTS, WHICH HAVE BEEN OR MAY HEREAFTER BE ENTERED INTO, AND THE MATERIALS EMBRACED THEREIN, AND AUTHORIZING AND EMPOWERING SAID COMPANY, ITS AUTHORIZED AGENTS OR ATTORNEYS, TO ENTER UPON AND TAKE POSSESSION OF SAID TOOLS, PLANT, EQUIPMENT, MATERIALS, AND SUBCONTRACTS, AND ENFORCE, USE, AND ENJOY SUCH POSSESSION UPON THE FOLLOWING CONDITIONS, VIZ: THIS ASSIGNMENT SHALL BE IN FULL FORCE AND EFFECT AS OF THE DATE HEREOF, SHOULD THE UNDERSIGNED FAIL, REFUSE, OR BE UNABLE TO COMPLETE THE SAID WORK IN ACCORDANCE WITH THE TERMS OF THE CONTRACT COVERED BY SAID BOND, OR IN EVENT OF ANY DEFAULT ON THE PART OF THE UNDERSIGNED UNDER THE SAID CONTRACT.

"IN FURTHER CONSIDERATION OF THE EXECUTION OF THE SAID BOND, THE UNDERSIGNED DOES HEREBY AGREE, AS OF THIS DATE, THAT THE SAID DETROIT FIDELITY AND SURETY COMPANY SHALL, AS SURETY ON SAID BOND, BE SUBROGATED TO ALL RIGHTS, PRIVILEGES, AND PROPERTIES OF THE UNDERSIGNED AS PRINCIPAL AND OTHERWISE IN SAID CONTRACT, AND 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 AT THE TIME OF SUCH BREACH OR DEFAULT, OR THAT MAY THEREAFTER BECOME DUE AND PAYABLE TO SAID UNDERSIGNED ON ACCOUNT OF SAID CONTRACT, OR ON ACCOUNT OF EXTRA WORK OR MATERIALS SUPPLIED IN CONNECTION THEREWITH, HEREBY AGREEING THAT ALL SUCH MONEYS, AND THE PROCEEDS OF SUCH PAYMENTS AND PROPERTIES, SHALL BE THE SOLE PROPERTY OF THE SAID DETROIT FIDELITY AND SURETY COMPANY AND BE BY IT CREDITED UPON ANY LOAN, COST DAMAGE, CHARGE, AND EXPENSE SUSTAINED, OR INCURRED BY IT AS ABOVE UNDER ITS BOND OF SURETYSHIP.'

A CERTIFIED COPY OF SAID APPLICATION HAS BEEN FILED WITH, AND IS NOW OF RECORD IN, YOUR OFFICE.

JOHN P. CURLEY PROCEEDED WITH THIS CONTRACT UNTIL SOME TIME IN DECEMBER, 1927, WHEN HE CEASED WORK UPON SAME AND THE DETROIT FIDELITY AND SURETY COMPANY, HEREAFTER REFERRED TO AS THE SURETY COMPANY, WAS NOTIFIED THAT PROGRESS WAS UNSATISFACTORY IN CONNECTION WITH THE CONTRACT.

UNDER DATE OF JANUARY 10, 1928, THE GOVERNMENT NOTIFIED THE SURETY COMPANY THAT IT HAS TERMINATED THIS CONTRACT, AND UNDER THE SAME DATE THE SURETY COMPANY ADVISED THE GOVERNMENT THAT IT ELECTED TO TAKE OVER THE CONTRACT AND COMPLETE THE SAME AND PAY PROPER LABOR AND MATERIAL BILLS. UNDER DATE OF JANUARY 13, 1928, THE SURETY COMPANY NOTIFIED THE GOVERNMENT BY LETTER REITERATING ITS ELECTION TO COMPLETE SAID CONTRACT AND MAKING CLAIM TO ANY AND ALL MONEYS DUE OR TO BECOME DUE UNDER SAID CONTRACT.

