Continental Casualty Company v. United States

• Decision Date: 30 June 1962
• Docket Number: No. 16912.,16912.
• Citation: Continental Casualty Company v. United States, 305 F.2d 794 (8th Cir. 1962)
• Parties: CONTINENTAL CASUALTY COMPANY, a Corporation, Appellant, v. The UNITED STATES of America for the Use and Benefit of the ROBERTSON LUMBER COMPANY, a Corporation, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

305 F.2d 794 (1962)

CONTINENTAL CASUALTY COMPANY, a Corporation, Appellant, v. The UNITED STATES of America for the Use and Benefit of the ROBERTSON LUMBER COMPANY, a Corporation, Appellee.

No. 16912.

United States Court of Appeals Eighth Circuit.

June 30, 1962.

James L. Lamb, of Degnan, Hager, McElroy & Lamb, Grand Forks, N. D., made argument for the appellant and filed brief.

John G. Shaft, of Shaft, Benson & Shaft, Grand Forks, N. D., made argument for the appellee and filed brief.

Before VAN OOSTERHOUT and BLACKMUN, Circuit Judges, and HENLEY, District Judge.

HENLEY, District Judge.

This litigation arose out of the construction of certain housing for military personnel stationed at the Grand Forks Air Force Base, Grand Forks, North Dakota, under the housing program authorized by the Capehart Housing Act, as amended.¹ Appellee, use plaintiff below, furnished materials to the prime contractor engaged in the construction of the housing and not being paid therefor commenced this action against the prime contractor and one of the sureties on the contractor's statutory payment bond. The contractor did not defend the action. The issues between appellee and the surety were narrowed to a single question of law, and the District Court rendered summary judgment for appellee. United States for the Use and Benefit of the Robertson Lumber Company v. Progressive Contractors, Inc., et al., D.C.N.Dak., 196 F.Supp. 171. This appeal followed.

The 1956 amendment to the Capehart Act provided that all contracts for Capehart housing "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, and no additional bonds shall be required under such section."²

The bond in suit was executed on a form specifically prescribed by the contract for the construction of the housing, which form had been adopted by the Department of Defense and by the Federal Housing Commissioner. The bond contained certain provisions for notice to be given by laborers or materialmen as a condition precedent to action on the bond. Admittedly, appellee failed to give the notice required by the bond, and appellant pleaded this failure as a complete defense.

In meeting this defense appellee contended that the relationship between the Capehart Act and the Miller Act was such that a supplier of labor or materials to a Capehart housing contractor is entitled to all of the protection of the Miller Act, that the procedural provisions of the Miller Act (40 U.S.C.A. §§ 270b and 270c) extend to bonds executed under the Capehart Act, and that notice requirements inserted in a Capehart bond which are more stringent than the notice requirements of the Miller Act are invalid and are to be ignored. The notice provisions of the bond in suit are in fact more stringent than the notice requirements of the Miller Act, and appellee had met all of the requirements of that Act. Based on those premises appellee urged that the defense set up by appellant was without merit.

In attacking the judgment of the District Court appellant takes the position that although the Capehart Act refers to section 1 of the Miller Act, nevertheless a Capehart Act bond is not a Miller Act bond; that the Secretary of Defense or his designee has the power to prescribe the form and contents of a Capehart bond; that the form here used was prescribed by and satisfactory to the Department of Defense; that the notice provisions contained in the bond were valid, and that compliance therewith was a condition precedent to action on the bond.

Alternatively, appellant contends that even if the Secretary and the Federal Housing Commissioner had no right to insert in the bond notice requirements in excess of those contained in the Miller Act, nevertheless such requirements were in fact inserted, and that the liability of the surety should be measured by the terms of the instrument which it actually signed rather than by the terms of the Miller Act.

