Balboa Ins. Co. v. U.S.

• Decision Date: 28 October 1985
• Docket Number: No. 85-823,85-823
• Citation: 775 F.2d 1158
• Parties: 33 Cont.Cas.Fed. (CCH) 74,051 BALBOA INSURANCE COMPANY, Appellant, v. The UNITED STATES, Appellee. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1158

775 F.2d 1158

33 Cont.Cas.Fed. (CCH) 74,051

BALBOA INSURANCE COMPANY, Appellant, v. The UNITED STATES, Appellee.

Appeal No. 85-823.

United States Court of Appeals, Federal Circuit.

Oct. 28, 1985.

Jeff B. Slagle, Atlanta, Ga., argued for appellant. With him on brief was Dewitte Thompson.

Sara V. Greenberg, Commercial Litigation Branch, Dept. of Justice, Washington, D.C., argued for appellee. With her on brief were Richard K. Willard, Acting Asst. Atty. Gen., David M. Cohen, Director and Sandra P. Spooner, Washington, D.C.; Susan D. Warshaw, Trial Atty., Dept. of Navy, Washington, D.C., of counsel.

Before RICH and KASHIWA, Circuit Judges, and JACK R. MILLER, ^* Senior Circuit Judge.

JACK R. MILLER, Senior Circuit Judge.

This is an appeal by a Miller Act surety from a partial summary judgment by the Claims Court (No. 6-82C (Oct. 4, 1984) ) denying the surety's claim for the recovery of a progress payment of $23,163.50, alleged by the surety to have been improperly paid the prime contractor by the Government after it had notified the Government that the contractor was in default. We vacate and remand for further proceedings.

BACKGROUND

Balboa Insurance Company ("Balboa") was the surety for the contractor, Chemical Engineers & Constructors, Inc. ("CEC"), on contract N62467-79-C-2604 ("contract") entered into August 8, 1979, for alterations to an existing structure at the Naval Training Center, Orlando, Florida. Balboa provided CEC Miller Act (40 U.S.C. Secs. 270a- The fifth payment, at issue here, was requested from the Government by CEC on January 30, 1980. According to Navy interoffice memoranda, the amount of completed performance under the contract at that time was 91%. Payment was authorized on February 1, 1980. Balboa received written notice by early February that led it to believe that CEC was in financial straits and would not be able to fulfill its payment and performance obligations. On February 14, 1980, it addressed a letter to this effect to the Contracting Officer (received the next day) demanding that no further contract funds be released without its consent. A Government check in the amount of $23,163.50 was issued and disbursed to CEC on February 21, 1980, nevertheless.

270d (1982) ) payment and performance bonds.

Subsequently, CEC authorized the Government to make future contract payments directly to Balboa. (The sixth progress payment check, also issued to CEC, was disputed in the Claims Court, but is not at issue in this appeal.) In June, 1980, the Government terminated the contract, and another firm completed the contract. Balboa asserted that it should have received the fifth payment check and, when the Government denied liability, sought recovery of that amount in the U.S. Claims Court. ¹

The opinion of the Claims Court was issued from the bench. The court granted the Government's motion for summary judgment and denied the Government's liability to the surety. It is from this judgment that Balboa appeals.

OPINION

A. Jurisdiction

The Government argues that because it owes no duty to protect the surety from its principal, CEC, during performance, payment to the contractor is "not an appropriate subject for judicial review to determine whether the Government considered the surety's interests." Further, it contends that a surety is similar to a subcontractor, who is not in privity of contract with the Government. Thus, it concludes that neither the Claims Court nor this court possesses jurisdiction over the suit of a surety against the United States to recover an allegedly improperly paid progress payment.

Decisions of our predecessor court and the Supreme Court make clear that a surety is not in the same position as that of a subcontractor or materialman. E.g., United Electric Corp. v. United States, 647 F.2d 1082, 1086, 227 Ct.Cl. 236, cert. denied, 454 U.S. 863, 102 S.Ct. 322, 70 L.Ed.2d 163 (1981). A suretyship is the result of a three-party agreement, whereby one party (the surety) becomes liable for the principal's or obligor's debt or duty to the third party obligee, see United States v. United States Fidelity & Guaranty Co., 236 U.S. 512, 35 S.Ct. 298, 59 L.Ed. 696 (1915). Both the obligor-principal (the prime contractor) and the surety are liable to the obligee (here, the Government), and no suretyship exists in the absence of any of the three parties. In contrast to a subcontractor, which has no obligations running directly to or from the Government, United States v. Munsey Trust Co. of Washington, D.C., 332 U.S. 234, 241, 67 S.Ct. 1599, 1602, 91 L.Ed. 2022 (1947) (and therefore possesses no enforceable rights against the United States), a surety, as bondholder, is as much a party to the Government contract as the contractor. If the surety fails to perform, the Government can sue it on the bonds. E.g., Carchia v. United States, 485 F.2d 622, 202 Ct.Cl. 723 (1973).

