A-22817, AUGUST 7, 1928, 8 COMP. GEN. 58

A-22817: Aug 7, 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 GOVERNMENT ROADS AND THE WORK IS TAKEN OVER 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 HAD COMPLETED THE WORK ITSELF. THE SURETY'S RIGHT OF SUBROGATION IS SUPERIOR TO CLAIMS OF THE CONTRACTOR. FOR ANY BALANCES DUE UNDER THE CONTRACT WHICH ARE NECESSARY TO PROTECT THE SURETY FROM LOSS IN COMPLETION OF THE WORK. INASMUCH AS SAID RIGHT IS SUPERIOR IN LAW AND EQUITY TO THAT OF THE BANKRUPT'S ESTATE.

A-22817, AUGUST 7, 1928, 8 COMP. GEN. 58

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 GOVERNMENT ROADS AND THE WORK IS TAKEN OVER 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 HAD COMPLETED THE WORK ITSELF. THE SURETY'S RIGHT OF SUBROGATION IS SUPERIOR TO CLAIMS OF THE CONTRACTOR, OR HIS ASSIGNS, FOR ANY BALANCES DUE UNDER THE CONTRACT WHICH ARE NECESSARY TO PROTECT THE SURETY FROM LOSS IN COMPLETION OF THE WORK, AND THE SUBSEQUENT BANKRUPTCY OF THE CONTRACTOR WOULD NOT AFFECT THE SURETY'S RIGHT OF SUBROGATION, INASMUCH AS SAID RIGHT 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. THE ESTATE OF A DEFAULTING BANKRUPT CONTRACTOR FOR GOVERNMENT WORK WOULD HAVE NO EQUITY IN MONEYS DUE UNDER THE CONTRACT UNTIL THE SURETY ON HIS PERFORMANCE BOND WHO TOOK OVER THE WORK FOR COMPLETION HAS BEEN REIMBURSED FOR EXPENDITURES NECESSARY TO LIQUIDATE THE CONTRACTOR'S LIABILITIES UNDER THE CONTRACT AND TO COMPLETE THE CONTRACT SATISFACTORILY IN ACCORDANCE WITH THE PROVISIONS THEREOF.

COMPTROLLER GENERAL MCCARL TO THE SECRETARY OF THE TREASURY, AUGUST 7, 1928:

THERE HAS BEEN RECEIVED YOUR LETTER OF JULY 23, 1928, AS FOLLOWS:

ON SEPTEMBER 1, 1927, A CONTRACT WAS ENTERED INTO BETWEEN THE UNITED STATES AND MR. L. MORGAN JOHNSTON, OF ARLINGTON, VIRGINIA (NOY-164) , FOR THE CONSTRUCTION OF ROADS AT THE NAVY MINE DEPOT, YORKTOWN, VIRGINIA. SECURE THE PERFORMANCE OF THE CONTRACT, AND TO GUARANTEE THE PAYMENT OF CLAIMS FOR LABOR, MATERIAL, AND SUPPLIES, THE CONTRACTOR FURNISHED A BOND DATED SEPTEMBER 6, 1927, IN THE AMOUNT OF $35,627, IN WHICH THE EAGLE INDEMNITY COMPANY OF NEW YORK WAS SOLE SURETY, CONDITIONED UPON THE PERFORMANCE OF THE CONTRACT AND THE PAYMENT OF PERSONS SUPPLYING LABOR AND MATERIALS IN THE PROSECUTION OF THE WORK.

