1. Notwithstanding claims of a surety on a statutory payment
bond (given under 40 U.S.C. § 270a) for reimbursement for sums paid
to laborers and materialmen, the Government may set off, against
unappropriated percentages of progress payments withheld by it and
due to the contractor on the construction contract, a debt owed to
it by the contractor as a result of a separate and independent
transaction. Pp.
332 U. S.
236-244.
2. When a receiver is appointed for a contractor with
instructions to collect money owing to the contractor by the
Government and to hold it for reimbursement of a surety on a
payment bond for payments made to laborers and materialmen, a suit
in the Court of Claims by the receiver against the Government for
money due the contractor is in the right of the contractor, but the
receiver may assert the surety's rights also. P.
332 U. S.
239.
Page 332 U. S. 235
3. Under Judicial Code § 145, 28 U.S.C. § 250, when a receiver
asserts in the Court of Claims a contractor's title to a sum owing
to him by the Government, that Court is under statutory duty to
recognize an undisputed claim of the Government against the
contractor. Pp.
332 U. S.
239-240.
4. With reference to withheld and unappropriated percentages of
progress payments on a construction contract, performance of which
has been completed and accepted, the Government is not a mere
general creditor, but a secured creditor entitled to withhold what
it owes the contractor until it is paid whatever the contractor
owes the Government. P.
332 U. S.
240.
5. A surety on a payment bond who has paid laborers and
materialmen for labor and material furnished under a Government
construction contract is not entitled, by subrogation to their
rights, to a lien on unappropriated percentages of progress
payments retained by the Government for its own protection. Pp.
332 U. S.
241-242.
6. The right of the Government to retained percentages of
progress payments on a construction contract does not devolve on a
surety who has paid laborers and materialmen, so as to prevent the
Government from applying the unappropriated sum to the satisfaction
of its own claim growing out of a separate and independent
transaction. Pp.
332 U. S.
242-243.
7. The provisions of 40 U.S.C. § 270a requiring a separate bond
for payment of laborers and materialmen were enacted for their
benefit, and do not give sureties who have paid them rights to the
detriment of the Government. Pp.
332 U. S.
243-244.
8. When the work to be done under a Government construction
contract has been completed at the contract price and accepted by
the Government, the law of damages is not pertinent to the rights
of a surety on a payment bond given under 40 U.S.C. § 270a who has
paid laborers and materialmen. P.
332 U. S.
244.
107 Ct.Cl. 131, 67 F. Supp. 976, reversed.
Notwithstanding the existence of a claim by the Government
against the contractor growing out of another transaction, the
Court of Claims gave judgment against the Government to a receiver
for a contractor for withheld and unappropriated percentages of
progress payments on a construction contract, to be used by the
receiver in reimbursing a surety on a payment bond for payments
made
Page 332 U. S. 236
to laborers and materialmen. 107 Ct.Cl. 131, 67 F. Supp. 976.
This Court granted certiorari. 330 U.S. 814.
Reversed, p.
332 U. S.
244.
MR. JUSTICE JACKSON delivered the opinion of the Court.
This case presents a problem arising out of contracts for public
building construction and repair. The rights
inter sese of
contractor, surety, assignees, and government have been productive
of much litigation, but we have not heretofore had to decide
whether percentages retained pursuant to contract by the United
States may be subjected to its setoff claims despite the claims of
a surety who has paid laborers and materialmen.
In May and July, 1940, six contracts were made between the
United States and the Federal Contracting Corporation, in which the
corporate contractor agreed to paint and repair certain federal
buildings. Each contract conformed to the requirements of statute,
49 Stat. 793, 40 U.S.C. § 270a
et seq., by providing for
two surety bonds, one conditioned on the completion of the work
within the contract period and the other on the payment of those
furnishing labor and material to the contractor. The Aetna Casualty
and Surety Company signed those bonds, each of which assigned to it
the contractor's claims against the government for sums due on the
contracts whenever the surety should be compelled
Page 332 U. S. 237
by default of the contractor to fulfill its obligations.
