B-158142, FEB. 14, 1966

B-158142: Feb 14, 1966

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GENERAL SERVICES ADMINISTRATION: REFERENCE IS MADE TO YOUR LETTER. THIS NOTICE WAS NOT ACCEPTED BY THE CLAIMANT. " AND WARNED THAT THEY WERE "PUTTING YOU (MASTER CRAFTSMEN) ON NOTICE THAT THE ASSIGNMENT DOES NOT MEET WITH OUR APPROVAL.'. IT COULD NOT BE ALLOWED EVEN IF THE COMPETING CLAIM OF THE ASSIGNEE WERE NOT IN THE PICTURE. FOR SUCH PAYMENT CANNOT BE MADE UNTIL IT IS SHOWN THAT ALL CLAIMS AGAINST MASTER CRAFTSMEN. FOR LABOR AND MATERIALS FURNISHED IN CONNECTION WITH THE CONTRACT WORK HAVE BEEN SATISFIED. WE HAVE CONSISTENTLY TAKEN THIS POSITION. THAT WHATEVER RIGHT OF PRIORITY A SURETY MAY HAVE OVER OTHER CLAIMANTS. ITS RIGHTS AS SUBROGEE WILL NOT BE RECOGNIZED UNTIL ALL CLAIMS FOR LABOR AND MATERIAL ARE SATISFIED.

B-158142, FEB. 14, 1966

TO THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION:

REFERENCE IS MADE TO YOUR LETTER, SYMBOL 3BCRPA, OF OCTOBER 29, 1965, IN WHICH YOU SUBMITTED A CLAIM LETTER DATED SEPTEMBER 10, 1965, FROM MARYLAND CASUALTY COMPANY FOR RESOLUTION. IN THEIR LETTER THE CLAIMANT INFORMED THE GENERAL SERVICES ADMINISTRATION OF THE CLAIMANT'S POSSIBLE LIABILITY AS A SURETY FOR MASTER CRAFTSMEN, INCORPORATED, UNDER GSA CONTRACT NO. GS- 03B-11747 OF NOVEMBER 23, 1964, FOR SEVERAL CLAIMS HAD BEEN FILED BY SUBCONTRACTORS; AND REQUESTED THAT PAYMENT OF MONIES DUE UNDER SAID CONTRACT BE MADE DIRECTLY TO MARYLAND CASUALTY, OR ALTERNATIVELY, PAYMENT BE WITHHELD ALTOGETHER UNTIL SUCH TIME AS A DETERMINATION OF THEIR RIGHTS VERSUS THOSE OF THE NATIONAL BANK OF COMMERCE OF CHARLESTON, THE ASSIGNEE OF MONEY DUE THE CONTRACTOR, HAD BEEN MADE.

MASTER CRAFTSMEN, INCORPORATED, ENTERED INTO GSA CONTRACT NO. GS-03B 11747 ON NOVEMBER 23, 1964, FOR THE EXTENSION AND MODERNIZATION OF THE UNITED STATES POST OFFICE IN KEYSER, WEST VIRGINIA, AT A COST OF $119,973. ON THE SAME DAY MARYLAND CASUALTY COMPANY EXECUTED A $59,986.50 PAYMENT BOND AND A $119,973 PERFORMANCE BOND ON THE CONTRACT TO IMPROVE THE KEYSER POST OFFICE.

MASTER CRAFTSMEN, INCORPORATED, THEN, BY LETTER OF JANUARY 8, 1965, NOTIFIED THE GENERAL SERVICES ADMINISTRATION OF ITS ASSIGNMENT OF MONEY DUE UNDER THE SUBJECT CONTRACT TO THE NATIONAL BANK OF COMMERCE OF CHARLESTON, TO WHICH THE GSA REPLIED UNDER DATE OF FEBRUARY 5, 1965, INFORMING THE CONTRACTOR THAT WRITTEN NOTICE AND A TRUE COPY OF THE INSTRUMENT OF ASSIGNMENT SHOULD BE FORWARDED TO THE CONTRACTING OFFICER AND THE SURETY, AS PROVIDED BY THE ASSIGNMENT OF CLAIMS ACT, 40 U.S.C. 15. MASTER CRAFTSMEN SENT THE REQUESTED NOTICE AND COPIES OF THE ASSIGNMENT INSTRUMENT TO BOTH PARTIES BY LETTER OF FEBRUARY 9, 1965. THIS NOTICE WAS NOT ACCEPTED BY THE CLAIMANT, MARYLAND CASUALTY COMPANY, WHO BY THEIR LETTER OF FEBRUARY 24, 1965, TOLD THE CONTRACTOR THAT THEY WOULD NEITHER "ACKNOWLEDGE OR ACCEPT SUCH AN AGREEMENT," AND WARNED THAT THEY WERE "PUTTING YOU (MASTER CRAFTSMEN) ON NOTICE THAT THE ASSIGNMENT DOES NOT MEET WITH OUR APPROVAL.'

