American Fidelity Fire Insurance Co. v. United States

• Decision Date: 16 April 1975
• Docket Number: No. 176-73.,176-73.
• Citation: 513 F.2d 1375
• Parties: AMERICAN FIDELITY FIRE INSURANCE CO. v. The UNITED STATES v. Ernst H. BRANDT, III, Third-Party.
• Court: U.S. Claims Court

513 F.2d 1375

AMERICAN FIDELITY FIRE INSURANCE CO. v. The UNITED STATES v. Ernst H. BRANDT, III, Third-Party.

No. 176-73.

United States Court of Claims.

April 16, 1975.

Kent Leeds Vallette, Beverly Hills, Cal., attorney of record, for plaintiff.

Bernard M. Brodsky, Washington, D. C., with whom was Asst. Atty. Gen. Carla A. Hills, New York City, for defendant. Leslie H. Wiesenfelder, Washington, D. C., of counsel.

Ernst H. Brandt, III, third party, pro se.

Before DAVIS, KASHIWA and KUNZIG, Judges.

KASHIWA, Judge.

This is a suit seeking reimbursement from the Government of payment of $15,900 made by plaintiff surety to a subcontractor on a payment bond. The plaintiff surety and the Government are here on cross motions for summary judgment. For the reasons stated below, we hold that the plaintiff surety may recover $14,055.40, the amount the Government paid the contractor, but not the retainage of $1,990.72 withheld by the Government. We further hold for the Government and against the contractor who is a third-party defendant herein in the amount of $14,055.40.

Contract N62474-72-C-6604 was awarded on November 1, 1971, by the Department of the Navy to Ernst H. Brandt, III, d/b/a Variant Mechanical Contractors (hereinafter referred to as Variant or contractor) for Interim Repairs to Refractory in Boilers 48 and 50, Building 653, Naval Air Station, North Island, San Diego, California. The total amount of the contract was $15,900 which was later increased to $16,046.12. Pursuant to the Miller Act, 40 U.S.C. §§ 270a-270d (1970), amending 49 Stat. 793-794 (1935), plaintiff surety on November 22, 1971, executed a performance bond for $15,900 and a payment bond for $7,950. On February 14, 1972, Variant subcontracted the entire work to Marine Boiler Repair, Inc. (hereinafter referred to as Marine Boiler). On March 9, 1972, the Government informed Variant that the work was complete and that it was accepted as of March 3, 1972.

On April 21, 1972, the Government received a letter from the plaintiff surety dated April 19, 1972, demanding that any monies due under the contract be distributed to and placed with plaintiff surety. The text of the letter appears below.¹ On May 3, 1972, the Government responded and stated that it could not comply with plaintiff surety's request. The Government's reply letter appears below.²

On May 12, 1972, the Government made a partial payment of $14,055.40 to Variant. No other sums have been disbursed under this contract. On May 16, 1972, Marine Boiler presented its claim to plaintiff surety for $16,220 for its performance of the work. Ernst H. Brandt, III, d/b/a Variant Mechanical Contractors, filed a petition in bankruptcy on June 26, 1972, and received a discharge in bankruptcy on October 30, 1972. On August 9, 1972, and on January 1, 1973, plaintiff surety made payments to Marine Boiler totaling $15,900. On November 2, 1972, Variant's trustee in bankruptcy requested that the Government pay to him as trustee the contract retainage of $1,990.72. The trustee has not filed a third-party petition asserting a claim to the $1,990.72.

On March 28, 1973, plaintiff sued Marine Boiler in California Superior Court to recover $7,950 of the $15,900 paid on the ground that plaintiff only intended to pay the $7,950 penal amount of the performance bond, the excess of $7,950 having been paid by mistake.³ The case is still pending in the California Superior Court. On June 18, 1973, plaintiff surety filed its petition in this court. On September 6, 1973, the Government filed in this case its contingent cross claim against Ernst H. Brandt, III, d/b/a Variant Mechanical Contractors, and the trustee of his estate in bankruptcy.⁴

The questions involved herein are the following: (1) Does plaintiff surety have standing to sue? (2) Was plaintiff surety's notice of April 19, 1972, to the Government such that it made the Government a stakeholder so that the subsequent payment of $14,055.40 by the Government to the contractor was illegal? (3) Is plaintiff surety entitled to recover the retainage of $1,990.72? (4) Are the contractor and the trustee in bankruptcy liable to the Government to the extent plaintiff surety is entitled to recovery?

