Fireman's Fund Insurance Company v. United States

• Decision Date: 07 June 1973
• Docket Number: Civ. A. No. KC-3376.
• Court: U.S. District Court — District of Kansas
• Parties: FIREMAN'S FUND INSURANCE COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.

362 F. Supp. 842

FIREMAN'S FUND INSURANCE COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. KC-3376.

United States District Court, D. Kansas.

June 7, 1973.

Robert H. Foerschler, of McAnany, Van Cleave & Phillips, Kansas City, Kan., James C. Mordy, of Morrison, Hecker, Cozad, Morrison & Curtis, Kansas City, Mo., for plaintiff.

Robert J. Roth, U. S. Atty., James A. Pusateri, Asst. U. S. Atty., Kansas City, Kan., for defendant.

MEMORANDUM AND ORDER

O'CONNOR, District Judge.

This is an action between a Miller Act payment bond surety and the United States. Plaintiff, Fireman's Fund, alleges that the United States wrongfully paid the contractor (Scheven), when it was under a duty to refrain from making such payments. Plaintiff has paid certain of Scheven's suppliers and now seeks recovery for these payments to the extent of the Government's alleged improper remittances to Scheven.

There is no question that this court has jurisdiction of the parties and subject matter of the action.

Three construction projects are involved and each will be considered separately.

I. McCONNELL AIR FORCE BASE. The dispute arising out of the McConnell Air Force contract has to do with two progress payments made by the government to Scheven in the amount of $2,292.57 and $4,344.44. Plaintiff claims that it is subrogated to the first $3,928.25 of the combined amount of these payments. As is true with all three projects, there is no factual dispute. The following facts are stipulated:

1. On or about July 23, 1969, defendant, acting by and through the Procurement Division of McConnell Air Force Base, Kansas, entered into Contract No. F 14614-69-C-0236 with Fredrick Scheven, for the performance of certain work at or near said McConnell Air Force Base.

2. As required by the provisions of the Miller Act, 40 U.S.C. § 270a, Scheven, on or about July 8, 1969, secured a payment bond with himself as principal and defendant as obligee. Plaintiff is the surety on said bond, its number being SC-6164530.

3. By letter dated December 18, 1969, Mr. Gary Norton, attorney for the Swiff-Train Company, a supplier of Scheven, notified Scheven that his account with the Swiff-Train Company, in the amount of $3,928.25 for materials allegedly furnished by his client on the McConnell contract, was overdue and had been referred to the writer for collection. A copy of this letter was sent to and received by the Contracting Officer at McConnell Air Force Base.

4. On January 14, 1970, defendant delivered to Scheven a progress payment in the amount of $2,292.57.

5. By letter dated January 23, 1970, sent by certified mail to the Contracting Officer at McConnell Air Force Base, plaintiff notified said Officer that it has received notice that certain parties who had allegedly supplied materials for the McConnell project had not been paid by Scheven. Plaintiff requested that all further sums falling due under that contract be forwarded to Scheven, in care of the plaintiff, in order that appropriate application of said monies could be assured.

6. By letter dated January 30, 1970, defendant informed plaintiff that only a bank, trust company, or other financing institution could be a proper assignee of funds due on the McConnell contract.

7. By letter dated February 13, 1970, a copy of which was sent to and received by the Contracting Officer at McConnell Air Force Base, Swiff-Train Company's attorney informed plaintiff that the amount owing from Scheven was as yet unpaid, and that unless it was paid within one week, he would file suit against Scheven and plaintiff.

8. On February 26, 1970, plaintiff telephoned the Service Contracts Branch, Procurement Division, McConnell Air Force Base and, upon learning that the Base Finance Officer was in the process of issuing a progress payment to Scheven in the amount of $4,344.44, requested that said payment be withheld pending receipt of a letter of direction from Scheven.

9. That same date, plaintiff sent a teletype to the Base Finance Officer requesting that she defer forwarding the check pending receipt of a letter of direction from Scheven.

10. On or about March 2, 1970, the letter of direction, not having been received at McConnell Air Force Base, Scheven's invoice was processed for payment. On March 4, 1970, plaintiff sent a teletype to the Base Finance Officer, informing her that plaintiff had been unable to locate Scheven and presumed that he had sent the letter of direction to her. Once again plaintiff referred to the unpaid claims of suppliers and requested payment to Scheven, in care of plaintiff.

