Court Opinion

ID: 4537740
Source: CourtListenerOpinion
Date Created: 2020-05-29 16:00:52.849419+00
Date Added: 2024-06-11T12:43:07.387122
License: Public Domain

Case: 18-1394     Document: 71     Page: 1    Filed: 05/29/2020

   United States Court of Appeals
       for the Federal Circuit
                   ______________________

   GUARANTEE COMPANY OF NORTH AMERICA,
                  USA,
                Appellant

                              v.

                      IKHANA, LLC,
                          Appellee
                   ______________________

                         2018-1394
                   ______________________

     Appeal from the Armed Services Board of Contract Ap-
 peals in Nos. 60462, 60463, 60464, 60465, 60466, 61102,
 Administrative Judge James R. Sweet.
                  ______________________

      ON PETITION FOR REHEARING EN BANC
               ______________________

      PATRICK M. PIKE, Pike & Gilliss LLC, Towson, MD,
 filed a petition for rehearing en banc for appellant. Also
 represented by ROBERT KLINE.

    WILLIAM ATKINS SCOTT, Pederson & Scott, P.C.,
 Charleston, SC, filed a response to the petition for appellee.

     CORINNE ANNE NIOSI, Commercial Litigation Branch,
 Civil Division, United States Department of Justice, Wash-
 ington, DC, for amicus curiae United States.          Also
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 2      GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC

 represented by JOSEPH H. HUNT, ROBERT EDWARD
 KIRSCHMAN, JR., PATRICIA M. MCCARTHY.

    EDWARD GRAHAM GALLAGHER, The Surety & Fidelity
 Association of America, Washington, DC, for amicus curiae
 The Surety & Fidelity Association of America.
                  ______________________

 Before PROST, Chief Judge, NEWMAN, LOURIE, DYK, MOORE,
  O’MALLEY, REYNA, WALLACH, TARANTO, CHEN, HUGHES,
                and STOLL, Circuit Judges.
  WALLACH, Circuit Judge, with whom NEWMAN, DYK, and
  MOORE, Circuit Judges, join, dissents from the denial of
           the petition for rehearing en banc.
 PER CURIAM.
                          ORDER
     A petition for rehearing en banc was filed by appellant
 Guarantee Company of North America, USA and a re-
 sponse was invited by the court and filed by appellee
 Ikhana, LLC. A motion for leave to file an amicus curiae
 brief was filed by The Surety & Fidelity Association of
 America (“SFAA”) and granted by the court. The court fur-
 ther invited the United States to file an amicus curiae brief.
 The petition for rehearing and SFAA amicus curiae brief
 were first referred to the panel that heard the appeal, and
 thereafter, the petition for rehearing, response, and amici
 curiae briefs of SFAA and the United States were referred
 to the circuit judges who are in regular active service. A
 poll was requested, taken, and failed.
     Upon consideration thereof,
     IT IS ORDERED THAT:
     1) The petition for panel rehearing is denied.
     2) The petition for rehearing en banc is denied.
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 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC         3

    3) The mandate of the court will issue on June 5,
       2020.

                                FOR THE COURT

  May 29, 2020                  /s/ Peter R. Marksteiner
     Date                       Peter R. Marksteiner
                                Clerk of Court
Case: 18-1394    Document: 71      Page: 4   Filed: 05/29/2020

   United States Court of Appeals
       for the Federal Circuit
                  ______________________

   GUARANTEE COMPANY OF NORTH AMERICA,
                  USA,
                Appellant

                              v.

                     IKHANA, LLC,
                         Appellee
                  ______________________

                        2018-1394
                  ______________________

     Appeal from the Armed Services Board of Contract Ap-
 peals in Nos. 60462, 60463, 60464, 60465, 60466, 61102,
 Administrative Judge James R. Sweet.
                  ______________________

