B-234582, Dec 11, 1990, 90-2 CPD ***

B-234582: Dec 11, 1990

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PROCUREMENT - Payment/Discharge - Payment priority - Payment sureties DIGEST: Requests for payments to sureties of final contract payments were considered in two cases presented. Federal agency may pay the surety because state court judgment is a judicial determination of the rights of the parties under FAR section 28.106-7(b). Final contract payment is not authorized to be made to the surety until a court has decided who is entitled to such proceeds. Under FAR section 28.106-7(b) final contract payment is not authorized to the surety until a court judgment determines the rights of the parties to such proceeds. Groves was required to provide performance and payment bonds and consequently entered into a General Indemnity Agreement with Capitol Indemnity Corporation (Capitol).

B-234582, Dec 11, 1990, 90-2 CPD ***

PROCUREMENT - Payment/Discharge - Payment priority - Payment sureties DIGEST: Requests for payments to sureties of final contract payments were considered in two cases presented. In first case, federal agency may pay the surety because state court judgment is a judicial determination of the rights of the parties under FAR section 28.106-7(b). In the second case, pursuant to FAR section 28.106-7(b), final contract payment is not authorized to be made to the surety until a court has decided who is entitled to such proceeds.

Fish and Wildlife Service-- Payment of Retained Contract Proceeds to Sureties:

A contracting officer with the Fish and Wildlife Service (FWS), Department of Interior, requests an opinion whether final payments under two construction contracts may be made to the respective sureties, which had previously paid subcontractors' and suppliers' claims. In the first case, payment can be made pursuant to FAR section 28.106-7(b) because of surety's state court judgment against contractor. In the second case, under FAR section 28.106-7(b) final contract payment is not authorized to the surety until a court judgment determines the rights of the parties to such proceeds.

BACKGROUND

In the first case, contract No. 14-16-0006-85-058, FWS contracted with Camco Inc., for work associated with the restoration of the Seedskadee National Wildlife Refuge. United States Fidelity and Guaranty Company (USF&G) and Camco entered into a Master Surety Agreement pursuant to which USF&G issued surety bonds to secure Camco's performance of the contract and to pay its suppliers and subcontractor claims.

FWS accepted Camco's contract as substantially complete on September 30, 1986. On February 25, 1987, USF&G notified FWS that due to claims paid to Camco's subcontractors, any amounts remaining under the contract should be made payable to USF&G. /1/ Monies remaining under the contract totaled $2,333.22. USF&G submitted checks to show it had paid subcontractors $20,296.49. Subsequently, it obtained a $25,000 state court judgment against Camco for payments to subcontractors and suppliers. The Department of Interior's Regional Solicitor reviewed the judgment and advised the FWS contracting officer that the judgment did not authorize payment to the surety. In the opinion of the Regional Solicitor, final payment to the surety could only be made with the consent of the contractor or on the basis of a judgment which binds the government to make such a payment. The state court lacked the competence to compel the government to make such a payment because of sovereignty immunity.

In the second case, contract No. 14-16-0006-85-038, FWS contracted with the Groves Construction Company (Groves) to rehabilitate an office building in Seedskadee, Wyoming. Groves was required to provide performance and payment bonds and consequently entered into a General Indemnity Agreement with Capitol Indemnity Corporation (Capitol). Under the Agreement, Groves transferred its right in contracts and unpaid balances on contracts to Capitol as security should it fail to carry out the terms of any bond issued or any agreement such bond secured.

Groves substantially completed the contract on January 27, 1986. early 1986, Capitol was notified of unpaid obligations due subcontractors and/or material suppliers on the office building project. It requested FWS to withhold payment of any sums due or to become due on the contract. The government owed the contractor $6,099.10. Capitol asserted that it had a security interest in the contract proceeds under the General Indemnity Agreement. A Department of Interior Regional Solicitor advised the FWS contracting officer that in accordance with FAR section 28.106-7, upon contract completion, final payment may be withheld, provided the surety agrees to hold the government harmless from any and all claims of the contractor. /2/

The surety's attorney provided documentation that the surety had paid $11,292.44 in subcontractor claims. The contracting officer advised Capitol that any funds remaining under the contract must be paid in accordance with FAR section 28.106-7 which requires that the surety and contractor must agree to such payment or that a court judgment be obtained. Although Groves had substantially completed the contract in January 1986, FWS considered Groves to have abandoned the contract because it could not be contacted in November 1986 regarding minor repairs, totaling $400, which the government had to make. In 1987, the surety orally advised the contracting officer that Groves had filed bankruptcy. Groves never responded to the contracting officer's May 1987 letter requesting confirmation of its filing.

ANALYSIS

The general legal principles applicable to both these cases are the same. A payment surety is entitled to be reimbursed for the payment of subcontractor claims out of funds owed the contractor and retained by the government at completion of the contract. The surety is subrogated to both the subcontractors' right to be paid out of such funds and the contractor's right to the funds had its subcontractors been paid. United States Fidelity and Guaranty Co. v. United States, 475 F.2d 1377, 1381- 1382 (Ct.Cl. 1973); and Pearlman v. Reliance Insurance Co., 371 U.S. 132 (1962).

FAR section 28.106-7(b) provides that a contracting officer shall withhold final contract payment, if the surety provides written notice that the contractor has not paid its subcontractors or suppliers. The surety must agree to hold the government harmless from any liability resulting from the contracting officer's action. Under this FAR provision, final payment will be authorized upon agreement of the contractor and surety or a judicial determination concerning the rights of the parties.

With regard to the Camco case, we believe the state court decision is in the words of FAR section 28.106-7(b) "a judicial determination concerning the rights of the parties." We have found no indication in the FAR or any administrative or court decisions which restricts this provision to federal court decisions. Specifically, this provision authorizes "final payment upon the agreement of the contractor and surety, or upon a judicial determination of the rights of the parties." In our view, from the context of this provision, it is reasonable to interpret the latter phrase as referring to a court judgment determining the rights of the contractor and surety. /3/

With regard to the Groves case, section 28.106-7(b) provides that a final retained contract payment can be paid to a surety upon the agreement of the contractor and surety or upon a judicial determination of the rights of the parties. Agreement between the parties is unlikely since Groves has abandoned the contract and we understand may have filed for bankruptcy. Consequently, payment can only be made pursuant to section 28.106-7(b) after a judicial action to determine who is entitled to final contract payment.

/1/ The record does not disclose whether USF&G agreed, as required by FAR section 28.106-7(b), to hold the government harmless from any liability resulting from the withholding of final contract payment to Camco.

/2/ It also provided the contracting office with a Notice of Assignment by Groves of the contract proceeds to Capitol. The Contracting Officer rejected the Notice of Assignment because it did not meet the requirements of FAR Sec.section 32.802(b). Under this provision, contract proceeds can only be assigned to a financial institution, which does not include sureties.

/3/ While we agree with the Regional Solicitor that a state court could not compel the government to make payment to a surety, the language of FAR section 28.106-f(b) does not require that a court order the government to make payment. This section only provides that a court action determining the rights of the parties constitutes authorization for the federal agency to make final contract payment to the surety.