Free Motion to Dismiss - Rule 12(b)(6) - District Court of Federal Claims - federal

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No. 03-2033C (Judge Firestone)

IN THE UNITED STATES COURTOF FEDERAL CLAIMS COMMERCIAL CASUALTY]NSLrRANCE CO. OF GEORGIA, Plaintiff,
V.

THE UNITED STATES, Defendant.

DEFENDANT'S MOTIONTO DISMISS OR, IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT

PETER D. KEISLER Assistant Attorney General DAVID M. COHEN Director JAMES M. KINSELLA Deputy Director Of counsel: PAMELAJ. NESTELL Trial Attorney EngineeringField Activity Chesapeake Litigation Headquarters 1314 Harwood St., S.E. Washington, D.C. 20374 Tele: (202) 685-2136 KELLY B. BLANK Trial Attorney CommercialLitigation Branch Civil Division Departmentof Justice Attn: Classification Unit 8th Floor It00 L St, N.W Washington, D.C. 20530 Tele: (202) 353-7961 Fax: (202) 353-7988 Attorneys for Defendant

May27, 2005

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TABLE OF CONTENTS PAGE(S) DEFENDANT'SMOTIONTO DISMISS OR, IN THE ALTERNATIVE, FOR SUMMARY .................................................................................................... JUDGMENT DEFENDANT'S BRIEF .......................................... QUESTIONS .......................................................................................................... PRESENTED STATEMENT............................................................................................................ OF FACTS ARGUMENT ................................................................................................................................. I. The Surety, Having Paid Only Under Its PaymentBond, Cannot Maintain An Action Against The GovernmentIn This Court To Recover The AmountIt Paid Pursuant That ......................................................................................... To Bond 1I. CommercialCasualty, As A Matter Of Law, Cmmot Recover Under The Doctrine Of Equitable Subrogation Because It Failed To HonorIts Payment Bond Fully PayTheSubcontractors This Contract................................... And Upon CONCLUSION ............................................................................................................................

1 2 2 2 4

4

13 17

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TABLE OF AUTHORITIES CASES AdmiraltyConstr.. Inc. v. Dalton, 156 1217 Cir.1998) F.3d (Fed. .......................................................................................... Aetna Casualty & Surety Co. v. United States, 228 C1. 655 1047 Ct. 146, F.2d (1981) .......................................................................... AmericanPacific Roofin~Co. v. United States, 21C1. 265 Ct. (1990) ......................................................................................................... Anderson Liberty Lobby.Inc., v. 477 242 U.S. (1986) ................................................................................................... ArgonautIns. Co. v. United States, 193 C1.483,434 1362 Ct. F.2d (1970) .................................................................. BalboaIns. Co. v. UnitedStates, 775 1158 Cir.1985) F.2d (Fed. ...................................................................................... Departmentof the Army Blue Fox. Inc., v. 525 255 U.S. (1999) ..................................................................................................... DvnalectronCorp. v. United States, 4 C1. 424 Ct. (1984) ........................................................................................................... Eastport SteamshipCorp. v. United States, 178 C1. 372 1002 Ct. 599, F.2d (1967) .............................................................................. Fidelity ConstructionCo. v. UnitedStates, 700 1379 Cir.1983) F.2d (Fed. .......................................................................................... Fireman'sFundhas. Co. v. UnitedStates, 909 495 Cir.1990) F.2d (Fed. ............................................................................................ Fireman's Fund Insurance Company England, v. 313 1344 Cir.2002) F.3d (Fed. ................................................................................ PAGE(S)

