B-165075, NOV. 18, 1968

B-165075: Nov 18, 1968

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METROPOLITAN WAS AWARDED THE SUBJECT GSA CONTRACT FOR INTERIOR AND EXTERIOR PAINTING AND FLOOR FINISHING AT THE UNITED STATES POST OFFICE. NATIONAL SURETY CORPORATION WAS THE SURETY ON THE PERFORMANCE AND PAYMENT BONDS. THIS CONTRACT WAS APPARENTLY PERFORMED TO THE SATISFACTION OF ALL PARTIES CONCERNED. HE RECEIVED NOTICE FROM THE SURETY THAT IT WAS CLAIMING THE CONTRACT BALANCE UNDER ITS RIGHT OF SUBROGATION FOR LOSSES INCURRED AS SURETY FOR METROPOLITAN UNDER THE PERFORMANCE BOND OF THE NAVY CONTRACT. THE SURETY IS SUBROGATED TO THE GOVERNMENT'S RIGHT AS A CREDITOR TO OFFSET ANY DEBTS OWED BY THAT PARTY TO THE GOVERNMENT. THE GSA CONTRACTING OFFICER AGREED TO WITHHOLD PAYMENT OF THE CONTRACT BALANCE DUE METROPOLITAN UNTIL SUCH TIME AS THE DISPUTE OVER ENTITLEMENT WAS SETTLED.

B-165075, NOV. 18, 1968

TO FIREMAN'S FUND, AMERICAN INSURANCE COMPANIES:

WE REFER TO YOUR LETTER OF AUGUST 14, 1968, WITH ENCLOSURES, ASSERTING A CLAIM IN BEHALF OF AN AFFILIATE, NATIONAL SURETY CORPORATION (THE SURETY), FOR A CONTRACT BALANCE OF $1,021.20 DUE THE METROPOLITAN CONTRACTING COMPANY, INCORPORATED, UNDER GENERAL SERVICES ADMINISTRATION CONTRACT NO. GS-02B-11357 (GSA CONTRACT) AS PARTIAL COMPENSATION FOR LOSSES SUFFERED AS SURETY FOR METROPOLITAN UNDER CONTRACT NO. NBY-50943 AWARDED BY THE U.S. NAVAL AMMUNITION DEPOT, EARLE, COLTS NECK, NEW JERSEY (NAVY CONTRACT).

ON NOVEMBER 7, 1963, METROPOLITAN WAS AWARDED THE SUBJECT GSA CONTRACT FOR INTERIOR AND EXTERIOR PAINTING AND FLOOR FINISHING AT THE UNITED STATES POST OFFICE, SUFFERN, NEW YORK. NATIONAL SURETY CORPORATION WAS THE SURETY ON THE PERFORMANCE AND PAYMENT BONDS. THIS CONTRACT WAS APPARENTLY PERFORMED TO THE SATISFACTION OF ALL PARTIES CONCERNED. HOWEVER, ON FEBRUARY 26, 1965, BEFORE THE GSA CONTRACTING OFFICER HAD AN OPPORTUNITY TO MAKE THE FINAL PAYMENTS DUE METROPOLITAN, HE RECEIVED NOTICE FROM THE SURETY THAT IT WAS CLAIMING THE CONTRACT BALANCE UNDER ITS RIGHT OF SUBROGATION FOR LOSSES INCURRED AS SURETY FOR METROPOLITAN UNDER THE PERFORMANCE BOND OF THE NAVY CONTRACT. ACCORDING TO THIS CONTENTION, THE SURETY IS SUBROGATED TO THE GOVERNMENT'S RIGHT AS A CREDITOR TO OFFSET ANY DEBTS OWED BY THAT PARTY TO THE GOVERNMENT.

THE GSA CONTRACTING OFFICER AGREED TO WITHHOLD PAYMENT OF THE CONTRACT BALANCE DUE METROPOLITAN UNTIL SUCH TIME AS THE DISPUTE OVER ENTITLEMENT WAS SETTLED. AFTER FURTHER REVIEW BY THE APPROPRIATE OFFICIALS, GSA HAS REFUSED TO AUTHORIZE DISBURSEMENT OF THE CONTRACT BALANCE IN VIEW OF THE CONTRACTOR'S CONFLICTING CLAIM UPON THE FUND.

ACCORDING TO INFORMATION FURNISHED BY THE SURETY, THE OFFICERS OF METROPOLITAN HAVE "DEPARTED FOR PLACES UNKNOWN" , SO THAT NO PROPER REPRESENTATIVE OF THE FIRM REMAINS TO ACCEPT PAYMENT.

