United States Fidelity & Guar. Co. v. United States

Decision Date16 March 1973
Docket NumberNo. 183-70.,183-70.
Citation475 F.2d 1377
CourtU.S. Claims Court

Peter J. Gagne, Boston, Mass., for plaintiffs. Samuel H. Cohen, Boston, Mass., attorney of record for plaintiffs.

Leslie H. Wiesenfelder, Washington, D. C., with whom was Asst. Atty. Gen. Harlington Wood, Jr., for defendant.




Plaintiff USF&G was a Miller Act1 surety on contract No. NBy-58920 in which Premier Contractors, Inc., the prime contractor, had agreed to make modifications to building No. 36, Barracks and Mess, at the United States Naval Station, Boston, Massachusetts. The contract was awarded on February 10, 1965, on a bid of $255,204. The plaintiff executed a payment bond in the amount of $127,602 and a performance bond in the amount of $255,204 on that same day. The prime contractor entered into performance of the contract and began to encounter financial difficulties soon thereafter.

By the summer of 1965, several of the subcontractors had begun to complain verbally of nonpayment of bills by the prime. These complaints were soon formalized by the filing of notices of nonpayment with the surety. Thus, the surety knew at this point that the prime contractor was not properly paying the labor and material obligations being generated under the contract.

By September 27, 1965, the Government had made six progress payments to the prime contractor, totaling $182,000. Just prior to the preparation of the seventh progress payment, the surety, on December 3, 1965, sent the contracting officer two telegrams notifying him that the prime had not made the proper payments to the laborers and suppliers and was, therefore, in default on the subject contract and demanding that the Government refrain from making any further progress payments to the prime contractor.

On that same day, the Navy representative telephoned the agent of the surety and notified him that there was insufficient basis on which to warrant the stopping of further progress payments to the prime, and that the work on the site was progressing and was expected to be completed shortly. A telegram to this effect was sent to confirm the telephone conversation. Thereafter, on December 8, 1965, the seventh progress payment was made to the prime contractor for $29,000.

On December 9, 1965, the Navy sent the surety a letter notifying it that the Government did not consider the prime to be in default on the contract, and that the nonpayment of bills was considered a matter between the surety and the prime. The surety responded on December 17, 1965, in a letter in which it reaffirmed its demand that no further payments be made to Premier and advising the contracting officer that it had notice of unpaid bills in excess of its liability on the payment bond, including three lawsuits filed by the subcontractors against Premier and the plaintiff-surety.

Approximately 3 weeks later, on January 10, 1966, the Navy notified the prime contractor that it would make no further progress payments until it could be shown that the Government would not sustain liability to subcontractors. Premier was likewise informed that its progress was now considered unsatisfactory and unless this was remedied by January 17, 1966, the contract would be closed out by a deductive change order with new contracts to be let in order to finish the project. This action would serve effectively to terminate the contract.

Premier responded to this letter by informing the Government that without further progress payments it would be unable to complete the contract. The surety likewise told the Navy that in the event of a default by the prime it would not complete the project, risking possible liability under its performance bond.

Following the receipt of these letters, the Navy on January 18, 1966, issued a change order deleting the work yet to be finished on the project, thereby reducing the total contract price by some $18,585. At the same time, the Navy entered into direct contracts with several of the subcontractors to finish the work on the project at a cost approximately the same as that saved by canceling the contract with Premier. Thus, the surety suffered no liability on the performance bond.

On January 16, 1966, the plaintiff-surety filed a suit in interpleader in the District Court of Massachusetts (Civ. Action No. 66-175-C) in which it deposited $127,602, the limit of its obligation under the payment bond. This amount was used to pay, on a pro rata basis, $165,090 in unpaid bills, plus interest. The difference was not paid by the surety and has not been paid by Premier.

On January 3, 1967, the Internal Revenue Service (IRS) served the Navy with a notice of a levy of $7,946.78 for taxes owed by the contractor. This amount was paid by the Navy out of funds still unexpended under the contract.