7

5, 7

5

13, 14

7, 11, 16

7, 8

8, 17

4

6

5

7 passim

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GoldenPacific Bancorp. United States, v. 15F.3d (Fed. 1994) 1066 Cir. .......................................................................................... Hea~v United States, v. 12C1. 694 Ct. (1987) ......................................................................................................... Henningsenv. United States Fid. & Guar. Co., 208 404 U.S. (1908) ........................................................................................................... Insurance Company the Westv. United States, of 243 1367 Cir.2001) F.3d (Fed. ................................................................................ KeeneCorp. v. United States, 508 200 U.S. (1993) ........................................................................................................... Library of Confess v. Shaw, 478 310 U.S. (1986) ........................................................................................................... National Surety Corp. v. United States, 118 1542 Cir.1997) F.3d (Fed. .................................................................................... Newark Insurance Co. v. United State~, 144 CI.655,169 Supp. (1959) Ct. F. 955 .......................................................................... Newman-Green. Inc. v. Alfonzo-Larrain, 490 826 U.S. (1989) ........................................................................................................... Pearlmanv. Reliance Ins. Co., 371 132 U.S. (1962) ........................................................................................................... Prairie State Bankv. UnitedStates, 164 227 U.S. (1896) ....................................................................................................... Ransom United States, v. 17C1.Ct. 263(1989), aft'd, 900F.2d242(Fed.Cir. 1990) ............................................ RoyalIndem. Co. v. United States, 208 C1.809, F.2d (1976) Ct. 529 t312 ..............................................................................

13

4

8

passim

5

5

7, 13

7

5

8

8, 9

11

7

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Spirit Levelin~Contractors v. UnitedStates, 19CI.Ct.84(1989) .................................................................................................... SweatsFashion. Inc. v. Panhill Knittin~ Co., 833 1560 Cir.1987) F.2d (Fed. ........................................................................................ ThomasCreek Lumber& Lo~ Co. v. United States, 36Fed. 220 Ct. (1996) ..................................................................................................... United States FideliW&Guar.Co. v. United States, 201 C1. 475 1377 Ct. t, F.2d (1973) ...................................................................... UnitedStates Fidelit,¢ &Guar.Co. v. UnitedStates, 230 C1. Ct. 355,676 622 F.2d (1982) ................................................................................ United States v. Connoll¥, 716 882 Cir.1983) F.2d ~ed. ............................................................................................ United States v. Kina, 395 1 (1969) U.S. ............................................................................................................... United States v. Munse¥ Trust Co., 332 234 U.S. (1947) .............................................................................................

13,14

13

13

7, 14, 15

7

6

5

10, 16, 17

UnitedStates v. NordicVillage. Inc., 503 30(1992) U.S. ............................................................................................................. United States v. Sherwood, 312 584 U.S. (1941) ........................................................................................................... UnitedStates v. Testan, 424 392 U.S. (1976) ....................................................................................................... United States v. White MountainApacheTribe, 537 465 U.S. (2003) ..................................................................................................... WestechCorp. v. United States, 20C1. 745 Ct. (1990) .......................................................................................................

5

5

5, 6

4, 12

10

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STATUTES 28 U.S.C.1491 § ........................................................................................................................ 31U.S.C. §3727(a)(1), (b)........................................................................................................... 41 U.S.C. .......................................................................................................................... §15(a) 4, 5 11 11

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IN THE UNITED STATES COURTOF FEDERALCLAIMS COMMERCIAL CASUALTY INSURANCE COMPANY OF GEORGIA, Plaintiff, No. 03-2033C (Judge Firestone) THE UNITED STATES, Defendant. DEFENDANT'S MOTIONTO DISMISS OR, IN THE ALTERNATIVE. FOR SUMMARY JUDGMENT Pursuant to Rules 12(b)(6) and 56(b) of the United States Court of Federal Claims, defendantrespectfully requests that the Court dismiss the complaintbecauseit fails to state a claimuponwhichrelief can be granted, giventhe fact that plaintiff is neither in pfivity with the Government, equitably subrogatedto the rights of a contractor whodoes have privity. In the nor alternative, defendant respectfully requests that the Court enter summary judgmentin the Govenmaent's favor uponthe groundsthat there is no genuineissue as to any material fact and that defendant is entitled to judgment a matter of law. In support of this motion, werely upon as the pleadings, Defendant'sProposedFindings of UncontrovertedFact, madthe following brief and appendix.

