Free Reply to Response to Motion - District Court of Federal Claims - federal

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No. 03-2033C (Judge Firestone)

IN THE UNITED STATES COURTOF FEDERAL CLAIMS COMMERCIALCASUALTYINSURANCE CO. OF GEORGIA, Plaintiff,
V.

THE UNITED STATES, Defendant.

DEFENDANT'S REPLY TO PLAINTIFF'S RESPONSE TO DEFENDANT'SMOTIONTO DISMISS OR, IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT

PETER D. KEISLER Assistmat Attorney General DAVID M. COHEN Director JAMES M. IC!NSELLA Deputy Director Of counsel: PAMELAJ. N~STELL Trial Attorney EngineeringField Activity Chesapeake Litigation Headquarters 1314Har~vood St., S.E. Washington, D.C. 20374 Tele: (202) 685-2136 KELLY B. BLANK Trial Attorney CommercialLitigation Brmach Civil Division Depa~nent of Justice Attn: Classification Unit 8th Floor 1100 L St, N.W Washington, D.C. 20530 Tele: (202) 353-7961 Fax: (202) 353-7988 Attorneys for Defendant

July 15, 2005

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TABLE OF CONTENTS PAGE(S) DEFENDANT'SREPLY TO PLAINTIFF'S RESPONSE TO DEFENDANT'S MOTIONTO DISMISS OR, IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT .................................................................................................................................. ARGUMENT ................................................................................................................................. I. Plaintiff, WhoNeither Paid To CompleteContract Perfonnance, Nor Took Over Contract Performance Is Not Equitably Subrogated To The Rights Of The Contractor, For WhichReason Its ComplaintFails To State A Claim Upon Relief BeGranted Which Can ............................................................................. CommercialCasualty, As A Matter Of Law, Cannot Recover Under The Doctrine Of Equitable Subrogation Becaase It Failed To HonorIts Pa3qnent Bond Fully PayTheSubcontractorsUpon And This Contract ..................... CONCLUSION ............................................................................................................................

t 2

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10 13

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TABLE OF AUTHORITIES CASES Admiralt7Construction. Inc. v. Dalton, 156 1217 Cir.1998) F.3d (Fed. ...................................................................................... Anderson Liberty Lobby,Inc., v. 477 242 U.S. (1986) ......................................................................................................... Argonaut Insurance Co. v. United States, 193 C1.483,434 1362 Ct. F.2d (1970) ............................................................................ BalboaInsurance Co. v. United States, 775 1158 Cir.1985) F.2d (Fed. .................................................................................. Casa de CambioComdiv S.A.. de C.V.v. United States, 291 1356 Cir.2002) F.3d (Fed. .......................................................................................... Celotex Corp. v. Catrett, 477 317 U.S. (1986) ......................................................................................................... Depat~nent of the Arm7v. Blue Fox, 525 255 U.S. (1999) ................................................................................................... Fireman's FundInsuranceCo. v. England, 313 1344 Cir.2002) F.3d (Fed. ...................................................................................... Helminesen United States Fidelity & Guar. Co., v. 208 404 U.S. (1908) ....................................................................................................... InsuranceCompany the Westv. United States, of 243 1367 Cir.2001) F.3d (Fed. .......................................................................................... Munsev TrustCo. v. United States, 332 234 U.S. (1947) ................................................................................................... Pearlman RelianceIns. Co., v. 371 132 U.S. (1962) ................................................................................................... Prairie State Bank UnitedStates, v. 164 227(1896) U.S. ................................................................................................... PAGE(S)

4, 6

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5, 6

5, 8

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5, 7, 8

5, 7, 8

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Ransom United States, v. 900 242 Cir.1990) F.2d (Fed. ............................................................................................ SweatsFashion.Inc. v. Panhitl Kafitting Co,, 833 1560 Cir.1987) F.2d (Fed. ........................................................................................ TransamericaInsurance Co. v. United States, 989 1188 Cir.1993) F.2d (Fed. ..................................................................................... TransamericaPremier Insurance Co. v. United States, 32Fed. 308 C1. (1994) ................................................................................................... United States Fidelity & Guar. Co. v. UnitedStates, 201 C1. Ct. 1,475 1377 F.2d (1973) ................................................................................ UnitedStates v. Testan, 424 392 U.S. (1976) ...........................................................................................................

