B-161093, APR. 6, 1967

B-161093, APR. 6, 1967

TO FIDELITY AND DEPOSIT COMPANY OF MARYLAND:

FURTHER REFERENCE IS MADE TO YOUR LETTERS CONCERNING YOUR CLAIM AS SURETY FOR JOE DOUGHERTY CONSTRUCTION COMPANY UNDER GENERAL SERVICES ADMINISTRATION (GSA), CONTRACT NO. GS-03B-8652. AS YOU WERE ADVISED IN EARLIER CORRESPONDENCE FROM OUR OFFICE, WE AUTHORIZED PAYMENT OF THE $5,000 BALANCE DUE UNDER THE CONTRACT TO DOUGHERTY ON DECEMBER 12, 1966.

YOU HAVE QUESTIONED OUR ACTION ON TWO GROUNDS. FIRST, YOU POINT OUT THAT YOU HAVE BEEN REQUIRED TO EXPEND MORE THAN $5,000 UNDER THE PAYMENT BOND TO SATISFY AT LEAST PART OF THE CLAIMS OF UNPAID LABORERS AND MATERIALMEN AND WERE, THEREFORE, ENTITLED TO ANY BALANCE DUE UNDER THE CONTRACT. SUPPORT OF THIS CONTENTION YOU HAVE CITED THE CASES OF PEARLMAN V. RELIANCE INSURANCE COMPANY, 371 U.S. 132; NEWARK INSURANCE COMPANY V. UNITED STATES, 169 F.SUPP. 955; AND MORGENTHAU V. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, 94 F.2D 632. SECOND, YOU QUESTION THE GOVERNMENT'S FAILURE TO EXERCISE ITS RIGHT OF SET-OFF AS YOU UNDERSTAND DOUGHERTY IS INDEBTED TO THE GOVERNMENT IN AN AMOUNT GREATER THAN $5,000 UNDER OTHER CONTRACTS WITH GSA.

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.

AS TO THE CASES YOU CITE, WE BELIEVE THEY ARE DISTINGUISHABLE FROM THE INSTANT CASE AND DO NOT, THEREFORE, SUPPORT YOUR POSITION. IN THE PEARLMAN CASE THE COURT HELD THE SURETY, WHO HAD PAID OUT $350,000 TO DISCHARGE DEBTS COVERED BY THE DEFAULTING CONTRACTOR'S PAYMENT BOND, TO HAVE A BETTER RIGHT TO PERCENTAGES RETAINED BY THE GOVERNMENT UNDER THE CONTRACT THAN THE CONTRACTOR'S TRUSTEE IN BANKRUPTCY. WHILE THIS CASE MAY TEND TO SUPPORT YOUR POSITION AS TO EQUITABLE PRIORITIES, WE DO NOT VIEW IT AS IMPOSING A LEGAL OBLIGATION ON THE GOVERNMENT TO DETERMINE THE EQUITIES AND DISBURSE THE CONTRACT PROCEEDS IN ACCORDANCE THEREWITH. THE FIRST PLACE, THE DISPUTE OVER THE WITHHELD FUNDS UNDER THE GOVERNMENT CONTRACT WAS BETWEEN THE TRUSTEE IN BANKRUPTCY OF THE CONTRACTOR AND THE SURETY ON THE CONTRACTOR'S PAYMENT BOND, AS TO WHICH HAD THE SUPERIOR RIGHT TO SAID FUNDS, AND THERE WAS NO SUGGESTION THAT PAYMENT BY THE GOVERNMENT TO THE TRUSTEE DID NOT SATISFY THE GOVERNMENT'S LIABILITY. HERE, THE CONTRACTOR HAS NOT BEEN ADJUDGED BANKRUPT, AND THE QUESTION IS WHETHER PAYMENT SHOULD BE MADE TO YOU AS SURETY OR TO THE CONTRACTOR. MOREOVER, IT APPEARS THAT IN THE PEARLMAN CASE THE SURETY HAD ESTABLISHED TO THE SATISFACTION OF THE COURT THAT IT HAD PAID ALL CLAIMS FOR LABOR AND MATERIAL ARISING UNDER THE CONTRACT, AND THE COURT WAS ABLE TO CONCLUSIVELY ADJUDICATE THE RIGHTS OF ALL THE INTERESTED PARTIES.

WE BELIEVE THE OTHER CASES YOU CITE ARE ALSO DISTINGUISHABLE FROM THE INSTANT CASE. IN NEWARK, THE SUIT WAS BROUGHT BY THE CONTRACTOR'S PAYMENT BOND SURETY AGAINST THE GOVERNMENT FOR THE FINAL PAYMENTS UNDER TWO CONTRACTS WHICH HAD BEEN PAID TO AN ASSIGNEE BANK, WHICH WAS IMPLEADED AS A THIRD PARTY BY THE GOVERNMENT. THE CASE CAME UP ON A MOTION BY THE GOVERNMENT FOR A SUMMARY JUDGMENT AGAINST THE PLAINTIFF,WHICH WAS DENIED. IN SO RULING ON THE MOTION, THE COURT STATED THAT THE SURETY WAS ENTITLED TO PRIORITY BETWEEN IT AND THE ASSIGNEE, WHICH IS NOT THE QUESTION HERE. THE MORGENTHAU CASE IS ALSO DISTINGUISHABLE BECAUSE THERE THE CONTRACTOR DEFAULTED, THE SURETY ADVANCED IT MONEY TO COMPLETE THE CONTRACT, AND THE SURETY HAD PAID ALL THE CLAIMS FOR LABOR AND MATERIALS. ALSO, THERE WAS NO QUESTION AS TO THE GOVERNMENT'S SECURING A GOOD ACQUITTANCE.

AS TO YOUR SECOND POINT, AT THE TIME OUR CLAIMS DIVISION AUTHORIZED PAYMENT OF THE $5,000 TO DOUGHERTY NEITHER OUR OFFICE NOR GSA'S REGION 3 OFFICE HAD ANY RECORD OF ANY INDEBTEDNESS OF THE CONTRACTOR OTHER THAN $3,500 FOR LIQUIDATED DAMAGES UNDER THE SUBJECT CONTRACT, WHICH WAS SET OFF. IF THE CONTRACTOR IS INDEBTED TO THE GOVERNMENT AS YOU ALLEGE,EVERY EFFORT WILL BE MADE TO RECOVER THE AMOUNT OF SUCH INDEBTEDNESS.

IN VIEW THEREOF, PAYMENT TO DOUGHERTY WAS PROPER AND SUCH ACTION IS SUSTAINED.