BY LETTER FROM THE PAYMASTER GENERAL OF THE NAVY DEPARTMENT, DATED MARCH 15, 1928, THE TREASURER OF THE UNITED STATES RECEIVED A POWER OF ATTORNEY EXECUTED BY L. MORGAN JOHNSTON ON MARCH 13, 1928, APPOINTING SAMUEL M. MARKS, OF WASHINGTON, D.C., THE REPRESENTATIVE OF THE EAGLE INDEMNITY COMPANY OF NEW YORK, HIS ATTORNEY TO RECEIVE, ENDORSE,AND COLLECT CHECKS IN THE NAME OF L. MORGAN JOHNSTON, DRAWN ON THE TREASURER OF THE UNITED STATES, FOR THE CONTRACT FOR ROADS AT THE NAVAL MINE DEPOT, YORKTOWN, VIRGINIA, WHICH HAD ACCRUED AND WERE THEN DUE AND PAYABLE. A PHOTOSTATIC COPY OF SUCH POWER OF ATTORNEY IS ENCLOSED HEREWITH.

ON MARCH 13, 1928, MR. JOHNSTON NOTIFIED THE NAVY DEPARTMENT THAT HE WAS NO LONGER FINANCIALLY ABLE TO DO THE WORK UNDER THE CONTRACT, AND HE WAS THEREUPON DECLARED TO BE IN DEFAULT BY THAT DEPARTMENT, AND THE SURETY COMPANY WAS REQUESTED TO COMPLETE THE JOB UNDER ITS BOND. THE SURETY COMPANY UNDERTOOK THE WORK OF COMPLETING THE CONTRACT.

ON MARCH 17, 1928, A CHECK FOR $15,971.61 WAS DRAWN ON THE TREASURER OF THE UNITED STATES IN PAYMENT OF WORK COMPLETED UNDER THE CONTRACT, WHICH CHECK WAS DRAWN TO THE ORDER OF THE CONTRACTOR AND WAS MAILED TO THE SURETY COMPANY. ON MARCH 22, 1928, THE TREASURER OF THE UNITED STATES WAS REQUESTED TO ADVISE THE FEDERAL RESERVE BANK OF RICHMOND AS TO THE AUTHORITY OF SAMUEL M. MARKS, ATTORNEY IN FACT, TO ENDORSE THE CHECK ISSUED ON MARCH 17, 1928. BEFORE THE RECEIPT OF THAT TELEGRAM, THE TREASURER HAD LEARNED OF THE BANKRUPTCY OF L. MORGAN JOHNSTON, AND ACCORDINGLY ADVISED THE BANK THAT THE CHECK SHOULD BE ENDORSED BY THE RECEIVER OF THE BANKRUPT PAYEE, AND THAT EVIDENCE OF THE APPOINTMENT AND QUALIFICATION OF THE RECEIVER SHOULD BE FURNISHED. THE ENDORSEMENT OF THE RECEIVER WAS NOT OBTAINED, AND THE FEDERAL RESERVE BANK, ACTING UPON THE ADVICE RECEIVED FROM THE TREASURER, DECLINED TO CASH THE CHECK.

THE DEPARTMENT IS NOW IN NOW IN RECEIPT OF A LETTER FROM THE ATTORNEY FOR THE SURETY COMPANY DATED JUNE 25, 1928, TOGETHER WITH AN ACCOMPANYING MEMORANDUM, REQUESTING THAT PAYMENT OF THE CHECK ISSUED MARCH 17, 1928, BE MADE TO THE SURETY COMPANY. THE MEMORANDUM AND A PHOTOSTATIC COPY OF THE LETTER REFERRED TO ARE ENCLOSED HEREWITH. THE DEPARTMENT HAS ALSO BEEN FURNISHED WITH AN AFFIDAVIT OF JOHN T. NOONAN, A CLAIM ATTORNEY FOR THE SURETY COMPANY, DATED JULY 16, 1928, SHOWING PAYMENT BY THE SURETY COMPANY OF THE SUM OF $15,971.61 FOR MATERIALS SUPPLIED BY JAMISON BROS., INC., TO L. MORGAN JOHNSTON, WHICH MATERIALS ARE STATED TO HAVE BEEN USED IN THE PERFORMANCE OF THE CONTRACT PRIOR TO MARCH 17, 1928. THE AFFIDAVIT ALSO RECITES THE PAYMENT BY THE SURETY COMPANY ON MARCH 10, 1928, OF THE SUM OF $664.25 TO WORKMEN ENGAGED ON THE JOB. IN ADDITION, THERE HAS BEEN FURNISHED TO THE DEPARTMENT AN AFFIDAVIT OF A. J. JAMISON, PRESIDENT AND AGENT OF JAMISON BROS., INC., DATED JULY 17, 1928, SETTING FORTH AND AGENT OF JAMISON BROS., INC., DATED JULY 17, 1928, SETTING FORTH THE PAYMENT OF $15,971.61 TO THAT COMPANY BY THE SURETY COMPANY. BOTH AFFIDAVITS ARE ENCLOSED HEREWITH.

