Kennedy Elec. Co., Inc. v. U.S. Postal Service

• Decision Date: 30 January 1975
• Docket Number: No. 74-1218,74-1218
• Citation: 508 F.2d 954
• Parties: KENNEDY ELECTRIC COMPANY, INC., Plaintiff-Appellee, v. UNITED STATES POSTAL SERVICE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 954

508 F.2d 954

KENNEDY ELECTRIC COMPANY, INC., Plaintiff-Appellee, v. UNITED STATES POSTAL SERVICE, Defendant-Appellant.

No. 74-1218.

United States Court of Appeals, Tenth Circuit.

Argued Nov. 12, 1974.

Decided Dec. 30, 1974, Rehearing Denied Jan. 30, 1975.

Robert E. Benson, of Holland & Hart, Denver, Colo., for plaintiff-appellee.

Thomas G. Wilson, Atty., Department of Justice (Carla A. Hills, Asst. Atty. Gen., James L. Treece, U.S. Atty., and Leonard Schaitman, Washington, D.C., on the brief), for defendant-appellant.

Before LEWIS, Chief Judge, and BREITENSTEIN and McWILLIAMS, Circuit judges.

BREITENSTEIN, Circuit Judge.

This is a suit by a subcontractor on a federal postal facility construction project to recover amounts due for labor and materials. Section 409(a), 39 U.S.C., and 28 U.S.C. 1339 confer jurisdiction. Recovery is sought out of funds both retained and disbursed. The case is unusual in that the payment and performance bonds required by the Miller Act, 40 U.S.C. 270a, were not furnished and the prime contract was executed in violation of that statute. The district court gave judgment for the subcontractor, Kennedy Electric Co., Inc. v. United States Postal Service, D.Colo., 367 F.Supp. 828, and Postal Service appeals. We affirm.

Plaintiff-appellee, Kennedy Electric Company, a Colorado corporation, is engaged in the electrical construction business. Defendant-appellant, United States Postal Service, is an independent establishment of the United States, 39 U.S.C. 201, with the power to sue and be sued, 39 U.S.C. 401(1). Under the Postal Reorganization Act, 39 U.S.C. 101 et seq., it succeeded to the interests of the former Post Office Department on July 1, 1971. The assets and liabilities of the Post Office Department were transferred to the Postal Service and constituted its initial capital. 39 U.S.C. 2002.

The principal facts were stipulated. No party objects to the fact findings of the trial court. For clarity we will refer to the former United States Post Office Department as Department, and to the recently created United States Postal Service as Service. On December 30, 1969, Department awarded to J. C. Corrigan Co. (Corrigan) a contract for the construction of a mail facility at Milwaukee, Wisconsin. Although payment and performance bonds were required to be filed in 10 days, none were ever filed. Corrigan was unable to obtain the bonds and neither filed them nor called the matter to the attention of Department. The failure to file the bonds was not discovered by Department until April, 1971. Department determined that Corrigan had wilfully failed to furnish the required bonds and on May 10, 1971, terminated the contract.

The contract price, adjusted for additional work and change orders, was $998,854.47. Corrigan subcontracted part of the work to Corrigan Construction Company. The trial court held that the two Corrigan companies 'are for all practical purposes a single entity.' 367 F.Supp. at 829. All payments on the contract were made to First National Bank of Boston, the assignee of Corrigan. The construction company subcontracted part of the work to plaintiff Kennedy which furnished labor and materials. A balance of $61,281.31 remains unpaid on the Kennedy subcontract. Corrigan is in bankruptcy and Corrigan Construction Company is insolvent. Both have failed and refused to pay Kennedy and neither has funds, or sources of funds, with which to pay Kennedy.

By March 10, 1970, Department knew that Kennedy was a subcontractor furnishing labor and materials for the project. In the months that followed Kennedy made repeated inquiries of Department as to project status. Department on many occasions called Corrigan's attention to the lack of satisfactory progress. Despite its concern Department made no effort to comply with the regulation on project supervision, 41 C.F.R. 1-30.521, and did not investigate the reasons for delay, the status of payments to subcontractors, or the financial position of Corrigan.

The contract and applicable regulations limited progress payments to 70% Of costs incurred with a maximum of 70% Of the contract price. As of November 27, 1970, Department had made to Corrigan's assignee progress payments of $684,064.00. Up to this time progress payments were made on invoices containing the required information. See 41 C.F.R. 1-30.519. Payments made thereafter were not on proper invoices. The progress payments exceeded the amount allowable both by the contract and the regulations.

