B-122793, MAY 26, 1955

B-122793: May 26, 1955

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ESQ.: REFERENCE IS MADE TO YOUR LETTER OF JANUARY 31. THE CLAIM OF THE SURETY IS BASED ON THE FACT THAT IT CAME TO THE CONTRACTOR'S FINANCIAL ASSISTANCE WHEN THE CONTRACT WORK WAS ABOUT 85 PERCENT COMPLETED. WHILE THE WORK WAS ACTUALLY COMPLETED BY THE CONTRACTOR. IT APPEARS TO HAVE BEEN KNOWN BY GOVERNMENT REPRESENTATIVES THAT THE COST THEREOF WAS BORNE BY THE SURETY. IT IS THE POSITION OF THE SURETY THAT IT IS ENTITLED TO ITS UNREIMBURSED COMPLETION COSTS OUT OF THIS CONTRACT BALANCE. A CERTIFICATE OF SETTLEMENT WAS ISSUED TO THE CONTRACTOR ON SEPTEMBER 9. 358.02 WAS ALLOWED AND APPLIED IN PARTIAL LIQUIDATION OF THE CONTRACTOR'S TAX LIABILITY TO THE UNITED STATES. THROUGH INADVERTENCE THE SURETY DOES NOT APPEAR TO HAVE BEEN ADVISED OF THIS ACTION.

B-122793, MAY 26, 1955

PRECIS-UNAVAILABLE

ALEXANDER M. HERON, ESQ.:

REFERENCE IS MADE TO YOUR LETTER OF JANUARY 31, 1955, MAKING CLAIM ON BEHALF OF THE FIDELITY AND DEPOSIT COMPANY OF MARYLAND AS SURETY FOR THE FINK CONSTRUCTION COMPANY UNDER CONTRACT NO. V-1001C-254.

BRIEFLY STATED, THE CLAIM OF THE SURETY IS BASED ON THE FACT THAT IT CAME TO THE CONTRACTOR'S FINANCIAL ASSISTANCE WHEN THE CONTRACT WORK WAS ABOUT 85 PERCENT COMPLETED. THE SURETY PAID $16,205.11 IN OUTSTANDING BILLS OWED BY THE CONTRACTOR AND EXPENDED $7,639.54 FOR LABOR AND MATERIAL NECESSARY TO COMPLETE THE WORK, ALL OF WHICH REMAINS UNREIMBURSED EXCEPT $2,323.86. WHILE THE WORK WAS ACTUALLY COMPLETED BY THE CONTRACTOR, IT APPEARS TO HAVE BEEN KNOWN BY GOVERNMENT REPRESENTATIVES THAT THE COST THEREOF WAS BORNE BY THE SURETY. AFTER COMPLETION OF THE WORK AND SETTLEMENT OF GOVERNMENT LIQUIDATED DAMAGE CLAIMS FOR DELAY THERE STILL REMAINED IN THE HANDS OF THE GOVERNMENT $10,358.02 OF THE TOTAL CONTRACT PRICE. IT IS THE POSITION OF THE SURETY THAT IT IS ENTITLED TO ITS UNREIMBURSED COMPLETION COSTS OUT OF THIS CONTRACT BALANCE.

THE ADMINISTRATIVE OFFICE, THE VETERANS ADMINISTRATION, SENT TO THE CLAIMS DIVISION OF THE GENERAL ACCOUNTING OFFICE FOR SETTLEMENT THE FINAL CONTRACT PAYMENT VOUCHER DRAWN IN FAVOR OF THE CONTRACTOR FOR $10,358.02, TOGETHER WITH THE SURETY'S CLAIM AND A FEDERAL TAX LEVY AGAINST THE CONTRACTOR IN THE AMOUNT OF $18,801.65. A CERTIFICATE OF SETTLEMENT WAS ISSUED TO THE CONTRACTOR ON SEPTEMBER 9, 1953, WHEREBY THE AMOUNT OF $10,358.02 WAS ALLOWED AND APPLIED IN PARTIAL LIQUIDATION OF THE CONTRACTOR'S TAX LIABILITY TO THE UNITED STATES. THROUGH INADVERTENCE THE SURETY DOES NOT APPEAR TO HAVE BEEN ADVISED OF THIS ACTION, AND YOUR LETTER OF JANUARY 31, 1955, WILL BE TREATED AS A REQUEST FOR REVIEW OF THE SETTLEMENT.

SEVERAL CASES ARE CITED BY YOU IN SUPPORT OF THE SURETY'S CONTENTION THAT IT IS ENTITLED TO SO MUCH OF THE CONTRACT BALANCE AS IS NECESSARY TO REIMBURSE IT FOR EXPENDITURES MADE TO ENABLE THE CONTRACTOR TO COMPLETE THE WORK. ALL BUT ONE OF THESE CASES, HOWEVER, INVOLVED CONFLICTING CLAIMS BY THE SURETY AND PARTIES OTHER THAN THE PERSON FOR WHOM THE WORK WAS BEING PERFORMED. FOR THIS REASON THE LEGAL PRINCIPLES STATED IN THOSE CASES ARE NOT DECISIVE OF THE QUESTION PRESENTED IN THIS CASE WHERE THE GOVERNMENT ITSELF IS CLAIMING ADVERSELY TO THE SURETY.