THE DEPARTMENT IS ALSO IN RECEIPT OF A LETTER DATED JUNE 23, 1928, FROM THE ATTORNEY FOR THE TRUSTEE IN BANKRUPTCY FOR L. MORGAN JOHNSTON, A PHOTOSTATIC COPY OF WHICH LETTER IS ENCLOSED HEREWITH, REQUESTING THAT PAYMENT OF THE CHECK TO THE SURETY COMPANY BE REFUSED, AND THAT THE FUNDS BE PAID TO THE TRUSTEE IN BANKRUPTCY.

IN VIEW OF THE FOREGOING, YOUR OPINION IS REQUESTED WHETHER THE TREASURER OF THE UNITED STATES SHOULD MAKE PAYMENT OF THE CHECK UPON THE ENDORSEMENT OF SAMUEL M. MARKS, ATTORNEY IN FACT, AS AGENT OF THE SURETY COMPANY, OR, IF NOT, UPON WHAT ENDORSEMENT AND TO WHOM PAYMENT OF THE CHECK SHOULD BE MADE. IN THIS CONNECTION, YOUR ATTENTION IS INVITED TO A LETTER DATED MAY 29, 1928, FROM YOU TO THE SECRETARY OF THE NAVY (A-22817).

THE FACTS RELATIVE TO THE MATTERS INVOLVED ARE STATED BY THE CHIEF OF THE BUREAU OF YARDS AND DOCKS IN HIS LETTER OF APRIL 5, 1928, TO THE SECRETARY OF THE NAVY, TO BE AS FOLLOWS:

1. MR. L. MORGAN JOHNSTON, OF ARLINGTON, VA., UNDER DATE OF SEPTEMBER 1, 1927, ENTERED INTO A CONTRACT (NOY-164) WITH THE UNITED STATES, REPRESENTED BY THE CHIEF OF THIS BUREAU, TO CONSTRUCT ROADS AND DO CERTAIN INCIDENTAL WORK AT THE NAVY MINE DEPOT, YORKTOWN, VA., FOR THE SUM OF $118,775, AND IN CONNECTION THEREWITH FURNISHED A BOND DATED SEPTEMBER 6, 1927, FOR $35,627, IN WHICH THE EAGLE INDEMNITY COMPANY OF NEW YORK IS SOLE SURETY, CONDITIONED UPON THE PERFORMANCE OF THE CONTRACT AND THE PAYMENT OF PERSONS SUPPLYING LABOR AND MATERIALS IN THE PROSECUTION OF THE WORK. NOTICE TO PROCEED WITH THE WORK WAS GIVEN SEPTEMBER 19, 1927, WHICH FIXED THE DATE FOR ITS COMPLETION AS JULY 15, 1928. UNDER THIS CONTRACT THERE HAS BEEN PAID TO DATE THE SUM OF $39,453.90, THE LATEST PAYMENT (THE FIFTH) HAVING BEEN MADE FEBRUARY 18, 1928.

