B-161093, JUN. 20, 1967

B-161093, JUN. 20, 1967

TO FIDELITY AND DEPOSIT COMPANY OF MARYLAND:

REFERENCE IS MADE TO YOUR LETTER OF MAY 18, 1967, REQUESTING RECONSIDERATION OF OUR DECISION OF APRIL 6, 1967, IN WHICH WE DENIED YOUR CLAIM, AS SURETY FOR JOE DOUGHERTY CONSTRUCTION COMPANY, FOR THE BALANCE DUE UNDER GENERAL SERVICES ADMINISTRATION CONTRACT NO. GS-03B 8652. THE BALANCE OF $5,000 WAS PAID TO DOUGHERTY BY GSA ON DECEMBER 20, 1966, PURSUANT TO OUR CERTIFICATE OF SETTLEMENT DATED DECEMBER 12, 1966.

YOUR CLAIM TO THE BALANCE DUE UNDER THE CONTRACT IS BASED ON EXPENDITURES OF MORE THAN $5,000 BY YOU UNDER THE PAYMENT BOND TO SATISFY SOME OF THE CLAIMS OF UNPAID LABORERS AND MATERIALMEN. YOU CITED SEVERAL COURT DECISIONS IN SUPPORT OF YOUR CLAIM. IN DENYING YOUR CLAIM, WE DISTINGUISHED THE CASES YOU CITED AND STATED THE POSITION OF OUR OFFICE AS FOLLOWS:

"IN CASES WHERE, AS HERE, THE CONTRACT HAS BEEN COMPLETED, BUT THERE ARE OUTSTANDING CLAIMS OF LABORERS AND MATERIALMEN, IT HAS BEEN OUR POSITION THAT THE CONTRACTOR IS ENTITLED TO ANY BALANCE DUE UNDER THE CONTRACT, SUBJECT TO THE GOVERNMENT'S RIGHT OF SET-OFF FOR ANY INDEBTEDNESS OF THE CONTRACTOR. SEE 10 COMP. GEN. 433, 23 ID. 655; AND 37 ID. 115. ALSO, SEE UNITED STATES V. NATIONAL SURETY COMPANY, 254 U.S. 73; AND AMERICAN SURETY CO. V. WESTINGHOUSE ELECTRIC MANUFACTURING CO; 296 U.S. 133. WHILE EXCEPTIONS TO THIS RULE MAY BE PROPER UNDER CERTAIN CIRCUMSTANCES, AS WHEN THE CONTRACTOR IS IN DEFAULT OR IS BANKRUPT, WHEN THE SURETY HAS SATISFIED ALL CLAIMS UNDER THE CONTRACT, OR WHEN A COURT HAS ADJUDGED THE RIGHTS OF THE PARTIES, THERE ARE NO SUCH CIRCUMSTANCES IN THE PRESENT CASE.'

YOU NOW CALL ATTENTION TO THE CASE OF THE HANOVER INSURANCE COMPANY V. UNITED STATES, DECIDED MARCH 21, 1967, BY THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. FROM THE COURT'S MEMORANDUM OPINION IT APPEARS THAT THE PLAINTIFF SURETY COMPANY PAID THE UNPAID SUPPLIERS OF LABOR AND MATERIALS THE AMOUNT OF $25,590.38, AND SOUGHT TO RECOVER THE CONTRACT BALANCE OF $4,782.88 WHICH HAD BEEN PAID TO THE CONTRACTOR BY THE GOVERNMENT "AFTER DEFENDANT HAD BEEN APPRISED OF AND ACKNOWLEDGED PLAINTIFF'S RIGHT TO THE CONTRACT BALANCE.' IN GRANTING THE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT, THE COURT RELIED ON THREE CASES: UNITED PACIFIC INSURANCE COMPANY V. UNITED STATES, 362 F.2D. 805; PEARLMAN V. RELIANCE INSURANCE COMPANY, 372 U.S. 132; AND NEWARD INSURANCE COMPANY V. UNITED STATES, 169 F.SUPP. 955. IN THE COURSE OF ITS OPINION, THE COURT QUOTED THE FOLLOWING FROM THE PACIFIC CASE:

"BASED UPON EQUITABLE CONSIDERATIONS, A SURETY WHICH HAS SATISFIED DEBTS OF A CONTRACTOR TO MATERIALMEN UNDER THE TERMS OF A PAYMENT BOND CONCEDEDLY POSSESSES A RIGHT OF SUBROGATION TO THE PROCEEDS DUE A GOVERNMENT CONTRACTOR AND RETAINED BY THE UNITED STATES. HENNINGSEN V. UNITED STATES FIDELITY AND GUARANTY CO., 208 U.S. 404, 28 S.CT. 389, 52 L.ED. 547 (1908); NATIONAL SURETY CORP. V. UNITED STATES, 132 CT.CL. 724, 133 F.SUPP. 382 (1955), CERT. DENIED, UNITED STATES, 132 CT. CL. 724, 133 F.SUPP. 382 (1955), CERT. DENIED, FIRST NAT. BANK IN HOUSTON V. UNITED STATES, 350 U.S. 902, 76 S.CT. 181, 100 L.ED. 793. SEE ALSO PRAIRIE STATE NAT. BANK OF CHICAGO V. UNITED STATES, 164 U.S. 227, 17 S.CT. 142, 41 L.ED. 412 (1896).'