 WALLACH, Circuit Judge, with whom NEWMAN, DYK, and
 MOORE, Circuit Judges, join, dissenting from denial of a
 petition for rehearing en banc.
     I respectfully dissent from the court’s decision declin-
 ing to rehear this appeal en banc. I believe that under the
 doctrine of equitable subrogation a surety should be able to
 step into the shoes of a government contractor in the event
 of that contractor’s default under fundamental principles
 of contract law. As our precedent now erroneously stands,
 a surety is hindered from playing its necessary role in gov-
 ernment contracting—bringing efficient resolution to con-
 tract disagreements, assuming financial risk, and ensuring
 execution of performance—because it lacks the legal rights
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 2      GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC

 it needs to ensure speedy dispute resolution. See Admi-
 ralty Constr. by Nat’l Am. Ins. Co. v. Dalton, 156 F.3d 1217
 (Fed. Cir. 1998), Fireman’s Fund Ins. Co. v. England, 313
 F.3d 1344 (Fed. Cir. 2002). Moreover, I think that the in-
 terpretations of the Contract Disputes Act (“CDA”), which
 governs government contracting, in Admiralty and Fire-
 man’s Fund are based on an erroneous extrapolation of the
 CDA’s legislative history and are at odds with basic tenets
 of insurance contract law. I also have grave concerns about
 the implications of the impediment Admiralty and Fire-
 man’s Fund pose. Specifically, sureties for government
 contracts must recognize the downstream shoals of our
 case law, and either opt out of providing the service or, rec-
 ognizing the potential for heightened financial risk, charge
 a higher rate for their service—a cost that is passed onto
 the U.S. taxpayer and a court created structural ineffi-
 ciency in the system. Accordingly, I respectfully dissent.
                I. Government Contracting Law
      The CDA regulates how the federal government may
 contract with non-governmental entities. See 41 U.S.C.
 §§ 7101–7109. The CDA provides the statutory framework
 for contract dispute resolution. See id. §§ 7104–7107. Un-
 der the CDA, “[a] contractor . . . may appeal the decision
 [by a government contracting officer] to an agency board[,]”
 id. § 7104(a)—here, the Armed Services Board of Contract
 Appeals (“ASBCA”), see id. § 7105(a). Limiting such ap-
 peals to the contractor is based on the policy rationale of
 winnowing down all claims to a “single point of contact”;
 this prevents a deluge of duplicative claims—with their as-
 sociated costs—against the government for any given con-
 tract. See S. REP. No. 95-1118, at 16 (1978), reprinted
 in 1978 U.S.C.C.A.N. 5235, 5250 (“the Senate Report”).
 Where a surety takes over the contract, we have held that
 the surety assumes the liabilities of the original contractor
 and so is a “contractor” with the government, albeit solely
 with respect to the contract’s outstanding performance.
 See Fireman’s Fund, 313 F.3d at 1351 (determining that,
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 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC          3

 as the surety “was not a party to any contract with the gov-
 ernment prior to the takeover agreement,” the surety was
 not a “contractor” under the CDA and so could not bring
 claims against the government).
     A suretyship is a contractual relationship “where one
 person,” the obligator, “has undertaken an obligation [to an
 obligee] and another person[,]” the surety, “is also under an
 obligation or other duty to the obligee” to perform that ob-
 ligator’s duty “rather than the [obligator].” Restatement
 (First) of Security § 82 (Am. Law Inst. 1941). Where an
 obligator, such as a contractor, enters a contractual rela-
 tionship, the surety agrees to assume the contractor’s obli-
 gations—such as the performance and debts—of the
 contractor in the event of default. See Restatement (Third)
 of Suretyship & Guaranty § 1 (Am. Law Inst. 1996); see
 also Couch on Ins. §§ 1:14–15. Under the doctrine of equi-
 table subrogation, a surety, as a subrogee, can assert the
 claims of a defaulted obligator. See Restatement (Second)
 of Contracts § 317 (1981); id. § 340, cmt. a. We have held
 that “Congress had not intended for the Anti-Assignment
 Act to cover subrogation claims,” and therefore that “the
 Tucker Act’s waiver of sovereign immunity extends to a
 subrogee.” Ins. Co. of the W. v. United States, 243
 F.3d 1367, 1373–74 (Fed. Cir. 2001); see 28 U.S.C. §
 1491(a) (Tucker Act); 31 U.S.C. § 3727 (Anti-Assignment
 Act).
      A surety benefits both the contractor and the party
 seeking performance, here the government, because the
 surety’s agreement with the contractor ensures that, in the
 event of default, the contracted performance is executed
 without significant delay (a “performance” bond) and sub-
 contractors’ valid costs are paid in a timely manner (a “pay-
 ment” bond), while the cause of the default can be litigated.
 See 40 U.S.C. § 3131(b) (requiring government contractors
 to possess both performance and payment bonds); see also
 Couch on Ins. §§ 1:15, 163:10. If a surety fails to execute
 its obligations under either bond, the government may sue
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 4     GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC

 the surety. See Balboa Ins. Co. v. United States, 775
 F.2d 1158, 1160 (Fed. Cir. 1985) (concluding that “a surety,
 as [a] bondholder is as much a party to the [g]overnment
 contract as the contractor” and so may be sued by the gov-
 ernment).
      If a contractor defaults on its performance, the surety
 may discharge the performance bond in several ways. The
 surety “is not obligated to perform the contract of the con-
 tractor though it may do so[,]” such that it “may discharge
 its obligations by taking over the contract and completing
 performance, assuming liability for the government’s costs
 in completing the contract that exceed the contract price,
 or . . . provid[e] funds to an insolvent contractor to com-
 plete the performance.” Couch on Ins. § 164:14. The pay-
 ment bond is discharged through negotiation or possibly
 litigation with subcontractors. See id. § 164:16.
     Under the doctrine of equitable subrogation, the gen-
 eral rule is that a surety can assert the claims of a de-
 faulted contractor. See Restatement (Second) of Contracts
 § 317 (1981); id. § 340, cmt. a; Prairie State Nat. Bank v.
 United States, 164 U.S. 227, 231 (1896). In that connection,
 we have held that “Congress had not intended for the Anti-
 Assignment Act to cover subrogation claims,” and therefore
 that “the Tucker Act’s waiver of sovereign immunity ex-
 tends to a subrogee.” Ins. Co. of the W., 243 F.3d at 1373–
 74; see also United States v. Aetna Cas. & Sur. Co., 338
 U.S. 366 (1949).
     The anomaly presented by this case is that the doctrine
 of equitable subrogation is not recognized for claims under
 the CDA. Before the surety steps into the shoes of the con-
 tractor—or in situations where the surety never executes a
 takeover agreement with the government and instead en-
 sures the contract is carried out by other means—we have
 concluded that the surety is not a “contractor” with the gov-
 ernment and is not permitted to bring claims under the
 CDA. See Admiralty, 156 F.3d at 1220–21, Fireman’s
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 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC           5

 Fund, 313 F.3d at 1351–52. As a result, a surety can assert
 a claim at the Court of Federal Claims, but not at a Board
 of Contract Appeals. This is contrary to the purpose of the
 CDA: channeling contract disputes through a single, effi-
 cient process. See generally S.Rep. No. 95–1118, reprinted
 in 1978 U.S.C.C.A.N. at 5250.
     Admiralty and Fireman’s Fund were wrongly decided;
 they unnecessarily create inconsistency between cases in
 the Court of Federal Claims and the Boards of Contract
 Appeals and create a conflict between government con-
 tracting law and fundamental principles of suretyship and
 contract law.
             II. Admiralty and Fireman’s Fund
     In Balboa, we first addressed the relationship between
 the government, a contractor, and a surety in the event of
 default, but we stopped short of determining whether a
 surety was a contractor or otherwise in privity with the
 government upon the default of the contractor. See Balboa,
 775 F.2d at 1160–61 (“Although it is conceivable that under
 certain circumstances a surety could assert rights against
 the [g]overnment under the third-party beneficiary rule . . .
 or even as one in privity in contract with the [g]overn-
 ment . . . the traditional means of asserting a surety’s
 claim is under the equitable doctrine of subrogation.” (in-
 ternal citations omitted)); see also Ins. Co. of the W., 243
 F.3d at 1370 (“[I]n Balboa we reserved the question
 whether there was a contract or privity of contract between
 the government and a surety.”).
     We considered the unanswered question in Admiralty
 and decided a surety is not a “contractor” within the mean-
 ing of the CDA. See Admiralty, 156 F.3d at 1220–21. In
 doing so, we said that “the central issue in [that] case [wa]s
 whether the CDA permits [the surety] to bring [a] claim on
 behalf of [the contractor]” and concluded that both because
 a surety is not a “contractor” as defined by the CDA and
 because “[t]he CDA limits the eligibility to appeal to the
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 6      GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC

 boards of contract appeals to contractors with claims on
 contracts entered by a [g]overnment agency,” which the
 surety had not done, the surety lacked the standing to
 bring such an appeal. Id. at 1220–21 (emphasis added).
 We then addressed “whether [the surety] can represent
 [the contractor] in an appeal to the [ASBCA]” and deter-
 mined that, in the “limited circumstances” where the
 surety “take[s] over contract performance or finance[s] the
 completion of the defaulted contract under its performance
 bond,” the surety may be “entitl[ed] . . . to succeed to the
 contractual rights of the contractor against the govern-
 ment.” Id. at 1222 (internal quotation marks and citations
 omitted). In Fireman’s Fund, we clarified this determina-
 tion, concluding that the surety could only raise claims
 against the government that arose from the work the
 surety itself did following the takeover of the contract and
 not any claims pertaining to the prior period. See 313 F.3d
 at 1351; see also id. (“[The surety] was not a party to any
 contract with the government prior to the takeover agree-
 ment it had with the government, and its pre-takeover
 claims did not arise under such a contract.”).
     Our analysis in Admiralty, and by extension Fireman’s
 Fund, gave little consideration to the argument that, be-
 cause the surety and the contractor had agreed that the
 contractor would cede all legal rights to the surety in the
 event of default, the surety should assume all of the con-
 tractor’s legal rights—including those to appear before a
 board such as the ASBCA—with respect to the contract.
 See generally Admiralty, 156 F.3d at 1220–22. Instead, we
 focused primarily on the Senate Report that addresses the
 policy rationales supporting the creation of the CDA. See
 id. at 1221. Undergirding the rationale “for limiting the
 appeal right to a single ‘contractor’ [in] the Senate Report,”
 we noted, was the goal to narrow the claims to those be-
 tween the government and “a ‘single point of contact’—the
 prime contractor.” Id. at 1220 (quoting S. REP. No. 95-
 1118, at 16). Limiting appeals to only a single contractor
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 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC           7

 “would prevent multiple, duplicative claims and appeals by
 subcontractors.” Id. (citing S. REP. No. 95-1118, at 16). The
 CDA, therefore, “makes only a single ‘contractor’ eligible to
 appeal a contracting officer’s final decision.” Id. We ex-
 plained that the Senate Report itself suggested the best
 system was one of a “single point of contact,” or ensuring
 that only the contractor could pursue claims against the
 Government before the ASBCA and all other claims would
 be litigated elsewhere, such as between the contractor and
 subcontractors in district court. Id.; see S. REP. No. 95-
 1118, at 16.
      Closer analysis of the Senate Report, however, demon-
 strates the portion relied upon by our precedent relates en-
 tirely to precluding subcontractors from the administrative
 remedies of the CDA, see S. REP. No. 95-1118, at 16–17, and
 speaks nothing of sureties, see generally id. See, e.g., S.
 REP. No. 95-1118, at 16 (explaining that “[t]he recommen-
 dations . . . specifically exclude bringing subcontractors un-
 der the provisions of” the CDA (emphasis added)), id. (“If
 direct access were allowed to all Government subcontrac-
 tors, contracting officers might, without appropriate safe-
 guards, be presented with numerous frivolous claims that
 the prime contractor would not have sponsored.” (emphasis
 added)), id. (explaining that “[b]y forcing the prime con-
 tractor to administer its subcontractor network, the Gov-
 ernment permits prime contractors and subcontractors” to
 resolve contract disputes through “their familiar commer-
 cial procedures”), id. at 17 (concluding that “denying the
 subcontractors direct access” to the CDA would “forc[e] the
 prime contractor and the subcontractor to negotiate their
 disputes”); see also Admiralty, 156 F.3d at 1220 (citing S.
 REP. No. 95-1118, at 16), Fireman’s Fund, 313 F.3d
 at 1351–52 (same). Congress did not mention sureties
 when discussing the limits of the CDA’s administrative
 remedies jurisdiction. See generally S. Rep. No. 95-1118,
 at 16–17. In Admiralty and Fireman’s Fund, we equated a
 surety to a subcontractor with no supporting analysis.
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 8      GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC

      A surety is different from a subcontractor in fundamen-
 tal respects. Significantly, the surety is obligated to engage
 and negotiate with the party seeking performance to en-
 sure that it is completed. See Dependable Ins. Co. v. United
 States, 846 F.2d 65, 66–67 (Fed. Cir. 1988) (determining
 that a performance bond guarantees that the surety will
 ensure that the contracted performance will be completed
 upon the default of the contractor). These differences are
 showcased in the appeal at hand, regarding the perfor-
 mance and payment bonds of Surety Guarantee Company
 of North America (“GCNA”) and Ikhana, LLC (“Ikhana”).
 Here, as in Fireman’s Fund, the terms of the bonds in-
 cluded an indemnity agreement in which the contractor as-
 signed to its surety all rights under the contract and all
 legal actions and claims that the contractor may have had.
 J.A. 2 (quoting GCNA and Ikhana’s indemnity agreement
 as granting to GCNA, in the event of Ikhana’s default, the
 right to “assert and prosecute any right or claim hereby as-
 signed, transferred or otherwise conveyed in the name of
 [Ikhana] and to compromise and settle any such right or
 claim on such terms as it considers reasonable . . . in its
 sole and absolute discretion”); see Fireman’s Fund, 313
 F.3d at 1346 (explaining that the surety’s bond included
 the “General Indemnity Agreement” in which the contrac-
 tor assigned “all of their rights under the contract . . . in-
 cluding . . . all actions, causes of actions, and claims and
 demands whatsoever which the [contractor] may have
 in . . . [the] contract covered by such [b]ond”). To engage in
 a business relationship with a contractor, a bonding in-
 surer must be able to set its prices upon the assumption
 that the clauses of its contract are valid.
     Our court has repeatedly turned to these two cases and
 specifically to the two pages of the Senate Report to support
 the proposition that a surety does not become a “contractor”
 with the government upon a contractor’s default. See Lum-
 bermens Mut. Cas. Co. v. United States, 654 F.3d 1305,
 1321 (Fed. Cir. 2011) (relying on Admiralty and the Senate
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 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC           9

 Report at pages 16 and 17 to support the assertion that
 “[t]his legislative history suggests that claims by third par-
 ties who are not in privity of contract with the government
 are not covered by the CDA”); Hardie v. United States, 19
 F. App’x 899, 905 (Fed. Cir. 2001) (explaining that, in Ad-
 miralty, the court, in reliance on the Senate Report, deter-
 mined that “[d]ue to the strong policy interest in
 maintaining a ‘single point of contact’ with the United
 States, there is a correspondingly strong resistance to ex-
 tend the concept of ‘privity’ beyond the actual parties with
 which the United States originally contracted explicitly”
 (citation omitted)); Ins. Co. of the W., 243 F.3d at 1370–71
 (relying on Admiralty to conclude that “there is no such
 [contractual] relationship” between the government and a
 surety). That proposition is erroneous as a matter of law.
  III. This Case Squarely Presented the Opportunity to Re-
                    view Our Precedent
     The roles and responsibilities of sureties—including
 the assumption of all legal rights—are well-defined within
 insurance contract law and are applicable to both private
 and public contracts. See Alvin, Ltd. v. U.S. Postal Serv.,
 816 F.2d 1562, 1564 (Fed. Cir. 1987) (“The government en-
 ters into contracts as does a private person, and its con-
 tracts are governed by the common law.” (citation
 omitted)). They necessarily apply here. Because of Admi-
 ralty and Fireman’s Fund, however, a surety of a govern-
 ment contract has its hands tied when it comes to resolving
 ongoing litigation against the government and executing
 performance. Indeed, this is the issue presented in the in-
 stant case. Ikhana the contractor, filed claims against the
 government with the ASBCA upon its default termination.
 J.A. 2–3. The government sued GCNA on its performance
 bond and GCNA stepped in to ensure the contract was ex-
 ecuted despite the default. J.A. 2–3. To do so, GCNA en-
 tered into a settlement agreement with the government to
 resolve the government’s claim on the performance bond.
 J.A. 3–4. GCNA tendered a new contractor to complete the
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 10     GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC

 work. J.A. 4. At the same time, GCNA agreed to dismiss
 Ikhana’s appeal against the government and the govern-
 ment agreed to release GCNA from all liability relating to
 the performance and payment bonds. J.A. 4. This plan
 was stymied when GCNA was denied standing before the
 ASBCA, which held, based on erroneous authority, that it
 did not become a “contractor” with the government. J.A. 6.
     The facts of this case are representative of the nature
 of a surety’s role—bringing efficient resolution to contract
 disagreements, assuming financial risk, and ensuring per-
 formance—and of the necessity for granting sureties the le-
 gal rights they need to ensure speedy resolutions. The
 significance of this standard contractually based negotiat-
 ing tool should not be understated. Lengthy delays in pub-
 lic projects are problematic, expensive, and potentially
 dangerous. Unfortunately, as our precedent now stands,
 sureties for government contracts must recognize the lurk-
 ing ensnarement, and either cancel the service or actuari-
 ally charge a higher rate for their services. Whatever the
 outcome, the overall cost of doing business will be higher
 for all government contractors.