Home Indemnity Company v. United States

Citation376 F.2d 890
Decision Date12 May 1967
Docket NumberNo. 29-66.,29-66.
PartiesThe HOME INDEMNITY COMPANY v. The UNITED STATES.
CourtCourt of Federal Claims

Edward Gallagher, Washington, D. C., for plaintiff.

Edward L. Metzler, Washington, D. C., with whom was Asst. Atty. Gen. Barefoot Sanders, for defendant.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON and NICHOLS, Judges.

ON DEFENDANT'S MOTION TO DISMISS PETITION OR FOR JUDGMENT ON THE PLEADINGS AND PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

COWEN, Chief Judge:

In May of 1963, Wayne Gangwish contracted with the United States through the Bureau of Land Management of the Department of the Interior to plow and seed some 15,000 acres of rangeland in Nevada at an estimated price of $64,779. Plaintiff, a surety company, issued payment and performance bonds pursuant to the Miller Act, 49 Stat. 793 (1935), as amended, 40 U.S.C. §§ 270a-270d (1964 ed.) for the contract. Plaintiff now seeks to recover from the Government a contract payment alleged to have been made improperly to Gangwish.

On March 5, 1964, plaintiff wrote the contracting officer that it was receiving claims from suppliers on the job and that plaintiff's letters to the contractor had remained unanswered. Plaintiff also sought information as to the status of the contract work and asked whether the Government knew of any unpaid claims. The contracting officer replied on March 9, 1964, forwarding the information requested and stating that he had been notified that the contractor had not paid the Standard Oil Company of California, which was encountering difficulties in collecting the account from the contractor.

The contractor, Gangwish, satisfactorily completed the contract on March 11, 1964, and signed and delivered a release. As a result, on April 7, 1964, $6,210.66 in retainages remained due under the contract.

On April 7, 1964, plaintiff's attorneys advised the contracting officer in writing that two suppliers, Cesco Contractors Equipment Supply Company and Standard Oil Company of California, had filed claims with plaintiff in the amount of $9,445.06 on their unpaid accounts for material furnished to the contractor. In view of such unpaid claims, plaintiff then demanded that "the balance of the contract funds be retained pending settlement of the unpaid job expenses." On April 9, 1964, the contracting officer wrote the Mutch Oil Company, acknowledging the receipt of its claim against Gangwish for materials supplied for use on the contract and furnishing information regarding the terms of the payment bond executed by plaintiff.

On April 10, 1964, the contracting officer responded to plaintiff's written demand of April 7, 1964, and stated that, since the withholding of money otherwise due a contractor involved complicated legal issues, he was submitting the question to the Comptroller General.

By letter of June 16, 1964, the Assistant Comptroller General advised the Bureau of Land Management that, since the contractor had completed the work, it was entitled to be paid the balance due regardless of outstanding claims against him for labor and material. In the same letter, the agency was authorized to certify the balance due on the contract for payment to the contractor. Consequently, payment of the contract balance was made directly to the contractor on June 23, 1964. Plaintiff first learned of the Comptroller General's ruling and the payment to Gangwish about July 13, 1964, when it sought information from the contracting officer for use in connection with a contemplated suit against the contractor. Some 13 months later, plaintiff paid the two materialmen about $9,000 for material furnished the contractor to complete the contract.

Plaintiff now seeks to recover the $6,210.66 which the Government paid to the contractor. Relying upon this court's decision in Newark Ins. Co. v. United States, 144 Ct.Cl. 655, 169 F.Supp. 955 (1959), plaintiff maintains that, in the light of the facts we have recited above, the Government became liable to it by making the final payment to the contractor. We agree.

The rights of the surety in the final contract payment have long been recognized. Prairie State Nat. Bank of Chicago v. United States, 164 U.S. 227, 231-232, 17 S.Ct. 142, 41 L.Ed. 412 (1896); Henningsen v. United States Fid. & Guar. Co., 208 U.S. 404, 410, 28 S.Ct. 389, 52 L.Ed. 547 (1908); Pearlman v. Reliance Ins. Co., 371 U.S. 132, 137, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962). In Prairie State Nat. Bank, the Supreme Court quoted with approval the following statement from a state case:

The law upon this subject seems to be, the reserved per cent. to be withheld until the completion of the work to be done is as much for the indemnity of him who may be a guarantor of the performance of the contract as for him for whom it is to be performed. And there is great justness in the rule adopted. Equitably, therefore, the sureties in such cases are entitled to have the sum agreed upon held as a fund out of which they may be indemnified, and if the principal releases it without their consent it discharges them from their undertaking.

Id. 164 U.S. at 239, 17 S.Ct. at 147. The contract itself reserves to the Government the right to withhold payments under the contract if laborers and mechanics are unpaid and to apply any balance owing to the contractor toward the payment of their claims. Thus, the contract retainage is a security held by the Government for the protection of itself and the surety "just as though the contractor had pledged so many Liberty Bonds." Town of River Junction v. Maryland Cas. Co., 110 F.2d 278, 281, 134 A.L.R. 727 (5th Cir.), cert. denied, 310 U.S. 634, 60 S.Ct. 1077, 84 L.Ed. 1404 (1940).

The defendant contends quite correctly that the surety's right is only a potential one which does not become an actuality until the surety satisfies a debt of its principal. However, the surety's rights of subrogation relate back to the date of the execution of the surety bonds, and the contractor can give no one a greater right in the retained percentages than that of the surety. Once the contractor's claims are satisfied by the surety, it is entitled to look to the retained fund for reimbursement. Nat'l Sur. Corp. v. United States, 133 F.Supp. 381, 384, 132 Ct.Cl. 724, 728-729 (1955); Continental Cas. Co. v. United States, 169 F.Supp. 945, 947, 145 Ct.Cl. 99, 103 (1959).

On April 7, 1964, when plaintiff demanded that the balance of contract funds be retained pending settlement of the unpaid claims of materialmen, the defendant had written notice that the contractor had defaulted on his payment bond by failing to pay materialmen's claims which exceeded the balance due on the contract. At that point, the defendant should have known that the contractor no longer had any property rights in the contract fund. Royal Indemnity Co. v. United States, 93 F.Supp. 891, 899, 117 Ct.Cl. 736, 755 (1950); Atlantic Ref. Co. v. Continental Cas. Co., 183 F. Supp. 478, 482 (W.D.Pa.1960); United States Fid. & Guar. Co. v. Triborough Bridge Authority, 297 N.Y. 31, 35-36, 74 N.E.2d 226, 227-28 (1947); 4 Corbin, Contracts § 901.

In Pearlman v. Reliance Ins. Co., supra, it was argued that, since the Miller Act requires a public contract surety to secure both a payment and a performance bond, the principles of law enunciated in Prairie Bank and Henningsen were no longer applicable in situations where the contractor has not defaulted in performance of the contract. The Supreme Court rejected that contention and held that the surety's rights of subrogation and property interest in the fund retained by the Government exist when...

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