2. BY LETTER OF MARCH 9, 1928, TO THIS BUREAU (COPY INCLOSED) MR. JOHNSTON REQUESTED THAT ALL FUTURE CHECKS DUE AND PAYABLE TO HIM UNDER THE CONTRACT BE DELIVERED TO THE EAGLE INDEMNITY COMPANY THROUGH MR. SAMUEL M. MARKS, ITS ATTORNEY IN FACT, SUITE 605, INVESTMENT BUILDING, WASHINGTON, D.C., AND BY LETTER OF THE SAME DATE (COPY INCLOSED) THE SURETY COMPANY, THROUGH MR. MARKS, ASKED THAT "DUE TO THE FINANCIAL EMBARRASSMENT OF LOUIS M. JOHNSTON, WHO IS UNABLE TO COMPLETE THE * * * CONTRACT," THE FURTHER PAYMENTS UNDER THE CONTRACT BE SENT, AS REQUESTED BY MR. JOHNSTON, TO THE SURETY, AND NOT DIRECTLY TO HIM. ON MARCH 13 A COUCHER (NO. 6) FOR THE PAYMENT OF $15,971.61, COVERING WORK DONE TO FEBRUARY 29, 1928, WAS APPROVED, AND ON THE SAME DATE THE CONTRACTOR GAVE MR. MARKS A POWER OF ATTORNEY, WHICH WAS FILED WITH THE BUREAU MARCH 13, AUTHORIZING HIM TO ENDORSE THE PAYMENT CHECK IN HIS NAME AND COLLECT THE PROCEEDS THEREOF. CHECK DATED MARCH 17 FOR $15,971.61, THE AMOUNT REPRESENTED BY VOUCHER NO. 6, DRAWN TO THE ORDER OF THE CONTRACTOR, WAS MAILED TO THE SURETY COMPANY ACCORDINGLY.

3. BY A LETTER OF MARCH 13, FILED WITH THE BUREAU MARCH 14, MR. JOHNSTON GAVE NOTICE THAT HE WAS "FINANCIALLY EMBARRASSED AND WITHOUT ANY FUNDS" AND COULD NOT CONTINUE OR COMPLETE THE WORK UNDER THE CONTRACT, AND ASKED THAT HE BE DECLARED IN DEFAULT. THEREUPON THE BUREAU, MARCH 14, TERMINATED HIS RIGHT TO PROCEED WITH THE WORK; DIRECTED THE APPOINTMENT OF A BOARD AT YORKTOWN TO ESTIMATE THE VALUE OF MATERIALS DELIVERED AND WORK DONE UNDER THE CONTRACT AND TO INVENTORY AND ESTIMATE THE VALUE OF APPLIANCES AND PLANT ON THE SITE AND NECESSARY FOR THE PROSECUTION OF THE WORK; AND CALLED UPON THE EAGLE INDEMNITY COMPANY TO COMPLETE THE CONTRACT. THIS THE SURETY IS DOING.

4. ON MARCH 22 IT CAME TO THE BUREAU'S NOTICE THAT MR. JOHNSTON HAD BEEN ADJUDGED A BANKRUPT, AND ON APRIL 3 THERE WAS RECEIVED A CERTIFIED COPY OF AN ORDER OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA, DATED MARCH 14, APPOINTING T. W. ROBINSON, JR., AND FRANK D. MOORE, BOTH OF ALEXANDRIA, RECEIVERS OF THE ESTATE OF THE BANKRUPT.

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

ON SEPTEMBER 1, 1927, A CONTRACT WAS ENTERED INTO BETWEEN THE UNITED STATES AND L. MORGAN JOHNSTON WHEREBY L. MORGAN JOHNSTON FOR THE CONSIDERATIONS STATED IN THE CONTRACT, AGREED TO DO CERTAIN WORK, MORE PARTICULARLY DESCRIBED NOY-164 (SPECIFICATION NO. 5424) FOR THE CONSTRUCTION OF ROADS AT THE NAVY MINE DEPOT, YORKTOWN, VIRGINIA.