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IN THE UNITED STATES COURTOF FEDERALCLAIMS COMMERCIAL CASUALTY INSURANCE COMPANYOF GEORGIA, Plaintiff, v. THE UNITED STATES, Defendant. ) )

)
) ) ) No. 03-2033C (Judge Firestone)

)
)

)
) DEFENDANT'S REPLY TO PLAINTI]FF'S RESPONSE TO DEFENDANT'SMOTIONTO DISMISS OR, IN THE ALTERNATIVE. FOR SUMMARY JUDGMENT In our May27, 2005motion to dismiss or, in the alternative, motion for summary judgment,weestablished that plaintiff failed to state a claim uponwhichrelief could be granted becausea surety is not equitably subrogatedto the rights of a contractor whereits claim is based solely uponits payment bond, or, in other words, the rights of subcontractors and suppliers. In the alternative, weestablished that there is no genuineissue as to any material fact and that defendantis entitled to judgn~ent a matter of law becausethe surety failed to fully pay the as snbcontractorsuponthe contract at issue. h~ response to our motion, plaintiff, Commercial Casualty Insurance Company Georgia of

("ComraercialCasualty" or "surety"), argnes that its complaintshould not be dismissed becanse, among other reasons, the Govennnent a merestakeholder, lacking any direct interest in the is contract funds at issue m~d,therefore, may assert its sovereignimmunity this action. P1. not in Br. at 9, 13-14] z "P1. Br. at __" refers by page number plaintiff's responseto our motionto dismiss or, to in the alternative, for summaryjudNnent, filed on June 24, 2005. "Def. App. __" refers to a page within the appendix accompanying movingbrief. "Compl. ¶ __" refers to a paragraph our

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As set forth belo~v, the Court should reject Commercial Casualty's argumentsand dismiss its complaintbecausenoneof its arguments establish that it is equitably subrogatedto the rights of a contractor in privity with the Govemrnent. ARGUMENT I. Plaintiff, Who Neither Paid To CompleteContract Performance, Nor Took Over Contract Performance Is Not Equitably Subrogated To The Rights Of The Contractor, For WhichReason Its ComplaintFails to State A Claim UponWhich Relief Can Be Granted

Commercial Casualty contendsthat it is equitably subrogatedto the rights of the contractor it bonded. Hadthe contractor, F.A.S. Development, Inc. ("FAS"), defaulted uponits performanceunder its contract ~vith the Government,and had Commercial Casualty taken over performm~ce funded completion of the contract, Commercial or Casualty wouldbe correct. In the absenceof either of these, however,ColmnercialCasualty has no legal relationship with the United States sufficient to have a monetaryclaim against the Government. Thus, under Rule 12(b)(6) of the Rules of the United States Court of Federal Claims("RCFC"), plaintiff's 2 should be dismissedfor failure to state a claim uponwhichrelief can be granted. In our motionto dismiss and openingbrief, the Government forth the necessary set

of the complaint filed on September2, 2003. "PPFUF __" refers to a specific paragraph of ~l plaintiff's ProposedFindings of Uncontroverted Fact. ~ CommercialCasualty confuses the basis upon which we filed our RCFC 12(b)(6) motionto dismiss, stating that "the Navy'scontention that jurisdiction wouldvanish upon inquiry into the facts meausthat this Court could never havejurisdiction over cases involving claims by sureties." P1. Br. at 5. This is an inaccurate characterization of our argument.Rather, the Government's position is that, assuming oftbe facts alleged in its complaintare true, all Conmaercial Casualty has failed to state a claim uponwhichrelief can be granted becauseit cmmot equitably subrogatedto the rights of a contractor in privity with the Govermnent be solely upona payment bond, as it alleges in its complaint. Compl.¶ 8.