UNDER DATE OF JANUARY 18, 1928, THE GOVERNMENT GAVE FORMAL PERMISSION TO THE SURETY COMPANY TO COMPLETE SAID CONTRACT IN ACCORDANCE WITH ITS ELECTION. IT ALSO ADVISED THE SURETY COMPANY THAT CHECKS OR WARRANTS IN PAYMENT OF ESTIMATES WOULD BE MADE PAYABLE TO THE ORIGINAL CONTRACTOR, JOHN P. CURLEY, AND DELIVERED TO THE SURETY COMPANY, AND THE GOVERNMENT FURNISHED THE SURETY COMPANY WITH A BLANK FORM OF POWER OF ATTORNEY FOR THE SAID CONTRACTOR TO EXECUTE IN FAVOR OF THE SURETY COMPANY AUTHORIZING IT TO ENDORSE SAID CHECKS OR WARRANTS RECEIVED IN PAYMENT OF ESTIMATES SO THAT THE MONEY THEREON COULD BE PAID DIRECT TO THE SURETY COMPANY. THE CONTRACTOR REFUSED TO EXECUTE SUCH POWER OF ATTORNEY AND LATER ON YOUR DEPARTMENT RULED, ON THE ADVICE OF THE COMPTROLLER GENERAL'S OFFICE, THAT ALL ESTIMATES FOR WORK EARNED BY THE SURETY COMPANY IN COMPLETING THE CONTRACT AND ALL RETAINED PERCENTAGES THEREON SHOULD BE PAID BY CHECK OR WARRANT MADE PAYABLE DIRECTLY TO THE SURETY COMPANY, BUT THAT THE RETAINED PERCENTAGES AND THE ESTIMATES EARNED BY THE ORIGINAL CONTRACTORS UP TO THE DATE OF THE TERMINATION OF THE CONTRACT WOULD BE PAID BY CHECK MADE PAYABLE TO THE CONTRACTOR, JOHN P. CURLEY, AND DELIVERED TO THE SURETY COMPANY.

JOHN P. CURLEY SOME TIME DURING THE MONTH OF FEBRUARY, 1928, FILED A PETITION IN BANKRUPTCY, WAS DULY ADJUDICATED BANKRUPT AND THE TRUSTEE OF HIS ESTATE WAS ELECTED.

AT THE DATE OF THE TERMINATION OF SAID CONTRACT BY THE GOVERNMENT IT IS SHOWN BY LETTER OF FEBRUARY 28, 1928, WRITTEN BY THE GOVERNMENT TO THE SURETY COMPANY THAT THERE WAS AVAILABLE FOR THE COMPLETION OF THE CONTRACT AND THE PAYMENT OF LABOR AND MATERIAL BILLS, OUT OF THE CONTRACT PRICE, THE SUM OF $42,718.23. THE SURETY COMPANY IN PURSUANCE TO ITS ELECTION TO COMPLETE SAID CONTRACT, EMPLOYED A CONTRACTOR AT A FIXED PRICE OF $53,000.00 TO COMPLETE SAID CONTRACT, THEREBY SUSTAINING A LOSS ON THE COMPLETION OF THE SAID CONTRACT ALONE OF $10,281.77, AND IN ADDITION THERETO, THE SURETY COMPANY, BY DILIGENT SEARCH AND INQUIRY, HAS ASCERTAINED THAT THERE ARE UNPAID LABOR AND MATERIAL BILLS FOR WHICH IT MAY BE LIABLE AND FOR THE MAJORITY OF WHICH IT IS UNDOUBTEDLY LIABLE, AMOUNTING TO APPROXIMATELY $16,000.00, MAKING A TOTAL LOSS WHICH THE SURETY COMPANY WILL SUSTAIN IN CONNECTION WITH THIS CONTRACT OF ABOUT $26,000.00.

SAID CONTRACT IS NEARING COMPLETION AND SAID SURETY COMPANY HAS PAID, AND IS NOW ENGAGED IN PAYING, SUCH OF SAID LABOR AND MATERIAL BILLS AS IT IS LIABLE FOR.

THE SITUATION, THEREFORE, IS THAT THE SURETY COMPANY IS COMPLETING THE CONTRACT AND PAYING BILLS AND IS RECEIVING CURRENT ESTIMATES FOR WORK DONE BY IT, BY CHECK OR WARRANT MADE PAYABLE TO IT DIRECTLY. THE GOVERNMENT TAKES THE POSITION, HOWEVER, THAT WHEN THE TIME FOR FINAL SETTLEMENT ARRIVES THE SURETY COMPANY WILL RECEIVE A CHECK OR WARRANT MADE PAYABLE DIRECTLY TO IT FOR THE FINAL ESTIMATE AND THE RETAINED PERCENTAGES DUE ON ACCOUNT OF WORK PERFORMED BY THE SURETY COMPANY IN COMPLETING THE CONTRACT, AND THAT A CHECK WILL BE MADE PAYABLE TO THE SAID JOHN P. CURLEY FOR THE AMOUNT OF THE RETAINED PERCENTAGES HELD BY THE GOVERNMENT FOR WORK PERFORMED PRIOR TO THE DATE OF THE TERMINATION OF THE CONTRACT AND FOR THE AMOUNT OF ESTIMATE EARNED DURING DECEMBER, 1927, BY SAID CURLEY PRIOR TO THE DATE OF TERMINATION OF THE CONTRACT. THE RETAINED PERCENTAGES ON SUCH WORK AMOUNT TO $3,241.70 AND THE AMOUNT OF THE DECEMBER ESTIMATE IS $555.53, MAKING A TOTAL OF $3,797.23 WHICH THE GOVERNMENT PROPOSES TO PAY BY CHECK ISSUED IN FAVOR OF JOHN P. CURLEY, SAID CHECK TO BE DELIVERED TO THE DETROIT FIDELITY AND SURETY COMPANY.

