Argonaut Insurance Company v. United States

• Decision Date: 11 December 1970
• Docket Number: No. 306-68.,306-68.
• Citation: 434 F.2d 1362
• Parties: ARGONAUT INSURANCE COMPANY, a Corporation, Plaintiff v. The UNITED STATES, Defendant, WELLS FARGO BANK, Third-Party Defendant, James A. A. Smith, Receiver, and Ted Watkins Construction Co., Inc., Third-Party Defendants.
• Court: U.S. Claims Court

434 F.2d 1362 (1970)

ARGONAUT INSURANCE COMPANY, a Corporation, Plaintiff v. The UNITED STATES, Defendant, WELLS FARGO BANK, Third-Party Defendant James A. A. Smith, Receiver, and Ted Watkins Construction Co., Inc., Third-Party Defendants.

No. 306-68.

United States Court of Claims.

December 11, 1970.

Gerald R. Knecht, San Francisco, Cal., attorney of record, for plaintiff. Knecht, Dingus & Boring, San Francisco, Cal., of counsel.

Mary J. Turner, Washington, D. C., with whom was Asst. Atty. Gen. William D. Ruckelshaus, for defendant.

John G. Keller, Jr., Washington, D. C., attorney of record for third-party defendant Wells Fargo. Leva, Hawes, Symington, Martin & Oppenheimer, Washington, D. C., of counsel.

W. A. McGugin, Fresno, Cal., attorney of record for third-party defendant Ted Watkins Construction Co., Inc., and the Receiver.

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

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT AND MOTION OF THIRD-PARTY WELLS FARGO FOR SUMMARY JUDGMENT AGAINST DEFENDANT

COWEN, Chief Judge.

In August of 1967, Ted Watkins Construction Co., Inc., herein Watkins, contracted with the United States through the Federal Highway Administration, Bureau of Public Roads, Department of Transportation, for the surfacing of 26.834 miles of the Klamath River National Forest Highway, in California, at a contract price of $478,842.10. Plaintiff, a Miller Act surety,¹ executed performance and payment bonds for the contract. Plaintiff now seeks to recover from defendant the final contract payment, as well as part of a progress payment made during the course of performance to Wells Fargo Bank, Watkins' assignee. Defendant challenges plaintiff's right to recover any part of either the progress payment or an unpaid balance of $151,562.82, determined to be due upon completion of the contract. Defendant has also filed a cross-claim against Wells Fargo Bank, impleaded as a third-party defendant, and asserts that if the court awards a judgment to plaintiff for any part of the progress payment, defendant is entitled to recover that amount from the bank. Wells Fargo Bank denies any liability to defendant, contends that plaintiff's claim has been discharged by plaintiff's participation in bankruptcy proceedings involving the contractor, and says that the bank's assignment entitles it to recover the entire unpaid balance due on the contract. The third-party contractor and James A. A. Smith, its receiver in bankruptcy, have filed an answer, requesting the court to determine the respective rights of the surety and the assignee bank in the contract balance held by defendant and praying that the contractor and receiver be given credit on the contractor's liability and obligation by the party whom the court finds entitled to recover.

The case comes before the court on cross-motions for summary judgment. We find there are no material issues of fact. The pertinent facts and our conclusions with respect to the bankruptcy proceedings will be discussed before our consideration of the parties' respective claims.

I The Bankruptcy Proceedings

On September 11, 1968, a week after completion and acceptance of the project, Watkins filed a petition for proceedings for an arrangement under Chapter XI of the Bankruptcy Act,² in the United States District Court, Central District of California.

While the proceeding was pending, a notice of levy for taxes owed the United States by the contractor was made upon the Federal Highway Administration. On November 27, 1968, Watkins brought an action in the bankruptcy court to require the United States to offset the taxes against the final contract payment held by the Government. Plaintiff, defendant, Wells Fargo Bank, the Federal Highway Administration, the Internal Revenue Service, and Watkins were parties in the proceeding.

In an order dated January 7, 1969, the referee permitted the offset on the ground that the right of the United States to offset the taxes against the contract balance was superior to the rights of the other parties. The order was not appealed and became final, except as it was modified.³

A Plan of Arrangement for Watkins was approved by order of the bankruptcy court on May 28, 1969. The plan included an unsecured claim by the plaintiff surety for $218,719.31, and provided for payment in the amount proved and allowed by installments over an 8-year period. Wells Fargo Bank had been scheduled as a secured creditor and therefore was not affected by the arrangement.

Wells Fargo Bank's first contention is that Section 371 of the Bankruptcy Act⁴ provides that judicial confirmation of a plan of arrangement operates to discharge all provable, unsecured debts. Since plaintiff participated in the arrangement as an unsecured creditor, the bank argues that plaintiff's claim was discharged, thereby barring plaintiff's right to recover anything in this action.

