National Surety Corporation v. United States

• Decision Date: 11 August 1970
• Docket Number: Civ. A. No. 68-500.
• Citation: 319 F. Supp. 45
• Parties: NATIONAL SURETY CORPORATION, a corporation, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Alabama

319 F. Supp. 45

NATIONAL SURETY CORPORATION, a corporation, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 68-500.

United States District Court, N. D. Alabama, S. D.

August 11, 1970.

London, Yancey, Clark & Allen, Birmingham, Ala., for plaintiff.

Wayman G. Sherrer, U. S. Atty., B. Don Hale, Asst. U. S. Atty., Birmingham, Ala., for defendant.

MEMORANDUM OPINION

McFADDEN, District Judge.

Plaintiff sues under the Tucker Act to recover money allegedly erroneously paid out to its principal.

Defendant, acting through the Veterans Administration, awarded contract V5121C-142, dated May 20, 1966, in the amount of $54,900.00 to Hartenstein Elevator Company (Contractor), for the replacement of two passenger and one freight elevator in the Veterans Administration Hospital at Tuscaloosa, Alabama. Plaintiff, as surety, and Hartenstein as principal, executed performance and payment bonds on this project in accordance with the Miller Act, 40 U.S.C. § 270a et seq.

The contract required completion within 240 days of June 16, 1966, the date of receipt of the notice to proceed, or by February 11, 1967, and subjected contractor to liquidated damages of $40.00 per calendar-day for failure to do so. The contract performance time was twice extended—110 calendar-days and 15 days, respectively—to June 16, 1967, and the contract price was decreased to $53,525.00.

The work was not complete by June 16, 1967, and liquidated damages were assessed from that date.

The contracting officer received telephone calls, on or about September 9, 1967, from two sub-contractors, Campbell Construction Company, Tuscaloosa, Alabama, and Hauenstein and Burmeister, Inc., Minneapolis, Minnesota, claiming non payment by the contractor for labor and materials furnished for the project in approximate respective amounts of $3,000 and $7,000. Both sub-contractors were referred to the plaintiff as surety under the payment bond.

On September 14, 1967, the contracting officer received a telephone call, confirmed by a telegram of the same date, from Henry Yates of the plaintiff's Dallas, Texas, office, which informed the contracting officer that the contractor was in default under the contract for failure to pay labor and material suppliers on the job. Plaintiff requested that the contracting officer refrain from making further payments of contract funds to the surety's principal on account of the contractor's default in payment of its obligations under the contract and by virtue of an assignment contained in the bond application. The contracting officer concedes the receipt of the telephone call and telegram.

The contracting officer sought advice by telephone from the Purchase and Contract Division in the Central Office of the Veterans Administration, and was advised that the plaintiff had no claim against the United States even if contractor had assigned payment in the bond application. The contracting officer was further advised that an assignment would have to be made through the contracting officer and that a surety did not qualify as a permissible assignee under the Assignment of Claims Act. 31 U.S.C. § 203. The contracting officer took the position that the plaintiff had no control over the payments to the contractor and if a request for partial payment was presented which met contract requirements he had no alternative but to pay the contractor directly, notwithstanding the surety's request and the notice of non payment from sub-contractors.

Hauenstein and Burmeister, Inc. advised the contracting officer by letter dated September 18, 1967 that it had not been paid for material supplied to the contractor and requested the identity of the surety and the terms of the payment bond. This sub-contractor was advised by letter dated September 26, 1967 that bonds under the contract were furnished by plaintiff; its recourse for collection was between it and surety, and the Government was obligated to the contractor and future payments would be made accordingly.

The contracting officer's representative submitted to the United States Treasury on September 19, 1967, the contractor's application of September 18, 1967, for a fifth progress payment in the sum of $10,420.00 based on a value of $53,050.00 for materials and labor in place less $1,500.00 retained, less liquidated damages of $3,240.00 (81 days at $40.00 per day) and less previous payments of $37,890.00.