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criteria to establish a surety's right to proceedagainst the UnitedStates undera theory of equitable subrogation. Thosecriteria were most recently reiterated by the United States Court of Appeals for the Federal Circuit ("Federal Circuit") in Insurance Company the Westv. United of States, 243 F.3d 1367(Fed. Cir. 2001)("ICW").In that decision, the Federal Circuit "specified two circumstancesin whicha surety maysucceed to the contractual rights of a contractor against the govenmlent:whenthe surety takes over contract perfom~ance whenit finances completion or of the defaulted contract." ICW,243 F.3d at 1370. In the present case, the contractor completed contract and, thus, there wasno the defaulted contract to take over. Further, the surety never paid to completethe work.Therefore, Commercial Casualty cammt acquire the rights of the contractor and pursue its claims against the Govermnent this Court. in In support of its claim, Commercial Casualty points to, among others, the decision of this Court in TransamericaPremier Insurance Co. v. United States, 32 Fed. C1. 308 (1994). While that decision wasrendered without the benefit of the insight providedby the Federal Circuit's decision in ICW,it is not, in any event, controlling uponthis Court, whichhas the intervening benefit of the guidance provided by ICW.See Casa de CambioComdiv S.A.. de C.V.v. United States, 291 F.3d 1356, 1364n.1 (Fed. Cir. 2002) ("prior decisions of the Court of Federal Claims are not binding.., on... the Court of Federal Claims"). Moreover,in Transamerica Premier, the court based its decision as to the existence of jurisdiction over equitable subrogation claims by a surety uponBalboaInsurmlce Co. v. United States, 775 F.2d 1158(Fed. Cir. 1985). In concludingthat jurisdiction existed in this Court for payment bondsurety, the court, citing Balboa, concludedthat "[a] surety's traditional means for

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gaining access to this court is through the equitable doctrine of subrogation." Transamerica Premi 32 Fed. C1. at 311. Tbe misplaced reliance upon Balboa as a basis for finding jurisdiction wasnot clear until the Federal Circuit decided AdmiraltyConstruction. Inc. v. Dalto~n, 156 F.3d 1217(Fed. Cir. 1998). In that case, the Federal Circuit explainedthat Balboa merely held that the Govenunent becomes stakeholder upon notification by the surety of a default by the contractor. Admiralty, 156 F.3d at 1221. Thns, any reliance upon Balboabeyond that limited holding appears unfounded.Admittedly, Admiralty does not establish what acts serve to create jurisdiction over a surety's claims based uponequitable subrogation?It does, however,clarify what the Court meantin Balboa, whichhas often been misapplied. Id_~. at 122122; Sere Ransom UnitedStates, 900 F.2d 242, 245 (Fed. Cir. 1990) (explaining the context v. restrictions in Balboa). Moreover, Admiralty,the Federal Circuit stated that "[a] surety is in subrogated to the rights of the Government upon payment or takeover under a perfomaance ~ bond." Admiralt2, 156 F.3d at 1222 (emphasis added) (quotation omitted). Thus, despite apparent support for Commercial Casualty's position afforded by TransamericaPremier, a closer exanaination of the intervening precedent renders tbat support hollow. Indeed, relying uponBalbo_a,Commercial Casualty alleges that a contractual relationship exists betweenthe surety and the Govenmaent. Br. at 8. Commercial P1. Casualty is incorrect whenit characterizes Balboaas holdingthat privity of contract exists between surety and the a 3 Admiralt considered the question of whethera surety could bring an action before a 2 board of contract appeals. In tbat case, the surety claimedthat becauseit succeededto the rights of a contractor based uponequitable subrogation, it wasentitled to bring the action before the board. Admiralty, 156 F.3d at 1221-22. In support of that claim, the surety cited Balboa, which contained languagethat had been improperlyread to create a contractual relationship betweenthe surety and the Govermnent. Id.; See Ransom United States, 900 F.2d 242, 245 (Fed. Cir. v. 1990). TheFederal Circuit, again, clarified the limited nature of the holdingin Balboa. Id.