[
Footnote 1] The work was
completed by the contractor, apparently, in 1940, and accepted by
the government. The surety therefore was not called upon to make
good the promise of the performance bonds. But the contractor did
not pay $13,065.93 owed to persons who had supplied labor and
material for performance of five of the six contracts. This
indebtedness the surety paid between April and September, 1941 as
the payment bonds obliged it to do.
Under the customary terms of its contracts, the government had
retained percentages of the progress payments due to the
contractor. This retained money, on acceptance of the work,
amounted to $12,445.03, but it was not disbursed. On October 18,
1940, the Federal Contracting Corporation submitted a bid to the
United States for another painting job, in St. Louis. That bid was
accepted, but the contractor then failed to enter into contract for
the work. Another contractor painted the building for a price which
left the government considerably more out of pocket than it would
have been had Federal undertaken performance at its bid price. It
is undisputed that $6,731.50 is the amount of damages sustained by
the government after it had applied the contractor's deposit of
$415.00 in reduction.
Almost inevitably, court process was begun to untangle claims to
the money the United States still owed on the six contracts. A
stockholder of Federal asked the United States District Court for
the District of Columbia to appoint a receiver [
Footnote 2] to collect the money. The Aetna
Page 332 U. S. 238
Casualty and Surety Company was made a party to that action.
Respondent here, the Munsey Trust Company, was appointed receiver
with directions to demand and authority to receive from the United
States the proceeds of the six contracts. The order of appointment
also recited that
"the proceeds of all collections made by the Receiver pursuant
to this order shall be held for the reimbursement of the defendant
The Aetna Casualty and Surety Company for expenditures made by it
in the payment of furnishers of labor and material under the
several contracts of the Federal Contracting Corporation."
On demand by the receiver for the amounts due, the General
Accounting Office deducted the government's claim of $6,731.50 and
paid over $5,713.53. Aetna, by letter to the Comptroller General,
protested the government's settlement by setoff, and asserted its
right to an additional $3,568.23. [
Footnote 3] The receiver also protested the setoff and
demanded $3,143.23 for reimbursement of the surety. It relied upon
Maryland Casualty Co. v. United States, 100 Ct.Cl. 513, 53
F. Supp. 436. The Acting Comptroller General declined to follow the
opinion of the Court of Claims in the absence of ruling by this
Court, and rejected the protests. When the receiver reported its
efforts to the district court, it was ordered to turn over to the
surety the money collected, less $500. That sum was for prosecution
of suit in the Court of Claims for the recovery of whatever other
moneys "may be due under the contracts of the Federal Contracting
Corporation." This action was begun, and the Court of Claims gave
judgment for $3,568.23 to respondent. 67 F.Supp.
Page 332 U. S. 239
976. We granted the government's petition for certiorari because
of the importance and novelty of the question and the cumulative
effect of
Maryland Casualty Co. v. United States, supra,
and the decision below. 330 U.S. 814.
In these cases, it is usual for the rights relied upon to be
largely derivative or subrogated ones. Decision will be attended
with unnecessary confusion and difficulty if it is not clear whose
rights are being asserted and who claims them. The Court of Claims
treated this case as though the surety were plaintiff. But the
district court directed the receiver to bring the suit. Its order
of appointment made it the representative of Federal Contracting
Corporation, although the sums it was to collect were to be held
for the reimbursement of Aetna. The second order authorized this
action to collect whatever other money might be held to be due
under the six contracts which the government would not voluntarily
pay. Certainly, the receiver sued at least in the right of Federal,
but, since its efforts were directed to be for the benefit of
Aetna, it might assert the surety's rights also.
Samuel Olson
& Co. v. Voorhees, 292 F. 113, 115.
If the right of the United States to make the setoff were
opposed only by the claims of the contractor, this case would
present no difficulty. 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."
Gratiot v. United
States, 15 Pet. 336,
40 U. S. 370;
McKnight v. United States, 98 U. S.
179,
98 U. S. 186.
More than that, federal statute gives jurisdiction to the Court of
Claims to hear and determine
"All setoffs, counterclaims, claims for damages, whether
liquidated or unliquidated, or other demands whatsoever on the part
of the Government of the United States against any claimant against
the Government in said court. . . ."
Judicial Code § 145, 28 U.S.C. § 250(2).