ALTHOUGH THE HANOVER CASE MAY APPEAR AT FIRST BLUSH TO SUPPORT YOUR POSITION, WE BELIEVE THAT UPON CLOSER EXAMINATION IT DOES NOT. THE CASES ARE DISTINGUISHABLE ON THE FACTS IN AT LEAST TWO SIGNIFICANT RESPECTS. FIRST, AT NO TIME HAS THE GOVERNMENT "ACKNOWLEDGED" YOUR "RIGHT TO THE CONTRACT BALANCE.' SECOND, ALTHOUGH THE OPINION DOES NOT SPECIFICALLY SAY SO, PRESUMABLY THE PLAINTIFF SURETY SATISFIED ALL OF THE CLAIMS FOR THE UNPAID LABOR AND MATERIALS PRIOR TO PAYMENT OF THE CONTRACT BALANCE TO THE CONTRACTOR BY THE GOVERNMENT, WHICH IS NOT TRUE IN THE INSTANT CASE. THIS IS SIGNIFICANT IN VIEW OF THE COURT'S HOLDING IN THE AMERICAN SURETY CO. V. WESTINGHOUSE ELECTRIC MANUFACTURING CO., 296 U.S. 133, CASE, WHEREIN IT WAS SAID:

"* * * A SURETY WHO HAS UNDERTAKEN TO PAY THE CREDITORS OF THE PRINCIPAL, THOUGH NOT BEYOND A STATED LIMIT, MAY NOT SHARE IN THE ASSETS OF THE PRINCIPAL BY REASON OF SUCH PAYMENT UNTIL THE DEBTS THUS PARTIALLY PROTECTED HAVE BEEN SATISFIED IN FULL. THIS IS THE RULE WHERE THE RIGHT TO A DIVIDEND HAS ITS BASIS IN THE PRINCIPLE OF EQUITABLE SUBROGATION. A SURETY LIABLE ONLY FOR PART OF THE DEBT DOES NOT BECOME SUBROGATED TO COLLATERAL OR TO REMEDIES AVAILABLE TO THE CREDITOR UNLESS HE PAYS THE WHOLE DEBT OR IT IS OTHERWISE SATISFIED.' UNITED STATES V. NATIONAL SURETY CO., 254 U.S. 73.' IF THE HOLDING WERE DIFFERENT, THE SURETY WOULD REDUCE THE PROTECTION OF THE BOND TO THE EXTENT OF ITS DIVIDEND IN THE ASSETS OF THE DEBTORS.' IN THIS CONNECTION, SEE MARTIN V. NATIONAL SURETY CO., 300 U.S. 588.

IF, IN FACT, ALL OF THE CLAIMS WERE NOT PAID BY THE SURETY IN THE HANOVER CASE, WE DO NOT FEEL CONSTRAINED TO FOLLOW IT AS IT APPEARS THE COURT HAS EITHER OVERLOOKED OR IGNORED THE BASIC HOLDING BY THE SUPREME COURT IN THE AMERICAN SURETY CO. CASE, SUPRA, THAT THE SURETY MUST PAY ALL UNPAID LABORERS AND MATERIALMEN BEFORE IT CAN BE CONSIDERED A CLAIMANT TO THE FINAL PAYMENT ON A COMPLETED CONTRACT WITH THE GOVERNMENT. NOR DO WE THINK THE OTHER CASES CITED BY THE COURT SUPPORT ITS DECISION IN THE ABSENCE OF PAYMENT OF ALL CLAIMS. IN OUR DECISION OF APRIL 6, 1967, WE STATED OUR POSITION WITH REGARD TO THE PEARLMAN AND NEWARK CASES.

IN THE UNITED PACIFIC CASE, THE COURT FOUND THE GOVERNMENT NOT LIABLE TO THE SURETY FOR THE CONTRACT BALANCE PAID TO THE CONTRACTOR BECAUSE THE CONTRACTOR HAD NOT DEFAULTED AND THE SURETY ,FAILED TO ESTABLISH THAT DEFENDANT HAD DUE NOTICE OF SUFFICIENT FACTS TO INDICATE THAT PLAINTIFF POSSESSED AN EQUITABLE RIGHT BEFORE THE FINAL PAYMENT OF THE PROCEEDS TO THE CONTRACTOR.' ALTHOUGH THE COURT SEEMS TO IMPLY THAT A MERE DEMAND BY THE SURETY FOR PAYMENT OR FOR WITHHOLDING PAYMENT TO THE CONTRACTOR WOULD HAVE BEEN SUFFICIENT TO CHARGE THE GOVERNMENT WITH LIABILITY, WE DO NOT THINK THIS WARRANTS A DEPARTURE FROM THE RULE ENUNCIATED IN THE AMERICAN SURETY CO. CASE. FURTHERMORE, THIS IMPLICATION IS CONTRARY TO THE COURT'S STATEMENT QUOTED IN THE HANOVER CASE, WHEREIN IT IS SPECIFICALLY RECOGNIZED THAT THE SURETY'S RIGHT OF SUBROGATION TO THE PROCEEDS DUE A GOVERNMENT CONTRACTOR DEVOLVES UPON A "SURETY WHICH HAS SATISFIED DEBTS OF A CONTRACTOR TO MATERIALMEN UNDER THE TERMS OF A PAYMENT BOND * * *.'