1 "Compl.¶ __" refers to a paragraph of the complaint filed on September2, 2003. "Def. App. ~" refers to a page within the appendix accompanying this brief. "DPFUF __" ¶ refers to a specific paragraphin Defendmat's ProposedFindings of UncontrovertedFact.

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DEFENDANT'SBRIEF QUESTIONS PRESENTED 1. Whetherthe complaint fails to state a claim uponwhichrelief can be wanted, because

paymentby the surety wasmadeonly pursuant to the surety's pabqnent bond? 2. Whether plaintiff, as a matter of law, cannot recover under the doctrine of equitable

subrogation? STATEMENT OF FACTS OnJune 25, 2001, the United States Departmentof the Navy("Navy") awardedContract No. N62467-01-C-3215 ("the contract") to F.A.S. Development Company, Inc. ("FAS"), replace a 400Hzfrequency converter at NavalAir Station Atlanta in Marietta, Georgia. Def. App. 1-3; Compl.¶ 4. On July 17, 2001, plaintiff, Commercial Casualty Insurance Company of

Georgia ("CommercialCasualty" or "surety"), executed a performance bond in the amount $108,768.00and a paymentbond in the amountof $108,768.00 in connection with and as required by the contract. Def. App.5-8; Compl.¶4. OnJanuary 10, 2002, Commercial Casualty notified the Navyof outsta~ading claims by "subcontractors and vendors on projects bondedby the surety" uponbehalf of FAS,and that no payments should be made to FAS. Def. App. 9. On March 27, 2002, FASand the Navy executeda bilateral modification, ModificationNo. P00001,to amend contract specifications, the decrease the contract price from $108,768.00, to $52,625.00, and extend the contract completion date fiom October 9, 2001, to June 14, 2002. Def. App. 10-11. Subsequently, FASand the Navy executed Modification No. P00002to extend the contract completion date from June 14, 2002, to June 24, 2002. Def. App. 12. FAScompletedits workupon the contract on or about July 24, -2-

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2002. Def. App.20; Compl.~[ 7. OnJuly 31, 2002, the NavyinformedFAS that its request for an assignmentof the contract balance to Commercial Casualty was denied pursuant to the Assignmentof Claims Act, because "voluntary assignmentsof claims against the Government [are barred] unless the assignmentis to a bank, trust, or financial institution." Def. App.13. OnAugust2, 2002, Commercial Casualty requested by letter that the Navynot release the contract funds to FASbut, instead, pay Commercial Casualty as the surety. Def. App. 16-18. In its letter, Commercial Casualtystated that it "is equitably subrogatedto the contract funds tt~ough its payment of claims on this and other projects." Def. App. 17 (emphasisadded). At that time, however, Commercial Casualty had paid no claims upon this contract. Def. App. 34-35. OnAugust19, 2002, the Navyunilaterally issued Modification No. P00003 the to contract, assessing liquidated damages $140.00per day for 30 days in the mnount at of $4,200.00, and decreasing the contract price to $48,425.00. Def. App.19-20. OnSeptember10, 2002, FASsubmitted a final invoice, release, and request for paymentof the remainingcontract balance of $48,425.00. Def. App. 21-23. The Navyhas not paid FASand continues to retain the contract funds. Compl. 6. '~[ By letter dated September16, 2002, Commercial Casualty notified the Navythat it had received claims for paymentfrom FAS'ssubcontractors upon the contract, FCX Systems, Inc. and RogersElectrical Contractors, Inc. ("Rogers Electric"), and demanded that the Navymake pasnnent to CommercialCasualty. Def. App. 24-25. CommercialCasualty received claims from FAS'ssubcontractors totaling $37,209.00. Def. App. 26-32. OnJuly 31, 2003, Commercial Casualty sent a paymentto Hatmakerand Associates, a -3-