YOU ASSERT THAT UNDER THE LAWS OF SURETYSHIP, THE SURETY IS SUBROGATED TO ALL OF THE RIGHTS AND CLAIMS THE GOVERNMENT WOULD HAVE AVAILABLE TO RECOUP LOSSES SUFFERED UNDER THE NAVY CONTRACT. IN PARTICULAR, YOU CONTEND THAT AS SURETY, YOU ARE SUBROGATED TO THE GOVERNMENT'S COMMON LAW RIGHT AS A CREDITOR TO OFFSET AGAINST ANY MONIES DUE TO THE DEBTOR, ALL MONIES OWED TO THE CREDITOR BY SAID DEBTOR, WITHOUT REGARD TO THE RELATIONSHIP OF THE TWO DEBTS. YOU THEREFORE SUGGEST THAT THE GOVERNMENT IS OBLIGED TO APPLY THE FUNDS DUE METROPOLITAN UNDER THE GSA CONTRACT IN MITIGATION OF THE SURETY'S LOSSES SUFFERED UNDER THE NAVY CONTRACT, AND WARN THAT THE GOVERNMENT'S FAILURE TO SO MITIGATE THE SURETY'S LOSSES WILL PROVIDE THE SURETY WITH AN ADEQUATE DEFENSE AGAINST ANY FUTURE GOVERNMENT CLAIMS BASED ON THE SURETY'S OBLIGATIONS UNDER THE NAVY CONTRACT BOND.

IN ADDITION, YOU CONTEND THAT PARAGRAPH 15 OF THE APPLICATION OF BOND SIGNED BY METROPOLITAN ON NOVEMBER 11, 1963, IN CONNECTION WITH THE GSA CONTRACT ASSIGNS THE COLLATERAL SECURITY FOR ALL PRIOR OR SUBSEQUENT BONDS TO THE SURETY AS SECURITY UNDER THE GSA CONTRACT BOND, AS WELL FOR ALL PRIOR OR SUBSEQUENT BONDS ISSUED FOR METROPOLITAN BY THE SURETY.

DEALING WITH THIS LAST QUESTION FIRST, THE SURETY'S ATTEMPT TO MAKE THE COLLATERAL FOR A PARTICULAR BOND COLLATERAL FOR EACH AND EVERY BONDING TRANSACTION WHICH TRANSPIRES BETWEEN THE SURETY AND METROPOLITAN APPEARS TO BE TOO BROAD A WAIVER OF RIGHTS FOR EFFECTIVE ENFORCEMENT. IN ANY EVENT, THIS ATTEMPTED ASSIGNMENT IS NOT EFFECTIVE AGAINST THE GOVERNMENT BECAUSE 31 U.S.C. 203 RENDERS "ABSOLUTELY NULL AND VOID" ALL ASSIGNMENTS OF CLAIMS AGAINST THE GOVERNMENT EXCEPT THOSE MADE TO FINANCING INSTITUTIONS UNDER CERTAIN STATED CIRCUMSTANCES. FOR THIS REASON, WHATEVER THE EFFECT OF PARAGRAPH 15 MIGHT BE AS BETWEEN THE PARTIES, IT CANNOT IMPOSE OBLIGATIONS ON THE GOVERNMENT.

AS TO YOUR CLAIM AS SUBROGEE UPON THE GOVERNMENT'S RIGHT TO RECOVER LOSSES UNDER THE NAVY CONTRACT BY OFFSETTING FUNDS REMAINING IN THE GOVERNMENT'S POSSESSION DUE THE CONTRACTOR UNDER THE GSA CONTRACT, WE DO NOT AGREE THAT THE GOVERNMENT IS OBLIGED TO USE ITS POWER AS A CREDITOR TO OFFSET DEBTS FOR THE BENEFIT OF A SURETY. IT IS OUR OPINION THAT A SURETY IS SUBROGATED ONLY TO SUCH RIGHTS OF THE GOVERNMENT AS ARE RELATED TO THE PARTICULAR CONTRACT UNDER WHICH THE SURETY CLAIMS ITS RIGHT OF SUBROGATION. ACCORDING TO 83 C.J.S. SUBROGATION SEC. 52, P. 681: "* * * A SURETY WILL BE SUBROGATED ONLY TO SUCH RIGHTS AND SECURITIES AS ARE HELD BY THE CREDITOR WITH RESPECT TO THE PARTICULAR DEBT OR CONTRACT FOR WHICH THE SURETY IS BOUND; * * *" AGAIN, 83 C.J.S. SUBROGATION SEC. 57, P. 694, STATES:

"APPARENTLY, THERE CAN BE NO SUBROGATION TO RIGHTS OF THE PRINCIPAL WHICH HAVE NO CONNECTION WITH THE DEBT WHICH THE SURETY PAID; * * *"

THUS, WE CONCLUDE THAT A SURETY'S RIGHTS AS SUBROGEE IS GENERALLY LIMITED IN SCOPE TO COLLATERAL ASSOCIATED WITH THE PARTICULAR SURETY SHIP AGREEMENT AT ISSUE, RATHER THAN EXTENDING TO ALL ASSOCIATIONS BETWEEN THE PARTIES.

