B-200374, OCT 21, 1980

B-200374, OCT 21, 1980

DIGEST: NOTWITHSTANDING ERRONEOUS PAYMENT TO DEFAULTED CONTRACTOR, MILLER ACT PERFORMANCE AND PAYMENT BONDS SURETIES WHO UNDERTAKE TO COMPLETE CONTRACT UNDER TAKEOVER AGREEMENT AND TO SATISFY, CLAIMS MADE AGAINST PAYMENT BOND ARE ENTITLED TO PROGRESS PAYMENTS WHICH BECAME DUE AFTER TAKEOVER AND AMOUNTS EARNED BY CONTRACTOR PRIOR TO DEFAULT NOT TO EXCEED ACTUAL EXPENSES INCURRED.

AMERICAN FIDELITY FIRE INSURANCE COMPANY; HERITAGE INSURANCE COMPANY OF AMERICA:

THE DEPARTMENT OF THE ARMY HAS FORWARDED A CORPS OF ENGINEERS DISBURSING OFFICER'S REQUEST FOR AN ADVANCE DECISION WHETHER TO PAY THE CLAIM OF TWO BONDING COMPANIES, THE AMERICAN FIDELITY FIRE INSURANCE COMPANY (AMERICAN FIDELITY), AND THE HERITAGE INSURANCE COMPANY OF AMERICA (HERITAGE), WHICH ARE COMPLETING PERFORMANCE OF A DEFAULTED CONTRACT. AMERICAN FIDELITY AND HERITAGE ARE THE SURETIES UNDER MILLER ACT (40 U.S.C. SECS. 270A-270F (1976 & SUPP II 1978)) PERFORMANCE AND PAYMENT BONDS PROVIDED BY THE DEFAULTED PRIME CONTRACTOR, CONTRACTING VENTURES, INC., UNDER CONTRACT NUMBER DACA45-78-C-0079 FOR THE CONSTRUCTION OF A FIREMAN TRAINING FACILITY AT GENERAL BILLY MITCHELL FIELD, MILWAUKEE, WISCONSIN.

AMERICAN FIDELITY AND HERITAGE UNDERTOOK COMPLETION OF THE WORK PURSUANT TO A TAKEOVER AGREEMENT EXECUTED ON OCTOBER 19, 1979, BY THE GOVERNMENT, THE CONTRACTOR, AND THE SURETIES. THE TAKEOVER AGREEMENT, AUTHORIZED BY DEFENSE ACQUISITION REGULATION SEC. 18-618.5 (1976 ED.), PROVIDED THAT THE CORPS WOULD PAY THE SURETIES "THE BALANCE OF THE CONTRACT PRICE UNPAID AT THE TIME OF DEFAULT" SUBJECT IN PART TO THE FOLLOWING CONDITIONS:

"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.

"IN NO EVENT SHALL (THE SURETIES) BE ENTITLED TO BE PAID ANY AMOUNT IN EXCESS OF THEIR TOTAL EXPENDITURES NECESSARILY MADE IN COMPLETING THE WORK AND DISCHARGING) THEIR LIABILITIES UNDER THE PAYMENT BOND OF THE DEFAULTING CONTRACTOR. FURTHERMORE, PAYMENTS TO THE SURETY TO REIMBURSE IT FOR DISCHARGING ITS LIABILITIES UNDER THE PAYMENT BOND OF THE DEFAULTING CONTRACTOR SHALL BE ONLY ON AUTHORITY OF (A) MUTUAL AGREEMENT BETWEEN THE GOVERNMENT, THE DEFAULTING CONTRACTOR AND THE SURETY, OR (B) DETERMINATION OF THE COMPTROLLER GENERAL AS TO PAYEE AND AMOUNT, OR (C) ORDER OF A COURT OF COMPETENT JURISDICTION."

THE DOCUMENT ALSO STATED THAT THE DEFAULTED CONTRACTOR AGREED THAT ALL FUNDS EARNED BUT NOT PAID TO IT PRIOR TO DEFAULT SHOULD BE USED FOR REIMBURSEMENT OF THE SURETIES FOR DISCHARGING THEIR OBLIGATIONS UNDER THE PAYMENT BOND.

THE CLAIM, IN THE AMOUNT OF $89,039.50, INCLUDES PROGRESS PAYMENTS WHICH BECAME DUE AFTER THE DATE OF THE TAKEOVER AND AMOUNTS EARNED BY THE CONTRACTOR PRIOR TO DEFAULT WHICH THE SURETIES SEEK AS REIMBURSEMENT FOR FUNDS EXPENDED UNDER THE TAKEOVER AGREEMENT. THE CORPS ERRONEOUSLY PAID THE MONEY TO THE CONTRACTOR WHO REFUSES TO RETURN THE PAYMENT. THE DISBURSING OFFICER ASKS WHETHER PAYMENT TO THE SURETIES WOULD BE PROPER IN VIEW OF THE ERRONEOUS PAYMENT.