As the case comes before the court, it is in a somewhat unusual form. The original petition was filed by the plaintiff-surety joining all 23 subcontractor laborers and materialmen with unpaid claims as co-plaintiffs. In the petition, United States Fidelity & Guaranty Co. claimed that the $29,000 progress payment made December 8, 1965, by the Navy was improper since the surety had given the Navy adequate notice of the unpaid bills. Therefore, payment to the prime, despite this notice was urged as violation of the surety's right of subrogation. The surety likewise contended that the payment to the IRS of the portion of the funds unexpended under the contract was improper since either the surety or the subcontractors had a prior right to those funds ahead of the IRS. The surety also claimed that there was approximately $25,000 left unexpended under the contract to which it or the subcontractors have a prior right. In its answer, the Government asserted that the amount unexpended under the contract was only $4,445.22 after the tax levy and liquidated damages were deducted. This contention has not been refuted by the plaintiffs and has apparently been accepted as true by them since that time.

The Government's initial response to this suit was the filing of a motion to dismiss all the plaintiffs but the surety for lack of standing to sue. This court subsequently suspended action on the motion until the surety's claim was disposed of by the court. This issue must now be dealt with along with the merits of the various claims raised by the plaintiffs.

The Government has also filed a contingent cross-claim against the third-party contractor (Premier), should it be found liable with respect to the making of the December 8, 1965 progress payment.

The claims presented by the plaintiffs divide into three distinct issues. First, the court must decide if the $29,000 progress payment made over the surety's protest was proper or a violation of the surety's right of subrogation. Second, the court must consider the relative priorities between the plaintiffs and defendant with respect to the $7,946.78 paid by the Navy to the IRS to cover tax obligations owed by the prime contractor. Finally, the court must decide which of the parties has a prior right to the $4,445.22 still held by the defendant and unexpended under the contract. This issue really concerns the measure of the rights subcontractors have to assert an equitable claim against the United States, and is linked closely to the issue raised by the Government's motion to dismiss the subcontractors for not having standing to sue at all. This last issue will be dealt with first.

The Government in its briefs and on oral argument has conceded that the $4,445 still unexpended under the subject contract is not its to keep. The United States clearly has no further interest under the contract. The buildings are complete and all the pertinent debts owed by the contractor to the Government in the way of taxes have been paid. In this position, the defendant is merely a stakeholder of the retained fund. The issue is, quite simply, to whom should the Government pay this fund? The fund would ordinarily be owed to the prime contractor had it paid all of its obligations to the subcontractors, but when the Government is in the position of a stakeholder, it is not free simply to pay the contractor when the surety has given adequate notice of other competing claims to the fund. Fireman's Fund Ins. Co. v. United States, 421 F.2d 706, 190 Ct.Cl. 804 (1970); Home Indem. Co. v. United States, 376 F.2d 890, 180 Ct.Cl. 173 (1967); Newark Ins. Co. v. United States, 169 F. Supp. 955, 144 Ct.Cl. 655 (1959). The Government in this situation must ordinarily await a judicial determination or an agreement between the parties before it may safely pay a contested amount.

Under the facts in this case, it is also quite clear that the surety has no claim of priority to the fund unexpended under this contract. Even though the surety was not required to make any payments on its performance bond, it did deposit the full value of its payment bond in the Massachusetts District Court. As it turned out, the payment bond was insufficient to cover all of the subcontractors' claims, so there still remains $43,657.57 in debts incurred by the prime contractor which were not and have not been paid. In North Denver Bank v. United States, 432 F.2d 466, 193 Ct.Cl. 225 (1970), this court followed the rule laid down in American Sur. Co. v. Westinghouse Elec. Mfg. Co., 296 U.S. 133, 56 S.Ct. 9, 80 L.Ed. 105 (1935), in which it was held that the surety was required to show that it had fully paid the claims of the laborers and materialmen arising out of the contract before it could share in the unexpended sums retained under the contract. See also, National Union Fire Ins. Co....

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