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Govermnent. Rather, in Balboa, the Federal Circuit distinguished privity of contract from the doctrine of equitable subrogation, whichmaypermit a surety in certain circumstmaces bring a to claim against the Govermnent despite the absence ofprivity. Balboa, 775 F.2d at 1160-61. The Federal Circuit plainly stated in ICW that, °'[a]lthough in Balboawereserved the question whetherthere was a contract or privity of contract betweenthe govermnent a surety.., we and have since held that there is no such relationship." ICW,243 F.3d at 1370. Rather, a waiverof sovereign immunity construed tl~rough the equitable doctrine of is subrogation. As the Court of Appeals explained in ICW,much the analysis finding of jurisdiction over a surety's equitable subrogationclaims wasbased uponthe trilogy of Prairie State Bankv. United States, 164 U.S. 227 (1896); Henningsen United States Fidelity &Guar. v. Co., 208 U.S. 404 (1908); and Pearlmanv. Reliance Ins. Co., 371 U.S. 132 (1962). The Court continued that "after [Dept. of the Army Blne Fox[, 525 U.S. 255 (1999)] wecan no longer v.] rely on those tl~ree cases to find a waiverof sovereignimmunity," equitable subrogationcases. in ICW,243 F.3d at 1372. For a surety to state a claim of equitable subrogationin this Court, there mustbe some legal basis uponwhichthe surety has beensubrogatedto the rights of the contractor. This is because only the general contractor is in privity with the Government. Munsey Trust Co. v. United States, 332 U.S. 234, 241 (1947). Thus, the surety must undertake someact by which the general contractor's privity is passed through to it by operation of law. See Fireman'sFund Insurance Co. v. England, 313 F.3d 1344, 1352 (Fed. Cir. 2002) (aclmowledging that equitable subrogation constitutes an assigmnentby operation of law). It is only through such conductthat privity exists in somefashion betweenthe Government the surety. In other words, the surety and

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is assignedby operation of law the rights and position of the contractor, such that, in effect, the surety stands in the place of the contractor. For exan~ple, in Munse,/Trust, the Supreme Court concludedthat, where the surety paid subcontractors and suppliers solely under its payment bond, the surety had no cause of action against the United States. Munsey Trust, 332 U.S. at 237. This conclusion follows from the fact that "[o]ne whorests on subrogationstands in the place of one whose claim he has paid." Id_~. at 242. Therefore, becausethe surety paid the claims of the subcontractors and suppliers, it was subrogatedto those rights, whichcammt enforcedagainst the UnitedStates. Id_=. at 241. Thus, be wherethe claim paid is that of a subcontractoror supplier, subrogationwill not vest the surety with rights against the Government ~vhich are enforceable in this Court. This conclusionis consistent with Federal Circuit decisions in such cases. For exmnple, in Fireman'sFund,the court appears to have had no difficulty concludingthat jurisdiction existed over a claim by a surety whowasa "take over surety." Id~ at 1351. Theflaw in the surety's claim in Fireman's Fundwasnot that it failed in its claimof equitable subrogation,but rather that it chose a forumwhichlacked jurisdiction over such non-ContractDisputesAct claims. Id_=.; Se__~e Admiralty, 156 F.3d at 1221(distinguishing betweenboard and this Court's jurisdiction over proper equitable subrogation claims). Further, in TransamericaInsurance Co. v. United State~, 989 F.2d 1188, 1194(Fed. Cir. 1993), the Federal Circuit, as did this Court, foundthat jurisdiction existed over the equitable subrogation claims of a surety which had paid under its performance bond to complete a project followingthe default of its bondedcontractor. Whilethe Federal Circuit reversed this Court as to the scope of the substantive right, it set forth the "general rule.., that 'a surety who pays the 6

