During the course of a government contract, the contractor declared bankruptcy and assigned its rights under the contract to Hanover National Bank. Shortly thereafter, the remaining work on the contract was completed by the surety, American Empire Insurance Company, and the question of what to do with unexpended funds was raised. Under the terms of the takeover agreement, the unexpended funds were labeled the "contract fund" and were defined as funds payable under the contract including all retained percentages and earned but unpaid progress estimates which were owed, but not paid to the defaulted contractor. Claims for this fund were filed by the trustees in bankruptcy, Hanover, and the Internal Revenue Service for unpaid taxes. However the surety, having completed the defaulted contract pursuant to the takeover agreement with the Government, was entitled to priority to contract retainage under the performance bond.
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