United Pacific Insurance Company v. United States

• Decision Date: 10 June 1966
• Docket Number: No. 119-61.,119-61.
• Citation: 176 Ct. Cl. 176,362 F.2d 805
• Parties: UNITED PACIFIC INSURANCE COMPANY v. The UNITED STATES.
• Court: U.S. Claims Court

176 Ct. Cl. 176, 362 F.2d 805 (1966)

UNITED PACIFIC INSURANCE COMPANY v. The UNITED STATES.

No. 119-61.

United States Court of Claims.

June 10, 1966.

Edward Gallagher, Washington, D. C., attorney of record, for plaintiff.

Gerson B. Kramer, Washington, D. C., with whom was Asst. Atty. Gen. John W. Douglas, for defendant.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS and COLLINS, Judges.

OPINION

COWEN, Chief Judge.

Plaintiff, a surety company which issued payment and performance bonds on two Government construction contracts under the Miller Act (40 U.S.C. § 270a et seq.), sues to recover from the United States the proceeds of a check alleged to have been illegally disbursed by the Government to the contractor, who proceeded to cash the same and retain the funds.

Fred H. Stegeman, an individual doing business as Fred H. Stegeman and Associates, entered into two contracts with the Federal Bureau of Public Roads for the grading, surfacing, and bridging of certain roads in Oregon, respectively designated the Mt. Hood and Whittaker Creek projects. Under the Mt. Hood contract plaintiff furnished a performance bond, guaranteeing performance of the work, in a penalty of $249,680.65, and under the Whittaker Creek contract, a performance bond in a penalty of $53,504.10. Payment bonds were executed under both contracts, assuring payment of all labor and material bills incurred in connection with the work. The two projects were eventually completed, but the contractor left unpaid material bills that plaintiff, pursuant to its surety obligation, was compelled to satisfy. A total of $46,586.51 was paid by plaintiff to materialmen, $17,000 on the Mt. Hood job, and $29,586.51 on the Whittaker Creek. At issue in the case is the Government's final payment of $41,624.79 to the contractor under the Mt. Hood contract.¹ Plaintiff hopes, in short, to recoup the bulk of its loss on the two payment bonds by recovering the full amount of this check from defendant.

At the trial in this court, it was stipulated by defendant's attorney and the attorney for the trustee in bankruptcy that out of the proceeds of the aforesaid check cashed by the contractor, $36,500 has not come into the possession of the trustee. It was also agreed that consideration of the question of whether any portion of the balance of $5,124.79 came into the possession of the trustee will be deferred until determination of the primary issue herein between the surety and the Government.

Plaintiff's claim to recovery is based upon the contention that the authorized officials of the Bureau of Public Roads, after receiving due notice of facts giving rise to an equitable right to the contract proceeds in the surety over the contractor, and after being notified of plaintiff's assertion of such a right, paid out the proceeds in question to the contractor without any legal justification for so doing. Plaintiff claims that the facts of the present case are analogous to those in Newark Insurance Co. v. United States, 144 Ct.Cl. 655, 169 F.Supp. 955 (1959), wherein this court, confronted with issues somewhat similar to those now framed by plaintiff, awarded judgment for a surety against the United States. To decide the merits of the above contention a review of the salient facts of the case is necessary.

Alfred G. Mansfield, an insurance agent specializing in contract bonds and insurance for contractors, wrote the bonds for Stegeman, the contractor, on both the Mt. Hood and Whittaker Creek contracts. Sometime in September of 1960, Mansfield received a copy of a letter from the Bureau of Public Roads to Stegeman acknowledging receipt of an attempted assignment of contract proceeds by Stegeman to one of his employees. Although the proposed transfer of proceeds was not effected and was ultimately rejected by the Bureau, the mere fact that such a transaction had been attempted aroused concern on Mansfield's part that Stegeman might be experiencing some financial difficulty. Consequently, he telephoned the local office of the Bureau and objected to the proposed assignment, stating that plaintiff would never consent to such action. Shortly thereafter, Mansfield was informed by an official of the Bureau that a claim had been asserted by a supplier to a subcontractor of Stegeman. No request was made by Mansfield that payments under the Stegeman contracts be withheld.