Page 332 U. S. 240
This power given to the Court of Claims to strike a balance
between the debts and credits of the government, by logical
implication, gives power to the Comptroller General to do the same,
subject to review by that court. Insofar as the suitor in the Court
of Claims asserted the contractor's title to the sum in dispute,
that court was under statutory duty to recognize the undisputed
claim for damages of the United States.
Cherry Cotton Mills,
Inc. v. United States, 327 U. S. 536.
But the surety urges that it is subrogated also to the rights of
laborers and materialmen whom it paid and of the United States.
From
Prairie State Nat. Bank of Chicago v. United States,
164 U. S. 227, to
American Surety Co. v. Sampsell, 327 U.
S. 269, we have recognized the peculiarly equitable
claim of those responsible for the physical completion of building
contracts to be paid from available moneys ahead of others whose
claims come from the advance of money. But, in all those cases, the
owner was a mere stakeholder, and had no rights of its own to
assert. Respondent tells us that here, the United States is in the
same position, and that, as a general creditor, it has no more
right to the money which it holds than does any other general
creditor of the contractor.
At the time demand for payment was made by the receiver, the
claim of the United States on the St. Louis contract was extant for
some time. The disbursing officers therefore did not concede that
they held the entire amount of the retained percentages for
distribution to the contractor or others. And one whose own
appropriation and payment of money is necessary to create a fund
for general creditors is not a general creditor. He is not
compelled to lessen his own chance of recovering what is due him by
setting up a fund undiminished by his claim, so that others may
share it with him. In fact, he is the best secure of creditors; his
security is his own justified refusal to pay what he owes until he
is paid what is due him.
Page 332 U. S. 241
But the infirmity in respondent's case goes deeper. If the
United States were obligated to pay laborers and materialmen unpaid
by a contractor, the surety who discharged that obligation could
claim subrogation. But nothing is more clear than that laborers and
materialmen do not have enforceable rights against the United
States for their compensation.
Cf. H. Herfurth, Jr., Inc. v.
United States, 89 Ct.Cl. 122;
see Schmoll v. United
States, 105 Ct.Cl. 415, 455, 63 F. Supp. 753;
Maryland
Casualty Co. v. United States, 53 F. Supp. 436, 440. They
cannot acquire a lien on public buildings,
Hill v. American
Surety Co., 200 U. S. 197,
200 U. S. 203;
Equitable Surety Co. v. W. McMillan & Son,
234 U. S. 448,
234 U. S. 455,
and, as a substitute for that more customary protection, the
various statutes were passed which require that a surety guarantee
their payment. Of these, the last and the one now in force is the
Miller Act, under which the bonds here were drawn.
The surety says, nevertheless, that the laborers and materialmen
may have a lien, or something in the nature of a lien, on the
retained percentages. Its argument runs into logical difficulties.
For it asserts that the moneys are retained by the government as
much for assurance that the contractor will perform his contract by
paying the laborers and materialmen as by completing the work on
time. It is said to follow that, so long as they remain unpaid, the
contractor may not demand payment, and the government would be
justified in refusing to disburse the retained percentages.
[
Footnote 4] In that case, how
may the laborers and materialmen have a lien upon money which the
United States may legally keep? Surely it is not intended that the
laborers and materialmen
Page 332 U. S. 242
may claim payment of that which is not due to the contractor. We
are aware that the laborers and materialmen have been paid, so that
by no interpretation of the contracts between government and
contractor can there be restrictions on paying out the money
retained. It is said that it was the surety's payment of those
claims which released the asserted contract restrictions. In
relying on the rights of the laborers and materialmen, however, the
surety must establish that those rights existed before their claims
were paid. For it is elementary that one cannot acquire by
subrogation what another whose rights he claims did not have. Once
the laborers and materialmen have been paid, either by contractor
or surety, they have no rights in any fund. If, before they are
paid, the fund to which they are said to be entitled to look is
unavailable for the very reason that they are unpaid, the surety
relies on nothing when it relies on those nonexistent "rights." One
who rests on subrogation stands in the place of one whose claim he
has paid, as if the payment giving rise to the subrogation had not
been made.
