U.S. Fidelity & Guar. Co. v. Missouri Highway and Transp. Com'n
| Decision Date | 06 February 1990 |
| Docket Number | No. WD,WD |
| Citation | 783 S.W.2d 516 |
| Court | Missouri Court of Appeals |
| Parties | UNITED STATES FIDELITY & GUARANTY COMPANY, Appellant, v. MISSOURI HIGHWAY AND TRANSPORTATION COMMISSION, Respondent. 42275. |
G. Steven Ruprecht, Kansas City, for appellant.
Rich Tiemeyer, Chief Counsel, Cynthia B. Green, Asst. Counsel, Jefferson City, for respondent.
Before KENNEDY, P.J., and LOWENSTEIN and BERREY, JJ.
This case involves the question of who has priority on retained construction proceeds--the surety on a performance bond which advanced the funds to complete the project when the principal, the contractor, ran out of money, or, the state as obligee which was owed a previous debt by the contractor. The facts here are somewhat unusual, making a brief overview in order.
Tri-City Construction Company (Tri-City) and its subsidiaries contracted with the Missouri Highway and Transportation Commission (Commission) to repair five specific highway projects in Jackson County, for an approximate total of $6,600,000. The appellant United States Fidelity & Guaranty Company (USF & G) acted as surety by writing the required performance and payment bonds in favor of the Commission. Well into construction, Tri-City ran out of operating funds, so USF & G took over supplying money to Tri-City and various creditors which allowed Tri-City to complete the work without there ever having been a declared default. USF & G arranged to have the Commission make all future progress payments to it. To hold down losses on the bond and to insure prompt completion of the projects, USF & G felt it was best to have Tri-City, rather than a new construction company, complete the job. USF & G had Tri-City execute notes, financing statements and other documents covering the funds it advanced. State payments on the contracts were to be applied to the shortfall.
Out of the last retainage of the progress payments on two of the projects, the Commission deducted an amount owed it by Tri-City for a prior debt created by Tri-City and two related corporations on a prior commissioner's award which exceeded the ultimate value placed on their property condemned by the Commission. Attempts by USF & G to persuade the Commission to pay it the final sums in the retainage were unsuccessful, so it filed this suit for $73,170.77, the sum the Commission claimed it held by way of setoff.
Summary judgment was requested by both sides and granted to the Commission on stipulated facts which are now set out: the chronology of events listed below is divided; the column on the left showing the evolvement of the Tri-City debt growing out of the condemnation, the right side tracking construction and the performance bonds on the two projects to which the Commission applied its setoff.
Date CONDEMNATION CONSTRUCTION
12"70 Condemnation of property owned by
Tri"City and two related companies
(R.E. Wolfe and family comprised
offices of all three)
2"75 Condemnation exceptions settled: Tri"City
owes $114,000, related companies owe
$50,000--they execute separate notes to
the state
1978 No payments on notes, Tri"City then owed
$64,500, the related companies $45,000
11"4"83 Performance Bond
in penal amount
of $1,309,902
written on
project #
435"691
12"1"83 Master surety
agreement
12"30"83 Novation of related companies debt and
new note payable by Tri"City for the
full $110,000 ($64,500
Tri"City--$45,000 other companies)
6"1"84 Performance bond
written in penal
amount of
$1,212,212.91 on
project #
70"1(89)
9"15"84 Tri"City executes new installment note
for $98,000 payable at $2,000 a month
plus interest, but immediately due upon
default
8"22"85 Tri"City letter to
Commission
requesting
payments be made
to USF & G
9"9"85 Financing
statement with
funds advanced
to Tri"City to
pay bills
9"10"85"5"14"86 Payments to
Tri"City by USG
& G
5"14"86"10"31"86 Payments direct to
creditors by USF
& G
10"25"85 # 70"1(89)
completed
11"25"85 # 435"691
completed
3"18"86 Commission declared default on 1984 note
(Sept. 1984 payment not paid, March
1986 payment not paid and a check for
another payment bounced) $64,945 was
immediately due
8"21"87 Commission, after receiving no payment
declares $73,170.77 due and deducts
from the retainage of these two
projects the amounts shown in
parentheses
# 70"1 (89) ($51,170.77)
# 435"691 ($22,000)
The projects were timely completed and accepted by the Commission, all payments on the contracts went to USF & G except for the funds in question, and no formal default was ever declared by the obligee-Commission. On the two projects in question, USF & G made a total expenditure of $1,207,000. The Tri-City corporate charter was forfeited in October, 1986. No question has ever been raised as to the dire financial condition of Tri-City which became obvious in August, 1985. USF & G did not inquire of the Commission about the ongoing collection arising out of the condemnation, and was first informed of this debt in August of 1987 when the deduction from the retainage was formally made.
Based on the facts, the trial court rendered judgment for the obligee-Commission reasoning 1) there was no claim by the Commission of non-performance, 2) under a performance bond the surety only incurs liability when the obligee claims the principal is not performing the contract, and 3) payments by USF & G were nothing more than a loan to which it must look, as a lender, to Tri-City, the borrower, for repayment, not as the bond surety. Therefore, reasoned the court, absent payment under the performance obligation, any claim USF & G had to the retained proceeds was inferior to the Commission's right of equitable set off on the debt of Tri-City. Strong v. Gordon, 203 Mo.App. 470, 221 S.W. 770, 771 (1920).
As stated earlier, the issue here is which party gets priority, the public entity owner who has an equitable right of setoff, or the completing surety which has an equitable lien on the contract proceeds.
The case at bar is factually similar to Morrison Assurance Company, Inc. v. United States, 3 Cl.Ct. 626 (1983), where the contractor owed money to the Internal Revenue Service. This amount was deducted from the proceeds of a National Park Service contract. During construction, the surety, through its investigation, found out suppliers and the IRS were not being paid. The financial condition of the contractor was so poor, the surety felt default was inevitable. The surety had Park Service payments to the contractor stopped and assigned to it, and determined "it would be less expensive to utilize, if possible, CBC (the contractor) to complete the projects." As in the case at bar, the surety funded the successful completion of the project, no formal default having ever been declared by the government, nor were federal procedures followed for a surety takeover. In ruling for the surety, the United States Claims Court relied on 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), to declare that when a surety pays construction expenses under a performance bond, it receives the contract proceeds free from setoff by the government, for it is entitled to the money not as a creditor and subject to setoff, but as a subrogee having the same rights as the government. The court wrote that the fact the contractor stayed on the...
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