B-157892, DEC. 17, 1965

B-157892: Dec 17, 1965

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

REGION 7: REFERENCE IS MADE TO YOUR LETTER OF SEPTEMBER 7. WAS AWARDED TO THE BOB COOK CONSTRUCTION COMPANY ON OCTOBER 22. THE CONTRACT PROCEEDS WERE ASSIGNED TO CONSOLIDATED STATE BANK OF HILL CITY. THE ASSIGNMENT WAS PROPERLY EXECUTED BY THE INTERESTED PARTIES AND NOTICE THEREOF GIVEN TO AND ACKNOWLEDGED BY THE GOVERNMENT AND SURETY. PERFORMANCE AND PAYMENT BONDS ON THE CONTRACT WERE FURNISHED TO THE UNITED STATES BY THE NATIONAL UNION FIRE INSURANCE COMPANY. THE FILE INDICATES THAT TWO SUITS HAVE BEEN BROUGHT AGAINST THE SURETY UNDER THE PAYMENT BOND BY TWO INDIVIDUALS WHO ALLEGE THAT THEY FURNISHED CERTAIN EQUIPMENT TO THE CONTRACTOR FOR WHICH THEY HAVE NOT RECEIVED PAYMENTS TOTALING $15.

B-157892, DEC. 17, 1965

TO MR. H. F. DUGAN, DIRECTOR, BUREAU OF RECLAMATION, REGION 7:

REFERENCE IS MADE TO YOUR LETTER OF SEPTEMBER 7, 1965, WITH ENCLOSURES, REQUESTING OUR DECISION ON THE PROPRIETY OF MAKING FINAL PAYMENT IN THE AMOUNT OF $4,600.94, UNDER CONTRACT NO. 14-06-700-4551, IN ACCORDANCE WITH AN ENCLOSED VOUCHER IN FAVOR OF THE CONTRACTOR, BOB COOK, DOING BUSINESS AS BOB COOK CONSTRUCTION COMPANY. DOUBT AS TO THE PROPER PARTY TO WHOM THE FINAL PAYMENT SHOULD BE MADE RESULTS FROM POSSIBLE CONFLICTING CLAIMS FROM AN ASSIGNEE BANK AND THE SURETY ON THE PAYMENT AND PERFORMANCE BONDS. IN LETTERS DATED MAY 28, JULY 14, AND OCTOBER 19, 1965, THE SURETY, NATIONAL UNION FIRE INSURANCE COMPANY, HAS REQUESTED THAT THE FINAL PAYMENT EITHER BE WITHHELD PENDING ITS INVESTIGATION OF ALLEGED UNPAID MATERIAL CLAIMS, OR THAT THE FINAL PAYMENT BE MADE TO IT.

THE SUBJECT CONTRACT FOR CONSTRUCTION OF EARTH LINING IN THE EXISTING REACHES OF THE KIRWIM SOUTH CANAL, KIRWIN UNIT, KANSAS, SOLOMON DIVISION, MISSOURI RIVER BASIN PROJECT, WAS AWARDED TO THE BOB COOK CONSTRUCTION COMPANY ON OCTOBER 22, 1963. ON MARCH 10, 1965, THE CONTRACT PROCEEDS WERE ASSIGNED TO CONSOLIDATED STATE BANK OF HILL CITY, KANSAS, BY THE CONTRACTOR PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED, 31 U.S.C. 203, 41 U.S.C. 15. THE ASSIGNMENT WAS PROPERLY EXECUTED BY THE INTERESTED PARTIES AND NOTICE THEREOF GIVEN TO AND ACKNOWLEDGED BY THE GOVERNMENT AND SURETY. ALTHOUGH THE FILE DOES NOT INDICATE THE BALANCE, IF ANY, DUE THE ASSIGNEE OR THE ASSIGNEE'S POSITION WITH REGARD TO ENTITLEMENT TO THE FINAL PAYMENT, IT DOES NOT APPEAR THAT THE ASSIGNMENT HAS BEEN RELEASED.

