Appealed from: U.S. Court of Federal Claims. Judge Margolis
Before Plager, Lourie and Rader, Circuit Judges.
Plaintiff Transamerica Insurance Company (Transamerica) was the performance bond surety on two construction contracts with defendant United States (United States or government), the second of which was defaulted on by the contractor. Transamerica sued the government, under the doctrine of equitable subrogation, for recovery of funds payable by the government to the contractor under an equitable adjustment to the first contract, which the contractor sought and obtained after completing the first contract. The funds were sought as mitigation of Transamerica's losses incurred when it took over and completed performance of the second contract. The Court of Federal Claims*fn1 granted the motion of the government for judgment on the pleadings, and dismissed Transamerica's complaint.*fn2 We reverse and remand for further proceedings.
The United States, through the U.S. Army Corps of Engineers, entered into two separate contracts with the Bodenhamer Building Corporation (Bodenhamer), both regarding construction at Fort Bragg, North Carolina. Contract No. DACA-21-85-C-0104 (the 0104 contract) was for construction of the Commissary Warehouse and Class VI Store -- it will be referred to hereafter as the Commissary contract -- and Contract No. DACA-2187-C-0054 (the 0054 contract) was for construction of the Bowley Elementary School -- hereafter the School contract. Transamerica, a surety bond company, issued payment and performance bonds for both of the contracts on behalf of Bodenhamer for the benefit of the government.
Bodenhamer defaulted on the School contract. Transamerica, pursuant to its obligations as surety, took over and completed the construction of the elementary school by obtaining a replacement contractor. Transamerica claims that it incurred over $1,000,000 in losses while undertaking its obligations under this performance bond.
Bodenhamer apparently completed its work under the Commissary contract, and filed a claim with the Corps of Engineers for equitable adjustment in an amount exceeding $500,000. Transamerica, having closely monitored Bodenhamer's progress on its claim for adjustment, sought the funds owed by the government to Bodenhamer pursuant to the settlement reached on the claim. Transamerica claims that it gave written notice to the government that it sought under the doctrine of equitable subrogation the funds owed Bodenhamer. However, the government disbursed the funds to Bodenhamer.
Transamerica sued the government in the Court of Federal Claims, arguing that it had been damaged by the government's disregard of Transamerica's right of equitable subrogation. Transamerica argued that it was therefore entitled to damages from the government.
The government moved to dismiss Transamerica's claim for lack of jurisdiction and for failure to state a claim upon which relief may be granted. The Court of Federal Claims concluded it had jurisdiction; that issue is not appealed here and need not be further addressed. However, once the court reached the merits of Transamerica's argument, it concluded that "Transamerica as performance bond surety on Contract 0054 [the School contract] is unable to recover funds the government owed to Bodenhamer on Contract 0104 [the Commissary contract]." 22 Cl. Ct. at 677.
The Court of Federal Claims thus rejected Transamerica's argument that it was entitled to set off its losses incurred under the School contract against funds owed to Bodenhamer under the Commissary contract. Transamerica had argued that, because the government could have set off any losses it incurred through completion of the School contract against funds it owed to the contractor under the Commissary contract, Transamerica could, under equitable subrogation, step into the government's shoes and set off the losses it incurred through completion of the same contract against these same funds. In coming to its Conclusion, the Court of Federal Claims relied largely on Dependable Ins. Co. v. United States, 846 F.2d 65 (Fed. Cir. 1988), and the authorities cited therein, viz., Security Ins. Co. v. United States, 192 Ct. Cl. 754, 428 F.2d 838 (Ct. Cl. 1970); Ram Constr. Co. v. American States Ins. Co., 749 F.2d 1049 (3d Cir. 1984); Western Casualty & Sur. Co. v. Brooks, 362 F.2d 486 (4th Cir. 1966); Balboa Ins. Co. v. United States, 775 F.2d 1158 (Fed. Cir. 1985); and Universal Sur. Co. v. United States, 10 Cl. Ct. 794 (1986). The Court of Federal Claims reasoned that these authorities stand for the proposition that a "surety's rights and remedies are limited to recovery of retained funds from the contract generating the claim," id. at 677 (citing Dependable, 846 F.2d at 67), and that this result is not changed just because the surety enters into a number of construction bonds with the same contractor. Id. Therefore, Transamerica could not set off its losses against the funds owed to Bodenhamer because those losses arose out of a different contract. Id.
Transamerica appealed here, challenging the Court of Federal Claims' decision. Transamerica argues, as it did before the Court of Federal Claims, that the instant action is distinguishable from, and warrants a different result than that in, Dependable and the cases cited therein. In Transamerica's view, Dependable involved a situation in which the government had a competing claim to the funds at issue; the use of those funds to offset the surety's losses would have preempted the government's competing claim. Here, since the government has no such competing claim that could be preempted, Transamerica should be able to offset through equitable subrogation its losses against these funds.
Transamerica points out that this result provides an incentive for a surety to complete a project, as usually preferred by the government, because the surety is not made any worse off than the surety would have been had the government chosen to complete the project itself. Any loss is most efficiently, and most fairly, shifted to the defaulting contractor, who is really the party responsible for the loss.
In support of its position, Transamerica cites us to District of Columbia v. Aetna Ins. Co., 462 A.2d 428 (D.C. Ct. App. 1983). That case concerned a performance bond surety for two public works projects with the District of Columbia government involving the same contractor. 462 A.2d at 429. Upon default by the contractor on one of the projects, the surety completed the project and then sought to recover through equitable subrogation funds arising from the other project which the contractor completed. As in the present situation, the surety in District of Columbia gave written notice to the District asserting its rights to the funds owed the contractor by the District on the contractor-completed contract. The surety and the contractor were the only claimants for the retained funds; the District was only a stakeholder. Nevertheless, the district later disbursed the funds to the contractor.
The surety in District of Columbia sued the District, arguing that it was subrogated to the rights of the District to offset its loss against the profit on the ...