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debt collection agency hired by FCX Systems, in the amountof $25,644.00 for the labor and materials that FCX Systems provided upon the contract. Def. App. 33-34. Hatmakermad Associates kept 20 percent of the paymentowedto FCX Systemsas its fee for debt collection. Def. App. 40. Accordingly, FCX Systems only received $20,515.20 of the amountowedto it uponthe contract. Id._.~. AlthoughFAS forwardedinvoices from Rogers Electric to Commercial Casualty for pa3qnenton or about August6, 2002, Rogers Elect~c has not received any payment from CommercialCasualty. Def. App. 26, 38-39. The payment made by CommercialCasualty to FAS'ssubcontractor, FCX Systems, was madepursuant to the paymentbond issued by Commercial Casualty. Compl.~ 8. ConmaercialCasualty did not perform pursuant to its performance bond, and does not claim equitable subrogationuponthat basis. Compl. '~I']l 7, 8. ARGUMENT I. The Surety, Having Paid Only Under Its PaymentBond, Cannot Maintain An Action Against The Government This Court To Recover The Anaount It Paid In Pursuant To That Bond

Like its predecessors, this is a Court of limited jurisdiction. Heaev UnitedStates, 12 v. C1. Ct. 694, 697 (1987); DvnalectronCorp. v. United States, 4 C1. Ct. 424, 428 (1984). Absent congressionalconsentto entertain a claim against the UnitedStates, the Court lacks authority to grant relief.-' UnitedStates v. Testan, 424 U.S. 392, 399 (1976); United States v. Sherwood, 312 2 In United States v. White MountainApacheTribe, 537 U.S. 465 (2003), the Supreme Court opined that because the TuckerAct waives sovereign immunity suits of the type for generally encompassed a claim, jurisdiction exists (at least for purposesof surviving a motion by to dismiss for lack of jurisdiction). Baseduponthis guidance, the UnitedStates maintains that the instant claim fails to state a claim uponwhichrelief can be granted. This conclusionfollows fromthe fact that the surety's complaint,uponits face, states a type of claimover whichthis Court has jurisdiction, whichappears to meet the criterion established by WhiteMountain. Havingsaid that, the Government maintainsthat jurisdiction is lacldng over this particular claim, because the TuckerAct, 28 U.S.C. §t491, does not waiveclaims by entities such as the surety -4-

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U.S. 584, 586 (1941); Insurance Company the Westv. United States, 243 F.3d 1367, 1372 of (Fed. Cir. 2001). Congressional consent to suit in this Court, a waiverof the Government's traditional immtmity,must be explicit and strictly constrt~ed. Library of Congressv. Shaw,478 U.S. 310, 318 (1986); UnitedStates v. King, 395 U.S. 1 (1969); Fidelity ConstructionCo. v. UnitedStates, 700 F.2d 1379, 1383 (Fed. Cir. 1983). A waiver of sovereign immunity,therefore, cannot implied, but must be expressed "unequivocally" by Congress. Testag,_ 424 U.S. at 399; United States v. Kin~, 395 U.S. at 1; Insurance Company the West, 243 F.3d at 1372. When of confi'ontedwith a jurisdictional issue, the Court's "task is to discern the 'unequivocally expressed' intent of Congress,constraing ambiguities in favor of immunity."United States v. Nordic Village. Inc., 503 U.S. 30, 33 (1992). Thecentral provision granting consent to suit in this Court is the TuckerAct, 28 U.S.C. § 1491. Testan, 424 U.S. at 397; AetnaCasualty & Surety Co. v. United States, 228 Ct. C1. 146, 151,655F.2d 1047, 1051(1981). Underthat statute, an action maybe maintained in this Court only if it is "foundedeither uponthe Constitution or any Act of Congress,or any regulation of an executive department,or uponany express or implied contract with the United States, or for liquidated or unliquidated damages cases not soundingin tort. "3 28 U.S.C. § 1491. There is in

