Appealed from: U.S. Claims Court, Judge White.
Markey, Chief Judge, Newman and Archer, Circuit Judges.
The Aetna Casualty and Surety Company (Aetna) appeals the judgment of the United States Claims Court, The Aetna Casualty and Surety Co. v. United States, 12 Cl. Ct. 271 (1987), denying its claim that it is entitled, as a performing surety, to retained funds on three construction contracts between the Naval Facilities Engineering Command (NAVFAC) and Mansfield Contracting Company (Mansfield) for which Aetna had issued payment and performance bonds. We reverse and remand.
The background facts involved are fully set forth in the Claims Court's opinion and will only be summarized here.
NAVFAC awarded three construction contracts to Mansfield: Contract No. N62477-79-C-0020 (OCS contract) for the construction of the OCS Complex Dining Facility, Quantico Marine Base, Quantico, Virginia; Contract No. N62477-79-C-0447 (EMO contract) for the renovation of, and addition to, the EMO Club, Naval Medical Command, Bethesda, Maryland; and Contract No. N62477-81-C-0118 (Fire Station contract) for the construction of a new fire station at the Quantico Marine Base, Quantico, Virginia. Aetna issued Miller Act, 40 U.S.C. § 270a, payment and performance bonds with respect to each of these contracts, naming Mansfield as principal and Aetna as surety.
On December 7, 1982, Mansfield informed Aetna that it was unable to meet its obligations under the contracts. Because of its bond obligations, Aetna began to fund Mansfield's operations relating to the contracts and so advised NAVFAC. On June 21, 1983, Aetna entered into a formal financing agreement with Mansfield in which it agreed to advance to Mansfield its costs on the bonded contracts. In September 1983, Mansfield advised Aetna that its future earnings under the three contracts would be sufficient to permit Mansfield to complete the work under the contracts. Aetna then stopped providing funds directly to Mansfield, but continued to make payments to subcontractors and suppliers.
When Mansfield fell behind schedule on all three projects, representatives of NAVFAC, Aetna and Mansfield met on a number of occasions. At these meetings, Mansfield's representative proposed new completion schedules. Aetna's representative stated that it would limit its activities to paying bills of subcontractors and suppliers, and declined NAVFAC's suggestion that it apply management or financial pressure on Mansfield to complete the projects. Aetna advised NAVFAC in writing on September 29, 1983, of the amounts that it had expended on the three contracts and requested that all funds still held by NAVFAC under the contracts be paid to Aetna. NAVFAC rejected this request.
Mansfield thereafter failed to comply with the new completion schedules. NAVFAC concluded that Mansfield was not capable of completing the projects and took beneficial occupancy of the OCS, EMO and Fire Station facilities in late 1983 and early 1984. For contract work that had not been completely finished, NAVFAC issued unilateral deductive change orders to each of the three contracts, reducing the contract prices.
On March 21, 1984, NAVFAC released to the Internal Revenue Service (IRS) $193,559 of retained funds owed to Mansfield for work performed under the contracts, pursuant to a levy by the IRS for taxes owed by Mansfield. In a series of letters, Aetna objected to the release of contract funds to the IRS, but NAVFAC took the position that Aetna's rights as a surety did not entitle it to the funds transferred to the IRS. At the time of trial, NAVFAC still retained $30,053 under the OCS contract, $100,233 under the EMO contract, and $28,216 under the Fire Station contract.
Under a payment bond, a surety guarantees that subcontractors, laborers, and materialmen will be paid in the event of the principal's default. As stated in Morrison Assurance Co., Inc. v. United States, 3 Cl. Ct. 626, 632 (1983):
A payment bond . . . protects the subcontractors, the materialmen, and the laborers. . . . They look first to the prime contractor for payment. If, however, the prime contractor fails to pay any ...