In February, 1971, Department made a progress payment of $14,500.00 and in March a further payment of $190,747.00. These payments to the assignee were made without the required invoices. In making these two payments Department did not comply with the provisions of 41 C.F.R. 1-30.505 providing that the head of the procuring activity, or a duly designated official, must approve unusual progress payments, and the provisions of 41 C.F.R. 30-521.1 requiring assurance that the unpaid balance be sufficient to cover costs of completion or that contractor have adequate resources to complete. Department did not know the intended disposition of the funds by Corrigan's assignee.

On July 1, 1971, Department transferred to Service on account of the Milwaukee contract assets in the amount of $107,698.47 representing obligated appropriations on the books of Department. A third party completed the contract on August 15, 1971.

After a non-jury trial the district court held that there remained in Service's hands a fund of $35,739.47 on which Kennedy had an equitable lien. It also held that Kennedy had an equitable lien on the March 24, 1971, payment of $190,747.00 made to the assignee. Judgment was entered for Kennedy, and against Service, for $61,281.31 plus interest.

Service argues that sovereign immunity bars the suit. It seeks to avoid 39 U.S.C. 401, which authorizes service to sue and be sued, by asserting (1) the suit seeks monetary recovery from the Treasury of the United States and (2) the Kennedy claim was not a legal liability of Department assumed by Service under the Postal Reorganization Act.

F.H.A. v. Burr, 309 U.S. 242, 245, 60 S.Ct. 488, 490, 84 L.Ed. 724, says that absent implied exceptions and restrictions, not here present, or other showing that Congress used the phrase in a narrow sense, 'it must be presumed that when Congress launched a governmental agency into the commercial world and endowed it with authority to 'sue or be sued', that agency is not less amenable to judicial process than a private enterprise under like circumstances would be.'

Service points out that its funds are held in the Treasury of the United States, 39 U.S.C. 2003(a), and that a suit is against the sovereign if 'the judgment sought would expend itself on the public treasury.' Land v. Dollar, 330 U.S. 731, 738, 67 S.Ct. 1009, 1012, 91 L.Ed. 1209; see also Dugan v. Rank, 372 U.S. 609, 620, 83 S.Ct. 999, 10 L.Ed.2d 15. We can discern no congressional intent to emasculate the 'sue or be sued' provision of 401 by 2003(a). We are concerned with the right to sue and recover judgment, not with any question of execution to enforce the judgment. See F.H.A. v. Burr, 309 U.S. at 250-251, 60 S.Ct. 488.

The Postal Reorganization Act provides, 39 U.S.C. 2002(a)(2), that upon the start of Service operations the unexpended balances of appropriations to Department and 'all liabilities chargeable thereto shall become assets and liabilities, respectively, of the Postal Service.' Service says that the claim of Kennedy was not a legally enforceable liability of Department and, hence, it never became a liability of Service. The argument begs the question. Service may be sued. Determination of liability goes to the merits, not to jurisdiction. We reject the contention that sovereign immunity destroys jurisdiction and turn to the merits.

The Miller Act, 40 U.S.C.A. 270a, was intended to provide a remedy for suppliers of labor and material to a federal project. These suppliers do not have their usual security interest because a lien cannot attach to federal property. Miller Act protection goes to those who have a contractual agreement with a prime contractor or a subcontractor. F.D. Rich Co., Inc. v. United States, 417 U.S. 116, 122, 94 S.Ct. 2157, 40 L.Ed.2d 703. Kennedy was within the protected class but, because of Department's failure to comply with the statute, the contractor did not furnish a payment bond. There is no surety from which Kennedy may recover.

Kennedy relies on a twopronged equitable lien. The first relates to the $35,739.47 which remained in Service's hands from the obligated appropriation transferred to it by Department. The computation appears in the district court's findings. See 367 F.Supp. at 832. In this regard we reject Service's claim for liquidated damages in the sum of $45,000.00. The project has been completed. Although the contract permits recovery of both cost of completion and liquidated damages, Service's claim for liquidated damages must be weighed against subcontractor's claim for payment on account of the labor and materials which it furnished. The equities favor subcontractor. A court of equity may subordinate a claim because of equitable considerations. See Pepper v. Litton, 308 U.S. 295, 306, 60 S.Ct. 238, 84 L.Ed. 281. We agree with the trial court that subordination of Service's claim is in order.

The second prong relates to Department's March 24, 1971, payment of $190,747.00 to Corrigan's assignee. Payment was made in violation of various pertinent regulations. See e.g. 41 C.F.R. 1 30.505, 1-30.519, 1-30.521-1, and 1 30.521 2. Department then had notice of the Kennedy claim and knew that there was slight chance that the money would be used to complete the contract or to pay the subcontractor. See 367 F.Supp. at 830-831. The courts have consistently held that the government cannot escape liability to a Miller Act surety by making a wrongful payment. See Fireman's Fund...