trader the facts presentedhere. Therefore,the issue of jurisdiction is inextricably linked to the failure to state a claim, for which reason, it is discussedat the outset of this motion. 3 Theexistence of jurisdiction is determinedat the time the complaintis filed. Keene Corp. v. United States, 508 U.S. 200 (1993); Newman-Green, v. Alfonzo-Larrain, 490 U.S. Inc. 826, 830 (1989) ("[t]he existence of federal jurisdiction ordinarily dependsuponthe facts as they exist whenthe complaintis filed"). Plaintiffbears the burden of proving the soundnessof his allegations of jurisdiction. See, e._~., American Pacific Roofin~ v. UnitedStates, 21 Ct. Ct. Co. 265,267(1990) ("wherethe court's jurisdiction is put in question, plaintiff'bears the burden -5-

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no question, but that the Tucker Act contains a waiver of the Govermnent's sovereign immunity to be sued by its contractors or by those who"stand in the shoes" of its contractors. Insurance Company the West, 243 F.3d at 1375. The question is the extent to which that waiver of extends. Further, it is axiomaticthat the TuckerAct does not create any substantive right of recovery against the United States for money damages.Testan, 424 U.S. at 398; Eas~ort StemzashipCorp. v. United States, 178 Ct. Ct. 599, 605-07, 372 F.2d 1002, 1007-09(1967). Rather, it merelyconfers jurisdiction uponthe Court whenever substantive right exists. the Testan, 424 U.S. at 398; United States v. Cormollv,716 F.2d 882, 885 (Fed. Cir. 1983) (en banc). Aclaimant, therefore, must look beyondthis jurisdictional statute and establish somesubstantive provision of law, regulation, or the Constitution, whichcan fairly be construed as mandating compensation, state a claim within the jurisdiction of this Court. Connollv,716 F.2d at 885. to Thus,jurisdiction to entertain plaintifPs complaintexists in this Court only ifplaintiffcan establish that its cause of action lies within the well-establishedlimitations of this Court's jurisdiction. Clearly there is no pfivity of contract betweenthe Goverrmaent the non-takeover and surety whodid not completethe project under the terms of its performancebond. As the Court of Appealsfor the Federal Circuit recently observed,"[w]ehave specified two circumstancesin whicha surety maysucceed to the contractual fights of a contractor against the govenmlent: whenthe surety takes over contract performance whenit finances completionof the defaulted or

establishing subject matter jurisdiction by a preponderance of the evidence'") ~ ~olds v. Army Air Force ExchangeService, 846 F.2d 746, 748 (Fed. Cir. 1988)). and -6-

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contract." Insurance Company the West, 243 F.3d at 1370. This succession, or assignment of of rights by operation of law, appears to be the basis uponwhichthe "non-contractual doctrine of equitable subrogation" is founded.4 Fireman's FundInsurance Company England, 313 F.3d v. 1344, 1351(Fed. Cir. 2002). Fromthis it necessarily follows that, absent take over of the contract or financing completionof the contract via its performance bond, the surety is not equitablysubrogatedto the fights of the primecontractor and is, instead, left only with the rights that a subcontractor mayhave against the primecontractor. TheNst of the surety's complainthere is that the Navy,as a stakeholder retaining the contract balance upon a contract completedby FAS,should pay. Commercial Casualty instead of 5 FAS. Thesurety's substantive claim and assertion of jurisdiction are premiseduponthe opinions in cases such as BalboaIns. Co. v. UnitedState~, 775 F.2d 1158(Fed. Cir. 1985); United States Fid. & Guar. Co. v. United State~, 230 Ct. C1. 355,676 F.2d 622 (1982); Indem.Co. v. United States, 208 Ct. C1. 809, 529 F.2d 1312(1976); United States Fid. & Guar. Co. v. United States, 201 Ct. C1. 1,475 F.2d 1377(1973); and ArgonautIns. Co. v. United

