Standard Accident Ins. Co. v. United States

Decision Date05 June 1951
Docket NumberNo. 46116.,46116.
Citation97 F. Supp. 829
PartiesSTANDARD ACCIDENT INS. CO. v. UNITED STATES.
CourtU.S. Claims Court

John J. Wilson, Washington, D. C., for plaintiff.

Philip S. Peyser, and Whiteford, Hart, Carmody & Wilson, all of Washington, D. C., were on the brief.

Robert E. Mitchell, Washington, D. C., with whom was Asst. Atty. Gen. H. G. Morison, for defendant.

Plaintiff was surety for the Graves-Quinn Corporation under a Government contract and upon default of the contractor completed the work called for by such contract. Plaintiff, as surety, took over and completed the contract, expending $24,853.33 in so doing, in addition to $53,704.65 under a payment bond to laborers and materialmen. Upon completion there was a balance of $14,658.37 due from the Government. Of this amount, $9,444.37 was the balance of the contract price due upon completion and $5,214 represented the percentages retained by the Government from payments to the contractor prior to its default. The latter amount was not paid but was offset, $5,194 on account of employment taxes due the defendant by the defaulting contractor, and $20 on account of another claim against the contractor. In this action, the surety seeks to recover the amount of $5,194.

Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and HOWELL, Judges.

LITTLETON, Judge.

Plaintiff company, surety on a Government contractor's performance bond, completed the contract after its principal defaulted. Under the terms of the contract the Government had retained certain percentages from the payments made to the contractor during the progress of the work before its default. The question here is whether the completing surety's right to the retained percentages is superior to the right of the Government to apply them in partial satisfaction of taxes owed by the contractor. It is settled that a surety satisfying its principal's obligation on a bond securing payment to laborers and materialmen is not so favored. United States v. Munsey Trust Co., 332 U.S. 234, 67 S.Ct. 1599, 91 L.Ed. 2022. The issue is whether completion under a performance bond gives the surety a better right. We hold that it does not.

Plaintiff's principal entered into two construction contracts with the United States, an Army contract and a Coast Guard contract. As required by law, it furnished two bonds for each contract, one to secure the contract's performance, the other to secure payment to laborers and materialmen. Plaintiff was surety on the bonds. The contractor defaulted in its payment obligations on both jobs and the surety made good on the payment bonds. The contractor completed the Army contract, freeing the surety from the obligation of the performance bond for that contract. This suit arises out of the Coast Guard contract, which was 95 percent completed when a petition in bankruptcy was filed against the contractor and it suspended performance. Plaintiff took over and completed the contract at a cost of $24,853.33.

Upon completion of the Coast Guard contract there was a balance of $14,658.37 remaining due from the Government. Of this amount, $5,214 represented the percentages retained from the payments made to the contractor for work done before its default, and $9,444.37 was the amount of the contract price earned by the completing surety. The General Accounting Office authorized payment to plaintiff of the $9,444.37. But it set off the entire amount of the retained percentages, which the surety also claimed, in partial satisfaction of social security taxes owed by the contractor.1

Plaintiff contends that defendant had no right to set off against the retained percentages because they were sums dedicated to the completion of the contract to which the surety became entitled in its own right when it stepped into the contractor's shoes and fulfilled the contractor's obligation to the United States. In other words, plaintiff bases its claim on subrogation to the rights of the United States. A completing surety is of course entitled to retained percentages as against its principal. See Restatement of Security, § 141; see also the annotations at 45 A.L.R. 379; 134 A.L.R. 738; and 164 A.L.R. 613. The surety's right is superior to the right of an assignee of the principal which lent money to be used in performance. Prairie State Nat. Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412; Royal Indemnity Co. v. United States, 92 F.Supp. 1003, 117 Ct.Cl. 736. A surety satisfying its principal's obligation to the United States is also entitled to be subrogated to the priority of the United States. See 31 U.S. C.A. § 193; see also the annotations at 24 A.L.R. 1502, and 83 A.L.R. 1131. The Supreme Court has held, however, that a surety's right of subrogation to the priority of the United States cannot operate contrary to the interest of the United States. United States v. National Surety Co., 254 U.S. 73, 41 S.Ct. 29, 65 L.Ed. 143. A similar principle is, we think, applicable here.

The retained percentages represented money earned by the contractor from the United States and due it from the United States when it completed the contract. But the United States has a right to set off its creditor's debt to it before paying its debt to the creditor. United States v. Munsey Trust Co., supra, 332 U.S. at pages 239-240, 67 S.Ct. at pages 1601-1602, 91 L.Ed. 2022. The United States cannot be deprived of its right of set-off by the circumstance that the completing surety rather than the contractor is claiming the fund. The contractor, plaintiff's principal, was both a debtor and a creditor of the United States. Plaintiff surety seeks to step into its principal's shoes as a creditor of the United States but not as its debtor. We hold that as against the United States the surety is in no better position than its principal. As we said in Globe Indemnity Co. v. United States, 84 Ct.Cl. 587, 595, certiorari denied 302 U.S. 707, 58 S.Ct. 26, 82 L.Ed. 546:

"Sureties on a Government contract are in contractual relationship with the United States only through the contract of their principal and while in a proper case they may be subrogated to the rights of the United States to any funds or securities in its hands due the contractor under the contract, or which it might use for any legitimate purpose under the contract, such as the payment of claims for materials or labor, or for completion of the contract upon default of the principal, such right of the surety to lay claim...

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14 cases
  • US v. TAC Const. Co., Inc.
    • United States
    • U.S. District Court — Southern District of Mississippi
    • 30 de janeiro de 1991
    ...to the claims of the surety or of other private parties. United States v. Munsey Trust Co., supra; Standard Acc. Ins. Co. v. United States, 97 F.Supp. 829, 119 Ct.Cl. 749 (1951) over-ruled 428 F.2d 838, 841, 192 Ct.Cl. 754; United Pac. Ins. Co. v. United States, 362 F.2d 805, 176 Ct.Cl. 176......
  • Barrett v. United States
    • United States
    • U.S. Claims Court
    • 10 de novembro de 1966
    ...to the claims of the surety or of other private parties. United States v. Munsey Trust Co., supra; Standard Acc. Ins. Co. v. United States, 97 F.Supp. 829, 119 Ct.Cl. 749 (1951); United Pac. Ins. Co. v. United States, 362 F.2d 805, 176 Ct.Cl. ___ (June However, plaintiff contends that the r......
  • Trinity Universal Insurance Company v. United States
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • 12 de setembro de 1967
    ...as the government.8 We recognize that our holding is in conflict with that of the Court of Claims in Standard Accident Insurance Co. v. United States, 1951, 97 F.Supp. 829, 119 Ct.Cl. 749. With deference, however, we cannot agree with that The same result is reached more directly by the alt......
  • IN RE BUILDICE COMPANY
    • United States
    • U.S. District Court — Northern District of Illinois
    • 11 de dezembro de 1956
    ...1939, 307 U.S. 200, 59 S.Ct. 811, 83 L.Ed. 1222; In re Miller, 2 Cir., 1939, 105 F.2d 926. The case of Standard Accident Ins. Co. v. United States, 1951, 119 Ct.Cl. 749, 97 F.Supp. 829, relied upon by the United States, is not in point. There the controversy involved not the surety's right ......
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