As is well known, the Miller Act, adopted in 1935, has for its purpose the protection of those who supply labor or materials for use in Government construction. Fanderlik-Locke Co. v. United States for Use of Morgan, 10 Cir., 285 F.2d 939; United States for Use and Benefit of Hopper Brothers Quarriers v. Peerless Casualty Co., 8 Cir., 255 F.2d 137; St. Paul-Mercury Indemnity Co. v. United States for Use of Jones, 10 Cir., 238 F.2d 917. The Act, which is to be construed liberally, is designed to give such suppliers the same protection that State lien laws give ordinarily to persons furnishing labor and materials for use in private construction; and since the property of the United States is not subject generally to State lien laws, the bond protection of the Miller Act is in lieu of the liens provided by State law. United States for Use and Benefit of Munroe-Langstroth, Inc. v. Praught, 1 Cir., 270 F.2d 235; United States for Use of Gibson v. Harman, 4 Cir., 192 F.2d 999; United States to Use of Acme Furnace Fitting Co. v. Ft. George G. Meade Defense Housing Corporation, D.C.Md., 186 F.Supp. 639; United States for Use of James F. O'Neil Co. v. Malan Construction Corp., E.D.Tenn., 168 F.Supp. 255.

As far as notice is concerned a Miller Act supplier who deals directly with a prime contractor is not required to give any notice as a condition precedent to a suit on the bond, although presumably he will make demand for payment before commencing his suit. Where the supplier deals with a sub-contractor, he is required to give notice to the prime if he expects to recover against the prime and the latter's surety, but in no event is a Miller Act supplier required to give notice to the surety before commencing suit or, in any event, to give notice to more than one person or entity. 40 U.S.C.A. § 270b(a).³

The purpose of the Capehart Act was to provide urgently needed housing for military personnel on Government property, and while Capehart housing is undoubtedly "Government housing," Capehart construction differs from conventional Government construction in certain significant respects.

Ordinarily, federal public works are paid for both initially and finally with federal funds. Capehart housing, on the other hand, initially is built and financed by private capital, although loans made by financial institutions to finance the construction are fully insured by the Federal Housing Administration. Both the Department of Defense and the Federal Housing Administration are concerned with the administration of the Capehart program, and the Federal Housing Commissioner has been authorized to promulgate regulations concerning the program, 12 U.S.C.A. § 1748f, which authority has been exercised, see 24 C.F. R. Part 292a.

The Capehart Act now requires both payment and performance bonds, and standard forms of those bonds have been worked out by the Department of Defense and the Federal Housing Administration, and all Capehart housing contracts call for the giving of those particular bonds, as was done in this case.

With some allowance for possible oversimplification, a typical Capehart project may be described substantially as follows:

A building contractor desiring to build Capehart housing and who has been the successful bidder for such housing, and who has made satisfactory arrangements to secure private financing, forms a corporation to take a long term lease on the Government property on which the housing is to be constructed and to execute a mortgage on the leasehold estate to the financial institution which is to lend the money required for construction purposes. This corporation, which is at all times under complete Government control, does not do the actual building of the housing units. That is done by the contractor under contract with the Government and with the corporation. The functions of the corporation are limited and to some extent nominal. It takes the lease and executes the mortgage and is a party to the construction contract. Further, it is one of the obligees named in the contractor's performance and payment bonds. In the statute, regulations, and contract documents the contractor is called the "eligible bidder," the corporation is called the "mortgagor-builder," and the lending agency is called the "mortgagee."

As the project is completed, the housing units are turned over to and operated by the Government and are occupied by military personnel. Quarters allowances previously paid to such personnel are retained by the Government and used to pay off the mortgage. When the mortgage is finally retired, the lease to the "mortgagor-builder" is terminated, and that corporation is dissolved, leaving title to the housing in the Government.

The contractor derives his profit from doing the actual building of the housing. From the Government's standpoint, advantages are seen in that federal funds are not expended for initial construction and, while the housing will be paid for eventually with federal money, that money would have been expended in any event as quarters allowances for the affected service personnel. In addition, the program may be supposed to provide a stimulus for private industry and capital.

Having made the foregoing comments with regard to the Miller Act and the Capehart Act and the program contemplated by the latter Act, we return to the question for decision which is whether the notice provisions contained in the bond in suit were valid.

In holding those provisions invalid the District Court cited Lasley v. United States for Use of Westerman, 5 Cir., 285 F.2d 98; United States to Use of Acme Furnace Fitting Co. v. Ft. George G. Meade Defense Housing Corporation, supra; and Autrey v. Williams & Dunlap, W.D.La., 185 F.Supp. 802. Although none of those cases involved the validity of the notice provisions...