THE CASE OF UNITED STATES FIDELITY & GUARANTY CO. V. UNITED STATES, 92 C. CLS. 144, CITED BY YOU, DID INVOLVE THE RESPECTIVE RIGHTS OF A COMPLETING SURETY AND THE GOVERNMENT, BUT IS DISTINGUISHABLE FROM THE PRESENT CASE BY REASON OF THE FACT THAT THE CONTRACTOR'S RIGHT TO PROCEED WAS TERMINATED AND THE SURETY ENTERED INTO A WRITTEN AGREEMENT WITH THE GOVERNMENT TO COMPLETE THE WORK. UNDER THIS AGREEMENT THE GOVERNMENT AGREED SPECIFICALLY THAT IT WOULD PAY TO THE SURETY ALL CONTRACT BALANCES, INCLUDING RETAINED PERCENTAGES EARNED BY THE CONTRACTOR PRIOR TO DEFAULT. THE COURT HELD THAT THE SURETY WAS ENTITLED TO THE RETAINED PERCENTAGES UNDER THE AGREEMENT. THE COURT ALSO CITED THE DOCTRINE OF THE SURETY'S SUBROGATION TO THE EQUITIES OF THE GOVERNMENT AS AN ADDITIONAL REASON FOR HOLDING IN FAVOR OF THE SURETY, BUT THIS PART OF THE OPINION MUST BE CONSIDERED AS OVERRULED BY THE LATER CASE OF STANDARD ACCIDENT INSURANCE COMPANY V. UNITED STATES, 119 C. CLS. 749.

IN THE STANDARD ACCIDENT CASE THE CONTRACT WAS TERMINATED FOR DEFAULT AND THE SURETY ELECTED TO COMPLETE THE WORK WITHOUT ANY WRITTEN AGREEMENT AS TO FUTURE PAYMENTS UNDER THE CONTRACT. UPON COMPLETION OF THE WORK BY THE SURETY AT A COST OF OVER $24,000 THERE REMAINED IN THE HANDS OF THE GOVERNMENT SOME $5,000 IN RETAINED PERCENTAGES WHICH HAD BEEN EARNED BY THE CONTRACTOR PRIOR TO DEFAULT AND ABOUT $10,000 EARNED BY THE SURETY IN COMPLETING THE WORK. THE SURETY WAS PAID THE $10,000, BUT THE $5,000 WAS APPLIED AGAINST TAXES OWED TO THE GOVERNMENT BY THE CONTRACTOR. THE COURT HELD THAT THE GOVERNMENT'S RIGHT TO SET OFF THE RETAINED PERCENTAGES AGAINST THE CONTRACTOR'S TAX DEBT WAS SUPERIOR TO THE COMPLETING SURETY'S RIGHT AS SUBROGEE. UNDER THE RULE OF THE STANDARD ACCIDENT CASE, EVEN IF THE PRESENT CONTRACTOR'S RIGHT TO PROCEED HAD BEEN TERMINATED, ANY RETAINED PERCENTAGES THERETOFORE EARNED BY THE CONTRACTOR COULD BE SET OFF AGAINST ITS TAX INDEBTEDNESS.

IT MAY BE ARGUED THAT ONLY A PART OF THE $10,358.02 APPLIED AGAINST THE CONTRACTOR'S TAX DEBT CONSISTED OF RETAINED PERCENTAGES AND THAT THE BALANCE, CONSISTING OF CONTRACT MONEYS EARNED AFTER THE SURETY BEGAN FINANCING THE WORK, SHOULD BE CONSIDERED AS EARNED BY THE SURETY. HOWEVER THIS QUESTION MIGHT BE DECIDED IN A COURT OF LAW, THERE ARE COMPELLING REASONS AGAINST ITS RESOLUTION IN FAVOR OF THE SURETY BY OUR OFFICE. THE CONFLICTING CLAIMS OF THE SURETY AND THE UNITED STATES CANNOT BOTH BE SATISFIED OUT OF THE CONTRACT BALANCE. THE SURETY'S CLAIM IS BASED ON THE EQUITABLE DOCTRINE OF SUBROGATION, WHILE THE GOVERNMENT'S CLAIM IS A DEFINITE LEGAL DEBT. THE AMOUNT OF THE SURETY'S CLAIM, EVEN IF IT SHOULD PREVAIL OVER THAT OF THE GOVERNMENT, WOULD DEPEND ON FACTS INVOLVED IN ITS RELATIONSHIP WITH THE CONTRACTOR. SINCE OUR OFFICE IS NOT IN A POSITION TO DETERMINE THESE FACTS INDEPENDENTLY, A PROPER REGARD FOR THE INTEREST OF THE GOVERNMENT REQUIRES THAT SUCH FACTS BE ESTABLISHED BY THE SURETY IN A JUDICIAL FORUM BEFORE ITS CLAIM IS PREFERRED TO THAT OF THE UNITED STATES.

ACCORDINGLY, THE ACTION TAKEN BY THE SETTLEMENT OF SEPTEMBER 9, 1953, IS SUSTAINED.