American Auto Insurance Co. v. United States

• Decision Date: 24 July 1959
• Docket Number: No. 5426.,5426.
• Citation: 269 F.2d 406
• Parties: AMERICAN AUTO INSURANCE CO., Defendant, Appellant, v. UNITED STATES of America, for the use and benefit of Alvah C. LUCE, d/b/a Northern Electric Service & Supply Co., Plaintiff, Appellee.
• Court: U.S. Court of Appeals — First Circuit

269 F.2d 406 (1959)

AMERICAN AUTO INSURANCE CO., Defendant, Appellant, v. UNITED STATES of America, for the use and benefit of Alvah C. LUCE, d/b/a Northern Electric Service & Supply Co., Plaintiff, Appellee.

No. 5426.

United States Court of Appeals First Circuit.

Heard March 3, 1959.

Decided July 24, 1959.

John D. Leddy, Portland, Me., for appellant.

Sidney W. Thaxter, Portland, Me., with whom Royden A. Keddy, Portland, Me., was on the brief, for appellee.

Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.

MAGRUDER, Circuit Judge (Retired).

This is an appeal by the surety on a contractor's Miller Act payment bond from a judgment against it in favor of a subcontractor. Roslyn Construction Company, to which the United States had awarded contract No. NOy-88588 for construction of "Crash Facility and Utilities" at the Naval Air Station in Brunswick, Maine, during the years 1956 and 1957, subcontracted the required electrical work to the use plaintiff, Luce, who does business as Northern Electric & Supply Co.

The subcontract between Roslyn and Luce corresponding to contract No. NOy-88588 was dated May 7, 1956. It contained the usual terms, most of which are wholly irrelevant for the present purposes. It required generally that all work described by certain specifications, including the supplying of materials and labor, be performed by Luce to the satisfaction of Roslyn, the United States Government, the Navy, and the architect. The subcontract established a job price of $7,900 and provided a procedure for approval of "extras"; two such "extras" which were thus approved increased the total amount due under the subcontract to $8,582. The payment provisions, which are central to this case, required that 90 per cent of the total value of work done during each month, as shown by a progress billing submitted on or before the last day of that month, and subject to the approval of the architect, be paid by the 15th day of the following month. Final payment (comprising the retained 10 per cent) was due within 60 days after the completion and final acceptance of the work. The entire article governing payments was subject to an overriding proviso (attached as a rider to the printed subcontract form)

"that in no event shall the Roslyn Construction Co., Inc. be Liable (sic) for payments to the sub contractor (sic) prior to 10 days of receipt by the contractor of payment from the owner on such work performed by the sub contractor (sic) under this contract."

Work under contract NOy-88588 was substantially completed December 17, 1956, and accepted by the Navy on March 18, 1957; final settlement was made between the United States and Roslyn on January 28, 1957, and the final payment was made to Roslyn on February 4, 1957. Meanwhile, Roslyn's payments to Luce were in arrears. Although Luce made progress billings to Roslyn, no bill was paid within the time allowed. The first payment was about thirteen days tardy. A payment of substantially the total due against the second and third progress billings was made almost three months after the third bill should have been paid. Roslyn failed to make any further progress payments or the final payment, so that $7,000 remains due. Luce, commencing in April, 1957, received a note and subsequent renewal notes for the amount due from Roslyn, which Luce in turn endorsed and discounted at his bank.

If this subcontract had pertained to construction work on property of a private owner, Luce would have a lien against that property of the owner to the extent of the $7,000 owed him for labor and materiel. See Maine R.S.1954, c. 178, § 34. Because the Naval Air Station is the property of the United States Government, however, the statutory lien of a materialman cannot attach. But Congress has provided substitute protection since 1894 (see 28 Stat. 278), which is presently found in the Miller Act, 40 U.S.C.A. § 270a(a) (2). The statute requires that, before any person is awarded any public work or building contract with the United States, and as a prerequisite to such an award, he must furnish (inter alia) a payment bond

"which shall become binding upon the award of the contract to such person, * * * with a surety or sureties satisfactory to the officer awarding the contract for the protection of all persons supplying labor and material in the prosecution of the work provided for in said contract for the use of each such person."

