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107 O. Cls.

Opinion of the Court

contract, as shown in finding 5, and the amount now claimed by plaintiff in this proceeding:

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Denver, Colorado, Contract WA-2-pb-531.. $1, 423. 67
Tulsa, Oklahoma, Contract WA-2-pb-629.

5, 116. 10 Whitewater, Wisconsin, Contract WA-2-pb-597- 910.00 Portland, Maine, Contract WA-2-pb-609.

3,649.00 Skowhegan, Maine, Contract WA-2-pb-702.

391. 60 Gallup, New Mexico, Contract WA-2-pb-806... 964. 66 Total..

12, 445.03 Less: Amounts previously paid plaintiff (see finding 8). Total amount claimed by plaintiff....

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No payments have been made to the plaintiff, on account of the claims involved in this proceeding, other than herein described.

The court decided that the plaintiff was entitled to recover. LITTLETON, Judge, delivered the opinion of the court:

The question presented for determination in this case involves the legal and equitable rights of the Government and the surety on certain Government contracts who paid certain amounts for labor and material claims under its payment bonds given in connection with such contracts, in a certain portion of the total of the balances in the hands of the Government and remaining due under said contracts upon completion and acceptance of the work called for by such contracts.

In May and July, 1940, the Federal Contracting Corporation, a New York corporation, entered into six contracts with the United States for the painting and repairing of certain Federal buildings, as set forth in finding 2. Under the terms of the bids of the Federal Contracting Corporation, the contracts, and the provisions of the act of August 24, 1935, 49 Stat. 793, payment and performance bonds were given by the contractor on each of which The Aetna Casualty and Surety Company was surety for the payment by the contractor to all persons supplying labor and material in the prosecution of the work provided for in said contracts and for the performance of work called for thereby. The contractor completed all six contracts and the work was duly


Opinion of the Court accepted by defendant. The record does not show the exact dates on which these six contracts were completed, but they appear to have been completed during 1940. The Federal Contracting Corporation, however, as to five of the six contracts, defaulted under its payment bonds and under the contract in failing to make payment of $13,065.93 to certain persons who had supplied and furnished labor and material for use in performance of the several contracts, as set forth in finding 5. Upon completion and acceptance there remained due from the Government a certain balance under each contract, which balances totaled $12,445.03. The Government had notice of the outstanding claims for labor and material. The persons supplying labor and material to the contractor made claims upon the Aetna Company, as surety on the payment bonds given under such contracts, and the Aetna Company after having verified the correctness of such claims made payment of the several claims due under five of the contracts in the total amount of $13,065.93 between April 7 and September 6, 1941—the last payment being in the amount of $35.00. The greater part of the total amount of all claims for labor and material was paid on May 12, 1941. By reason of these payments by the Aetna Company it became subrogated to all the rights of the Federal Contracting Corporation, the laborers and materialmen, whose claims the Aetna Company paid, and of the Government so far as its rights under the contracts were concerned, in the balances due under the contracts in connection with which the surety made such payments, to the extent of such balances, and to the extent of payments made where such payments were less than the balances due under the particular contract. Prairie State Bank v. United States, 164 U. S. 227; U.S. Fidelity and Guaranty Company v. United States, 92 C. Cls. 144. The legal and equitable rights of the surety to the balance due under said contracts were superior to those of the United States as a general creditor of the defaulting contractor on a claim arising independently of any of the contracts in connection with which the surety made such payments under its bonds. Maryland Casualty Corporation, a corporation v. United States, 100 C. Cls. 513.

The balances, totaling $12,445.03, remaining in the hands 107 C. Cls. Opinion of the Court of the Government and due under the six completed contracts were not paid, however, to the surety, as claimed by it, to the extent of $9,281.76, finding 10, but only $5,713.53 was paid. The difference between the total of the labor and material claims paid by the Aetna Company, and applicable to the balances remaining due under five of the contracts in the total amount of $9,281.76, and the amount of $5,713.53 paid to the surety by defendant, is $3,568.23, which amount the plaintiff, on behalf of the surety, seeks to recover herein.

The refusal of the defendant to pay the Aetna Company $9,281.76 on its claim, and to pay the plaintiff, after it was appointed receiver, the entire balances totaling $12,445.03, was due to the fact that the Federal Contracting Corporation had become indebted to the Government for $6,731.50 on an independent transaction not arising under any of the contracts in connection with which the surety had made payments under its payment bonds, and the claim of the Government that its right of offset was superior to any legal or equitable right which the Aetna Company, as surety, had under the contracts and the payment bonds in the balances remaining due under those contracts.

The offset made by the Comptroller General was the result of a settlement and adjustment made by him under authority of section 236 of the Revised Statutes, 31 U.S. Code section 71, to satisfy a debt due by the Federal Contracting Corporation to the Government which arose in the manner hereinbelow set forth.