~ Clearly, the surety is not a third party beneficiary of the Government contracts upon whichit posts bonds. National SureW Corp. v. United States, 118 F.3d 1542, 1545 (Fed. Cir. 1997)("The surety's rights and obligations are not based on third-party beneficiary concepts"); Fireman'sFundIns. Co. v. UnitedStates, 909 F.2d 495, 500 (Fed. Cir. 1990) (a surety "is neither the intended third-party, nor the direct, beneficiary" of the bondedcontract). Further, the surety is not in privity with the Government merely because the surety posted a bond upona Government contract. Admiralty Constr.. Inc. v. Daltol~ 156 F.3d 1217, 1222 (Fed. Cir. t998); Aetna Cas. & SureW United States, 845 F.2d 971,975 (Fed. Cir. 1988). v. s As a stakeholder, the Navyis "caught in the middle betweentwo competingclaimants [and] cannot, in effect, decide the merits of their claims by the merephysical act of delivering the stake to one of them." Newark Insurance Co. v. United States, 144 Ct. Ct. 655, 169 F. Supp. 955,957(1959). In such circnmstances, one remedyincludes the initiation of an interpleader proceeding district court by the stakeholder. I_d. in -7-

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States, 193 Ct. C1.483,434F.2d 1362 (1970), in which the Court held that the Government may be liable to a surety for unreasonablymaking progress payments a contractor after the surety to has givennotice that the contractor is in default. Despitethe line of cases identifying the substaaativerights of a surety, it wasnot until the decision in Balboathat the Federal Circuit addressedthe ClaimsCourt's jurisdiction over such claims. In Balboa~the Court relied upon three Supreme Court cases - Pearlmanv. Reliance Ins. ~ 371 U.S. 132 (1962); Hemaingsen United States Fid. & Guar. Co., 208 U.S. 404 (1908); v. and Prairie State Bankv. UnitedStates, 164 U.S. 227 (1896) - to support its conclusionthat the Court possessed jurisdiction over a claim of equitable subrogation. Morerecently, in Insurance Company the West~the United States Court of Appeals for of the Federal Circuit concludedthat, after the decision in Department the Army Blue Fox, of v. Inc., 525 U.S. 255 (1999), the Court could no longer rely uponthose three cases to find a waiver of sovereign inmaunity for subrogation claims. Insurance Company the West, 243 F.3d at of 1371-72. This conclusion followed fiom the SupremeCourt's opinion that Noneof these cases [Prairie State Bank, Henningsen,and Pearlman.] involved a question of sovereign immunity,and, in fact, none involveda subcontractor directly asserting a claim against the Government. Instead, these cases dent with disputes bet~veen private parties over priority to funds whichhad beentransferred out of the Treasury and as to which the Government disclaimed any had ownership. Blue Fox, 525 U.S. at 265. In view of the private nature of the litigants, the question of waivers ~ sovereign immunityfor such claims was never addressed. of s Based upon the opinion in Insurance Company the West, there maybe some of question as to whetherthe ftmds at stake in Prairie State Bankhad in fact been "transferred out of the Treasury." Insurance Company the West, 243 F.3d at 1372 n.2. This possible factual of -8-

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In Insurance Company the West, the Court of Appealsdefined the waiver of sovereign of immunity found in the TuckerAct insofar as it relates to a surety. Thescope of that waiver was based uponthe conclusionthat "a subrogee,afte__..~r steppinginto the shoes of a government contractor, mayrely on the waiverof sovereign iinmunity in the TuckerAct and bring suit against the UnitedStates." 243 F.3d at 1375(emphasisadded). TheCourt also stated that the subrogee, as an assignee by operation of law, has "the sanae right[s]" as the Government contractor, "with its advantagesand disadvantages."Id._~. at t 374 (emphasisadded). Giventhe requirementthat the surety "step into the shoesofa gover~maent contractor," Id. at 1375, there is little roomto argue that the TuckerAct's waiver extends beyonda takeover surety or one who effectively completesthe project by financing its completionunder its performance bond. In the instant case, the surety did neither, for whichreason it is not equitably subrogated the rights of to FAS.Se_~eFireman'sFund, 313 F.3d at 1352 (even where a surety takes over performance, the surety is not subrogatedto the rights of the taken over contractor for pre-takeoverclaims). In this case, even if the surety paid FAS'ssubcontractors pursuant to the paymentbond issued uponbehalf of FAS,this singular act did not convert the surety's actions into anything other than payment pursuant to its payment bondobligations. As such, the surety's actions fall within the well-established [rule] that a surety whodischarges a contractor's obligation to pay subcontractors is subrogated ~ to the rights of the subcontractor. Sucha surety does not step into the shoes of the contractor and has no enforceable rights against the government. Insurance Company the West, 243 F.3d at 1371 (emphasis added). This conclusion of

