Opinion ID: 334715
Heading Depth: 2
Heading Rank: 2

Heading: equitable subrogation theory

Text: 16 The secondary basis for recovery asserted by United Bonding was its equitable right of subrogation for disbursements made pursuant to its duties under the performance and payment bonds. See Pearlman v. Reliable Insurance Co., 371 U.S. 132, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962). As the district court acknowledged, United Bonding acquired an equitable right to payments due Miranti under the contracts, to the extent of its net costs. 6 17 It is agreed that this equitable right is potentially applicable only to five of the contracts at issue in this case. Under these contracts, Miranti was to receive a total of about $32,800 during the critical October 9 to November 1 time period. CATCO retained $2,430.22 of the total due, and the district court awarded a judgment in this amount to United Bonding. 7 CATCO paid out the remainder to Miranti and an assignee bank. At the time, United Bonding recovered $5,430 of the payments directly from Miranti. United Bonding now seeks the remaining $25,000 on the theory that CATCO wrongfully disbursed this money. 18 United Bonding's equitable right is not contested on this appeal; if CATCO had not paid out the contract balances then the bond company would have an undisputed right to all the money retained. This right relates back in time to the bonding agreement and has priority over the rights of the contractor or an assignee. National Shawmut Bank v. New Amsterdam Casualty Co., 411 F.2d 843, 848-49 (1st Cir. 1969). The question remains, however, whether CATCO is liable for having paid someone other than United Bonding after receiving notice of the bond company's rights. 19 If these contracts had been fully performed by the time the payments came due, then CATCO would have been a stakeholder faced with the conflicting claims of Miranti (and its assignee bank) and United Bonding. Payment to the contractor would not discharge liability if the surety subsequently established a right to the funds. American Fidelity Fire Insurance Co. v. United States,513 F.2d 1375, 1379 (Ct.Cl.1975); Home Indemnity Co. v. United States, 376 F.2d 890, 893-94, 180 Ct.Cl. 173 (1967). 20 On the other hand, CATCO would not have been a stakeholder if the contracts were still in progress. The interest in obtaining timely completion of the contracts could give CATCO a legitimate reason for continuing progress payments to the contractor. In such a case the contracting party has discretion to continue paying the contractor and is liable to the surety only for an abuse of that discretion. The contracting party must balance its  interests in proceeding with the contract, against possible harm to the surety in deciding whether to continue payments. United States Fidelity & Guaranty Co. v. United States, 475 F.2d 1377, 1384-85, 201 Ct.Cl. 1 (1973); accord, Argonaut Insurance Co. v. United States, 434 F.2d 1362, 1368-69, 193 Ct.Cl. 483 (1970); Fireman's Fund Insurance Co. v. United States, 362 F.Supp. 842, 845-46 (D.Kan.1973). 21 The Final Payment 22 The district court found CATCO to be a stakeholder as to one of the contracts, in which it made a final payment after the project had been actually completed. However, the court found that this payment of $1,663.80 to Miranti was subsequently turned over to United Bonding, and thus denied the bond company a double recovery. The evidence that this money was turned over to United Bonding was purely circumstantial; however, we cannot say that the district court's finding was clearly erroneous. 23 The Three Progress Payments 24 Pursuant to three other contracts there were progress payments which raise a more serious question. 8 The court concluded that these projects were not physically completed as of the dates payments were made. It indicated that its conclusion was based on a stipulation by United Bonding which denominated some later payments made by CATCO as progress payments. However, this inference is by no means unambiguous. 9 Moreover, the same document relied upon by the district court to establish that one contract was actually completed before payment was made shows also that the three contracts here in question were actually completed on or before the dates of the contested payments. 10 In any event, the labeling of a payment as a progress payment cannot be dispositive of whether the contracts in question were completed. See Great American Insurance Co. v. United States, 492 F.2d 821, 825, 202 Ct.Cl. 523 (1974). 25 It is possible the district court based its conclusion on a finding that the three contracts in question were not legally completed as of the date CATCO made the disbursements in question. However, a contracting party is not always privileged to prefer the contractor to an equitable subrogee prior to legal completion of the contract. The question is whether CATCO had a good reason to overlook the bond company's subrogation rights to the payments. This requires a balancing of the interests at stake, and CATCO is liable if it abused its discretion in continuing to pay Miranti. We are satisfied that once a construction project is physically completed, continued payment to the contractor instead of the subrogee is unlikely to be justified. 11 26 Whether or not CATCO's continued payments were improper also depends on the extent of its knowledge of Miranti's financial difficulties and of the bond company's rights. This is not a black-and-white question: the degree of notice must be balanced against the extent of CATCO's interest in continuing its payments to the contractor. Where a construction project is physically completed or virtually so, the interest in continuing to receive performance is not likely to be substantial; thus a relatively summary notice to CATCO would be sufficient to make it liable to the bond company for subsequent wrongful disbursements.