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debt of anotheris entitled to all of the rights of the personhe paid to enforcehis right to be reimbursed.'"Transamerica Ins., 989 F.2d at 1194(citation omitted). If this is in fact "the general rule," as the Government maintainsthat it is, then jurisdiction based uponequitable subrogation exists only wherethe surety has provided a benefit to the Government uponbehalf of the bonded contractor, as discussed in both Munsey Trust, and ICW. Nevertheless, Commercial Casualty alleges that the Government cannot assert sovereign immunity this case becausethe Govenm~ent no "direct interest in the contract funds it in has holds," as a stakeholder.4 P1. Br. at 9, 13-14. Ho~vever, waiver of the Government's sovereign immunityconcerns only whether the Government consented to be sued in this Court upon has this claim. For the purposesof establishing a waiver of the Goven~nent's sovereign immunity,it is irrelevant that the UnitedStates is a stakeholder in this matter. Whether TuckerAct the contains a waiver of the Govermnent's sovereign immunitydepends solely upon whether the Government sued by its contractor, or by one who"stand in the shoes" of its contractor. ICW~ is 243 F.3d at 1375. The question in this case is whethertbat waiver extends to claims wherethe surety stands only in the shoes ofa snbcontractor. Commercial Casualty contends that Depa~nent the Armyv. Blue Fox, Inc., 525 U.S. of 255 (1999), does not aid the Govermnent's argumentbecause the equitable subrogation cases that the Court cited in that opinion - Prairie State Bank, Henningsen,and Pearlman- address situations wherethe Govermnent transferred the funds in controversy out of the United States

: Commercial Casualty also implies that FAScan no longer be paid because it has completeda Chapter 7 corporate bm~cruptcy.PPFUF 15. However,FAS'sdebts do still exist, ~ and the bankruptcyestate maybe reopenedfor the benefit of FAS's priority creditors, if funds due to the contractor are available.

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Treasury and "disclaimed any ownership"of those funds. P1. Br. at 13-14. However, is it incorrect to assumethat the Government no ~'ownership has interest" in the contract balance here. Id__~. Althoughthe Govermnent a stakeholder in this matter, the funds sought by Commercial is Casualtyare, in fact, held in the Treasury, and havenot beenpaid over to a private party or deposited in a court. Commercial Casualty here seeks money from the public fisc to compensate it for payments allegedly made subcontractors and suppliers in satisfaction of the contractor's to obligation, which CommercialCasualty assumed upon its payment bond. As such, Conmlercial Casualty's assertion that the Govenm~ent possesses no sovereign immunity this matter is in incorrect, and, accordingly, the Govennnent's waiver of its sovereign immunitymust be "expressed unequivocally." Se_~eUnitedStates v. Testan, 424 U.S. 392, 399 (1976). As we demonstratedin our moving brief, Blue Foxaltered the analysis underlying determinations as to waivers of sovereign immunity.In Blue Fo~, the Court was confronted not with claims by a surety, but instead those created by an equitable lien. Whilethe two claims are different, the question underlying both is the same: whetherthe United States has waived sovereig-n immunity to such claims. As set forth above, issues of jurisdiction over claims by as sureties under a theory of equitable subrogation have been analyzed employing Prairie State Ban~k,Hem~ingsen, Pearhnan. The Supreme and Court's decision in Blue Fox called into questionreliance uponthese cases for the propositionthat jurisdiction exists in this Courtfor equitable subrogationclaims by sureties by plainly stating that, "[n]one of these cases... [.Prairie State Bank, He~min~sen, Pearlman] involved a question of sovereign immunity." Blue Fox, and 52 U.S. at 265. Thus, jurisdiction can no longer be based solely uponPearlma~n,as Con~nercial Casualtysuggestsin its brief. P1. Br. at 16. 8

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As recognizedby the Federal Circuit in ICW,these three cases and their progenyno longer provide the basis for finding a waiverof sovereign immunity,whichis necessary to bring action in this Court. See ICW,243 F.3d at 1372. Instead, analysis must once again focus upon the requirementthat, as relevant here, the claimant must either be a contractor or one whostands in the shoes of such a contractor. Accordingly,a surety "whodischarges a contractor's obligation to pay subcontractors is subrogatedonly to the rights of the subcontractor. Sucha surety does not step into the shoes of the contractor madhas no enforceable rights against the govermnent." ICW,243 F.3d at 1371. If the surety takes over the contract or completesperformanceof the contract pursuant to its performance bond, so that it assumes duties of the contractor, then the the surety has stated a claim that maybe reviewedin this Court. ICW,243 F.3d at 1370. Absent such a benefit flowing from the surety to the Government, whichinvests the contractor, and throughit the surety, with a right against the Government, surety has failed to state a claim of the equitable subrogation. As the Federal Circuit recogaaized in ICW,a waiver of sovereign immunity contained in the TuckerAct extends to a subrogeeafter stepping into the shoes of a contractor. ICW,243 F.3d at 1375. The analysis nowrequires that the subrogee must be assigned by operation of law someright of a party in privity with the Government jurisdiction to be extant. SuclTrights can for only be obtained by either taking over performance a contract or effecting such performance of by financing completionof the contract. For this reason, the complaintfails to state a claim upon which relief can be granted, whichmandatesdismissal pursuant to RCFC 12(b)(6).