TO SECURE THE PERFORMANCE OF SAID CONTRACT AND TO GUARANTEE THE PAYMENT OF CLAIMS, FOR LABOR, MATERIAL, AND SUPPLIES. L. MORGAN JOHNSTON, ON SEPTEMBER 13, 1927, PROCURED FROM THE SURETY COMPANY, AS SURETY, ITS CERTAIN PUBLIC CONTRACTOR'S BOND WHICH IT MADE AND DELIVERED TO THE UNITED STATES.

TO PROCURE THIS BOND THE CONTRACTOR, ON OR BEFORE THE SAID DATE, MADE APPLICATION TO THE SURETY COMPANY AND THEREIN STATED AS FOLLOWS:

"THAT, AS OF THIS DATE, THE SURETY SHALL BE SUBROGATED TO ALL RIGHTS, PRIVILEGES, AND PROPERTIES OF THE UNDERSIGNED, AS PRINCIPAL AND OTHERWISE IN SAID CONTRACT, AND UNDERSIGNED DOES HEREBY ASSIGN, TRANSFER, AND CONVEY TO THE SURETY ALL THE DEFERRED PAYMENTS, AND RETAINED PERCENTAGES, AND ANY AND ALL MONIES 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 THE UNDERSIGNED ON ACCOUNT OF SAID CONTRACT, OR ON ACCOUNT OF EXTRA WORK OR MATERIALS SUPPLIED IN CONNECTION THEREWITH, SHALL BECOME THE PROPERTY OF THE SURETY TO BE CREDITED UPON ANY CLAIM THAT MAY BE MADE UPON THE SURETY UNDER THE BOND OR BONDS ABOVE MENTIONED.'

IT WAS ALSO AGREED IN SAID APPLICATION

"THAT THE SURETY MAY, AT ITS OPTION, EXERCISE IN THE NAME OF THE UNDERSIGNED, OR OTHERWISE, ANY RIGHT, OR REMEDY, OR DEMAND WHICH THE UNDERSIGNED MAY HAVE FOR THE RECOVERY OF ANY SUMS PAID BY THE SURETY BY VIRTUE OF ITS SURETYSHIP, AND ANY AND ALL EXTENSIONS AND RENEWALS THEREOF, TOGETHER WITH ALL OTHER RIGHTS AND REMEDIES AND DEMANDS WHICH THE UNDERSIGNED HAS OR MAY HAVE IN THE PREMISES, ALL OF WHICH RIGHTS AND REMEDIES AND DEMANDS ARE HEREBY ASSIGNED TO THE SURETY WITH FULL POWER AND AUTHORITY TO THE SURETY, IN THE NAME OF THE UNDERSIGNED OR OTHERWISE, AS IT MAY BE ADVISED, AND AS ATTORNEY FOR THE UNDERSIGNED TO DO ANYTHING WHICH THE UNDERSIGNED MIGHT DO, IF PERSONALLY PRESENT, IF THIS INSTRUMENT WERE NOT EXECUTED, AND THE UNDERSIGNED HEREBY APPOINTS THE SURETY ATTORNEY OF THE UNDERSIGNED FOR SUCH PURPOSE.'

ON MARCH 12, 1928, THE CONTRACTOR, L. MORGAN JOHNSTON, WAS INDEBTED TO JAMISON, INC., IN EXCESS OF THE SUM OF $15,971.61 FOR WORK DONE AND MATERIALS AND SUPPLIES FURNISHED ON SAID JOB, ALL OF WHICH THE SURETY UNDER THE TERMS OF ITS BOND WAS OBLIGATED TO PAY.