WE CONSIDERED A SIMILAR SITUATION IN AMERICAN FIDELITY FIRE INSURANCE CO., 58 COMP.GEN. 64 (1978), 78-2 CPD 333. THERE, THE SURETY HAD ADVISED THE CONTRACTING OFFICER THAT THE CONTRACTOR WAS IN DEFAULT ON PAYMENTS DUE VARIOUS SUBCONTRACTORS, AND ALL PARTIES AGREED THAT CHECKS FOR FINAL PAYMENT WOULD BE MADE PAYABLE TO THE CONTRACTOR BUT SENT TO THE SURETY. HOWEVER, THROUGH "CLERICAL INADVERTENCE" THE PAYMENTS WERE MAILED DIRECTLY TO THE CONTRACTOR, AND HAD NOT BEEN RECOVERED.

WE CONCLUDED THAT THE GOVERNMENT WAS LIABLE TO THE SURETY (PROVIDED THAT THE SURETY HAD NOT RETRIEVED THE PAYMENT FROM THE CONTRACTOR) BECAUSE, UPON NOTIFICATION OF THE CONTRACTOR'S DELINQUENCY, THE GOVERNMENT OWED THE SURETY A HIGHER DUTY IN REGARD TO CONTRACT RETAINAGES THAN IT DID THE CONTRACTOR. SEE HOME INDEMNITY CO. V. UNITED STATES, 376 F.2D 890, 892 (CT.CL. 1967). WE QUOTED THE FOLLOWING PORTION OF THE COURT OF CLAIMS DECISION IN NEWARK INS. CO. V. UNITED STATES, 169 F. SUPP. 995, 957 (1955):

"IF IT IS MADE TO APPEAR THAT THE GOVERNMENT'S OFFICIALS, AFTER DUE NOTICE OF THE FACTS GIVING RISE TO AN EQUITABLE RIGHT IN THE (SURETY), AND OF THE (SURETY'S) ASSERTION OF SUCH A RIGHT, PAID OUT WITHOUT A VALID REASON FOR SO DOING, THE MONEY IN QUESTION TO SOMEONE OTHER THAN THE (SURETY), THE SURETY WILL BE ENTITLED TO A JUDGMENT."

WHILE IN THE INSTANT CASE THE CLAIM IS FOR PROGRESS PAYMENTS RATHER THAN FINAL PAYMENT, AS A GENERAL MATTER THE PRINCIPLE IS THE SAME, I.E., SURETIES WHO UNDERTAKE TO COMPLETE A CONTRACT PURSUANT TO A TAKEOVER AGREEMENT BECOME SUBROGATED TO THE RIGHTS OF THE PRIME CONTRACTOR AND THE GOVERNMENT, AND HAVE THE SAME RIGHTS TO THE FUNDS AS DOES THE GOVERNMENT. SEE SECURITY INSURANCE CO. OF HARTFORD V. UNITED STATES, 428 F.2D 838, 844 AT N. 12 (CT.CL. 1970); TRINITY UNIVERSAL INSURANCE CO. V. UNITED STATES, 382 F.2D 317, 321 (5TH CIR. 1967). THUS, THE GOVERNMENT IS SIMILARLY LIABLE TO THE SURETIES IF THE GOVERNMENT PAID THE MONEY TO SOMEONE ELSE WITHOUT A VALID REASON.

APPLYING THE FOREGOING PRINCIPLES, AND UNDER THE TERMS OF THE TAKEOVER AGREEMENT EXECUTED HERE, AMERICAN FIDELITY AND HERITAGE ARE ENTITLED TO PROGRESS MONIES DUE AFTER THE DATE OF THE TAKEOVER AGREEMENT (OCTOBER 15, 1979) AND TO FUNDS ACCRUED BEFORE THAT DATE TO THE EXTENT NECESSARY TO DEFRAY THE SURETIES'ACTUAL COMPLETION COSTS AND EXPENSES.

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

HOWEVER, BEFORE MAKING ANY PAYMENTS THE CORPS SHOULD HAVE AMERICAN FIDELITY AND HERITAGE ASSIGN TO THE GOVERNMENT ANY RIGHT THEY MAY HAVE TO RECOUP THE ERRONEOUS PAYMENT TO THE PRIME CONTRACTOR. SEE AMERICAN FIDELITY FIRE INSURANCE CO., SUPRA AT 67.