B-155504, JUL. 8, 1966

B-155504, JUL. 8, 1966

TO THE SECRETARY OF THE INTERIOR:

REFERENCE IS MADE TO THE LETTER DATED APRIL 15, 1966, FROM THE DEPUTY ASSISTANT SECRETARY OF THE INTERIOR RELATIVE TO THE REQUEST IN LETTERS OF MARCH 9, AND MAY 4, 1966, FROM THE ATTORNEYS FOR FIREMAN'S FUND INSURANCE COMPANY, COMPLETING SURETY ON GOVERNMENT CONTRACTS 14 10-0436-419 AND 14- 10-0436-428 WITH H.ANDM. CONSTRUCTION COMPANY, FOR CLARIFICATION AND RECONSIDERATION OF OUR DECISION B-155504, DATED NOVEMBER 16, 1965.

IN OUR EARLIER DECISION WE HELD THAT THE "UNEXPENDED CONTRACT BALANCE" IN EACH CASE, AFTER BEING REDUCED BY THE LIQUIDATED DAMAGES FOR DELAY IN COMPLETION OF CONTRACT, COULD BE PAID TO THE COMPLETING SURETY UP TO ITS COST OF COMPLETION. WE ALSO STATED:

"* * * IN THE EVENT THAT THE GOVERNMENT HAS NO CLAIM AGAINST THE PRINCIPAL, OR IF THERE IS A REMAINDER AFTER ACCOMPLISHING THE OFFSET, THE TOTAL OF THE SUMS DUE THE PRINCIPAL, INCLUDING WITHHELD PERCENTAGES AND UNPAID EARNED BALANCES, SHOULD BE PAID TO THE PRINCIPAL, OR AS IN THE PRESENT CASES, WHERE THE PRINCIPAL IS BANKRUPT, TO THE TRUSTEE IN BANKRUPTCY, ON HIS DEMAND.'

BECAUSE OF THE QUOTED SENTENCE SOME DOUBT HAS BEEN EXPRESSED AS TO WHETHER IN OUR USE OF ,UNEXPENDED CONTRACT BALANCE" WE HAD INTENDED TO INCLUDE WITHHELD PERCENTAGES AND UNPAID BALANCES EARNED BY THE DEFAULTED CONTRACTOR. IT SHOULD BE CLEARLY UNDERSTOOD THAT WE INTENDED BY THE TERM "UNEXPENDED CONTRACT BALANCE" TO INCLUDE ALL AMOUNTS UNEXPENDED, WHETHER EARNED PRIOR OR SUBSEQUENT TO THE ORIGINAL CONTRACTOR'S DEFAULT. THEREFORE, THE PERCENTAGES WITHHELD FROM AND THE UNPAID BALANCES EARNED BY THE DEFAULTED CONTRACTOR ARE AVAILABLE TO SATISFY THE SURETY'S COSTS OF COMPLETION. THE QUOTED SENTENCE, IN EXPLANATION OF THE POSITION EXPRESSED IN 31 COMP. GEN. 103, WAS INTENDED ONLY TO APPLY TO THE RELATIVE RIGHTS OF THE CONTRACTOR OR HIS SUCCESSORS AND THE SURETY UNDER THE PAYMENT BONDS.

THE ATTORNEYS FOR THE SURETY ALSO CLAIM ANY CONTRACT AMOUNTS REMAINING UNEXPENDED NECESSARY TO REIMBURSE THE SURETY FOR PAYMENTS MADE UNDER THE PAYMENT BONDS. IN SUPPORT OF THE PAYMENT BOND CLAIMS THE ATTORNEYS FOR THE SURETY CONTEND SUCH PAYMENTS ARE PROVIDED FOR UNDER THE TAKE-OVER AGREEMENTS AND, FURTHER, ARE FOR PAYMENT UNDER THE PRINCIPLE OF PEARLMAN V. RELIANCE INSURANCE O., 371 U.S. 132 (1962).