ON MARCH 12, 1928, THE CONTRACTOR, L. MORGAN JOHNSTON, IN FURTHERANCE OF HIS OBLIGATION TO THE SURETY UNDER SAID BOND AND APPLICATION, AND FOR THE PURPOSE OF CARRYING OUT SUCH OBLIGATION, GAVE A POWER OF ATTORNEY TO THE AGENT OF THE SURETY COMPANY TO COLLECT AND ENDORSE A DRAFT THEN DUE FOR WORK ON SAID JOB; AND ON MARCH 13, 1928, THE SAID L. MORGAN JOHNSTON NOTIFIED THE PROPER AUTHORITIES OF THE NAVY DEPARTMENT THAT HE WAS NO LONGER FINANCIALLY ABLE TO DO THE WORK AND CONSENTED TO BE DECLARED IN DEFAULT. THE NAVY DEPARTMENT THEREUPON DECLARED THE SAID L. MORGAN JOHNSTON IN DEFAULT AND REQUESTED THE SURETY TO COMPLETE THE JOB UNDER ITS BOND WHICH THE SURETY COMPANY IS NOW DOING. ON MARCH 15, 1928, L. MORGAN JOHNSTON FILED A PETITION IN VOLUNTARY BANKRUPTCY AND WAS ADJUDICATED A BANKRUPT.

ON MARCH 17 A DRAFT WAS ISSUED BY THE UNITED STATES TREASURY IN THE SUM OF $15,971.61 IN THE NAME OF L. MORGAN JOHNSTON. THIS DRAFT WAS DELIVERED TO THE AGENT OF THE SURETY COMPANY WHO THEREUPON ENDORSED IT TO JAMISON AND BROS., INC., ON ACCOUNT OF THEIR CLAIM AGAINST L. MORGAN JOHNSTON FOR WORK DONE AND MATERIALS AND SUPPLIES FURNISHED ON SAID PROJECT. THIS DRAFT THE TREASURY DEPARTMENT HAS SO FAR DECLINED TO PAY.

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 COMPANY, 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 COMPANY, 150 FED.REP. 465, 473, AFFIRMED BY UNITED STATES SUPREME COURT, 211 U.S. 552; TITLE GUARANTY AND SURETY COMPANY V. DUTCHER ET AL., 203 FED.REP. 167. IN THE INSTANT CASE IT APPEARS THAT THE SURETY IS PROCEEDING WITH THE COMPLETION OF THE WORK OF CONSTRUCTION OF ROADS AT THE NAVY MINE DEPOT AT YORKTOWN, VA., UNDER THE INVOLVED CONTRACT, TO THE SATISFACTION OF THE GOVERNMENT OFFICERS IN CHARGE THEREOF. UNDER THE PROVISIONS OF THE CONTRACTOR'S AGREEMENT WITH THE SURETY ON HIS PERFORMANCE BOND, ALL THE PAYMENTS DUE OR TO BECOME DUE UNDER THE CONTRACT WERE TO BE PAID TO THE SURETY, IN THE EVENT OF THE CONTRATOR'S DEFAULT, IN ORDER TO REIMBURSE EXPENDITURES BY THE SURETY TO LIQUIDATE ITS LIABILITIES THEREUNDER. THE EVIDENCE SHOWS THAT THE $15,971.61 PAYMENT IN QUESTION IS FOR WORK DONE PRIOR TO CONTRACTOR'S ABANDONMENT OF THE CONTRACT ON MARCH 13, 1928; THAT THE CONTRACTOR PRIOR TO SUCH ABANDONMENT OF THE CONTRACT HAD INCURRED LIABILITIES FOR LABOR AND MATERIALS IN EXCESS OF SUCH SUM, FOR WHICH THE SAID SURETY WAS FINANCIALLY RESPONSIBLE UNDER THE PERFORMANCE BOND; AND THAT THE SURETY HAS ALREADY PAID TO JAMISON BROS. (INC.) THE SUM OF $15,971.61 IN PARTIAL LIQUIDATION OF THE TOTAL AMOUNT DUE IT FOR LABOR AND MATERIALS FURNISHED THE CONTRACTOR.