We reject this contention. Section 371 merely operates to provide a debtor with the personal defense of discharge, which the debtor may assert in a subsequent proceeding. It does not extinguish the underlying debt. Cf. Kesler v. Department of Public Safety of Utah, 369 U.S. 153, 169-171, 82 S.Ct. 807, 7 L.Ed.2d 641 (1962); Zavelo v. Reeves, 227 U.S. 625, 33 S.Ct. 365, 57 L.Ed. 676 (1913). Nor does it prevent a surety from seeking to recover a final contract payment due on a Government contract. In re Gentry Constr. Co., 200 F.Supp. 546 (E.D.Mich. 1961); In Re Dutcher Constr. Corp., 378 F.2d 866 (2d Cir. 1967).

There is no indication the bankruptcy court exercised jurisdiction over the contract funds now held by the Government, except to decide the limited question of the Government's right to offset the taxes owed by Watkins.

The Appearance and Assertion of Interest of Ted Watkins Construction Company, Contractor, and James A. A. Smith, Receiver, filed in this court on April 7, 1969, shows quite clearly that the bankruptcy court did not attempt to exercise any jurisdiction over the contract fund in dispute here. In that pleading, the contractor and receiver requested this court to determine the priority rights of plaintiff and Wells Fargo Bank in the unpaid balance due on the contract.

Wells Fargo Bank also contends that in the order of January 7, 1969, the referee determined that Watkins did not default on its contract and that plaintiff is collaterally estopped from so asserting here. Wells Fargo argues that despite plaintiff's argument that Watkins was in default, the referee ruled that Watkins had performed its contract with the Government.

The referee did not hold that Watkins had not defaulted on the contract. The referee found as a factual matter only that Watkins performed the work to the Government's satisfaction and there was not a breach of the performance bond.⁵ Since the court made no ruling on the status of the payment bond or the contract as a whole, neither of which determinations was necessary in that proceeding,⁶ the doctrine of collateral estoppel or res judicata does not preclude the court from deciding the issues presented in this case. Cromwell v. County of Sac, 94 U.S. 351, 352-353, 24 L.Ed. 195 (1876); United States v. International Building Co., 345 U.S. 502, 506, 73 S.Ct. 807, 97 L.Ed. 1182, reh. denied, 345 U.S. 978, 73 S.Ct. 1120, 97 L.Ed. 1392 (1953).

II Priority Rights in the Progress Payment and the Final Contract Payment

(A) Facts: Watkins began the contract work in August 1967, and continued until November 15, when defendant suspended work until June 1968 for the winter season.

Although the work had proceeded on schedule, Watkins had financial difficulties, which began in late 1967. On May 20, 1968, Watkins advised plaintiff surety that it was unable to pay $52,229.93 in past obligations, and requested that plaintiff advance sufficient funds to permit Watkins to complete the project. On May 23, 1968, plaintiff paid Watkins' payroll for the week ending April 17, and on June 2, plaintiff paid the April 24 payroll. On May 23, Watkins directed the Bureau of Public Roads to make all future contract payments to plaintiff.

After an investigation of the contract work and Watkins' financial condition, however, plaintiff decided not to advance any more funds to Watkins for completion of the contract.

On June 6, 1968, the Government directed Watkins to resume work on the project.

On June 7, plaintiff wrote defendant, advising that the contractor had many unpaid bills for labor and materials for which plaintiff was liable on its payment bond. Plaintiff also requested that no further payments be made to the contractor without plaintiff's consent. Defendant replied it would follow Watkins' previous instruction to send payments to plaintiff until the instructions were rescinded by the contractor.

On June 17, 1968, in consideration for a loan to finance completion of the contract, Watkins assigned all funds due and to become due on the contract to Wells Fargo Bank. Notice of the assignment, made pursuant to the Assignment of Claims Act,⁷ was given to both plaintiff and defendant. Watkins also rescinded its direction that the Government send all payments to plaintiff.

Between June 7 and July 18, 1968, plaintiff and defendant held numerous telephone conversations concerning the project. On July 18, they met in a conference, and plaintiff urged the Government to declare Watkins in default and to terminate the contract. The Government refused, after showing plaintiff performance charts which indicated Watkins had performed on schedule, and appeared capable of completing the project within the time specified in the contract. Plaintiff then asked that the Government withhold Progress Payment No. 3 in the amount of $89,884.50, which was then due for completed work and was scheduled to be paid to Wells Fargo Bank, the assignee. Defendant refused on the grounds this would throw the contract into...