WE DO NOT AGREE WITH YOUR STATEMENT THAT THE GOVERNMENT'S REFUSAL TO PERMIT THE SURETY TO CLAIM THE GSA CONTRACT BALANCE AS SUBROGEE TO THE GOVERNMENT'S RIGHT OF OFFSET UNDER THE NAVY CONTRACT WILL OPERATE AS A DEFENSE AGAINST ANY POSSIBLE GOVERNMENT CLAIMS AGAINST THE SURETY ARISING FROM THE NAVY CONTRACT. YOU FAIL TO CITE AUTHORITIES IN SUPPORT OF YOUR CONTENTION. ON THE OTHER HAND, OUR REVIEW OF THE LEGAL AUTHORS REVEALS SUCH STATEMENTS AS THAT IN 10 WILLISTON ON CONTRACTS, 3RD ED., SEC. 1251, WHICH SAYS: "* * * WHEN THE SURETY IS SUED ALONE HE HAS NOT BEEN ALLOWED TO USE MATTER OF RECOUPMENT, COUNTERCLAIM, OR SET-OFF BASED ON RIGHTS OF THE PRINCIPAL AGAINST THE CREDITOR UNLESS THE SURETY HAS TAKEN AN ASSIGNMENT OF HIS PRINCIPAL'S CROSS-CLAIM. * * *"

SINCE, AS INDICATED ABOVE, SURETIES ARE NOT PROPER ASSIGNEES UNDER 31 U.S.C. 203, WE BELIEVE THAT THE GOVERNMENT'S REFUSAL TO HONOR THE SURETY'S CLAIM AS SUBROGEE WILL NOT ADVERSELY AFFECT THE GOVERNMENT'S RIGHTS AGAINST THE SURETY UNDER ANY POSSIBLE SUIT INVOLVING THE SURETY'S OBLIGATIONS UNDER THE NAVY CONTRACT.

YOUR OFFER TO SAVE HARMLESS THE GSA FROM AND AGAINST ANY CLAIMS ARISING OUT OF ITS PAYMENT OF THE CONTRACT BALANCE OVER TO YOU DOES NOT ALTER THE RIGHTS OF THE CONTRACTOR, METROPOLITAN, TO THE CONTRACT BALANCE. THEREFORE CANNOT AGREE TO SUCH AN ARRANGEMENT WITHOUT THE PRIOR CONSENT OF METROPOLITAN.

FOR THE ABOVE REASONS, WE DO NOT BELIEVE THAT THE GOVERNMENT IS LEGALLY OBLIGATED TO PAY OUT THE REMAINDER OF THE FUNDS FROM THE GSA CONTRACT TO THE SURETY, AS YOU SUGGEST. FURTHERMORE, AS A MATTER OF POLICY, WE DO NOT BELIEVE IT TO BE IN THE GOVERNMENT'S BEST INTEREST TO ACT AS A COLLECTION AGENT FOR THIS DEBT OWED TO THE SURETY BY METROPOLITAN. WHILE WE RECOGNIZE THAT THE SURETY'S POSITION HAS CERTAIN EQUITIES, IN THAT THE LOSSES WERE SUFFERED WHILE ACTING AS A SURETY UNDER A GOVERNMENT CONTRACT, THE SURETY WAS COMPENSATED FOR ITS BOND SOLELY BECAUSE OF ITS EXPRESSED WILLINGNESS TO ASSUME SUCH RISKS.

WHEN THE TREMENDOUS COMPLEXITY OF THE GOVERNMENT PROCUREMENT ESTABLISHMENT IS TAKEN INTO ACCOUNT, IT CAN BE SEEN THAT ANY ATTEMPT ON THE PART OF THE GOVERNMENT TO OFFSET DEBTS IN BEHALF OF SURETIES WILL INVOLVE THE GOVERNMENT IN EXTREMELY DIFFICULT PROBLEMS OF INTERNAL COMMUNICATIONS, ADMINISTRATIVE CONTROLS AND DETERMINATIONS ON THE MERITS OF CONFLICTING CLAIMS. ACCORDINGLY, WE BELIEVE THAT THE GOVERNMENT SHOULD NOT, NOR IS THERE ANY AUTHORITY TO, ACT IN ANY MANNER BEYOND ITS STRICT LEGAL OBLIGATIONS IN THE MATTER OF COMPENSATING SURETIES FOR LOSSES INCURRED IN GOVERNMENT CONTRACTING.

WITH RESPECT TO YOUR ASSERTION THAT ALL EFFORTS TO LOCATE METROPOLITAN'S OFFICERS OR AUTHORIZED REPRESENTATIVES HAVE FAILED, WE DO NOT BELIEVE THAT ANY CURRENT INABILITY TO LOCATE THEM WOULD CONSTITUTE A DEFENSE AGAINST A SUBSEQUENT LEGAL ACTION ON THE BALANCE DUE METROPOLITAN FOR SUCCESSFULLY PERFORMING THE GSA CONTRACT.

FOR THE REASONS STATED ABOVE, PAYMENT TO THE NATIONAL SURETY CORPORATION OF THE CONTRACT BALANCE OF $1,021.20 DUE METROPOLITAN CONTRACTING COMPANY, INCORPORATED, UNDER GSA CONTRACT NO. GS-02B-11357 MAY NOT BE AUTHORIZED.