Insurance Co. of the West v. U.S.

• Decision Date: 23 March 2001
• Docket Number: PLAINTIFF-APPELLEE,No. 00-5039,DEFENDANT-APPELLANT,00-5039
• Parties: (Fed. Cir. 2001) INSURANCE COMPANY OF THE WEST,, v. UNITED STATES,
• Court: U.S. Court of Appeals — Federal Circuit

Page 1367

243 F.3d 1367 (Fed. Cir. 2001)

INSURANCE COMPANY OF THE WEST, PLAINTIFF-APPELLEE, v. UNITED STATES, DEFENDANT-APPELLANT.

United States Court of Appeals for the Federal Circuit

No. 00-5039

March 23, 2001

Appealed from: United States Court of Federal Claims

Robert M. Wright, Whiteford, Taylor & Preston, L.L.P., of Baltimore, Maryland, argued for plaintiff-appellee. With him on the brief was Gerard P. Sunderland.

James M. Kinsella, Deputy Director, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, Dc, argued for defendant-appellant. On the brief were David M. Cohen, Director; Robert E. Kirschman, Assistant Director; and Katherine A. Barski, Attorney. Of counsel on the brief was Major James D. Slear, Attorney, Commercial Litigation Division, Aflsa/jacn, Department of the Air Force, of Arlington, Virginia.

Edward G. Gallagher, Wickwire Gavin, P.C., of Vienna, Virginia, for amicus curiae The Surety Association of America.

Before Clevenger, Circuit Judge, Smith, Senior Circuit Judge,^* and Dyk, Circuit Judge.

Dyk, Circuit Judge

Judge Christine O.C. Miller

DECISION

This case requires us to decide whether a subrogee, after stepping into the shoes of a government contractor, may rely on the waiver of sovereign immunity in the Tucker Act, 28 U.S.C. §§ 1491, and bring suit against the United States. We hold that the Supreme Court's decision in Dep't of the Army v. Blue Fox, Inc., 525 U.S. 255 (1999), did not upset the longstanding rule that such a suit is not barred by the doctrine of sovereign immunity, and that this case is governed by the Supreme Court's earlier decision in United States v. Aetna Cas. & Sur. Co., 338 U.S. 366 (1949).

I.

Insurance Company of the West ("ICW") issues performance and payment bonds for government contractors in accordance with the Miller Act, 40 U.S.C. §§ 270a(a)-(d). It brings this suit against the United States to recover $174,000 in contract funds paid to a prime contractor, P.C.E., Limited ("PCE"). ICW alleges that the government should have paid the funds to it as surety, based upon its right of subrogation.

On August 28, 1997, the United States Department of the Air Force awarded contract number F64605-97-C-0013 to PCE. The contract called for the replacement of automatic doors in the commissary at Hickham Air Force Base. ICW provided performance and payment bonds for the work to be performed by PCE.

PCE notified the United States by letter on November 21, 1997, that it would be financially unable to fulfill its obligations under the contract and that ICW would be responsible for assuming control and assuring completion of the contract. PCE "voluntarily and irrevocably" directed that all contract funds currently remaining due be paid to ICW. On December 4, 1997, ICW confirmed in writing to the contracting officer that it was to receive all payments due on the contract. On January 29, 1998, the Air Force executed a unilateral modification to change the remittance address for payments to PCE at ICW's address. ICW did not execute a takeover agreement, and the contract with PCE was never terminated. ICW financed completion of the contract to the extent of $354,744.34.

Instead of sending payment on the contract to PCE at ICW's address, the government continued to make payments directly to PCE, which apparently retained the funds and did not forward them to ICW. The government states that the Defense Finance and Accounting Service Center in Columbus, Ohio never received the contract modification. When ICW inquired about the payments, the government informed it that payments had been made to PCE and told it to "settle this problem with P.C.E."

ICW filed suit in the United States Court of Federal Claims under the Tucker Act, 28 U.S.C. §§ 1491, claiming entitlement to $174,000 in wrongfully disbursed funds. The government filed a motion to dismiss on the ground of sovereign immunity. Although this court had previously established in Balboa Ins. Co. v. United States, 775 F.2d 1158, 1161-63 (Fed. Cir. 1985), and other cases that a surety could recover from the United States payments made to a contractor after the surety had notified the government of the contractor's default, the government argued that the Supreme Court's decision in Dep't of the Army v. Blue Fox, Inc., 525 U.S. 255 (1999), had effectively overruled Balboa and these other cases. The government asserted that Blue Fox demonstrates that the government has not waived sovereign immunity for a surety's claims based on equitable subrogation.