The question of standing to sue is raised by the Government because of the rule that in order for a surety to share in the fund unexpended under the contract, it must first pay all of the claims of the laborers and materialmen. Great American Insurance Co. v. United States, 492 F.2d 821, 824, 203 Ct.Cl. 592, 598 (1974); United States Fidelity & Guaranty Co. v. United States, 475 F.2d 1377, 1381, 201 Ct.Cl. 1, 8 (1973); American Surety Co. v. Westinghouse Electric Manufacturing Co., 296 U.S. 133, 137, 56 S.Ct. 9, 80 L.Ed. 105 (1935); North Denver Bank v. United States, 432 F.2d 466, 469, 193 Ct.Cl. 225, 230 (1970). The principle is well stated at page 137 of 296 U.S., 56 S.Ct. 11 of American Surety Co., supra:

Liability to pay was ended, but equities growing out of the suretyship relation survived in undiminished force. Acquittance under the bond did not leave the surety at liberty to prove against the assets of the insolvent principal on equal terms with the materialmen, still less to go ahead of them. The settled principles of the law of suretyship forbid that competition. Jenkins v. National Surety Co., 277 U.S. 258, 266, 48 S.Ct. 445, 12 L.Ed. 874. A surety who has undertaken to pay the creditors of the principal, though not beyond a stated limit, may not share in the assets of the principal by reason of such payment until the debts thus partially protected have been satisfied in full. This is the rule where the right to a dividend has its basis in the principle of equitable subrogation. "A surety liable only for part of the debt does not become subrogated to collateral or to remedies available to the creditor unless he pays the whole debt or it is otherwise satisfied." United States v. National Surety Co., 254 U.S. 73, 76, 41 S.Ct. 29, 30, 65 L.Ed. 143 * * * Footnote omitted.

In this case the total claim of Marine Boiler was $16,220 and plaintiff surety paid $15,900; therefore, the excess claim over the amount received by the subcontractor is $320.⁵ Since the amount is so minor, we assume that plaintiff surety will forthwith pay the same to Marine Boiler. We shall condition the recovery by plaintiff surety upon the filing with the Clerk of this court evidence of payment to Marine Boiler of the said $320. A similar conditional method was adopted by this court in North Denver Bank, supra, 432 F.2d at 467, 193 Ct.Cl. at 227-228.

We now turn to the main question of the liability of the Government to plaintiff surety for the payment of $14,055.40 made to the contractor after the Government received notice from plaintiff surety. Plaintiff surety's letter of April 19, 1972, was a demand that monies due under the contract be "distributed to and placed with American Fidelity Fire Insurance Company." Defendant's response dated May 3, 1972, informs the plaintiff that the Navy could not comply with the request. On May 12, 1972, the Government made the payment of $14,055.40 to the contractor.

Several cases of this court have considered the Government's role as a stakeholder. In Great American Insurance Co., supra, 492 F.2d at 824-825, 203 Ct.Cl. at 598-599, this court carefully commented on the Government's role as a stakeholder as follows:

* * * We have repeatedly held that the surety who satisfies the contractor's obligations to pay laborers and materialmen under the payment bond has an equitable interest, superior to the interest of the contractor's assignee or the contractor's trustee in bankruptcy, in the unpaid contract balance held by the Government as a stakeholder. * * *

* * * * * *

* * * As in our previous decisions on this point, we hold that the Government improperly abandoned its role as a stakeholder and elected to decide the merits of the conflicting claims by paying the amount in dispute to the assignee without a valid reason for doing so. * * *

In The Home Indemnity Co. v. United States, 376 F.2d 890, 893-894, 180 Ct.Cl. 173, 178 (1967), this court stated:

When the contract involved here was completed, the Government was the stakeholder of the final payment or security for which there were two contending claimants, the surety and the contractor. In view of plaintiff's equitable rights in the fund, which were superior to those of the contractor, the Government had no right as a stakeholder to settle the question unilaterally by paying the fund to the contractor. * * * Footnote omitted.

The language of this court in Newark Insurance Co. v. United States, 169 F.Supp. 955, 957, 144 Ct.Cl. 655, 658-659 (1959), was more explicit:

Surely a stakeholder, caught in the middle between two competing claimants, cannot, in effect, decide the merits of their claims by the mere physical act of delivering the stake to one of them. If his position as stakeholder becomes uncomfortable, and the claimants do not take steps to get a judicial solution of the question, the law has provided him with an interpleader proceeding by which he can deposit the stake in court and walk out free of the annoyance of being in the middle.

If it is made to appear that the Government's officials, after due notice of the facts giving rise to an equitable right in the plaintiff surety company, and of the plaintiff's assertion of such a right, paid out, without a valid reason for so doing, the money in question to someone other than the plaintiff, the plaintiff will be entitled to a judgment.

See United States Fidelity & Guaranty Co., supra; Fireman's Fund Insurance Co. v. United States, 421 F.2d 706, 190 Ct.Cl. 804 (1970); National Surety Corp. v. United States, 319 F.Supp. 45 (N.D. Ala.1970); Argonaut Insurance Co. v. United States, 434 F.2d 1362, 193 Ct.Cl. 483 (1970).

We have to then determine whether the Government was a stakeholder under the circumstances of this case. With relation to...