Continental Casualty Company v. CO Brand, Inc.

• Decision Date: 16 March 1966
• Docket Number: No. 20468.,20468.
• Citation: 355 F.2d 969
• Parties: CONTINENTAL CASUALTY COMPANY, Appellant, v. C. O. BRAND, INC., and Hartford Accident and Indemnity Company, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

355 F.2d 969 (1966)

CONTINENTAL CASUALTY COMPANY, Appellant, v. C. O. BRAND, INC., and Hartford Accident and Indemnity Company, Appellees.

No. 20468.

United States Court of Appeals Fifth Circuit.

January 25, 1966.

Rehearing Denied March 16, 1966.

John O. MacAyeal, El Paso, Tex., R. Emmett Kerrigan, New Orleans, La., Edward H. Cushman, Philadelphia, Pa. (Deutsch, Kerrigan & Stiles, New Orleans, La., Cushman & Obert, Philadelphia, Pa., Mayfield, Broaddus, MacAyeal & Perrenot, El Paso, Tex., A. Morgan Brian, Jr., New Orleans, La., Kenneth M. Cushman, Philadelphia, Pa., of counsel), for appellant.

William Duncan, El Paso, Tex., Howard B. Brown, Los Angeles, Cal., Robert V. Blade, Oroville, Cal., Brown & Brown, Los Angeles, Cal., Kemp, Smith, Brown, Goggin & White, El Paso, Tex., for appellees.

Before TUTTLE, Chief Judge, and RIVES and WISDOM, Circuit Judges.

WISDOM, Circuit Judge:

The decisive issue before the Court is the validity of the dual notice provision in the standard Capehart Act¹ payment bond executed on a form prescribed by the Secretary of Defense. This provision requires, as a prerequisite to suit on the bond, that a Capehart Act supplier give notice of default to any two of the following parties: (1) the prime contractor; (2) any one of the obligees; and (3) the surety. A Miller Act² supplier who deals with a subcontractor must give notice of default before commencing suit against the prime's surety, but is required to notify only one person, the prime contractor. The defendant-appellant contends that the plaintiffs, claimants on a Capehart Act bond, failed to give the required dual notice.³ The plaintiffs-appellees assert that the Miller Act's liberal notice provision controls Capehart Act bonds; that, accordingly, the Secretary of Defense had no authority to provide for dual notice of default.

We hold, first, that the Miller Act single notice provision should not be read into a Capehart Act bond. The Capehart Act, as amended, delegates to the Secretary of Defense authority to require Capehart payment bonds containing more stringent notice provisions than are contained in Miller Act bonds. This conclusion is not inconsistent with decisions of this Court holding that the Miller Act controls jurisdiction for actions by suppliers against the prime contractor and the surety. See Autrey v. Williams and Dunlap, 5 Cir. 1965, 343 F. 2d 730; Lasley v. United States for use of Westerman, 5 Cir. 1960, 285 F.2d 98. Second, we hold that the district court's finding that the claimants here gave the required dual notice is clearly erroneous. We reverse.

I.

Hal Hayes, Texas, Inc. was the prime contractor, "eligible bidder", on a Capehart project for the construction of 410 military housing units at Fort Bliss, Texas, at a contract price of $6,473,000. The Capehart Act and contract requires the eligible bidder: (1) to organize a corporation, termed the "mortgagor-builder", to hold title to the project until construction is completed; (2) to obtain loans from lending institutions, "mortgagee-lenders", in an amount sufficient to cover the entire cost of the project, including profit; (3) to furnish a performance bond to protect the United States and a payment bond to protect the laborers and materialmen.⁴ Complying with these requirements, Hayes organized three corporations as mortgagor-builders (referred to collectively as Nike Village), obtained the necessary financing from two lending institutions, and gave three performance and payment bonds aggregating the full contract price. Continental Casualty Company, here the defendant-appellant, was the surety on the bonds; Nike Village and the lenders were the dual obligees on the bonds.

April 30, 1959, Hayes, through Winn Contractors, Inc.⁵ entered into a written subcontract for the project's earthwork with C. O. Brand Co., an experienced contractor. The contract price was the lump sum of $148,000. Hayes knew that this figure was a gross understatement of the cost of the work. Hayes and Brand had a secret oral agreement that, regardless of the written contract, Hayes was to pay Brand on a unit-price basis for the work performed. The written contract was a sham to deceive their sureties as to the extent of their obligations and thereby protect their limited bonding position with their sureties.