On October 18, 1940, the Federal Contracting Corporation, pursuant to an advertisement and invitation for bids by defendant, submitted a bid in the sum of $20,743.00 for painting the Post Office building at St. Louis, Mo. This bid was accepted by defendant, and the contractor signed the standard form of Government contract which, in its bid, it had agreed to execute. However, the contractor was unable to furnish surety bonds for performance and for payment to all persons supplying labor and material in prosecution of the work provided for in the contract. Thereupon the United States refused to award the contract to the Federal Contracting Corporation. It readvertised and relet the work to be performed to the lowest bidder at $27,867.00, which, together


Opinion of the Court with the cost of readvertising in the amount of $22.50, created an indebtedness of $7,146.50 from the Federal Contracting Corporation to the United States. After the application of the cash deposit of $415.00 made by the Federal Contracting Company with its bid, there remained an indebtedness due from the contractor of $6,731.50.

Soon after its appointment as receiver, as set forth in finding 7, plaintiff on January 10, 1942, formally notified defendant of its appointment and demanded payment to it by the United States of the balances due under the contracts hereinbefore mentioned, and requested that settlement under each of the contracts be made and that the balances due be paid over to it. Instead of doing this, the Comptroller General on September 27, 1943, made the offset of $6,731.50, as above mentioned, and paid the balance of $5,713.53 to plaintiff. Plaintiff protested this adjustment and settlement to the extent of $3,568.23, and on March 15, 1944, after the decision of this court in Maryland Casualty Company v. United States, supra, further protested the action of the Comptroller General and requested reconsideration and payment of the additional amount of $3,568.23 under authority of the Maryland Casualty Company decision. The Comptroller General refused to modify the settlement which he had made and advised plaintiff of his reasons therefor as follows:

At the outset, in considering the effect to be given to the holding of the Court of Claims, above referred to, it appears proper to repeat the sentiment often heretofore expressed that while the decisions of inferior courts are all given most careful study and consideration, especially where it appears that the merits of the legal principles involved have been presented to, and fully and faithfully considered by the court, nevertheless, it is the responsibility of this office, under the act of June 10, 1921, 42 Stat. 24, in the settlement and adjustment of claims, both for and against the United States, ultimately to determine the law for itself. 14 Comp. Gen. 648, 5 id. 720; 3 id. 479; id. 316.

This office does not consider the holding in the Maryland case a controlling precedent with respect to the right of subrogation of a surety to amounts otherwise due from the United States, as against the right of the Government to set off, out of such funds, moneys due from the surety's defaulting principal, The Govern107 C. Cls. Opinion of the Court ment's right of set-off is a legal right. This is so whether it be considered to derive from section 236, Revised Statutes, 31 U. S. C. 71 (see Taggart v. United States, 17 C. Cls. 322), or whether it be considered merely as a part of the general law of set-off. See Watkins v. United States, 9 Wall 759, 764; United States v. Eckford, 6 id. 484, 488; Pennsylvania Railroad Co. v. Miller, 124 F. 2d 160, 162; The Gloria, 286, F. 188, 192, affirmed sub nom., United States v. The Thekla, 266 U. S. 328. When, therefore, a surety's equitable right of subrogation comes in conflict with the Government's legal right, the equitable right must yield. “Subrogation being thé creature of equity

it will not be enforced

at the expense of a legal right." German Savings and Loan Society v. Tull, 136 F. 1, 6; Gray v. Jacobsen, 13 F. 2d 959; Federal Land Bank v. Smith, 129 Me. 233, 151 Atl. 420; Rand v. Cutler, 155 Mass. 451, 29 N E. 1085.

Accordingly, and in the absence of a contrary ruling by the Supreme Court of the United States, the Maryland case may not be accepted to change or modify the long standing view of this office that the right of the United States to have its debts first satisfied from funds earned by a contractor is paramount to the right of a surety asserting a loss in making payment of the claims of materialmen and laborers, and the action heretofore

taken in the matter must be, and is, affirmed. In its brief and argument in this case the defendant seeks to sustain the position taken by the Comptroller General and has reargued the question decided by this court in the Maryland Casualty Company case. We find no reason for modifying our opinion in that case.

In Moran v. Guardian Casualty Company, 76 Fed. (20) 438, the Circuit Court of Appeals for the District of Columbia said:

In Lyttle v. National Surety Co., 43 App. D. C. 136, we held, in a case involving the rights of a surety who had paid the claims of laborers and materialmen under a bond similar in all respects to the one here, that the surety was entitled to be subrogated not only to the rights of the contractor, but also to the rights of the United States under the contract. The former rights are here and generally bootless, but the latter include every right which the United States were capable of asserting against contractor bad the surety not satisfied the obli

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