issue, however,did not affect the Federal Circuit's conclusion that "the Supreme Court did not directly address the sovereign immunity issue in Prairie State Bank"Id. -9-

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consistent with the Supreme Conrt's decision in United States v. Mnnsev Trust Co., 332 U.S. 234 (1947), upon which the Court of Appeals relied, and in which the Supreme Court concluded: If the United States were obligated to pay laborers and materialmen unpaid by a contractor, the surety whodischarged that obligation could claim subrogation. But nothing is moreclear than that labors and materialmendo not have enforceable fights against the United States for their compensation. Munse,~ Trust, 332 U.S. at 241. Thus, where the surety simply pays the subcontractors and snppliers, its recourse is the sameas that of the subcontractorsand suppliers: against the prime contractor, not the Govermnent. other words, "[the surety] cannot acquire by subrogation what In [the subcontractor,] whoserights he claims [,] did not have." Munsev Trust~ 332 U.S. at 242. Theapparent rationale for distinguishing betweenperfom~ance bond or takeover sureties, and sureties that merelysatisfy the payment obligations of the primecontractor, lies in the benefit derived by the Govermnent from the acts of the surety. Thepurpose of a surety agreementis "simply to ensure completionof the government'sproject." WestechCorp. v. United States, 20 C1. Ct. 745,751(1990). Oncethe contract is complete, the Government's interest in assuring performanceno longer requires the protection afforded by the bond. Moreover,where the work is complete, but the suppliers and subcontractors are unpaid, "the government suffers no damage." Munse¥ Trust, 332 U.S. at 244. Peru~itting recourse by the surety against the Government, wherethe surety neither takes over nor finances completionof contract perforu~ance, converts the Goven~nent into an insurer for the surety against losses precipitated by the contractor with whom surety entered into a the contract. Instead, the question of loss under the paymentbondshould be a matter to be resolved betweenthe surety and the contractor that it bondedand that caused the loss. Baseduponthe -10-

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superior knowledge position of the surety, shifting the obligation to the surety to resolve such and 7 matters is neither unfair nor unreasonable. Indeed, the surety agreed, for a price, to accept the risk inherent in insuring the performance paymentby a contractor and occupied a better and position than the Government deciding to whom wouldissue bonds. Cf., Ransom United in it v. States, 17 CI. Ct. 263,269(1989)(informationrelated solely to an individual contractor's ability to performis better known surety than Goverunlent), affd, 900 F.2d 242 (Fed. Cir. 1990). by In its complaint, Commercial Casualtyalso claims that it is entitled to the contractual rights of the prime contractor becauseFAS "voluntarily" assigned its rights to the surety through a General Agreementof Indemnity and a pmportedassignment agreement. Compl.~I~I 8, 11. The assignment of claims under Government contracts is generally prohibited by what is commonly called the Anti-Assignment Act. That Act is composed two provisions, 41 U.S.C. §15(a) and of 31 U.S.C. §3727(a)(1), (b). See Fireman's Fund, 313 F.3d at 1349-50. Underthat Act, applicable here, generally the voluntary assignmentof any claim, except to a financing institution, is prohibited. See Fireman'sFund, 313 F.3d at 1350("Fireman's Fundis not 'financing institution,'" under the Anti-Assignment Act, but instead "an insurance company