THE PERFORMANCE BOND EXECUTED BY THE CONTRACTOR AND HIS SURETY IN CONNECTION WITH THE GOVERNMENT WORK WAS INTENDED TO PERFORM A DOUBLE FUNCTION--- (1) TO SECURE THE GOVERNMENT FOR THE FAITHFUL PERFORMANCE OF ALL OBLIGATIONS WHICH THE CONTRACTOR ASSUMED, AND (2) TO PROTECT THIRD PERSONS FROM WHOM THE CONTRACTOR OBTAINED MATERIALS AND LABOR. WHEN A CONTRACTOR ABANDONS HIS CONTRACT AND THE SURETY PROCEEDS WITH THE COMPLETION OF THE WORK AND PAYS THE UNLIQUIDATED CLAIMS FOR LABOR AND MATERIALS UNDER THE CONTRACT, AS APPEARS TO HAVE BEEN THE CASE HERE, SUCH 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. IN THIS CASE HAD THE GOVERNMENT COMPLETED THE WORK UNDERTAKEN BY THE CONTRACTOR AT A COST EXCEEDING THE ORIGINAL CONTRACT PRICE, IT WOULD HAVE HAD THE RIGHT TO APPLY THE BALANCE DUE SAID CONTRACTOR AT THE TIME OF ABANDONMENT IN REDUCTION OF SUCH COST. LIKEWISE, IF THE SURETY COMPLETES THE WORK IN THE PLACE OF THE CONTRACTOR, IT WILL BE SUBROGATED TO THE RIGHTS OF THE GOVERNMENT TO MAKE SUCH APPLICATION. THE RIGHT OF THE SURETY TO RECEIVE PAYMENT IN SUCH A CASE, UNDER THE DOCTRINE OF SUBROGATION, DATES FROM THE DATE OF THE PERFORMANCE BOND AND IS PARAMOUNT TO THE RIGHT OF THE CONTRACTOR OR ANYONE CLAIMING AS HIS ASSIGNEE, OR AS TRUSTEE, RECEIVER, OR ADMINISTRATOR OF HIS EFFECTS OR ESTATE. 26 COMP. DEC. 467.

CONCERNING THE CONTENTION OF THE RECEIVERS IN BANKRUPTCY OF THE ESTATE OF THE CONTRACTOR, L. MORGAN JOHNSTON, WHO APPEARS TO HAVE BEEN ADJUDGED A BANKRUPT ON OR ABOUT MARCH 14, 1928, IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA, THAT THE MONEY DUE THE CONTRACTOR FROM THE GOVERNMENT FOR CONSTRUCTION WORK DONE PRIOR TO THE ABANDONMENT OF THE CONTRACT ON MARCH 13, 1928, AMOUNTING IN THE AGGREGATE TO $15,971.61, CONSTITUTES AN ASSET BELONGING TO THE BANKRUPT'S ESTATE, IT MAY BE SAID THAT IT IS A GENERAL PRINCIPLE OF LAW THAT A TRUSTEE OR A RECEIVER IN BANKRUPTCY TAKES THE PROPERTY OF THE BANKRUPT IN THE SAME PLIGHT AND CONDITION AND SUBJECT TO THE SAME EQUITIES AND LIENS AS HE FINDS IT IN THE HANDS OF THE PERSON OR CORPORATION OUT OF WHOSE POSSESSION IT IS TAKEN. TRUSTEE OR A RECEIVER IN BANKRUPTCY CAN ACQUIRE NO OTHER, GREATER, OR BETTER INTEREST THAN THE BANKRUPT HAD IN THE PROPERTY AT THE DATE HE WAS ADJUDGED A BANKRUPT. THE BANKRUPTCY ACT, IN GENERAL TERMS, VESTS THE TRUSTEE WITH TITLE TO ALL PROPERTY WHICH, PRIOR TO THE FILING OF THE PETITION, THE BANKRUPT COULD BY ANY MEANS HAVE TRANSFERRED, OR WHICH MIGHT HAVE BEEN LEVIED UPON AND SOLD UNDER JUDICIAL PROCESS AGAINST HIM. THE TRUSTEE OR THE RECEIVER CAN SET UP NO RIGHTS AGAINST CLAIMS WHICH THE BANKRUPT COULD NOT HAVE SET UP, AND CAN TAKE NO RIGHT OR TITLE WHICH WAS EXTINGUISHED BEFORE HIS APPOINTMENT. IN THIS CONNECTION, SEE 7 CORPUS JURIS 114; COLLIER ON BANKRUPTCY (5TH ED.) P. 554; HEWIT V. BERLIN MACHINE WORKS, 194 U.S. 296; SOUTH PINE CO. OF GA. V. SAVANNAH TRUST CO., 141 FED.REP. 808.