The contracting officer advised plaintiff in a telegram dated September 22, 1967, that a payment of $10,420.00 would be paid to the contractor in accordance with the contract requirements unless specific objections, in accordance with law, were received by the contracting officer by the close of business on September 26, 1967. The telegram was received in the mail section of the V. A. Hospital, Dallas, Texas, at approximately 4:30 on Friday, September 22, 1967, and received by plaintiff's representative, Henry Yates, on Tuesday, September 26, 1967.

Upon receipt of the telegram, Mr. Yates immediately contacted representatives of the contractor requesting their cooperation in seeing that the progress estimate was used to pay the labor and material suppliers for the project. The contractor, in a letter dated September 28, 1967, and received by the contracting officer on October 2, 1967, requested that payments from contract funds be made directly to Hauenstein and Burmeister, Inc., and Campbell Construction Company in the amounts of $9,238.00 and $2,947.00, respectively. The United States, by telegram dated October 4, 1967, and received on October 9, 1967, advised the contractor that partial payment of $10,420.00 was processed before receipt of its letters and that regulations prohibited payment to anyone other than the prime contractor.

The contracting officer, however, readily admitted in this Court that it was possible to stop the processing of contractor's payment application when it received the contractor's request on October 2, 1967, but that he was still of the opinion that payment should be made to the contractor and therefore did not take any action to stop payment, and made payment to the contractor.

Contractor did not pay his suppliers and it became necessary for the plaintiff to do so under the terms of its payment bond. Plaintiff paid the sum of $14,808.90 to K. M. White Company and $9,727.32 to Hauenstein and Burmeister, Inc., under the terms of its payment bond. Plaintiff received the sum of $3,207.00 from the United States representing the final payment under the contract less liquidated damages and this sum was applied to reduce plaintiff's loss under its bond; other funds were received by plaintiff reducing the loss to $10,420.00. (Plaintiff has waived its right to any sum in excess of $10,000, the jurisdictional limit under the Tucker Act.)

No portion of the $10,420.00 payment, which is the basis of this action, was used to pay any claimant on the job.

The issue in this case is whether the Government is liable for the payment it made to contractor on or about October 4, 1967, after it had been put on notice by the surety and requested by the contractor to make payments jointly to it and its suppliers.

It is the Court's finding upon consideration of the evidence that the United States paid the sum of $10,420.00 to the contractor after the bonded contract was in default and in express disregard of the surety's advice concerning the default and instructions not to pay the money out without its consent. The only explanation for so doing was that the contracting officer was of the opinion that he was obligated to pay contractor.

The Government's main position is that it had a right under the contract to make progress payments without consulting the surety or obtaining its consent and relies heavily on Continental Casualty Company v. Public Building Authority of the City of Scottsboro, 381 F.2d 10 (5th Cir. 1967). The Court has analyzed the opinion in that case. The contract in that case required payment on the architect's certificate and this was done. The Court held that payments in accordance with the contract did not release the surety. The decision is inapposite in this case as it involves a construction contract and bond that was construed under the Law of Alabama. In this case we are dealing with the validity and interpretation of a contract entered into under the authority of a statute and ultimately of the Constitution. Federal Law therefore controls. See United States v. Seckinger, 397 U.S. 203, 90 S.Ct. 880, 25 L.Ed.2d 224 (1970).

This Court is bound to follow the rules of federal law enunciated by the United States Court of Claims and the United States Supreme Court construing contractual rights of the Government.

The Court is of the opinion that the contracting officer was mistaken and that the advice he received was erroneous. The anti-assignment act does not require the formality of an assignment to perfect a surety's rights to funds in the Government's hands. A surety called upon to answer for its principal's default is subrogated to any funds due or to become due under the contract and this subrogation right relates back to the date of the bond. American Fidelity Co. v. National Bank of Evansville, 105 U.S. App.D.C. 312, 266 F.2d 910 (1959).

Newark Insurance Co. v. United States, 169 F.Supp. 955, 144 Ct.Cl. 655 (1959), enunciates the controlling legal principles. In Newark the Court of Claims held the Government liable to the surety where it had, after notice, paid contract funds to an assignee bank which had complied with all the requirements of the antiassignment statute, 31...