B-180267, FEB 4, 1974

B-180267, FEB 4, 1974

UNDER RATIONALE OF SECURITY INSURANCE CO. OF HARTFORD V. UNITED STATES, 428 F.2D 838 (CT. CL. 1970), MILLER ACT SURETY FOR DEFAULTING CONTRACTOR WHICH COMPLETES PERFORMANCE OF CONTRACT UNDER ITS PERFORMANCE BOND, HAS BENEFITED THE GOVERNMENT BY ITS PERFORMANCE, AND IS THEREFORE ENTITLED TO RECOVER FROM ANY FUNDS REMAINING FOR DISTRIBUTION AT CONTRACT COMPLETION FOR AMOUNT EXPENDED IN COMPLETING CONTRACT, FREE FROM SETOFF FOR ANY TAXES OWED TO THE GOVERNMENT BY DEFAULTING CONTRACTOR.

TO AMERICAN EMPLOYERS' INSURANCE COMPANY:

CONTRACT NBY 65761 CALLED FOR CONSTRUCTION OF A COMPOSITE MEDICAL FACILITY AT SHAW AIR FORCE BASE, SUMTER, SOUTH CAROLINA, AND PROVIDED THAT CONSTRUCTION BE COMPLETED IN TWO PHASES. PHASE I CONSTRUCTION, AS EXTENDED, WAS TO BE COMPLETE BY NOVEMBER 13, 1967. THE CONTRACTOR, MIKE BRADFORD, INCORPORATED, DID NOT COMPLETE WORK ON PHASE I, AND ON MARCH 19, 1968, THAT FIRM'S CONTRACT WAS TERMINATED FOR DEFAULT.

A COMPLETION CONTRACT, CONTRACT NBY 96744, WAS AWARDED ON MARCH 22, 1968 TO AMERICAN EMPLOYERS' INSURANCE COMPANY (AEIC). AEIC FINISHED PHASE I OF THE WORK ON APRIL 15, 1968, OR 154 DAYS AFTER THE DATE SPECIFIED IN THE DEFAULTED CONTRACT. AT THE RATE OF $200 PER DAY, AS SPECIFIED IN PARAGRAPH SP-3 OF THE DEFAULTED CONTRACT, LIQUIDATED DAMAGES OF $30,800 WERE ASSESSED. NO LIQUIDATED DAMAGES WERE ASSESSED UNDER THE COMPLETION CONTRACT.

THE FINANCIAL STATUS AND COMPLETION COST ASPECTS OF THIS MATTER ARE REPORTED AS FOLLOWS:

$2,964,885.29 DEFAULTED CONTRACT PRICE THROUGH CHANGE "G"

2,728,498.16 AMOUNT PAID TO DEFAULTED CONTRACTOR

$ 236,387.13 AMOUNT AVAILABLE TO COMPLETE CONTRACT WORK

$180,304.40 TOTAL COMPLETION COSTS UNDER CONTRACT NBY 96744

33,028.89 COMPLETION COSTS NOT CHARGEABLE TO DEFAULTED CONTRACTOR

$147,275.51 COMPLETION COSTS CHARGEABLE TO DEFAULTED CONTRACTOR

$236,387.13 AMOUNT AVAILABLE FOR COMPLETION

147,275.51 COMPLETION COSTS CHARGEABLE TO DEFAULTED CONTRACTOR

89,111.62 FUNDS REMAINING AT COMPLETION

30,800.00 LIQUIDATED DAMAGES ASSESSMENT

$ 58,311.62 FUNDS REMAINING FOR DISTRIBUTION

THE INTERNAL REVENUE SERVICE HAS MADE CLAIM AGAINST ALL FUNDS REMAINING UNDER THE DEFAULTED CONTRACT WITH MIKE BRADFORD, INCORPORATED, FOR THE AMOUNT OF $38,044.54. THE SURETY HAS PRESENTED A CONFLICTING CLAIM FOR THESE FUNDS BASED UPON PAYMENTS MADE ON ITS PERFORMANCE BOND IN EXCESS OF $281,000.

IT HAS LONG BEEN RECOGNIZED THAT THE SURETY ACQUIRES A RIGHT TO WITHHELD FUNDS WHEN IT COMPLETES PERFORMANCE OF A CONTRACT UPON DEFAULT BY THE CONTRACTOR. PRAIRIE STATE BANK V. UNITED STATES, 164 U.S. 227 (1896); TRINITY UNIVERSAL INSURANCE CO. V. UNITED STATES, 382 F.2D 317 (5TH CIR. 1967), CERT. DENIED 390 U.S. 906 (1968). IN TRINITY, THE COURT OBSERVED THAT THE PERFORMANCE BOND SURETY WHO ELECTS TO COMPLETE PERFORMANCE CONFERS A BENEFIT ON THE GOVERNMENT BY RELIEVING IT OF THE TASK OF COMPLETING PERFORMANCE ITSELF, AND THUS CONCLUDED:

"THE SURETY WHO UNDERTAKES TO COMPLETE THE PROJECT IS ENTITLED TO THE FUNDS IN THE HANDS OF THE GOVERNMENT NOT AS A CREDITOR AND SUBJECT TO SETOFF, BUT AS A SUBROGEE HAVING THE SAME RIGHTS TO THE FUNDS AS THE GOVERNMENT."

