United Pacific Insurance Company v. United States

• Citation: 319 F.2d 893
• Decision Date: 12 July 1963
• Docket Number: No. 110-61.,110-61.
• Parties: UNITED PACIFIC INSURANCE COMPANY v. The UNITED STATES and Tinkham GILBERT, Trustee in Bankruptcy of Floyd R. Grubb, Third-Party.
• Court: Court of Federal Claims

319 F.2d 893 (1963)

UNITED PACIFIC INSURANCE COMPANY v. The UNITED STATES and Tinkham GILBERT, Trustee in Bankruptcy of Floyd R. Grubb, Third-Party.

No. 110-61.

United States Court of Claims.

July 12, 1963.

Edward Gallagher, Washington, D. C., for plaintiff.

T. W. Churchill, Salem, Or., for third party.

Gerson B. Kramer, Silver Spring, Md., with whom was Asst. Atty. Gen. John W. Douglas, for defendant.

Before WHITAKER, Acting Chief Judge, REED, Justice (Retired), sitting by designation, and LARAMORE, DURFEE and DAVIS, Judges.

WHITAKER, Judge.

Pursuant to the terms of a contract between Floyd R. Grubb, d/b/a Floyd R. Grubb Construction Company (hereinafter called the contractor), and the United States, acting through the Department of the Interior, Bureau of Reclamation, for the construction of certain earthwork, structures, and surfacing relocation of Trinity County Road in the State of California, the United States is withholding $48,087.63 (consisting of an earned estimate of $19,339.68, plus retainage of $28,747.95). Entitlement to this fund is claimed by both the plaintiff, United Pacific Insurance Company, as surety upon payment and performance bonds executed on behalf of the contractor, and by third-party, Tinkham Gilbert, Trustee of the Estate of Floyd R. Grubb, Bankrupt. The surety and the trustee each move for summary judgment.

The United States has filed a counterclaim or offset for $930.67, with interest, for Federal withholding and unemployment taxes which were duly assessed against the bankrupt contractor and are still owing. The parties have conceded this claim as a valid offset against the claims of the surety and the trustee. United States v. Munsey Trust Co., 332 U.S. 234, 67 S.Ct. 1599, 91 L.Ed. 2022 (1947); Cf. Pearlman v. Reliance Insurance Company, 371 U.S. 132, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962). The Government otherwise admits holding an unexpended contract balance of $48,087.63.

The material facts, as established by the pleadings and supporting affidavits, show that the contracting parties entered into their agreement on or about July 10, 1959, at which time the surety furnished its performance and payment bonds in accordance with the requirements of the so-called Miller Act, 49 Stat. 793 (1935), 40 U.S.C. § 270a (1958). The contractor proceeded with performance of the work until January 15, 1960, when he declared himself in default. The surety then assumed its obligations under both its performance and payment bonds, completing the work in August of 1960 (ahead of schedule) and paying all outstanding legitimate claims presented, at the total cost of $227,000.90.

On October 25, 1960, the contractor was adjudicated a bankrupt upon a voluntary petition filed by him in the United States District Court for the District of Oregon, and Mr. Tinkham Gilbert was appointed Trustee by order of that court.

It is the surety's position that under established principles of subrogation and exoneration, it is entitled to succeed to the rights of the United States, as well as to the rights of subcontractors, laborers and materialmen to whom it has paid monies by virtue of the terms of its bonds, and that its claim is superior to that of the Trustee in Bankruptcy. The surety's claim absorbs the entire contract balance, inasmuch as its loss under the bonds is in excess of this amount.

The trustee contends that his claim to the fund held by the United States is superior to the claim of the surety on the ground that the contractor did not default, but did, in fact, complete performance of the contract, thus eliminating the performance bond. He further contends that the surety has no right of subrogation under the payment bond because a necessary prerequisite to the right to subrogation herein is that the surety shall have paid all subcontractors, materialmen and laborers, which, he alleges, the surety has not done.

The superior rights of the surety of a defaulting contractor to subrogation, when the surety completes the contract after the default of its principal and has paid all claims of laborers and materialmen arising from said contract, was settled by the Supreme Court long ago concerning both performance bonds (Prairie State Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed. 412 (1896)) and payment bonds (Henningsen v. United States Fidelity and Guaranty Company, 208 U.S. 404, 28 S.Ct. 389, 52 L.Ed. 547 (1908)). Following these opinions, this court has upheld the superior rights of sureties as against the claim of an assignee bank, a financing institution, a trustee in bankruptcy, and other third parties. See National Surety Corporation v. United States, 133 F.Supp. 381, 132 Ct.Cl. 724 (1955) cert. denied First Bank of Houston v. United States, 350 U.S. 902, 76 S.Ct. 181, 100 L.Ed. 793; Continental Casualty Company v. United States, 169 F.Supp. 945, 145 Ct.Cl. 99 (1959).

Because some confusion developed among the circuits concerning the status of the Prairie Bank and Henningsen cases after the passage of the Miller Act, supra, and the opinion in United States v. Munsey Trust Company, supra, the...