PERFORMANCE AND PAYMENT BONDS ON THE CONTRACT WERE FURNISHED TO THE UNITED STATES BY THE NATIONAL UNION FIRE INSURANCE COMPANY. THE FILE INDICATES THAT TWO SUITS HAVE BEEN BROUGHT AGAINST THE SURETY UNDER THE PAYMENT BOND BY TWO INDIVIDUALS WHO ALLEGE THAT THEY FURNISHED CERTAIN EQUIPMENT TO THE CONTRACTOR FOR WHICH THEY HAVE NOT RECEIVED PAYMENTS TOTALING $15,416. THE SUITS ARE CASE NOS. T-3792 AND T-3793 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS. THE UNITED STATES IS A NOMINAL PARTY--- PLAINTIFF IN BOTH CASES AS REQUIRED BY THE MILLER ACT, 40 U.S.C. 270/B). THE SURETY'S LETTER OF OCTOBER 19, 1965, INDICATES THAT THERE MAY BE ADDITIONAL CLAIMS OUTSTANDING WHICH MAY REPRESENT OBLIGATIONS UNDER THE BOND. APPARENTLY NO CLAIMS HAVE BEEN PAID BY THE SURETY.

IN SUPPORT OF ITS CONTENTION THAT THE BALANCE DUE UNDER THE CONTRACT SHOULD BE TURNED OVER TO IT TO PAY OBLIGATIONS UNDER THE BOND, THE SURETY HAS CITED THE DECISION OF THE COURT OF CLAIMS IN NEWARK INSURANCE COMPANY V. UNITED STATES, 144 CT.CL. 655. THE CITED CASE, A SUIT BY THE SURETY ON A PAYMENT BOND TO RECOVER THE AMOUNT IT PAID LABORERS AND MATERIAL MEN INVOLVED IN THE PERFORMANCE OF A GOVERNMENT CONTRACT, WAS BEFORE THE COURT ON THE GOVERNMENT'S MOTION FOR A SUMMARY JUDGMENT. IN THE COURSE OF DENYING THE MOTION, THE COURT CITED TWO OF ITS EARLIER DECISIONS, ROYAL INDEMNITY CO. V. UNITED STATES, 107 CT.CL. 736, AND NATIONAL SURETY CORP. V. UNITED STATES, 132 CT.CL. 724,"TO THE EFFECT THAT IF THE GOVERNMENT HAS IN ITS HANDS MONEY EARNED BY A CONTRACTOR BUT CLAIMED BY BOTH AN ASSIGNEE OF THE CONTRACTOR AND A SURETY FOR THE CONTRACTOR WHO HAS BEEN OBLIGED TO PAY OUR MONEY TO FULFILL THE CONTRACTOR'S OBLIGATIONS, THE SURETY HAS THE BETTER RIGHT TO THE MONEY.' THESE CASES ARE READILY DISTINGUISHABLE FROM THE INSTANT SITUATION. IN BOTH THE CASES CITED BY THE COURT AND IN THE CASE THEN BEFORE IT, THE SURETIES HAD SATISFIED ALL CLAIMS FOR LABOR AND MATERIALS, WHILE IT APPEARS THAT NO CLAIMS HAVE YET BEEN SATISFIED BY THE NATIONAL UNION FIRE INSURANCE COMPANY. WE HAVE CONSISTENTLY TAKEN THE POSITION THAT A PAYMENT BOND SURETY'S RIGHT OF PRIORITY OVER OTHER CLAIMANTS CANNOT OTHERWISE BE RECOGNIZED UNTIL THE SURETY HAS SATISFIED ALL CLAIMS FOR LABOR AND MATERIALS. SEE B 142060, JUNE 25, 1964, AND CASES CITED.