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II.

Commercial Casualty, As A Matter Of Law, Cmmot Recover Under The Doctrine Of Equitable Subrogation BecauseIt Failed To HonorIts Pa'flnent BondAndFully Pay The Subcontractors UponThis Contract

In the event this Court concludestbat the surety's complaintstates a claim upon whicbrelief can be granted, as a matter of law, the Government entitled to summary is judgment. This conclusion follows from the nature of subrogation and the rights of the surety, whichare derived fromthose it paid. Summary disposition is appropriate where there are no genuine disputes as to any material fact. Andersonv. Liberty Lobby. Inc, 477 U.S. 242, 248 (1986). Where motionfor sunmlaryjudgmentis made, "the burden is not: on the movantto produce evidenceshowingthe absence of a genuine issue of material fact .... [Rather,] 'the

burden on the moving party maybe discharged by "showing" - that is, pointing out to the [Court of Federal Claims]- - that there is an absenceof evidenceto support the nonmoving party's case'." SweatsFashion. Inc. v. Panhill Knitting Co., 833 F.2d 1560, 1562 (Fed. Cir. 1987) (emphasisin original) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). Conm~ercialCasualty contends that our motion for summary judgment must be denied because it is "unsupportedby any affidavit, deposition or other sworntestimony." P1. Br. at 6. Commercial's Casualty's contention is incorrect. Pursuant to RCFC 56(b), defendant "may, at any time, movewith or without su~ affidavits for a summary

judgmentin the party's favor." RCFC 56(b) (emphasis added). Moreover, this Court's rules provide tbat a summary judgrnent motionshall be supported by citations to the "opposingparty's pleadings or to documentary evidence, sucb as affidavits or exhibit__s, 10

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filed with the motionor other~vise part of the record in the case." RCFC 56(h)(1). Indeed, most of the documentary evidence included in the appendix supporting our motionfor summary judgmentwas providedby plaintiff itself in its mandatoryinitial disclosures, madepursuant to RCFC 26(a)(1). Wherethe documentsthemselves support the facts relied uponby both parties, providingan affidavit is neither necessary,nor required by the rules. As discussed in our moving brief, Commercial Casualty maynot claim a fight to equitable subrogationwhereit failed to pay fully the subcontractors uponthe contract. United States Fidelity & Guar. Co. v. United States, 201 Ct. C1. 1,475 F.2d 1377, 1381, 1385 (1973) (surety had no claim to progess paymentsor retained funds where surety had not paid subcontractors in full). In UnitedStates Fidelity & Guar. Co., the Court of Claimsdenied recovery becausethe surety did not pay all of the outstanding claims of the laborers and suppliers. UnitedStates Fidelity & Guar. Co., 475 F.2d at 1381("[u]ntil the surety undertakesto pay all of the outstandingclaims owed [the primecontractor], it by will not be perulitted to share in retainages still held by the Gover~maent"). In this case, Commercial Casualty failed to pay the full amountowedto the two subcontractors upon this contract. In response to undisputedevidence fuat Rogers Electric has never beenpaid, Commercial Casualty avers that it has no legal obligation to pay the subcontractor becauseRogersElectric allegedly failed to present a timely claim to the surety. P1. Br. at 15. The facts demonstratethat Commercial Casualty was in possession of Rogers Electric's demand paymentin September2002. In its for September16, 2002letter to the Navy,Commercial Casualty stated, 11

