District of Columbia v. Aetna Insurance Company

• Decision Date: 26 May 1983
• Docket Number: No. 82-541.,82-541.
• Citation: 462 A.2d 428
• Parties: DISTRICT OF COLUMBIA, Appellant, v. AETNA INSURANCE COMPANY, Appellee.
• Court: D.C. Court of Appeals

Page 428

462 A.2d 428

DISTRICT OF COLUMBIA, Appellant, v. AETNA INSURANCE COMPANY, Appellee.

No. 82-541.

District of Columbia Court of Appeals.

Argued January 25, 1983.

Decided May 26, 1983.

Lutz Alexander Prager, Asst. Corp. Counsel, Washington, D.C., with whom Judith W. Rogers, Corp. Counsel, and Charles L. Reischel, Deputy Corp. Counsel, Washington, D.C., were on the brief, for appellant.

Edward Graham Gallagher, Washington, D.C., for appellee.

Before FERREN, PRYOR and TERRY, Associate Judges.

PRYOR, Associate Judge:

This is an appeal from a grant of summary judgment in favor of Aetna Insurance Company (Aetna), the surety under a construction contract involving the District of Columbia. There being no factual issues alleged, our review is limited to whether, as a matter of law, a performance bond surety for one of two public works projects involving the same contractor, upon default of the contractor on one job and full performance by the surety, is subrogated to the rights and remedies against the contractor that the District would have had if it had completed the project itself. The trial court ruled that the surety could property assert its right of subrogation. Finding no error, we affirm.

I

CSH Contractors, Inc. (CSH) posted performance and payment bonds to cover a contract that it entered into with the District's Department of General Services to build a firehouse.¹ Aetna, the appellee, served as surety on these bonds. The performance bond obligated Aetna to complete the contract or pay a liquidated sum if CSH defaulted on performance. Similarly the payment bond required the surety to pay suppliers, subcontractors, and employees if the contractor failed to pay them. Under a separate contract with the District's Department of Environmental Services, CSH agreed to build a water pumping station. As with the firehouse contract, performance and payment bonds were executed. However, Aetna was not the surety in the latter agreements. CSH successfully performed its obligation under the water pumping station contract, but in April of 1978, defaulted on the firehouse project. Aetna, pursuant to its role as surety, completed the project on April 30, 1979. The District released the firehouse contract retainages² of $122,844.70 to Aetna; however, Aetna's cost of performance was in excess of this amount. Aetna expended $380,672.70 under its performance bond obligations; in addition, it paid $149,535.15 to subcontractors and suppliers who had furnished labor and materials to CSH for use on the firehouse project but whom CSH had not paid. During the course of its performance on the firehouse project, Aetna mailed notices to the District government asserting its right to the water pumping station retainages. In August and October of 1978, respectively, Aetna wrote to the contracting officers of the Department of General Services and Department of Environmental Services demanding that the water pumping station retainages be released to it and not the contractor. The record reveals that, except for the contractor, there was no other claimant to the money. Disregarding Aetna's notices and asserting no claim of its own, the District, over a year after Aetna's completion of the firehouse project, disbursed payment to the president of CSH.

Aetna filed suit against the District asserting, by reason of the losses sustained in the firehouse contract, that it was subrogated to the rights of the District government against CSH, including the right to setoff the loss on the firehouse contract against the retainage on the water pumping station contract. Summary judgment was entered for Aetna on this question and the District of Columbia appeals.

II

Subrogation is the entitlement of one who has been compelled to satisfy an obligation (either the payment of money or contract performance) which was the responsibility of another, to a cession of all the remedies which the creditor might have against the other. H. SHELDON, LAW OF SUBROGATION 10 (1882); see Pearlman v. Reliance Insurance Co., 371 U.S. 132, 136-37, 83 S.Ct. 232, 234-35, 9 L.Ed.2d 190 (1962); Mungall, The Buffetting of the Subrogation Rights of the Construction Contract Bond Surety by United States v. Munsey Trust Co., 46 Insurance Counsel Journal 607 (1979) (hereafter cited as Mungall).³ In the present context "[t]he elements necessary for a successful application of the subrogation principle are:

1. An obligation of the contractor to the owner;

2. The failure of the contractor to perform that obligation;

3. Rights in the owner arising from the contractor's failure to perform;

4. The performance by the surety pursuant to the suretyship of the obligation which the contractor has failed to perform.