MOREOVER, AS BETWEEN THE RIGHTS OF A SURETY ON A PAYMENT BOND AND THE RIGHTS OF A CONTRACTOR'S ASSIGNEE THE COURTS ARE NOT IN AGREEMENT. WHILE THE COURT OF CLAIMS HAS TAKEN A POSITION FAVORING THE SURETY IN THE ROYAL INDEMNITY, NATIONAL SURETY AND NEWARK CASES CITED ABOVE, OTHER COURTS HAVE GIVEN PRIORITY TO THE RIGHTS OF AN ASSIGNEE OVER THE RIGHTS OF THE SURETY ON THE PAYMENT BOND. SEE NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA V. UNITED STATES, 304 F.2D 465 (1962); AMERICAN FIDELITY COMPANY V. NATIONAL CITY BANK OF EVANSVILLE, 266 F.2D 910 (1959); UNITED STATES CASUALTY COMPANY V. FIRST NATIONAL BANK OF COLUMBUS, 157 F.SUPP. 789 (1957); BANK OF ARIZONA V. NATIONAL SURETY CORPORATION, 237 F.2D 90 (1956); GENERAL CASUALTY CO. V. SECOND NAT. BANK OF HOUSTON, 178 F.2D 679 (1950); COCONUT GROVE EXCHANGE BANK V. THE NEW AMSTERDAM CASUALTY CO., 149 F.2D 73 (1945); CALIFORNIA BANK V. UNITED STATES FIDELITY AND GUARANTY CO., 129 F.2D 751 (1942).

IN ADDITION TO THE FOREGOING, THE COURT'S DECISION IN THE NEWARK CASE ALSO APPEARS TO BE SIGNIFICANT IN ANOTHER RESPECT. THUS, THERE IS LANGUAGE TO THE EFFECT THAT THE GOVERNMENT CANNOT DIVEST ITSELF OF RESPONSIBILITY TO THE CLAIMANT HAVING THE SUPERIOR EQUITY IN THE MONEY EARNED BY THE CONTRACTOR MERELY BY DELIVERING THE STAKE TO THE OTHER. THE COURT'S WORDS,

"SURELY A STAKEHOLDER, CAUGHT IN THE MIDDLE BETWEEN TWO COMPETING CLAIMANTS, CANNOT, IN EFFECT, DECIDE THE MERITS OF THEIR CLAIMS BY THE MERE PHYSICAL ACT OF DELIVERING THE STAKE TO ONE OF THEM.

"IF IT IS MADE TO APPEAR THAT THE GOVERNMENT'S OFFICIALS, AFTER DUE NOTICE OF THE FACTS GIVING RISE TO AN EQUITABLE RIGHT IN THE PLAINTIFF SURETY COMPANY, AND OF THE PLAINTIFF'S ASSERTION OF SUCH A RIGHT, PAID OUT, WITHOUT A VALID REASON FOR SO DOING, THE MONEY IN QUESTION TO SOMEONE OTHER THAN THE PLAINTIFF, THE PLAINTIFF WILL BE ENTITLED TO A JUDGMENT.'

TO THE SAME EFFECT, SEE THE COURT'S LATER DECISION INVOLVING THE SAME PARTIES IN NEWARK INSURANCE COMPANY V. UNITED STATES AND THE PIONEER BANK AND TRUST COMPANY, THIRD PARTY, 149 CT.CL. 170.

IN THE CIRCUMSTANCES THERE IS SUBSTANTIAL DOUBT WHETHER PAYMENT TO EITHER THE SURETY OR THE ASSIGNEE IN THE INSTANT CASE WOULD RESULT IN A GOOD AND VALID ACQUITTANCE FOR THE GOVERNMENT AND OBVIATE THE RISK OF DOUBLE LIABILITY, AND IT IS OUR OPINION THAT NO PAYMENT SHOULD BE MADE TO EITHER THE SURETY OR THE ASSIGNEE EXCEPT PURSUANT TO AGREEMENT BETWEEN THE PARTIES OR PURSUANT TO AN ORDER OF A COURT OF COMPETENT JURISDICTION. COMP. GEN. 608.

SINCE PAYMENT AS PROPOSED BY THE VOUCHER WOULD THEREFORE BE IMPROPER, THE VOUCHER AND SUPPORTING PAPERS ARE BEING RETAINED IN OUR OFFICE.