THE RULE IS WELL ESTABLISHED THAT A SURETY ON THE BOND OF A CONTRACTOR FOR PUBLIC WORK, WHO ASSUMED TO COMPLETE THE WORK AFTER ITS ABANDONMENT BY THE CONTRACTOR, IS ENTITLED TO BE SUBROGATED, SO FAR AS NECESSARY TO PROTECT IT FROM LOSS, TO ALL THE RIGHTS WHICH THE GOVERNMENT MIGHT HAVE ENFORCED AGAINST THE CONTRACTOR IF IT HAD DECLARED THE CONTRACT FORFEITED AND COMPLETED THE WORK ITSELF. THE SURETY'S RIGHT OF SUBROGATION HAS BEEN HELD TO BE SUPERIOR TO THE CLAIMS OF THE CONTRACTOR, OR HIS ASSIGNEES, FOR ANY BALANCES DUE UNDER THE CONTRACT WHICH ARE NECESSARY TO PROTECT THE SURETY FROM LOSS IN THE COMPLETION OF THE WORK. IN THIS CONNECTION, SEE FIRST NATIONAL BANK, SEATTLE, V. CITY TRUST, SAFE DEPOSIT AND SURETY CO., PHILA., ET AL., 114 FED.REP. 529; HENNINGSEN ET AL. V. UNITED STATES FIDELITY AND GUARANTY CO., ETC., ET AL., 143 FED.REP. 810, AFFIRMED BY THE UNITED STATES SUPREME COURT, 208 U.S. 404; PRAIRIE STATE BANK V. UNITED STATES, 164 U.S. 227; HARDAWAY AND POWELL V. NATIONAL SURETY CO., 150 FED.REP. 465, 473, AFFIRMED BY THE UNITED STATES SUPREME COURT, 211 U.S. 552.

IF IN THE INSTANT CASE THE SURETY PROCEEDED WITH AND IS ABOUT TO COMPLETE THE WORK ON THE POST-OFFICE BUILDING AT WINCHESTER, MASS., UNDER INVOLVED CONTRACT, TO THE SATISFACTION OF THE GOVERNMENT OFFICERS IN CHARGE THEREOF, WITH AN EXPENDITURE OF APPROXIMATELY $26,000 IN EXCESS OF THE AMOUNT OF THE CONTRACT PRICE, AND IF THERE IS OUTSTANDING AND UNPAID THE RETAINED PERCENTAGES ON SUCH WORK, AMOUNTING TO $3,241.70, AND THE DECEMBER, 1927, ESTIMATES, AMOUNTING TO $555.53, OR A TOTAL SUM OF $3,797.23, WITHHELD BY THE GOVERNMENT FOR WORK PERFORMED BY THE CONTRACTOR PRIOR TO THE DATE OF HIS DEFAULT IN PERFORMANCE, IN DECEMBER, 1927, THEN ALL THE PAYMENTS DUE OR TO BECOME DUE UNDER THE CONTRACT MAY BE PAID TO THE SURETY TO THE EXTENT NECESSARY TO REIMBURSE EXPENDITURES BY THE SURETY IN COMPLETION OF THE WORK. THE SURETY, HOWEVER, IS NOT ENTITLED TO ANY PROFIT UNDER THE CONTRACT; BUT IF IT BE A FACT THAT IT IS COMPLETING THE WORK AT A COST IN EXCESS OF THE CONTRACT PRICE IT WOULD APPEAR THAT NO PROFIT WOULD RESULT TO THE SURETY THEREUNDER.

THE FACT THAT THE CONTRACTOR WAS ADJUDICATED A BANKRUPT IN FEBRUARY, 1928, WOULD NOT AFFECT THE PROPOSED PAYMENT TO THE SURETY, INASMUCH AS THE SURETY'S RIGHT TO THE MONEYS NECESSARY TO COMPLETELY REIMBURSE IT FOR EXPENDITURES IN PERFORMANCE OF THE CONTRACT IS SUPERIOR IN LAW AND EQUITY TO THAT OF THE BANKRUPT'S ESTATE, WHICH HAS NO GREATER RIGHTS THAN THOSE OF THE CONTRACTOR AS AGAINST EITHER THE GOVERNMENT OR THE SURETY.

THE MATTERS HERE INVOLVED ARE SUCH THAT UPON COMPLETION OF THE CONTRACT THE FACTS SHOULD BE REPORTED HERE WITH A VOUCHER STATED ACCORDINGLY FOR PAYMENT BY SETTLEMENT OF THIS OFFICE INSTEAD OF BY A DISBURSING OFFICER.