Although it is conceivable that under certain circumstances a surety could assert rights against the Government under the third-party beneficiary rule, see Montana Bank of Circle, N.A. v. United States, 7 Cl.Ct. 601, 611 (1985), or even as one in privity in contract with the Government, see Hanover Insurance Co. v. United States, 279 F.Supp. 851, 852 (S.D.N.Y.1967); cf. Martin v. National Surety Co., 300 U.S. 588, 598, 57 S.Ct. 531, 535, 81 L.Ed. 822 (1937) ("The terms of the bond are read into the contract"), the traditional means of asserting a surety's claim is under the equitable doctrine of subrogation. Almost ninety years ago, the Supreme Court stated: "That [plaintiff], as surety on the original contract, was entitled to assert the equitable doctrine of subrogation is elementary." Prairie State Bank v. United States, 164 U.S. 227, 231, 17 S.Ct. 142, 144, 41 L.Ed. 412 (1896). Later, in United States Fidelity & Guaranty Co. v. United States, 475 F.2d 1377, 201 Ct.Cl. 1 (1973) (hereinafter United States Fidelity ), the Court of Claims clarified the respective rights of subcontractors and Miller Act sureties to sue the United States by explaining:

[T]he surety was entitled to the benefit of all the rights of the laborers and materialmen whose claims it paid and those of the contractor whose debts it paid. The surety then is subrogated to the rights of the contractor who could sue the Government since it was in privity of contract with the United States. The surety is likewise subrogated to the rights of the laborers and materialmen who might have superior equitable rights to the retainage but no right to sue the [United States].

475 F.2d at 1382.

The Government further contends that neither the Claims Court nor this court has jurisdiction over a claim by a surety for non-retained funds, as opposed to those not yet disbursed. It premises this argument on the assertion that

[C]ases involving a surety's claim to retainages, ... in which the Government's role has been described as that of a "stakeholder," are readily distinguishable from this action, since those cases involve rights arising through subrogation, upon satisfaction by the surety of outstanding subcontractor claims.... The concept of the United States as a stakeholder does not arise in a case such as this where the competing claims are those of the surety vis-a-vis the contractor. Rather, the theory is only applicable where the competing interests are those of the surety on the one hand and an assignee of the contractor on the other.

This assertion is untenable.

The Government's reasoning, that in this case the United States was not in the position of a "stakeholder" of the funds it had already disbursed to CEC, is based on its distinguishing cases in which the United States was found to be a "stakeholder" and the surety sought only the recovery of a retainage still in the possession of the Government. We are not persuaded that a difference exists for the purposes of jurisdiction. When a contractor defaults under the contract, the obligation of the surety then arises under its performance and payment bonds. When the surety then finances the contract to completion, it is subrogated to the contractor's property rights in the contract balance. Pearlman v. Reliance Insurance Co., 371 U.S. 132, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962); Great American Insurance Co. v. United States, 481 F.2d 1298, 1308, 202 Ct.Cl. 532 (1973) (hereinafter Great Insurance Co.). Upon subrogation, a surety's rights relate back to the date of the execution of the surety bond. Fidelity and Deposit Co. v. United States, 393 F.2d 834, 837, 183 Ct.Cl. 908 (1968). In Great American Insurance Co. v. United States, 492 F.2d 821, 203 Ct.Cl. 592 (1974) (hereinafter Great American Insurance Co.), (a case involving a suit to recover funds the surety alleged had been wrongfully disbursed), the Court of Claims, stated that

[W]hen plaintiff [the surety] notified defendant of the unpaid claims of laborers and materialmen and asserted a claim to the unpaid contract balance, the defendant still held [as yet unpaid funds]. At that time, the Government asserted no claim to the [funds] so that the Government held that amount as a stakeholder with full knowledge that the surety and the assignee claimed a right to the money.

492 F.2d at 825.

We agree with the conclusion of the Court of Claims that, upon notification by the surety of the unsatisfied claims of the materialmen, the Government became a stakeholder with respect to the amount not yet expended under the contract that it holds at the time of notification of default. However, we can discern no reasonable basis for the Government's distinction between retainages and progress payments when, as in this case, the surety informed the Government of the contractor's alleged breach before the payment was disbursed. American Fidelity Fire Insurance Co., 513 F.2d at 1379-81. Whether and under what circumstances the Government chooses to disburse the progress payment in dispute pertains not to the issue of jurisdiction, but rather, to...