Security Insurance Co. of Hartford v. United States

Decision Date15 July 1970
Docket NumberNo. 2-67.,2-67.
Citation428 F.2d 838
CourtU.S. Claims Court

Thomas Penfield Jackson, Washington, D. C., attorney of record, for plaintiff. Thomas S. Jackson, and Jackson, Gray & Laskey, Washington, D. C., of counsel.

Ira Mark Bloom, Dept. of Justice, Washington, D. C., with whom was Asst. Atty. Gen., Johnnie M. Walters, for defendant. Philip R. Miller and Joseph Kovner, Washington, D. C., of counsel.



COWEN, Chief Judge.

This case concerns the extent to which the Government may set off taxes owed to it by a defaulting contractor against retainages claimed by a Miller Act1 surety who completes the contract pursuant to its performance bond. The case comes before the court on cross-motions for summary judgment.

For the purposes of this motion, the following agreed and stipulated facts are pertinent: On or about October 31, 1962, the New Amsterdam Casualty Company hereinafter "surety" executed and delivered payment and performance bonds on a contract entered into on October 31, 1962, by the Flagg Construction Company hereinafter "contractor" and the Army Corps of Engineers (Contract No. DA 08-123 Eng 4696). The contract called for the construction of an enlisted men's barracks at Fort Allen, Puerto Rico. The August 11, 1963, completion date specified in the contract was later extended to September 10, 1963.

Plaintiff Security Insurance Company is successor by merger to the New Amsterdam Casualty Company.2

The surety obtained personal indemnity agreements from Norman G. Flagg and his wife, Caroline, who were officers and principal shareholders of Flagg Construction Company. From April 1962 to January 1963, the surety issued bonds to the contractor on four other construction contracts, including one with the Corps of Engineers for another project at Fort Allen, Puerto Rico.

By October 31, 1963, the contractor had not completed work on the barracks contract, or on the other project at Fort Allen. On December 10, 1963, the surety requested that the Corps of Engineers make no further payments to the contractor in view of the notices of claims the surety had received from laborers and materialmen. On December 11, 1963, the Corps of Engineers advised the surety that the work on the barracks contract was 99 percent complete as of December 1, 1963. Norman Flagg informed the surety on December 13, 1963, that liquidated damages were accruing at the rate of $60 per day on the two Fort Allen contracts.

Although the contractor's right to proceed with the barracks was never formally terminated, the surety took over completion of the barracks contract on February 1, 1964. The Corps of Engineers accepted the barracks as complete on February 7, 1964, stopping the accrual of liquidated damages, although the work was not actually completed until at least March 3, 1964.

The original contract price for the barracks of $100,162 was later reduced by change orders to $97,497.20. The Government paid the contractor $79,790.44, and charged the contractor $5,250 in liquidated damages as the result of the delay in completion. There was then due and owing by the Government under the barracks contract $12,456.76, comprised of the following items:

                $8,712.36 — retained percentages from
                               10/31/62 to 10/31/63
                $2,162.08 — earnings from 11/1/63 to
                $1,582.32 — earnings from 2/1/64 to

From the amount due under the barracks contract, the Government set off $9,764.08 for Federal taxes owed by the contractor. The contractor owed withholding, Federal Insurance Contribution Act (FICA), and Federal Unemployment Tax Act (FUTA) taxes, plus interest, in the total amount of $10,780.98 for 1962, 1963, and the first quarter of 1964.

On April 11, 1964, the contractor corporation was adjudicated bankrupt by the United States District Court for the District of New Hampshire. The Government recovered $95 on its tax claims, but the surety recovered nothing. On November 9, 1964, Caroline Flagg was adjudicated bankrupt by the same court. In the latter proceeding, the surety filed claims under the various indemnified payment and performance bonds it had issued to the contractor, including the payment and performance bonds on the barracks contract, and recovered $1,454.01.

Norman Flagg has not been adjudicated bankrupt. The record does not disclose what action, if any, the surety has taken regarding Norman Flagg's personal liability on the indemnity agreement.