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Commercial Casualtyis fully entitled to the release of the contract funds, and they will be used to pay claims by subcontractors and/or suppliers.., there have been several claims on the NAS project by FASsubcontractors. They include claims by FCXSystems... and Rogers Electric of Roswell, Georgia, in the amountof $10,406.50. Copies of demands from each subcontractor are attached hereto. Def. App. 24. However,CommercialCasualty waited until December 2003 to refuse to pay the amount owed,after the one-year statute of limitations for bringing a cause of action against the surety had expired. P1. Br. at 14-15; PPFUF 10; Def. App. 24-25, 38~ 39. Commercial Casualty suggests that these facts are irrelevant becausethe Government not litigate the subcontractor's claim before this Court. P1. Br. at t5. may However, present the facts and circmnstancesof the subcontractor's claim here not to we put forth a legal argument,but an e_.quitable one. Commercial Casualty's demand the for contract balanceis based uponthe equitable doctrine of subrogation, and it requests an equitable remedyin this Court uponits paymentbond. Accordingly,an inquiry into the equity of Commercial Casualty's conduct in honoring the paymentbond upon which it claims subrogationis entirely fair and proper. See AreonautIns. Co. v. UnitedStates, 193 Ct. C1. 483,434F.2d 1362, 1367(1970) ("the subrogation right claimed by plaintiff is not a right that springs frmncontract but is merelya creature of equity, to be carried out in the exercise of equitable discretion and with due regard to the legal and equitable rights of others"). Likewise, an inquiry into the facts and circumstances surrounding Commercial Casualty's paymentto FCX Systems, Inc., is entirely appropriate. AlthoughCommercial 12

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Casualty asserts that it "cannot be held accountable for FCX's decision to use Hatmaker and Associates to makeits claim on the Bond,"the mannerin whichthe subcontractor was forced to obtain paymentfrom the surety upon its paymentbond is relevant wherethe surety itself seeks an equitable remedy uponthat bond. P1. Br. at 15. It is undisputedthat Commercial Casualty only madepaymentto FCXSystems after the subcontractor hired a debt collection agency. Id__~. Moreover,Hatmaker Associates kept 20 percent of the and pasqnent owedto FCX Systemsas its fee for debt collection. Def. App. 40. Accordingly, FCX Systemsonly received $20,515.20of the amountowedto it uponthe contract. Id_~. Thus, FCX Systemshas not been fully paid by the surety for the labor and supplies it provided uponthe contract. Becauseneither subcontractor has been fully paid, the surety cannot claim equitable subrogation here. CONCLUSION For the foregoing reasons, and for the reasons stated in our moving brief, defendantrespectfully requests that this Court dismiss plaintiffs complaintpursuant to RCFC 12(b) or, in the alternative, pursuant to RCFC 56(b). Respectfully submitted, PETER D. I~ISLER Assistant Attorney General DAVID M. COHEN Director grant the Government's motion for summary judgment

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S/JAMES M. IGNSELLA JAMESM. IcANSELLA Deputy Director

OF COUNSEL: S/KELLY B. BLANK KELLY B. BLANK Trial Attorney ConmaercialLitigation Branch Civil Division Departmentof Justice Attn: Classification Unit 8th Floor 1100 L St, N.W Washington, D.C. 20530 Tele: (202) 353-7961 Fax: (202) 353-7988 Attorneys for Defendant

PAMELAJ. NESTELL Trial Attorney EngineeringField Activity Chesapeake Litigation Headquarters 1314 Harwood St., S.E. Washington, D.C. 20374 Tele: (202) 685-2136

July 15, 2005

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CERTIFICATE OF FILING I hereby certify that on July 15, 2005, a copy of the foregoing "DEFENDANT'S REPLY TO PLAINTIFF'S RESPONSE TO DEFENDANT'SMOTIONTO DISMISS OR, IN THE ALTERNATIVE, SUMMARY FOR JUDGMENT" filed was electronically.

I understand that notice of this filing will be sent to all parties by operationof the Court's electronic filing system. Parties mayaccess this filing through the Court's system.

/s/KELLY B. BLANK