The attempted assignment came to the attention of Seymour W. Tanner, an underwriter in plaintiff's Portland, Oregon, office, at about the same time and led him, also, to suspect that Stegeman was in some distress. As a result, he began to keep check on Stegeman's financial status by making periodic inquiries to determine whether he was paying his bills promptly. In the middle of November 1960, Tanner learned that a creditor, McNeilus, had a claim for approximately $6,000 against Stegeman on the Whittaker Creek contract. On November 14, 1960, Tanner, concerned by this clear indication of financial difficulty, communicated with W. T. Peterson, chief of the Administrative Audit Section in the Portland office of the Bureau of Public Roads, and informed him of the McNeilus claim. Peterson, who was apparently unaware of the claim, responded by advising Tanner about another claim against Stegeman on the Mt. Hood contract by F. H. McEwen, in the amount of $4,800. Peterson further informed Tanner that the final voucher for the Mt. Hood contract was still in his possession and was about to be approved and paid to the contractor. Tanner requested Peterson to delay payment of the final voucher, and Peterson accommodated by agreeing to delay final payment until November 18, 1960.

Tanner also inquired as to whether it would be possible to have a representative of the surety present when the proceeds were ultimately disbursed to the contractor, but Peterson informed him that under the Bureau's normal procedure the check would be mailed directly to Stegeman.

Tanner did not make a written request to Peterson to permanently withhold final payment under the Mt. Hood contract. Peterson did not, in any case, have authority on his own to indefinitely withhold payment merely because he had discovered or had been informed that the contractor was experiencing a certain amount of financial irregularity. Approval of the contracting officer would first have to be obtained before such a serious step could be taken. At the trial here, Peterson stated that he did not recall having received a verbal request from Tanner to stop payment and noted that if he had been so requested, he would undoubtedly have automatically discussed the matter with the contracting officer and have advised the surety to make a formal request in writing.

After the above conversation had been concluded, Tanner, in accordance with company procedure, sent a preliminary loss notice to plaintiff's Tacoma, Washington, home office for the purpose of encouraging the company's claim department to protect its interests by filing a formal request for the withholding of all payments to Stegeman until appropriate action could be taken to make the company joint payee of the proceeds still due. Under plaintiff's procedure, a request to withhold payments from a contractor emanates from plaintiff's home office in Tacoma and not from the local underwriter. In this November 14, 1960, communication, the home office was informed by Tanner of the relevant facts in the case, including the exact date when final payment would be made by the Government to Stegeman. The notice contained the following statement: "Final voucher totaling $41,000 on the Mt. Hood job ready for payment this date, but Bureau has agreed to hold it until Nov. 18th. Stegeman should receive this Nov. 22nd or 23rd. Final on Whittaker Creek job will run about $6,000 and will be forwarded to Stegeman in about two weeks. We feel that Stegeman should perhaps be consulted prior to his receipt of the $41,000 next Tuesday or Wednesday."

The final voucher was approved by the contracting officer on the next day, but Peterson, pursuant to his agreement with Tanner, held the voucher until November 18, 1960. At that time, it was scheduled for payment and forwarded to a central disbursing office. On November 22, 1960, the check for $41,624.79 was issued to the contractor, and on November 30, 1960, it was cashed by Stegeman. The proceeds have never been recovered, as Stegeman promptly disappeared (apparently to Canada) and has not been heard from since.

Not until March of the next year (some 4 months after Tanner's conversation with Peterson) did plaintiff's home office make demand upon the Bureau of Public Roads for the contract proceeds. On March 16, 1961, plaintiff's claim department wrote a letter to the Bureau requesting that it either pay the remaining funds assertedly still in its possession or take appropriate...