In completing the work under the barracks contract and on the other Fort Allen project, the surety expended $11,970.43 for labor and materials, and $2,558.02 for attorney's services, for a total expenditure of $14,528.45. The surety also expended other sums in the settlement of the claims of laborers and materialmen arising prior to the surety's taking over the work on the barracks.3

Plaintiff here sues to recover the $12,456.76 in accumulated retainages under the barracks contract, free from setoff for the contractor's indebtedness to the United States. Relying on the interpretation given United States v. Munsey Trust Co., 332 U.S. 234, 67 S.Ct. 1599, 91 L.Ed. 2022 (1947), by the Fifth Circuit Court of Appeals in Trinity Universal Ins. Co. v. United States, 382 F.2d 317 (5th Cir. 1967), cert. denied, 390 U.S. 906, 88 S.Ct. 820, 19 L.Ed.2d 873 (1968), plaintiff asks the court to reexamine its early decision in Standard Accident Ins. Co. v. United States, 97 F. Supp. 829, 119 Ct.Cl. 749 (1951), wherein the court, on the basis of Munsey, held that the Government was entitled to set off against the retainages claimed by a performance bond surety on a Government contract, the tax debt of the contractor to the United States. Plaintiff maintains, and Trinity, supra, holds that the rule permitting set off, as enunciated by the Supreme Court in Munsey, was intended to be applied only against a payment bond surety (the Munsey facts), and not against a performance bond surety who completes the contract.

The defendant, on the other hand, contends that Standard Accident was correctly decided and that the Munsey rule should be applied to suits both by payment and performance bond sureties. Further, the defendant contends that plaintiff is not entitled to the $2,162.08 earned by, but not paid to, the contractor prior to the date plaintiff took over performance of the barracks contract. The defendant concedes, however, that plaintiff is entitled to recover its earnings in the amount of $1,582.32 under the contract after it took over performance (February 1, 1964).4

We have carefully reviewed the Munsey decision to determine its application to the facts in the case at bar. We have also considered the trend manifested in the cases decided and the governmental regulations promulgated since Munsey and Standard Accident were handed down. As a result, we have concluded that the Munsey rule was intended to apply and, in justice to the surety and the Government, should only be applied in an action by a payment bond surety and not in a suit by a surety who completes performance of the contract pursuant to the surety's performance bond. To the extent, therefore, that Standard Accident holds otherwise, we overrule that decision.


We consider first United States v. Munsey Trust Co., supra. In Munsey, the Supreme Court faced the hitherto undecided question of the rights inter-sese of the Government and a payment bond surety on a Government contract to retainages withheld by the Government pursuant to the contract.5 The Court noted that the Government "has the same right `which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him'", 332 U.S. at 239, 67 S.Ct. at 1601, quoting Gratiot v. United States, 15 Pet. 336, 370, 10 L.Ed. 759 (1841). Accordingly, the Court held that the Government was entitled to set off against the retained funds otherwise payable to the surety, the indebtedness of the contractor to the Government under another and unrelated contract.

The Court rejected the surety's contention that it was subrogated to the rights of the laborers and materialmen it had paid pursuant to the payment bond, since the laborers and materialmen had no enforceable rights against the United States, 332 U.S. at 241, 67 S.Ct. 1599. Instead, the Court said that the surety was subrogated to the rights of the contractor, and, as subrogee of the contractor could not claim rights which the contractor did not have.

Significantly, however, from the standpoint of the instant case, the Court suggested, and we agree, that a different result would obtain in a suit by a surety on a performance bond, since in such a case, the surety, by electing to complete performance,6 would have conferred a benefit on the Government by relieving it of the task of completing performance itself.

The Court stated:

Respondent surety argues that if the work had not been completed, and the surety chose not to complete it, the surety would be liable only for the amount necessary to complete, less the retained money. Moreover, if the surety did complete the job, it would be entitled to the retained moneys in addition to progress payments. The situation here is said to be similar. But when a job is incomplete, the government must expend funds to get the work done, and is entitled to claim damages only in the amount of the excess which it pays for the job over what it would have paid had the contractor not defaulted. Therefore, a surety would rarely undertake to complete a job if it incurred the risk that by completing it might lose more than if it had allowed the government to proceed. When laborers and materialmen, however, are unpaid and the work is complete, the government suffers no

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