UPON LEARNING OF ITS POSSIBLE LIABILITY TO SUBCONTRACTORS UNDER THE PAYMENT BOND, MARYLAND CASUALTY INITIATED THIS ACTION TO PROTECT WHATEVER INTEREST IT HAD IN THE $6,182 NOW WITHHELD BY THE GOVERNMENT AS STATED IN ITS CLAIM LETTER OF SEPTEMBER 10, 1965.

AS TO PAYMENT DIRECTLY TO MARYLAND CASUALTY COMPANY, IT COULD NOT BE ALLOWED EVEN IF THE COMPETING CLAIM OF THE ASSIGNEE WERE NOT IN THE PICTURE, FOR SUCH PAYMENT CANNOT BE MADE UNTIL IT IS SHOWN THAT ALL CLAIMS AGAINST MASTER CRAFTSMEN, INCORPORATED, FOR LABOR AND MATERIALS FURNISHED IN CONNECTION WITH THE CONTRACT WORK HAVE BEEN SATISFIED. WE HAVE CONSISTENTLY TAKEN THIS POSITION, THAT WHATEVER RIGHT OF PRIORITY A SURETY MAY HAVE OVER OTHER CLAIMANTS, ITS RIGHTS AS SUBROGEE WILL NOT BE RECOGNIZED UNTIL ALL CLAIMS FOR LABOR AND MATERIAL ARE SATISFIED. SEE B- 142060, JUNE 25, 1965, AND CASES CITED THEREIN.

BUT EVEN IF MARYLAND CASUALTY COMPANY COULD DEMONSTRATE THAT NO FURTHER CLAIMS FOR GOODS AND SERVICES UNDER THE CONTRACT WERE OUTSTANDING, PAYMENT SHOULD BE SUSPENDED PENDING RESOLUTION OF THE QUESTION OF WHO HAS PRIORITY BETWEEN THE SURETY AND THE ASSIGNEE. WHILE IT HAS BEEN HELD THAT THE RIGHTS OF A SURETY ON A PERFORMANCE BOND FOR COMPLETING A CONTRACT ARE SUPERIOR TO THE RIGHTS OF A BANK AS THE CONTRACTOR'S ASSIGNEE, AS BETWEEN THE RIGHTS OF A SURETY ON A PAYMENT BOND AND RIGHTS OF A CONTRACTOR'S ASSIGNEE THE COURTS ARE NOT IN AGREEMENT. IN THIS REGARD, COMPARE COCONUT GROVE EXCHANGE BANK V. AMSTERDAM CASUALTY CO., 149 F.2D 73 (5TH CIR., 1945) AND GENERAL CASUALTY CO. OF AMERICA V. SECOND NATIONAL BANK OF HOUSTON, 178 F.2D 679 (5THCIR., 1949) WITH ROYAL INDEMNITY CORPORATION V. UNITED STATES, 132 CT.CL. 724 (1955). THE COCONUT GROVE AND GENERAL CASUALTY CASES, SUPRA, GAVE PRIORITY TO THE RIGHTS OF AN ASSIGNEE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940 OVER THE RIGHTS OF THE SURETY ON THE PAYMENT BOND, WHILE THE ROYAL INDEMNITY AND NATIONAL SURETY CASES, SUPRA, GAVE PRIORITY TO THE RIGHTS OF THE SURETY ON THE PAYMENT BOND OVER THE ASSIGNEE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940. NATIONAL SURETY, SUPRA, SPECIFICALLY RECOGNIZES THIS SPLIT IN OPINION BETWEEN THE COURT OF CLAIMS AND THE FIFTH CIRCUIT.