Unluckily for Brand, Hayes reneged on his gentlemen's agreement and insisted on Brand's performing the written subcontract in strict accordance with its ruinous terms. Financial difficulties beset Brand. July 20, Brand wrote Winn requesting adjustment of the subcontract and estimating that $211,837.95 would be necessary to complete it. July 23, Brand wrote a similar letter to Hayes and Winn. No such letter was sent to the surety, Continental, or to the obligees on Continental's Capehart payment bond with Hayes. July 29, 1959, Brand, totally lacking in funds, unable to meet payrolls, and unable to pry loose any payments from Hayes, abandoned the job. At that time Hayes had made progress payments to Brand amounting to $134,000. Hayes called upon Brand's surety, Hartford Accident and Indemnity Company, to complete the subcontract under Brand's performance bond. Hartford refused. Hayes eventually completed the work at an expense of about $50,000.

Brand's unpaid suppliers of labor and materials brought suit against Continental on its payment bonds with Hayes, and against Hartford on its payment bond with Brand. The suppliers obtained judgment against Hartford aggregating $86,998.94. Hartford paid the judgments, taking subrogations and assignments from the suppliers. Brand then brought this action against Hayes and Continental. Hartford, as subrogee and assignee of the claims of Brand's suppliers of labor and materials, joined Brand's action against Hayes and Continental.

The district court found that Hayes had fraudulently plotted to cause Brand's financial collapse.⁶ Accordingly, the court annulled the subcontract between Hayes and Brand, found that a reasonable subcontract price would be $283,547.33, and entered judgment in quantum meruit against Hayes and Continental in the aggregate sum of $149,843.74 ($62,844.80 to Brand and $86,998.94 to Hartford). Continental appealed.

On appeal, Continental does not question the district court's finding that Hayes was guilty of fraud vis-a-vis Brand. Continental contends that Brand's agreement with Hayes to conceal the extent of their commitments worked a fraud on the surety. We do not reach this point, because we agree with Continental's contention that the claimants failed to give the dual notice required as a prerequisite to suit on a Capehart Act bond.

II.

We discuss, first, the question whether the single notice provision of the Miller Act, 40 U.S.C. § 270b(a), rather than the express dual notice provision of the Capehart payment bond, controls a suit on the bond.

A. Since 1894, the Heard Act and its successor, the Miller Act, have required contractors of public works in the United States to provide bonds for the protection of their suppliers.⁷ The Capehart Military Housing Act, as originally enacted in 1955, did not refer to the Miller Act nor did it specifically require that the eligible bidder provide a payment bond for protection of suppliers of labor and materials. Nevertheless, the Secretary of Defense and the Commissioner of Housing required the bond during the first year following passage of the Capehart Act.⁸

To clarify the relationship of Miller Act bond requirements to Capehart housing projects,⁹ Congress amended the Capehart Act, August 7, 1956, to provide:

Any such contract shall provide for the furnishing by the contractor of a performance bond and a payment bond with a surety or sureties satisfactory to the Secretary of Defense, or his designee, and the furnishing of such bonds shall be deemed a sufficient compliance with the provisions of section 270a of Title 40 The Miller Act, and no additional bonds shall be required under such section.¹⁰

This amendment to the Capehart Act intensified the ambiguous relationship between that act and the Miller Act.

The Secretary's standard bond was promulgated in 1957 after numerous meetings attended by representatives of bonding companies, the Department of Defense, the Army, Navy, Air Force, Federal Housing Administration, and interested lending institutions.¹¹ Apparently, all of the agencies read the amendment as delegating to the Secretary of Defense discretionary authority to write a payment bond especially suited to Capehart housing projects.

Section 270a of the Miller Act provides that contractors for certain public works shall furnish a payment bond. Continental points out that the notice provision in § 270b(a) is applicable only to contracts "in respect of which a payment bond is furnished under section 270a * * *." But, Continental argues, the Capehart bond is not furnished under § 270a; it is furnished under the Secretary's regulations under the 1956 amendment to the Capehart Act; therefore, § 270b(a) of the Miller Act is not applicable to Capehart bonds. The language in the 1956 amendment providing that a bond satisfactory to the Secretary "shall be sufficient compliance with § 270a of the Miller Act" does not disturb this conclusion, so the argument runs; that language means only that a single bond, the Secretary's, is required for Capehart projects. See Comment, 111 U.Pa.L.Rev. 1014, 1018 (1963).

On the other hand, Hartford and Brand contend that the amendment substitutes the Secretary's bond for the bond § 270a of the Miller Act would otherwise require; that the remaining sections of the Miller Act conferring rights established by the bond required in § 270a apply as well to a substitute bond; therefore the notice provision in § 270b(a) is applicable to Capehart bonds. Accordingly, the appellees contend, the conflicting dual notice provision which the Secretary inserts is unauthorized and void. See Comment, 49 Va.L. Rev. 174, 179-80 (1963).

B....