A-76618, AUGUST 5, 1937, 17 COMP. GEN. 97

A-76618, AUGUST 5, 1937, 17 COMP. GEN. 97

BONDS - SURETY - SUBROGATION - CLAIMS OF LABORERS AND MATERIALMEN COMPLETING SURETY OF DEFAULTING CONTRACTOR IS NOT ENTITLED, UNDER THE DOCTRINE OF SUBROGATION, TO AMOUNTS OTHERWISE DUE CONTRACTOR UNLESS ALL CLAIMS OF LABORERS AND MATERIALMEN AGAINST THE CONTRACTOR HAVE BEEN PAID, EITHER BY THE SURETY OR OTHERWISE, NOTWITHSTANDING THE LABORERS AND MATERIALMEN FAILED TO FILE SUIT UPON THE BOND WITHIN THE TIME ALLOWED BY THE HEARD ACT OF AUGUST 13, 1894, 28 STAT. 278, AS AMENDED, 40 U.S.C. 270, PARTICULARLY WHERE THE SURETY WAS NO NOTICE OF SUCH CLAIMS.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE MARYLAND CASUALTY CO., AUGUST 5, 1937:

REFERENCE IS MADE TO YOUR LETTER OF MAY 28, 1937, CONCERNING YOUR CLAIM, AS COMPLETING SURETY, FOR THE BALANCE DUE UNDER CONTRACT T1PW 389, AUGUST 30, 1934, BETWEEN THE UNITED STATES AND MURCH BROS. CONSTRUCTION CO., FOR THE CONSTRUCTION OF A POST-OFFICE BUILDING AT ASHEBORO, N.C. YOU WERE THE SURETY ON THE CONTRACTOR'S PERFORMANCE BOND, AND YOUR CLAIM FOR THE BALANCE OTHERWISE DUE THE CONTRACTOR IS ON THE BASIS THAT PURSUANT TO THE CONDITIONS OF THE BOND UNDER THE PROVISIONS OF THE HEARD ACT OF AUGUST 13, 1894, 28 STAT. 278, AS AMENDED, 40 U.S.C.A. 270, YOU HAVE PAID THE OUTSTANDING CLAIMS OF LABORERS AND MATERIALMEN AGAINST YOUR INSOLVENT PRINCIPAL, THE CONTRACTOR, IN AN AMOUNT IN EXCESS OF THE BALANCE DUE THE CONTRACTOR FROM THE GOVERNMENT, AND ARE THEREBY ENTITLED UNDER THE DOCTRINE OF SUBROGATION TO BE PAID THE SAID BALANCE. YOUR LETTER OF MAY 28, 1937, RELATIVE TO THE PAYMENT BY YOU OF THE CLAIMS OF LABORERS AND MATERIALMEN IS, IN PART, AS FOLLOWS:

I HAVE HAD THE FILE EXAMINED AND FIND NO RECORD OF ANY CLAIM OF COX AND LEWIS HARDWARE COMPANY, ASHEBORO, NORTH CAROLINA, IN THE AMOUNT OF $24.57 FOR MATERIALS FURNISHED IN CONNECTION WITH THIS CONTRACT OTHER THAN A BILL FROM SAID COMPANY SUBMITTED QUITE SOME TIME AGO. WE ARE NOT INFORMED AS TO WHETHER SAID BILL HAS BEEN PAID BY MURCH BROTHERS CONSTRUCTION COMPANY OR ANYONE ELSE, NOR WHETHER SAME DID REPRESENT A PROPER CLAIM UNDER THIS CONTRACT. IT WAS NOT DISCLOSED IN THE EXAMINATION OF THE BOOKS OF MURCH BROTHERS CONSTRUCTION COMPANY. AS FINAL SETTLEMENT OF THE CONTRACT WITHIN THE MEANING OF THE HEARD ACT WAS HAD ON MARCH 7, 1936 (40 U.S.C.A., SECTION 270), THIS MATERIALMAN, IF HE HAD A CLAIM, FAILED TO BRING HIMSELF WITHIN THE PROTECTION OF THE HEARD ACT AND CANNOT NOW ASSERT ANY CLAIM AGAINST THIS COMPANY. WE THEREFORE RESPECTFULLY SUBMIT THAT NO FURTHER CONSIDERATION SHOULD BE GIVEN THIS BILL OF $24.57.