THEREFORE, IN VIEW OF THE DISAGREEMENT BY THE COURTS REGARDING THE RIGHTS OF A SURETY UNDER A PAYMENT BOND AGAINST THOSE OF AN ASSIGNEE BANK, IT WOULD NOT BE POSSIBLE TO CONCLUSIVELY DETERMINE ADMINISTRATIVELY THE RIGHTS OF ALL THE PARTIES. SINCE THE ASCERTAINMENT OF THE FACTS REGARDING THESE ISSUES IS PROPERLY FOR DETERMINATION BY A COURT, THE GOVERNMENT MIGHT BE SUBJECTED TO DOUBLE LIABILITY IF PAYMENT WERE MADE TO EITHER THE SURETY OR THE ASSIGNEE. SEE NEWARK INSURANCE COMPANY, INC. V. UNITED STATES, 144 CT.CL. 655 (1959). IN THESE CIRCUMSTANCES PAYMENT SHOULD NOT BE MADE TO EITHER THE ASSIGNEE OR THE SURETY EXCEPT PURSUANT TO AGREEMENT BY THE PARTIES OR PURSUANT TO AN ORDER BY A COURT OF COMPETENT JURISDICTION. SEE ALSO, B-157892 OF DECEMBER 17, 1965.

THE PRECEDING DISCUSSION IS BASED ON THE POSITION OF THE MARYLAND CASUALTY COMPANY AS SUBROGEE UNDER THE CONTRACT PAYMENT BOND, RATHER THAN AS AN ASSIGNEE OF MASTER CRAFTSMEN, INCORPORATED, UNDER THE LATTER'S BOND APPLICATION.

THE UNITED STATES COURT OF CLAIMS, WHICH GRANTS A SURETY PRIORITY OVER A LATER ASSIGNEE, RESTS ITS POSITION ON AN EQUITABLE THEORY OF SUBROGATION; THAT IS, THE SURETY'S RIGHTS ARE BASED UPON ITS RELATIONSHIP AS A SURETY, AND NOT UPON THE PRECISE TERMS OF ANY INSTRUMENT INVOLVED.

THE LANGUAGE OF THE COURT ITSELF IS PERHAPS THE CLEAREST EXPRESSION OF THE LAW INVOLVED WHEN IN NATIONAL SURETY, SUPRA, ON PAGE 729 IT SAID:

"* * * WHEN THE SURETY PAYS THE LABORERS AND MATERIALMEN, IT BECOMES SUBROGATED TO THEIR RIGHT TO ASSERT AN EQUITABLE CLAIM TO THE MONEYS IN THE HANDS OF THE DEFENDANT.'

ON THE BOTTOM OF THE SAME PAGE THE COURT RESTATES ITS REASONING THUSLY:

"LOOKED AT FROM ANOTHER LIGHT, THE SURETY'S RIGHTS ARE SUPERIOR TO THE RIGHTS OF THE BANK: IT IS SETTLED THAT THE SURETY'S RIGHTS ARISING BY SUBROGATION OR SUBSTITUTION RELATE BACK TO THE DATE OF THE EXECUTION OF THE SURETY BONDS. (CITATIONS OMITTED.) THEREUPON, THERE ACCRUES TO THE SURETY THE EQUITABLE RIGHT TO THE MONEYS DUE FROM THE GOVERNMENT TO THE CONTRACTOR TO THE EXTENT THAT THE SURETY DISCHARGES THE CONTRACTOR'S OBLIGATION TO THE GOVERNMENT.'

AS CAN BE SEEN FROM THE ABOVE EXCERPT, MARYLAND CASUALTY COMPANY NEED NOT PROVE A LEGALLY SUFFICIENT ASSIGNMENT CLAUSE IN THE SURETY INSTRUMENT. MEET THE STANDARD LAID OUT BY THE UNITED STATES COURT OF CLAIMS, IT NEEDED ONLY TO DEMONSTRATE THE FACT THAT IT WAS THE SURETY FOR MASTER CRAFTSMEN, INCORPORATED.