11. On March 5, 1970, plaintiff sent Scheven's letter of direction dated February 25, 1970, to the Finance Officer at McConnell Air Force Base.

12. On March 9, 1970, the defendant forwarded directly to Scheven, a progress payment in the amount of $4,344.44.

13. On or about March 11, 1970, in accordance with its obligation under its payment bond and the Miller Act, plaintiff paid to Swiff-Train Company $3,928.25, the amount owing by Scheven on the McConnell contract.

14. By letter dated November 18, 1970, plaintiff made formal demand upon defendant for the amounts of $2,292.57, and $4,344.44, paid by defendant to Scheven, and the amount of $2,257.89, which plaintiff calculated to be the balance remaining on the contract.

15. By letter dated December 17, 1970, the contracting officer at McConnell Air Force Base notified plaintiff that no part of said demand would be authorized for payment.

Plaintiff contends that the above mentioned correspondence and other communications from Fireman's Fund and Swiff-Train Company to the contracting officer at McConnell Air Force Base constituted demand upon the United States requiring it to refrain from paying the prime contractor, Scheven. Defendant's position is that plaintiff, as late as February 17, 1970, neither was out of pocket nor looked to anyone but Scheven for satisfaction of Swiff-Train's claim, and that a surety gains no entitlement to funds in the hands of the government, either in law or in equity, until the surety has in fact made payment to materialmen and laborers, and then only to the extent of reimbursement. See Pearlman v. Reliance, 371 U. S. 132, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962).

In cases of this nature, the government's primary interest is in the timely and efficient completion of the contract work. Plaintiff's argument is that even though the government's failure to make the progress payments might have resulted in a shutdown of the project and a default in the contractor's performance, that the government is still liable for refusing to allow the plaintiff to control the disposition of the progress payments — at least in the amount necessary to fully reimburse the plaintiff for its payment of the contractor's obligations to laborers and materialmen.

Plaintiff places great reliance on Home Indemnity v. United States, 376 F.2d 890, 180 Ct.Cl. 173 (1967); National Surety Corp. v. United States, 319 F.Supp. 45 (N.D.Ala.1970); Fireman's Fund v. United States, 421 F.2d 706, 190 Ct.Cl. 804 (1970); Newark Ins. Co. v. United States, 169 F.Supp. 955, 144 Ct. Cl. 655 (1959); Hanover Ins. Co. v. United States, 279 F.Supp. 851 (S.D.N. Y.1967). These cases are clearly distinguishable and do not support plaintiff's position. Each involved a situation where the government was the stakeholder of a final contract payment due after the completion of performance. In each instance, after due notice of the rights asserted by a payment bond surety, the government abandoned its role as a stakeholder and elected to decide the merits of the conflicting claims. Here, however, the progress payments were made while the contract was still being performed.

In the recent case of United States Fidelity and Guaranty Co., et al. v. United States, Court of Claims, 475 F.2d 1377, 1973, the court was presented with facts similar to those now before this court, and the court in part stated:

"The final issue to be discussed concerns the claim that the progress payment made by the Navy to Premier on December 8, 1965, over the surety's protest was improper and a violation of the surety's right of subrogation. The plaintiff cites numerous cases in which the payment of a contract sum over a surety's protest has resulted in liability on the part of the Government. There is a critical difference however, which distinguishes those cases from the one presently at issue, and that is the fact that at the time this surety notified the contracting officer that the contractor was not paying his bills, the contract was still in operation with the project not yet complete. In the cases cited by the plaintiff, the work under the contract was complete and the issue centered on who should receive the final payment. In other words the Government in those cases was merely a stakeholder, its interest being satisfied once the project was completed.

The case with which we are now concerned involves the Government's receiving a notice to stop payments to a contractor who was still performing under the contract. The United States in this situation is primarily concerned with completion of performance under the contract and is far from being a simple stakeholder. It was this distinction which led the court in Argonaut Ins. Co. v. United States, 434 F.2d 1362, 193 Ct.Cl. 483 (1970), involving facts similar to those presented in this case, to reject the surety's argument that once the surety notified the defendant of the contractor's failure to meet its obligations the Government was under a legal obligation to stop making payments which were inconsistent with the surety's rights. The court said:

`. . . to hold the Government liable to plaintiff under the circumstances in this case grants the payment bond surety economic control of both the decision to terminate and the completion of the contract. 434 F.2d at 1367, 193 Ct.Cl. at 492.'

Thus, where the Government representative is

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