THE CIRCUMSTANCES THAT IT MAY NOW BE TOO LATE FOR AN UNPAID MATERIALMAN TO BEGIN A SUIT ON THE BOND UNDER THE TERMS OF THE HEARD ACT HAS NO BEARING ON THE MATTER. IN AMERICAN SURETY CO. V. WESTINGHOUSE ELECTRIC CO., 296 U.S. 133, THE SUPREME COURT OF THE UNITED STATES HELD THAT THE SURETY ON A BOND GIVEN UNDER THE HEARD ACT FOR THE PROTECTION OF MATERIALMEN AND LABORERS WAS NOT ENTITLED, BY SUBROGATION, TO SHARE IN THE DISTRIBUTION OF THE ASSETS OF ITS INSOLVENT PRINCIPAL UNTIL THERE HAD BEEN PAID ALL OUTSTANDING CLAIMS OF THE CLASS OF PERSONS FOR WHOSE PROTECTION THE BOND WAS GIVEN, EVEN THOUGH THE TOTAL OF SUCH CLAIMS EXCEEDED THE AMOUNT OF THE BOND, AND THE SURETY, HAVING PAID THE FULL AMOUNT OF THE BOND, WAS SUBJECT TO NO FURTHER LIABILITY THEREON. THIS DECISION DID NOT REST ON THE CONDITIONS OF THE BOND OR THE SURETY'S LIABILITY THEREUNDER, BUT ON THE SUPERIOR EQUITIES IN FAVOR OF THE UNPAID MATERIALMEN FOR WHOSE PROTECTION THE HEARD ACT WAS ENACTED, AND THE SUBSISTING DEBTOR CREDITOR RELATIONSHIP BETWEEN THE UNPAID MATERIALMEN AND THE CONTRACTOR, IT BEING HELD, IN EFFECT, THAT THE RIGHT OF AN UNPAID MATERIALMAN TO RECOVER HIS DEBT FROM THE ESTATE OF THE CONTRACTOR, IRRESPECTIVE OF THE BOND, SHOULD NOT BE IMPAIRED BY PAYING ANY PART OF THE ASSETS OF THE ESTATE TO THE SURETY ON THE BOND GIVEN UNDER THE STATUTE FOR THE PROTECTION OF SUCH MATERIALMEN, AND THAT, THEREFORE, THE CLAIMS OF THE SURETY WERE POSTPONED TO THE CLAIMS OF ALL UNPAID MATERIALMEN AND LABORERS. THE ESSENTIAL POINT HERE IS THAT THE FULL AMOUNT OF THE BOND HAD BEEN PAID BY THE SURETY AND, CONSEQUENTLY, THE REMAINING UNPAID MATERIALMEN COULD NOT HAVE MAINTAINED A SUIT ON THE BOND. THE COURT HELD, NEVERTHELESS, THAT THE SURETY COULD NOT REACH THE ASSETS OF ITS PRINCIPAL, THE CONTRACTOR, UNTIL THE CLAIMS OF THESE OTHER MATERIALMEN HAD BEEN SATISFIED FROM SUCH ASSETS, OR OTHERWISE PAID.

APPLYING THE PRINCIPLES OF THIS DECISION TO THE INSTANT MATTER, IT SEEMS CLEAR THAT ALTHOUGH THE UNPAID MATERIAL FIRM IN QUESTION MAY NOT BE ABLE TO MAINTAIN A SUIT ON THE BOND, IT MAY STILL HAVE A GOOD CLAIM AGAINST THE ESTATE OF THE CONTRACTOR WHICH WOULD BE IMPAIRED BY THE PAYMENT TO YOU OF THE BALANCE OTHERWISE DUE THE CONTRACTOR'S ESTATE. SEE, FURTHER, IN THIS CONNECTION, DECISION ADDRESSED TO YOU SEPTEMBER 10, 1936, A-76618, AND AUTHORITIES CITED, IN A CASE INVOLVING THE CONSTRUCTION BY THIS SAME CONTRACTOR OF A POST-OFFICE BUILDING AT NEOSHO, MO., WHERE IT WAS SAID:

* * * BEFORE ANY CONSIDERATION OF WHETHER THE CLAIM OF THE SURETY MIGHT BE ENTITLED TO BE ENTERTAINED UNDER THE DOCTRINE OF SUBROGATION AN AFFIRMATIVE SHOWING BY COMPETENT PROOF WOULD BE NECESSARY THAT ALL LEGITIMATE CLAIMS OF THOSE FURNISHING LABOR AND MATERIALS UNDER THE CONTRACT HAD BEEN SATISFIED IN FULL, EITHER BY THE SURETY OR OTHERWISE.

FOR THE REASONS STATED HEREIN, THE EFFECT OF THIS RULE MAY NOT BE AVOIDED BY A SURETY'S FAILURE TO PAY THE CLAIMS OF LABORERS AND MATERIALMEN WITHIN THE LIMITED TIME ALLOWED THEM BY THE STATUTE TO INSTITUTE A SUIT UPON THE BOND.

THE RECORDS IN THIS CASE INDICATE THAT THE COX AND LEWIS HARDWARE CO., ASHEBORO, N.C., NOTIFIED NOT ONLY THIS OFFICE BUT THE TREASURY DEPARTMENT, THE POST OFFICE DEPARTMENT, AND YOU, OF ITS CLAIM FOR $24.57 FOR MATERIALS FURNISHED FOR THE CONSTRUCTION OF THE POST-OFFICE BUILDING UNDER THE CONTRACT HERE INVOLVED, AND THERE IS NOTED THE STATEMENT IN YOUR LETTER, SUPRA, THAT YOU HAVE ,A BILL FROM SAID COMPANY SUBMITTED SOME TIME AGO.'

IN VIEW OF THESE CIRCUMSTANCES, YOU ARE ADVISED THAT NO ALLOWANCE MAY BE MADE ON YOUR CLAIM IN THE ABSENCE OF SATISFACTORY EVIDENCE THAT THE CLAIM OF THE COX AND LEWIS HARDWARE CO. IS NONEXISTENT OR HAS BEEN PAID AND RELEASED.