At a hearing on August 11, 1999, the Court of Federal Claims concluded that it was bound by Balboa, which had not been overruled directly by Blue Fox. The Court of Federal Claims, however, certified the issue to this court upon motion by the government pursuant to 28 U.S.C. §§ 1292(d)(2). Initially, this court denied the government's petition for interlocutory appeal, finding that the Court of Federal Claims had not entered an order denying the government's motion to dismiss, and thus that there was no definitive order for this court to review. On December 10, 1999, the Court of Federal Claims entered both an Amended Order (following Balboa and denying the government's motion to dismiss) and also an order certifying the issue for interlocutory appeal. Ins. Co. of the West v. United States, No. 99-124C (Fed. Cl. Dec. 10, 1999). This court then granted the government's petition for interlocutory appeal pursuant to 28 U.S.C. §§ 1292(d)(2).

II.

Whether the United States has waived sovereign immunity for the equitable subrogation claims of a surety is a question of law, which we therefore review without deference. See Khan v. United States, 201 F.3d 1375, 1377 (Fed. Cir. 2000).

The Miller Act requires prime contractors to post performance bonds on all federal construction contracts. See 40 U.S.C. §§ 270a. Sureties such as ICW supply these bonds. The surety guarantees that a contract will be completed in the event of the principal's default and that the government will not have to pay more than the contract price. See United States v. Munsey Trust Co., 332 U.S. 234, 244 (1947). A performance bond generally gives the surety the option of taking over and completing performance or of assuming liability for the government's costs in completing the contract which are in excess of the contract price. A surety has yet a third alternative. It may provide funds to an insolvent contractor to complete performance, the course which was followed here. See Aetna Cas. & Sur. Co. v. United States, 845 F.2d 971, 975 (Fed. Cir. 1988).

A surety bond creates a three-party relationship, in which the surety becomes liable for the principal's debt or duty to the third party obligee (here, the government). Balboa Ins. Co. v. United States, 775 F.2d 1158, 1160 (Fed. Cir. 1985). "If the surety fails to perform, the Government can sue it on the bonds." Id. Although in Balboa we reserved the question whether there was a contract or privity of contract between the government and a surety, see id. at 1161, we have since held that there is no such relationship. See Ransom v. United States, 900 F.2d 242, 244-45 (Fed. Cir. 1990); Admiralty Constr., Inc. v. Dalton, 156 F.3d 1217, 1220-21 (Fed. Cir. 1998).

Rather than relying on privity of contract, sureties traditionally have asserted claims against the government under the equitable doctrine of subrogation. This approach dates back at least to 1896, when the Supreme Court stated in Prairie State Bank v. United States, 164 U.S. 227, 231 (1896), that the plaintiff, "as surety on the original contract, was entitled to assert the equitable doctrine of subrogation." We have specified two circumstances in which a surety may succeed to the contractual rights of a contractor against the government: when the surety takes over contract performance or when it finances completion of the defaulted contract. See Admiralty Constr., Inc., 156 F.3d at 1222; Aetna Cas. & Sur. Co., 845 F.2d at 975.

Before the Supreme Court's decision in Blue Fox, it had been well-established in this court that a surety could sue the United States and recover not only any retainage but also any amounts paid by the United States to the contractor after the surety had notified the government of default by the contractor under the bond. See Balboa, 775 F.2d at 1161-63; Nat'l Sur. Corp. v. United States, 118 F.3d 1542, 1545 (Fed. Cir. 1997); Transamerica Ins. Co. v. United States, 989 F.2d 1188, 1194-95 (Fed. Cir. 1993). Notice from the surety to the government was essential, for the government owes no duty to the surety unless the surety notifies the government of the contractor's default under the bond. Fireman's Fund Ins. Co. v. United States, 909 F.2d 495, 498 (Fed. Cir. 1990). In Balboa, we framed the ultimate factual question to be resolved by the trial court as whether a payment to the contractor rather than the surety "was a reasonable exercise of the discretion conferred on the contracting agency by the terms of the contract and the applicable law and regulations." Balboa, 775 F.2d at 1165. If the contracting officer did not act reasonably, the surety could recover against the government.

III.

The government argues that the Supreme Court's decision in Blue Fox uproots the previously-settled regime we have just described. Blue Fox, however, involved a subcontractor seeking to recover from the government, not a surety. In Blue Fox, an insolvent prime contractor failed to pay Blue Fox, a subcontractor, for work Blue Fox completed on a government construction project. After the government received notice that Blue Fox had not been fully paid, the government nevertheless disbursed additional funds to the prime contractor. The Supreme Court upheld "the long settled rule" that sovereign immunity bars subcontractors from recovering from the government when general contractors become insolvent. Blue Fox, 525 U.S. at 257, 264.

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