382 F.2D AT 320.

AS BETWEEN CONFLICTING CLAIMS OF THE COMPLETING SURETY AND THE INTERNAL REVENUE SERVICE TO A WITHHELD FUND, THE COURT OF CLAIMS HELD IN SECURITY INSURANCE CO. OF HARTFORD V. UNITED STATES, 428 F.2D 838 (CT. CL. 1970), THAT A MILLER ACT PERFORMANCE BOND SURETY WHICH COMPLETED A CONTRACT UPON THE CONTRACTOR'S DEFAULT WAS ENTITLED TO RECOVER, FROM RETAINED FUNDS AND REMAINING PROGRESS MONEY HELD BY THE GOVERNMENT, THE AMOUNT IT EXPENDED IN COMPLETING THE CONTRACT, FREE FROM SETOFF FOR TAXES THAT WERE OWED BY THE CONTRACTOR.

DRAWING UPON LANGUAGE OF THE SUPREME COURT IN UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234, 244 (1947), THE COURT EXPLAINED THAT ITS DECISION "AVOIDS THE ANOMALOUS RESULT WHEREBY THE PERFORMANCE BOND SURETY, IF SETOFF WERE PERMITTED, WOULD FREQUENTLY BE WORSE OFF FOR HAVING UNDERTAKEN TO COMPLETE PERFORMANCE." 428 F.2D AT 844.

WE NOTE THAT THIS RESULT IS CONSISTENT WITH THE PERTINENT PROVISIONS OF ASPR 18-618.5(C) WITH RESPECT TO TAKE-OVER AGREEMENTS:

"(C) BECAUSE OF THE POSSIBILITY OF CONFLICTING CLAIMS TO UNPAID PRIOR EARNINGS (RETAINED PERCENTAGES OR AMOUNTS REPRESENTING UNPAID PROGRESS ESTIMATES) OF THE DEFAULTING CONTRACTOR, THE SURETY MAY CONDITION ITS OFFER OF COMPLETION UPON THE EXECUTION BY THE GOVERNMENT OF A 'TAKE OVER' AGREEMENT FIXING THE SURETY'S RIGHTS TO PAYMENT FROM SUCH FUNDS. IN THAT EVENT THE CONTRACTING OFFICER MAY IN HIS DISCRETION (BUT NOT BEFORE THE EFFECTIVE DATE OF TERMINATION) ENTER INTO A WRITTEN AGREEMENT WITH THE SURETY. FURTHER, CONSIDERATION SHOULD BE GIVEN TO HAVING THE AGREEMENT INCLUDE BOTH THE SURETY AND THE DEFAULTING CONTRACTOR IN ORDER TO ELIMINATE ANY DISAGREEMENT AS TO THE CONTRACTOR'S RESIDUAL RIGHTS, SUCH AS CLAIMS TO UNPAID PRIOR EARNINGS. THE AGREEMENT SHALL PROVIDE THAT THE SURETY WILL UNDERTAKE TO COMPLETE THE WORK REQUIRED BY THE CONTRACT IN ACCORDANCE WITH ALL THE TERMS AND CONDITIONS OF THE CONTRACT, AND THAT THE GOVERNMENT WILL PAY THE SURETY IN THE MANNER PROVIDED BY THE CONTRACT, BUT NOT IN EXCESS OF THE SURETY'S COSTS AND EXPENSES, THE BALANCE OF THE CONTRACT PRICE UNPAID AT THE TIME OF DEFAULT; SUBJECT, HOWEVER, TO THE FOLLOWING CONDITIONS:

(I) ANY UNPAID EARNINGS OF THE DEFAULTING CONTRACTOR, INCLUDING RETAINED PERCENTAGES AND PROGRESS ESTIMATES FOR WORK ACCOMPLISHED PRIOR TO TERMINATION, SHALL BE SUBJECT TO CLAIMS BY THE GOVERNMENT AGAINST THE CONTRACTOR, EXCEPT TO THE EXTENT THAT SUCH UNPAID EARNINGS MAY BE REQUIRED TO PERMIT PAYMENT TO THE COMPLETING SURETY OF ITS ACTUAL COSTS AND EXPENSES INCURRED IN THE COMPLETION OF THE WORK, EXCLUSIVE OF ITS PAYMENTS AND OBLIGATIONS UNDER THE PAYMENT BOND GIVEN IN CONNECTION WITH THE CONTRACT."

ACCORDINGLY, AND SINCE IT IS REPORTED THAT THE BANKRUPTCY COURT HAS ORDERED THE TRUSTEE IN BANKRUPTCY FOR THE DEFAULTED CONTRACTOR TO DISCLAIM ANY INTEREST IN THE CONTRACT BALANCE, WE HAVE NO OBJECTION TO THE PROPOSAL TO PAY AEIC, AS COMPLETING SURETY, THE BALANCE OF CONTRACT FUNDS REMAINING ($58,311.62), FREE FROM SETOFF BY THE INTERNAL REVENUE SERVICE.