SO FAR AS CONCERNS THE TAKE-OVER AGREEMENTS, WE CANNOT AGREE THAT THEY SUPPORT THE PAYMENT BOND CLAIMS, AND ASSUMING ARGUENDO THAT THEY DID, WE QUESTION THE VALIDITY OF SUCH AN AGREEMENT. SEE 31 COMP. GEN. 103.

AS TO PEARLMAN, WE HAD OCCASION TO CONSIDER A SIMILAR PAYMENT BOND CLAIM IN B-150606, MARCH 7, 1963, WHEN WE STATED:

"IN THE PEARLMAN CASE THE COURT WAS ABLE CONCLUSIVELY TO ADJUDICATE THE RIGHTS OF ALL OF THE INTERESTED PARTIES CONCERNED. NO SUCH FINAL ADJUDICATION WOULD, HOWEVER, RESULT FROM ADMINISTRATIVE DISPOSITION OF THE MATTER. IN THIS CONNECTION IT SHOULD BE NOTED THAT THE RIGHT OF THE SURETY TO SUBROGATION IS AN EQUITABLE RIGHT AND IS PREDICATED UPON THE PAYMENT OF ALL CLAIMS FOR LABOR AND MATERIALS ARISING UNDER THE CONTRACT. UNITED STATES V. NATIONAL SURETY COMPANY, 254 U.S. 73 (1920). ASCERTAINMENT OF THE FACTS IN THIS RESPECT APPEARS TO BE A MATTER FOR JUDICIAL RATHER THAN ADMINISTRATIVE COGNIZANCE AND, SINCE THE ADMINISTRATIVE DECISION COULD NOT BE CONSIDERED RES JUDICATA, THE GOVERNMENT MIGHT BE SUBJECT TO DOUBLE LIABILITY SHOULD ANOTHER CLAIMANT APPEAR IN THE FUTURE.

"SINCE IN THIS CASE THE CLAIM OF THE SURETY IS DISPUTED BY THE TRUSTEE, WE DO NOT FEEL THAT WE CAN PROPERLY AUTHORIZE PAYMENT TO EITHER THE SURETY OR THE TRUSTEE EXCEPT PURSUANT TO AGREEMENT OF THE PARTIES OR TO AN ORDER OF A COURT OF APPROPRIATE JURISDICTION. IN ORDER TO HAVE THE MATTER RESOLVED AS PROMPTLY AS POSSIBLE, THE SURETY AND TRUSTEE MAY BE ADVISED THAT, IF THE SURETY AGREES, THE GOVERNMENT WILL TURN THE AMOUNT AT ISSUE OVER TO THE TRUSTEE SO THAT THE SURETY MAY PURSUE ITS REMEDY IN THE BANKRUPTCY COURT. OTHERWISE PAYMENT SHOULD BE WITHHELD PENDING JUDICIAL DETERMINATION OF THE RIGHTS OF THE PARTIES IN SUCH PROCEEDINGS AS THEY, OR EITHER OF THEM, MAY CHOOSE TO INSTITUTE.'

ACCORDINGLY, ADDITIONAL PAYMENTS MAY BE MADE TO THE COMPLETING SURETY FROM WITHHELD AND UNPAID AMOUNTS OTHERWISE DUE THE DEFAULTED CONTRACTOR FOR WORK PERFORMED PRIOR TO DATE OF TAKEOVER BY THE SURETY, NOT TO EXCEED THE UNRECOVERED EXPENSES OF THE SURETY IN COMPLETING THE CONTRACTS. HOWEVER, NO PAYMENT OF THE REMAINING BALANCES HELD BY THE GOVERNMENT AS STAKEHOLDER SHOULD BE PAID EXCEPT UPON AGREEMENT BETWEEN THE SURETY AND THE TRUSTEE IN BANKRUPTCY OR JUDGMENT OF A COURT OF COMPETENT JURISDICTION. CF. NEWARK INSURANCE COMPANY V. UNITED STATES, 144 CT.CL. 655, 169 F.SUPP. 955.TO THIS EXTENT OUR DECISION OF NOVEMBER 16, 1965, IS MODIFIED.

A COPY OF THIS LETTER IS BEING FURNISHED TO THE ATTORNEYS FOR FIREMAN'S FUND INSURANCE COMPANY, SURETY.