See Aetna Life Insurance Co. v. Middleport,
124 U. S. 534,
124 U. S. 548.
He cannot jump back and forth in time and present himself at once
as the unpaid claimant and again under the conditions as they have
changed because payment was made.
We need not decide whether laborers and materialmen would have
any claim to the retained percentages if both contractor and surety
failed to pay them. Even if they do, certainly those would be
rights to which the surety could not be subrogated, for, by
hypothesis, it would have done nothing to earn subrogation.
The surety has yet another party whose rights it would claim if
it cannot prevail by substitution or contractor or laborers and
materialmen. This contention, too, was sustained by the Court of
Claims when it said that the rights of the United States devolved
upon the surety because of its payments. We are told that the
United
Page 332 U. S. 243
States retained the money to assure performance of all the
obligations of the contractor, and that the surety is entitled to
apply that security to indemnify itself for performing one of those
obligations. This is by analogy to the rule that an obligee, as
against a surety, may not apply security in satisfaction of debts
other than the one it secures.
See 4 Pomeroy, Equity
Jurisprudence, 5th Ed., 1075. But, although we have assumed, for
the purposes of another argument, that assurance that laborers and
materialmen will be paid is one of the reasons for retaining the
money, it seems more likely that completion of the work on time is
the only motive.
California Bank v. United States Fidelity
& Guaranty Co., 129 F.2d 751;
see Schmoll v. United
States, 105 Ct.Cl. 415, 455, 63 F. Supp. 753;
Maryland
Casualty Co. v. United States, supra, 53 F. Supp. at 439. It
is hardly reasonable to withhold money in order to assure payments
which perhaps can be made only from the money earned. In any event,
we are not prepared to apply law relating to security to
unappropriated sums which exist only as a claim.
Finally, the surety, by reference to the
Maryland
Casualty case,
supra, suggests that it has rights of
its own in the money which the government retained. It argues that
the implication of the several contracts among government,
contractor, and surety was that the moneys earned under the repair
contracts would be available to pay claims arising under each job.
However, if statute did not require a surety, there could be no
question that the government would have the right of setoff.
Respondent's contention then comes to this: that, by requiring the
contractor to furnish assurances that he will perform his
obligations to laborers and materialmen, the government has
deliberately decreased the ordinary safeguards it would have had to
enforce the contractor's obligations to it. We see nothing in the
words of the contract or the statute to lead us to this conclusion.
On the contrary, the statutory provisions requiring a separate
bond
Page 332 U. S. 244
for payment of laborers and materialmen were enacted for their
benefit, not to the detriment of the government. It is the surety
who is required to take risk. We have no warrant to increase risks
of the government.
Respondent 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 damage.
The work has been done at the contract price. The government cannot
suffer damage, because it is under no legal obligation to pay the
laborers and materialmen. In the case of the laborers' bond, the
surety has promised that they will be paid, not, as in the case of
performance bond, that work will be done at a certain price. The
law of damages is therefore not pertinent to the payment bond.
We hold that the government properly used its right to set off
its independent claim, and the judgment below must be
Reversed.
MR. JUSTICE BURTON dissents.
MR. JUSTICE DOUGLAS took no part in the consideration or
decision of this case.
[
Footnote 1]
These assignments were, of course, invalid against the United
States, R.S. § 3477, 31 U.S.C. § 203;
Martin v. National Surety
Co., 300 U. S. 588, but
they enable the surety to prevail over the contractor if there is
contest between them.
[
Footnote 2]
Such proceedings to appoint a receiver in the District of
Columbia are for the purpose of taking possession of a fund or
property and to prevent its loss or dissipation. Insolvency is not
a necessary allegation,
Houston v. Ormes, 252 U.
S. 469, and there is no claim in this case that the
contractor is insolvent.
[
Footnote 3]
The surety did not and could not claim the whole amount retained
by the government. The payments for which it was liable and which
it paid on two of the contracts exceeded, and, on the other four,
were less than, the amounts retained on each particular
contract.
[
Footnote 4]
If the money is retained only to assure performance of the work,
then the contractor might compel payment when the work is accepted.
In that case, the surety's argument falls, since obviously, before
paying, the government might set off claims against the
contractor.