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June 24, 1975

The UNITED STATES of America for the Use and Benefit of CLARK-FONTANA PAINT COMPANY, INC. and Clark Paint and Wallcovering, Inc., Plaintiffs,
WIBCO, INC., and Reliance Insurance Company, Defendants

Gesell, District Judge.

The opinion of the court was delivered by: GESELL

GESELL, District Judge.

 This case presents the issue of whether a supplier of materials to a government contractor may allocate payments made "on account" but arising out of the government job to other outstanding obligations of the contractor and sue the surety on the government project for the unpaid balance under the Miller Act, 40 U.S.C. ยง 270b. The matter was tried to the Court without a jury and the parties were given the opportunity to file post-trial briefs arguing the law. This Memorandum Opinion states the Court's findings of fact and conclusions of law.

 The evidence showed that as of January 1, 1973, Robert Lowry, doing business under the trade name of WIBCO Painting Co., owed a total of $34,450.75 on open account to use-plaintiff Clark-Fontana Paint Co. Lowry determined to bid on a large G.S.A. contract for painting a number of government buildings, most of them located in the Northern Virginia suburbs of Washington, D.C.* In order to bid on the job, Lowry was required to incorporate and obtain a responsible surety on a payment bond for the benefit of subcontractors. Obtaining a surety presented some difficulty and eventually Lowry took one Robert Curtis into the business. A corporation, WIBCO, Inc., was formed with Lowry as President and Curtis as Secretary-Treasurer, which bid and won the job. A bond was obtained and Curtis subsequently personally indemnified the bonding company.

 In arranging for Clark-Fontana to continue to supply WIBCO's needs for materials, both Lowry and Curtis had discussions with Clark-Fontana's President, Reginald Clark. During these discussions they specifically explained that Clark-Fontana would be protected by the payment bond on the government job, that a new corporation had been formed, and that Curtis had been brought into the business to "supply new capital" to make possible the new work. It was not shown that Clark was ever told that Curtis was in essence personally liable on the payment bond by virtue of his indemnification agreement with the bonding company.

 During this same period, WIBCO made total payments to Clark-Fontana in the amount of $85,382.73, which were sufficient to reduce the aggregate indebtedness from $34,450.75 carried over from Lowry's WIBCO Painting Co. in January, 1973 to $18,550.27 in May, 1974, when payments ceased. All checks from WIBCO to Clark-Fontana bore simply the notation "on account" or no notation at all and were credited to reducing the running balance in the account. Of the $85,382.73 in payments, $66,000 was attributable to proceeds of the G.S.A. contract, although there was no indication that Clark was made aware of the source of each individual payment.

 On March 31, 1975, counsel for Clark-Fontana sent a letter to WIBCO purporting to allocate the payments received on account in such a fashion as to satisfy entirely the pre-existing debt carried over from Lowry's WIBCO Painting Co. and the non-governmental work which had been contemporaneous with the G.S.A. contract. This allocation, if effective, left the entire $18,550.27 balance to be satisfied out of the payment bond on the G.S.A. job.

 The March 31 letter came well after this suit was filed on January 14, 1975, and after WIBCO had answered, asserting (para. 6) that "materials purchased for projects other that [sic] GSA Contract #GS-00B-01165 were charged to this contract by complaintant [sic]." There was vague testimony that the allocation had been made sometime in 1974; however, no notice was given WIBCO until the March, 1975, letter and Clark-Fontana's books and documents do not reflect the allocation.

 The parties are in agreement that the law relating to allocation of payments in Miller Act cases has been summarized by Judge, later Justice, Blackmun in St. Paul Fire & Marine Ins. Co. v. United States for the Use of Dakota Elect. Supply Co., 309 F.2d 22, 25 (8th Cir. 1962):

(i) The payment is applied as the debtor intends and so manifests to the creditor before or at the time of the payment.
(ii) If the debtor fails so to indicate, the payment is applied as the creditor, within a reasonable time, determines.
(iii) If neither the debtor nor the creditor seasonably so indicates, the payment is applied as a just regard to its effect upon the debtor, the creditor, and third persons makes it desirable that it should be applied. This usually results in its application to the oldest unsecured account.
(iv) If the debtor is under a duty to a third person to devote funds paid by him to the discharge of a particular debt, the payment must be so applied if the creditor knows or has reason to know of that ...

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