When these elements exist the surety is substituted for the owner with respect to the rights which the owner has against the contractor as a result of the latter's failure to perform." Mungall, supra, at 607; see also Pearlman v. Reliance Insurance Co., supra, 371 U.S. at 136-37, 83 S.Ct. at 234-35, citing Hampton v. Phipps, 108 U.S. 260, 263, 2 S.Ct. 622, 623, 27 L.Ed. 719 (1883).

In the uncontroverted circumstances of this case, we observe that CSH had a contractual obligation to construct a firehouse for the District of Columbia. Although it had previously completed the construction of a water pumping station pursuant to an independent agreement, it nonetheless failed to complete the firehouse. As a consequence, Aetna, performing as surety, finished the project. Our inquiry is therefore focused upon Aetna's claim for monies which would otherwise be owed by the District to CSH for work which was done on the pumping station and was unrelated to the default.

It seems clear that a government entity which has encountered the default of a construction contract, has the same right "which belongs to every creditor, to apply the unappropriated monies of his debtor in extinguishment of the debts due him." Gratiot v. United States, 40 U.S. (15 Pet.) 336, 370, 10 L.Ed. 759 (1841), quoted in United States v. Munsey Trust Co., 332 U.S. 234, 239, 67 S.Ct. 1599, 1601, 91 L.Ed. 2022 (1947); Pearlman v. Reliance Insurance Co., supra, 371 U.S. at 140, 83 S.Ct. at 236; Ammerman v. Miller, 159 U.S.App.D.C. 385, 488 F.2d 1285 (1973); Orem v. Wrightson, 51 Md. 34, 34 Am.Rep. 286 (1878). This right to setoff unrelated losses has been generally recognized without reservation. See, e.g., Pearlman v. Reliance Insurance Co., supra; Centron Corp. v. United States, 585 F.2d 982 (Ct.Cl. 1978); Project Map, Inc. v. United States, 486 F.2d 1375 (Ct.Cl. 1973); Aetna Insurance Co. v. United States, 456 F.2d 773 (Ct.Cl. 1973); Johnson Motor Trasnport v. United States, 149 F.Supp. 175 (Ct.Cl. 1957).

In confronting this question, the District does not challenge the traditional concepts of subrogation nor the remedy of setoff. Rather, it urges that in the present circumstances, the surety cannot avail itself of such relief. In taking this position, the District intimates that the right to subrogation is governed by a contractual requirement of privity between the surety and the obligee (in this case Aetna and the District Government, respectively), and absent privity, subrogation should be restricted to agreements to which the surety was a party. It is suggested that if this court should rule otherwise, such expanded claims by sureties will be encouraged, causing a multitude of legal and administrative problems for contracting governmental agencies.

It is true in the simplest form of construction agreement — a three party arrangement involving a governmental agency, a contractor and a surety for a single project — that a contractual basis for the surety's rights can be identified, because the surety is generally a party to the initial agreement. The more fundamental analysis of the right of subrogation, however, is equitable in nature and allows the surety to be viewed as the owner because he has met the responsibilities of a defaulting contractor to the owner. Fairness would dictate that the surety be accorded the owner's rights and remedies with respect to the contractor. In circumstances, like the present, where the same contractor is engaged in more than one project, it becomes clearer that it is the reach or scope of the remedy rather than the equitable right itself which is at issue. Finding no persuasive reasons to the contrary, we adopt the view that, "[t]he right of subrogation is not founded on contract. It is a creature of equity; is enforced solely for the purpose of accomplishing the ends of substantial justice; and is independent of any contractual relations between the parties." Memphis L.R.R. Co. v. Dow, 120 U.S. 287, 301-02, 7 S.Ct. 482, 488-89, 30 L.Ed. 595 (1887); see City Stores Company v. Lerner Shops of District of Columbia, Inc., 133 U.S.App.D.C. 311, 410 F.2d 1010 (1969); G. HARRIS, A TREATISE ON THE LAW OF SUBROGATION 123-24 (1889); H. SHELDON, supra at 2, 10, 107-08.

The District's reliance on the decision in Glens Falls Indemnity Co. v. American Awning and Tent Co., 55 R.I. 284, 180 A. 367 (R.I. 1935), is misplaced. That case involved a dispute between a surety and creditors of...