BOTH AT COMMON LAW AND UNDER THE BANKRUPTCY ACT, SECTION 571, ACT OF JULY 1, 1898, 30 STAT. 560, AS AMENDED BY THE ACT OF FEBRUARY 5, 1903, 32 STAT. 799, A SURETY WHO HAS PAID A DEBT OF THE BANKRUPT, IN WHOLE OR IN PART, IS SUBROGATED TO THE RIGHTS OF THE CREDITOR, PRO TANTO. SEE SESSLER V. PADUCAH DISTILLERIES CO. ET AL., 168 FED.REP. 44. IN RE THOMPSON, 288 FED.REP. 385, DECREE AFFIRMED, 294 FED.REP. 247, CERTIORARI DENIED, 264 U.S. 582; 37 "CYC.' 402. SECTION 3468, REVISED STATUTES, GIVES TO A SURETY WHO PAYS TO THE UNITED STATES THE AMOUNT DUE ON A BOND OF AN INSOLVENT DEBTOR THE PRIORITY ENJOYED BY THE UNITED STATES OVER OTHER CREDITORS UNDER THE PROVISIONS OF SECTION 3466, REVISED STATUTES. THE COURTS HAVE HELD THAT INASMUCH AS THE PURPOSE OF THE SAID TWO SECTIONS WAS TO CONFER AND ENFORCE THE STATUTORY RIGHTS OF THE UNITED STATES FOR THE BENEFIT OF THE SURETY, SUCH RIGHTS ARE NOT AFFECTED BY THE BANKRUPTCY ACT. SEE TITLE GUARANTY AND SURETY COMPANY V. GUARANTEE TITLE AND TRUST CO., 174 FED.REP. 385; UNITED STATES V. NATIONAL SURETY CO., 254 U.S. 73.

IN VIEW OF THE FACTS AND CIRCUMSTANCES RELATING TO THE CONTRACT INVOLVED HERE, AS HEREINBEFORE SET FORTH, PAYMENT OF THE $15,971.61 DUE THE CONTRACTOR FOR WORK PERFORMED PRIOR TO HIS DEFAULT ON MARCH 13, 1928, SHOULD BE MADE TO THE SURETY, THE EAGLE INDEMNITY CO. OF NEW YORK, IN PARTIAL REIMBURSEMENT TO IT FOR EXPENDITURES MADE ON CLAIMS FOR LABOR AND MATERIALS USED IN THE CONSTRUCTION WORK INVOLVED. THE FACT THAT THE DEFAULTING CONTRACTOR WAS ADJUDGED A BANKRUPT ON MARCH 14, 1928, WOULD NOT AFFECT THE INVOLVED 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 ESTATE OF THE DEFAULTING BANKRUPT CONTRACTOR WOULD HAVE NO EQUITY IN THE MONEYS DUE UNDER INVOLVED CONTRACT UNTIL THE SURETY HAS BEEN REIMBURSED FOR THE EXPENDITURES NECESSARY TO LIQUIDATE CONTRACTOR'S LIABILITIES UNDER THE CONTRACT AND TO COMPLETE THE CONTRACT SATISFACTORILY IN ACCORDANCE WITH THE PROVISIONS THEREOF.