Opinion ID: 4777078
Heading Depth: 3
Heading Rank: 2

Heading: The narrow construction of “paid in full”

Text: The narrow construction of “paid in full” is that a surety makes payment “in full” once it “pays in full the portion of the creditor’s claim to which it stood as surety.” 4 Collier on Bankruptcy ¶ 509.04 (citing In re Tri-Union Dev. Corp., 314 B.R. 611 (Bankr. S.D. Tx. 2004)). “[T]he surety’s subrogated claim is not subordinated to the remaining portion of the creditor’s claim.” Id. Here, under the narrow construction, the issue is whether ICSP had made payment in full on its suretyship obligations for the NPCC Contract before the Settlement Order was entered on June 28, 2016.
obligations “in full” While there is limited authority on what constitutes payment in full, the “secondary authorities agree that to subrogate a claim, payment in the technical sense is not required.” Feldhahn v. Feldhahn, 929 F.2d 1351, 1354 (8th Cir. 1991). Rather, “[w]hatever discharges the liability and is accepted as payment is sufficient.” Id. (quoting 73 Am. Jur. 2d Subrogation § 29 (1974)); see also Chateaugay I, 89 F.3d at 948 (citing Feldhahn, 929 F.2d at 1354). And 11 U.S.C. § 509(c) provides that payment in full may be made “either 19 through payments under this title or otherwise.” Again, in the context of defaulted government contracts, a surety generally meets its obligation by “taking over and completing performance,” or “assuming liability for the government’s costs in completing the contract which are in excess of the contract price.” Ins. Co. of the W., 243 F.3d at 1370. As discussed above, to satisfy its suretyship obligations here, ICSP arranged for MVL to complete the work on the NPCC facility, and ICSP agreed to cover the payment of the excess costs. A reasonable factfinder could conclude that the United States was “paid in full” either when ICSP made the final payment to MVL on September 7, 2016, or when the United States sent the August 24, 2016 letter releasing ICSP from its suretyship obligations. But, as discussed below, there is no evidence in the record that would permit a reasonable factfinder to conclude that the United States was paid in full at any time before the June 28, 2016 Settlement Order was entered.4 So ICSP had not made payment in full at that time, and its rights were subordinate to the United States’ rights under Section 509(c). 4 The Bankruptcy Court determined that “[f]urther discovery would not help ICSP” on this issue. LTC Holdings, 597 B.R. at 577. ICSP has forfeited any challenge to that ruling by failing to raise the issue in its briefing. See Wettach, 811 F.3d at 115. 20
in full” are unavailing ICSP primarily argues that it completed its NPCC suretyship obligations on or about February 11, 2016, “when the physical work of the NPCC contract was completed.” Appellant’s Br. 42. ICSP correctly notes that the United States’ August 24, 2016 letter released ICSP from its suretyship obligations and stated that, following an inspection conducted February 10, 2016, the “construction progress [was] sufficiently complete to allow the Government use and occupancy of the facility effective February 11, 2016.” A389 (italic emphasis added). But, on its face, that statement does not indicate that the United States deemed ICSP’s suretyship obligations “actually complete” in February 2016, especially when the statement is viewed in the context of the record here. As the Bankruptcy Court emphasized, the uncompleted and unpaid work on the NPCC facility was the basis for the United States’ contingent DoD Surety Claim. See LTC Holdings, 597 B.R. at 578. When the United States filed its amended USPOC on May 24, 2016, the United States declared that the DoD Surety Claim was still “contingent upon the completion” of the NPCC Contract pursuant to the Tender Agreement. A636. That is not surprising, as ICSP later made three payments to MVL on July 25, August 18, and September 7, 2016, each for over $600,000. Those payments, in conjunction with the fact that the United States did not explicitly release ICSP from its suretyship obligations until August 2016, preclude a reasonable factfinder from concluding that ICSP had made payment in full in February 2016. 21 ICSP further argues, in the alternative, that it “discharged its obligations to the United States under the NPCC Performance Bond by entering into the NPCC Tender Agreement” in August 2014. Appellant’s Br. 40. It is true that, in some cases, a promise may “effectively discharge” a debt. See Chateaugay I, 89 F.3d at 948 (collecting cases). As the Bankruptcy Court explained, in those cases, the “understanding and behavior of both parties” indicate that the promise satisfies the debt. LTC Holdings, 597 B.R. at 577; see also id. (discussing Feldhahn, 929 F.2d at 1352, in which “the court treated the obligation as discharged because the bank cancelled the note it held for a divorced couple’s debt after the non-debtor wife assigned it the proceeds from a contemplated real estate sale”). But here, based on the record and the text of the Tender Agreement, the agreement itself did not satisfy ICSP’s suretyship obligations. The Tender Agreement provided that “[t]he Surety’s bonds shall remain in force and effect during the performance of Work by [MVL] up to the complete expenditure of the penal sum of the Performance Bond.” A364. Thus, the Tender Agreement merely set forth agreedupon actions that, once taken, would satisfy ICSP’s obligations. Again, the United States expressly indicated in its May 2016 amended USPOC that ICSP’s suretyship obligations were not yet satisfied. Relying on In re Chateaugay Corp., 94 F.3d 772, 780 (2d Cir. 1996) (“Chateaugay II”), which is discussed in detail below, ICSP alternatively argues that the United States was 22 paid in full through its settlement with the Debtors. But even assuming that the provisions of the Settlement Stipulation could have paid the United States in full here, the Settlement Stipulation did not take effect until after the entry of the Settlement Order. And the Settlement Order reserved ICSP’s rights as they existed “prior to the entry of this Order.” A277. Thus, any “payment” to the United States in the Settlement Stipulation cannot be used to determine the status of ICSP’s performance, and attendant subrogation rights, “prior to the entry” of the Settlement Order. In its reply brief, ICSP further argues that, as of June 2016, it was merely withholding the final payment until the United States sent a letter accepting MVL’s work. Specifically, ICSP argues that “it is neither unusual nor a contractual breach for a surety to withhold final payment to a completion contractor . . . until after a construction project’s owner formally confirms its acceptance of the work in writing.” Appellant’s Reply Br. 9. We do not need to evaluate the legal merit of that argument, as it rests on a factual premise that is not supported by the record here. No evidence supports ICSP’s view that, in June 2016, it was withholding only a final payment pending a letter from the United States accepting MVL’s work. After the Settlement Order was entered in June 2016, ICSP made three aforementioned payments (each over $600,000) on July 25, August 18, and September 7, 2016. Only the September 7 payment was made after the United States sent the August 24, 2016 letter releasing ICSP from its suretyship obligations. Thus, no reasonable factfinder could conclude that either the July 25 or the August 18 payment was a “final 23 payment” that ICSP was withholding until the United States accepted MVL’s work. Therefore, we conclude both that the United States was not yet “paid in full,” within the meaning of 11 U.S.C. § 509(c), prior to the entry of the Settlement Order on June 28, 2016, and that ICSP’s subrogation rights were subordinate to the United States’ remaining and superior claim at that time.