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Hartford Fire Insurance Co. v. United States

February 26, 1999


Before Michel, Rader and Schall, Circuit Judges.

The opinion of the court was delivered by: Schall, Circuit Judge.


Hartford Fire Insurance Co. ("Hartford") appeals the March 20, 1998 grant of summary judgment of the United States Court of Federal Claims in favor of the United States in Hartford Fire Insurance Co. v. United States, 40 Fed. Cl. 520 (1998). The court held that Hartford could not, under a theory of equitable subrogation, recover from the government its payments to subcontractors and suppliers under a surety bond because it failed to give the government proper notice that the contractor was in danger of defaulting with respect to sums owed to subcontractors and suppliers. We affirm.



On June 8, 1994, the government awarded a contract for the construction of the Criminal Investigation Division Field Operations Center ("CIDC") at Fort Leonard Wood, Missouri, to K & K Construction Company ("K & K"). The award was under Section 8(a) of the Small Business Act, 15 U.S.C. § 637(a) (setting forth a program that grants assistance to certain minority-owned small businesses). The contract named Edgar Poindexter as the contracting officer.

On June 16, 1994, K & K entered into a subcontract with Rau Construction Company ("Rau"), under which Rau was to perform various administrative tasks on the CIDC project, including obtaining a surety. *fn1 Article 8 of the subcontract provided that if the government found K & K in default of its obligations or if claims were made against the required surety bonds, Rau would have the right to complete the project and resolve any claims against the bonds as representative of the surety. Although the government was not a party to the subcontract, it approved it on July 20, 1994.

In the meantime, Rau and K & K jointly applied for surety bonds from Hartford, an approved surety. In the application, Rau agreed to indemnify Hartford for any loss that Hartford might incur on the bonds. In due course, Hartford issued surety bonds for the project.

Beginning on June 1, 1995, representatives of Rau told Mr. Poindexter that K & K had not deposited the last two progress payments in the designated project account and that Rau believed that subcontractors and suppliers were in danger of not being paid. Rau's representatives met with Mr. Poindexter on June 5, 1995, stating to him that K & K had made over $100,000 in unauthorized withdrawals from project funds and that K & K was placing progress payments in unauthorized bank accounts. In addition, Mr. Poindexter was told that K & K lacked adequate funds to pay its subcontractors and suppliers. Rau asked Mr. Poindexter to intervene in the matter to ensure that K & K paid its subcontractors and suppliers.

On June 30, 1995, the government conducted a final inspection of the CIDC project and approved K & K's request for a final progress payment in the amount of $208,190. On July 3, 1995, Rau's attorney sent a letter to Mr. Poindexter, advising him: (i) that the payment request lacked Rau's approval and therefore violated K & K's subcontract with Rau, (ii) that Rau was concerned that the payment would not be used to pay subcontractors and suppliers, and (iii) that Rau wanted Mr. Poindexter to take immediate action to ensure that K & K's subcontractors and suppliers were paid. Notwithstanding this letter, the government accepted the project as substantially complete on July 6, 1995, and a check in the amount of $208,910 was issued to K & K on July 14, 1995.

Although Mr. Poindexter had made numerous attempts to contact the president of K & K during June and July, it was not until July 14, 1995, that he sent notification that he was recommending termination of K & K from the section 8(a) program. Among other things, Mr. Poindexter wrote, K & K had failed to pay "significant financial obligations." On July 26, 1995, Mr. Poindexter took action to ensure that no further payments would be made to K & K.

By letter dated August 9, 1995, Hartford notified the government of claims received on its payment bond, requesting that any remaining payments be withheld and that, if possible, the government stop payment on the check representing the $208,190 final progress payment. Hartford also asserted a right to equitable subrogation in the event that it should be required to make payments on the bond. Over the following weeks, it became apparent that the final progress payment had not been deposited by K & K into the proper account. On September 26, 1995, Rau's attorney informed the government that Rau had agreed to indemnify Hartford in connection with the project and therefore would be accountable to Hartford for payments by Hartford to subcontractors. In addition, the attorney asked the government not to pay K & K amounts previously withheld as retainages due under the contract. The government ultimately delivered the contract retainages to Hartford. See id. at 522. Thereafter, Hartford paid all of K & K's subcontractors and suppliers under its surety bond. See Hartford Fire Ins. Co., 40 Fed. Cl. at 522.


Eventually, Hartford filed suit in the Court of Federal Claims, alleging that the government acted unreasonably and abused its discretion to Hartford's detriment: (i) by failing to take reasonable steps to determine whether K & K had the capacity and the intention to pay subcontractors and suppliers from the $208,190 progress payment, (ii) by failing to prevent the $208,190 progress payment from being made directly to K & K, and (iii) by failing to take reasonable steps to prevent the $208,190 progress payment from being used for purposes other than paying subcontractors and suppliers. See Hartford, 40 Fed. Cl. at 522. Hartford claimed that, through the doctrine of equitable subrogation, it was entitled to judgment in an amount exceeding $200,000, plus attorneys' fees, ...

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