U.S. v. Continental Casualty Co.

• Decision Date: 05 May 1975
• Docket Number: No. 74-1896,74-1896
• Citation: 512 F.2d 475
• Parties: UNITED STATES of America, Plaintiff-Appellant, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 475

512 F.2d 475

UNITED STATES of America, Plaintiff-Appellant, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellee.

No. 74-1896.

United States Court of Appeals Fifth Circuit.

May 5, 1975.

Rehearing Denied June 3, 1975.

Robert W. Rust, U. S. Atty., Mervyn L. Ames, Asst. U. S. Atty., Miami, Fla., Leonard Schaitman, Michael Kimmel, Attys., Dept. of Justice, Washington, D. C., for plaintiff-appellant.

Wesley G. Carey, Steven R. Berger, Miami, Fla., for defendant-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before DYER, MORGAN and GEE, Circuit Judges.

LEWIS R. MORGAN, Circuit Judge:

This case arises, somewhat tangentially, from a contract awarded on June 6, 1966, by the United States Army Corps of Engineers to Mike Bradford & Co., Inc. (hereafter "Bradford") and Southern Crane Corp., Inc., as a joint venture, in the amount of $273,645.00 for production of eleven hoists to be used in a lock and dam project on the Arkansas River. The joint venture immediately obtained a performance bond for $136,822.50 from appellee Continental Casualty Company (hereafter "Continental"), a corporate surety. On August 16, Bradford subcontracted with McNally Pittsburgh Manufacturing Corporation (hereafter "McNally") for fabrication of some of the equipment.

As provided by contract, McNally furnished progress reports known as "work estimates" to Bradford, which forwarded them to the government; the government paid Bradford which was in turn obliged to pay McNally. As of August 30, 1967, four payments totalling $159,872.13 had been made to Bradford; unfortunately, none of this money had been forwarded to McNally, even though that company had by then completed 66% of the fabrication. Suspecting finally that all was not as it should be, McNally notified the government on December 27, 1967, that it had not yet received payment from Bradford. In an attempt to improve what appeared to be a precarious position, McNally subsequently declared a lien on the partially completed equipment, all of which was still in its plant; the government denied the validity of the lien.

In early March, 1968, Bradford notified the government and Continental that it was financially unable to continue the project. On March 15, the government informed Bradford and Continental that the contract was terminated for default; in the same letter the government stated that McNally was still obligated to deliver the completed equipment and that all of the equipment covered by the progress payments to Bradford were the property of the United States. McNally, as noted, disagreed with this analysis, and asserted that its alleged lien took precedence over any government claim. At this point, the government took the action which has since become the focal point of this litigation: on May 27, 1968, it granted a reprocurement contract to McNally for $291,000.00 for purchase of the hoists. The contract thus ignored the $159,872.13 in payments already made to Bradford for purchase of the same equipment. On June 5, 1968, the government demanded payment from Continental of $177,227.13 (the second payment of $159,872.13 plus $17,355.00 in reprocurement costs) and on October 13, 1972, it filed suit in federal district court to enforce its claim. On cross motions for summary judgment, the court ruled in favor of Continental as to any liability in excess of the government's reprocurement costs. The court held that the government's second payment to McNally for the 66% of the equipment for which Bradford had already been paid prejudiced Continental's right of subrogation against McNally and therefore released it pro tanto from its obligation to the government. For reasons explained below, we affirm the judgment of the district court.

Ordinarily in a case such as this one, we would initially determine whether state or federal law controls our disposition of the substantive issue. Since the suit was brought in Florida, and the surety bond was made there, and Florida generally applies a lex loci contractu analysis, ¹ our choice would be between federal and Florida law. Since we find that there is no difference between the provisions of these two bodies of law in this area, however, we need not decide the choice of law question, but may proceed directly to the substantive problem.

It may be helpful to clarify at the outset precisely what is at issue here. The government insists that the right to subrogation does not accrue in favor of a surety until the surety has performed its contractual obligation, a precondition which Continental clearly did not fulfill. This proposition is true, but it is only a starting point for our analysis of this case; we must decide which party should bear the loss when the government in effect prevents the surety from performing its obligation, thereby negating any...