The bond which Roslyn had to furnish in order to secure its contract NOy-88588 was dated April 30, 1956, and the American Auto Insurance Company was the surety thereon. This bond was conditioned that Roslyn "shall promptly make payment to all persons supplying labor and material in the prosecution of the work provided for in said contract, and any and all duly authorized modifications of said contract that may hereafter be made, notice of which modifications to the surety being hereby waived". The bond contains no provision either requiring or excusing notice to the surety of the making, amendment, completion or discharge of any subcontract, or of the default of Roslyn in any regard.

The present litigation was begun by a complaint filed December 16, 1957, invoking the right of action given by the Miller Act, 40 U.S.C.A. § 270a et seq. Both Roslyn and the surety were named as defendants, but the court ordered Roslyn's default entered on August 8, 1958, after it failed to appear at the pre-trial conference. The case was tried without a jury, and at the end of the trial the court orally found for Luce against the surety; subsequently findings of fact and conclusions of law were filed and judgment was entered for Luce in the amount of $7,000, with interest from May 17, 1957, "the date when final payment was due under the terms of the contract between the use plaintiff and Roslyn". The surety has appealed from this judgment, contending that Luce's failure to obtain prompt payment discharged the surety from liability.

It is obvious that the obligation of a surety on a bond furnished under the Miller Act must be determined by federal law; the rule of Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, is inapplicable. The Miller Act implements a congressional policy that a bond with surety shall provide protection for persons supplying labor and materials for the construction or improvement of federal property. A suit under the Miller Act does not depend upon diversity of citizenship but is a special, federal right of action limited to the federal court.¹ Bonds given under the Miller Act are not even in the ordinary forms which would be involved in litigation in the state courts; Congress specified their conditions, and they are executed on printed blanks prescribed by the General Services Administration (for example, the bond in suit was executed on Standard Form 25a Revised November 1950), the meaning of which should not vary from state to state. There are no dangers of forum-shopping or of any unseemly deviation in rules of law which it was the policy of the Erie case to avoid.

It therefore seems that the decision of the Supreme Court in Guaranty Co. v. Pressed Brick Co., 1903, 191 U.S. 416, 24 S.Ct. 142, 48 L.Ed. 242, decided under a predecessor of the Miller Act, is fatal to the appellant's position. The subcontractor who furnished the brick to build the Denver Mint sued the contractor and the surety on the payment bond. The surety raised as a defense that it was discharged by the action of the subcontractor "in taking two promissory notes * * * for the amount of the brick company's account, then due and payable, one of said notes running for thirty days and the other for sixty days, and each bearing 10 per cent interest per annum from date". (191 U.S. at page 417, 24 S.Ct. at page 143.) The surety had not alleged that it had suffered an actual financial loss because of the subcontractor's accepting these notes. The Supreme Court answered in the negative the certified question whether the action described discharged the surety, holding that the rule automatically absolving a surety from liability because of an alteration in the contract between the principal and the obligee without the surety's consent is not applicable to bonds such as those under the Miller Act, where the surety has deliberately contracted for an uncertain obligation. This reasoning is clearly applicable to the present case: The bond executed by the surety and Roslyn is dated April 30, whereas Roslyn's subcontract with Luce was not entered into until May 7, a full week later. Thus the surety cannot claim that it entered into its obligation relying on the terms of the subcontract. The only real difference between the cases is that the Pressed Brick contract provided for a single lump sum whereas Luce was entitled to 90 per cent in progress payments, but this is not a meaningful distinction. Both cases involve an extension of time for payment, achieved by similar transactions, and the fact that the extension in Luce's case applied to several partial payments, and in Pressed Brick's case it only applied to one grand payment, is wholly irrelevant. The final result is even the same. Moreover, when the appellant surety undertook to guarantee the bond, it could not know that Luce and Roslyn would contract for progress payments. See also United States, to Use of J. B. Van Sciver Co. v. United States Fidelity & Guaranty Co., C.C.E.D. Pa.1910, 178 F. 721; United States, to Use of Noland Co., Inc. v. Maryland Casualty Co., D.C.D.Md.1941, 38 F.Supp. 479. Actual prejudice must also be shown under Maine law. Maine Central R. Co. v. National Surety Co., 1915, 113 Me. 465, 94 A. 929, L.R.A.1916A, 881.

In American Bonding Co. of Baltimore v. United States, to Use of Francini, 3 Cir., 1916, 233 F. 364, 368, upon which appellant relies, the contractor and subcontractor agreed shortly after the contract was made that, instead of cash progress payments for the amounts...