writing insurance policies that protect against risks"). As the Federal Circuit explained, "[t]he assignment [the contractor] of 'all of their rights underthe contracts' violated the prohibition by in 41 U.S.C. § 15(a) against the transfer of'any interest' in any contract involving the United 7 In ArgonautIns. Co. v. United States, 193 Ct. CI. 483,434F.2d 1362(1970), the Court of Claimsreiterated the "well-established principle that the subrogationright claimedby plaintiff is not a right that springs fromcontract 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." Id., 434 F.2d at 1367(citing National Surety Corp. v. UnitedStates, 132 Ct. C1. 724, 133 F. Supp. 381 (1955)). -11-

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States." Fireman's Fund, 313 F.3d at 1349. To the extent that ConnnercialCasualtyalleges in its complaintthat mayrights voluntarily assigned to it by the contractor permit it to bring an action against the Government enforce that to assignment, clearly it is wrong.Thus, the only claims that Commercial Casualty can bring against the United States are those claims the contractor had against the Government which and pass by operation of law, under equitable subrogation. This subrogation does not extend to any claim based upon rights "voluntarily" assigned by the contractor to Commercial Casualty in the General Agreementof Imdenmity an assignment agreement. Fromthis it necessarily follows or that if jurisdiction does not exist over Commercial Casualty's equitable subrogation claim against the UnitedStates, becausethe surety failed to take over the contract or finance its completion, then any rights that mayhave been assigned are emptyrights against tbe United States. Commercial Casualty neither completedthe contract performance of its bonded contractor, nor effectively completedthe contract performanceby paying for completionof contract performance under a performance bond. As such, the surety is not in privity with the Government further fails to meetthe criteria established to bring an equitable subrogation and claim against the Government. Giventhis fact and the fact that the surety wasnever a "contractor" for the Government, inescapableconclusionis tbat there is no basis for this the Court to exercise jurisdiction over the claim. This failure equates with a failure to state a claim uponwhichthis Court can grant relief, for which reason the claim should be dismissed. See, ~ White Mountain, 537 U.S. at 472-73.

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II.

CommercialCasualty, As A Matter Of Law, Cannot Recover Under The Doctrine Of Equitable Subrogation Because It Failed To HonorIts PaymentBondAnd Fully Pay The Subcontractors UponThis Contract

In the event this Court concludesthat the surety's complaintstates a claim uponwhich relief can be granted, as a matter of law, the Government entitled to summary is judgment. This conclusionfollows 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); GoldenPacific Bancorp. v. United States, 15 F.3d 1066, 1070 (Fed. Cir. 1994); Thomas Creek Lumber& o , Co. v. United States, 36 Fed. C1. 220, 234 (1996); Spirit Levelin~Contractors v. UnitedStates, 19 C1. Ct. 84, 89 n.1 (1989). Adispute over a "material fact" is one "that mightaffect the outcome the suit trader the governingla~v." Anderson,477 U.S. at 248. Furthermore,"there is of no genuinedispute wherethe evidence 'is so one-sided that one party must prevail as a matter of law.'" National Surety Corp. v. United States, 31 Fed. C1. 565, 570 (1994) (quoting Anderson, 477 U.S. at 252). Wherea motion for summary judgmentis made, "the burden is not on the movantto produceevidenceshowingthe absence of a genuine issue of material fact .... [Rather,] 'the

burdenon 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 non-movin~ party's case'." SweatsFashion. Inc. v. Panhill Knitting Co., 833 F.2d 1560, 1562~ed. Cir. 1987) (emphasisin original) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). Where materials beyondthe pleadings are considered, a motionto dismiss will be considered a motion -13-

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for surnmaryjudgrnent. RCFC 12(c). Finally, summary judgmentis not regarded as a disfavored procedtn:al short cut, "but rather an integral part of the court rules as a whole."CelotexCorp.v. Catrett, 477U.S. at 327. Indeed, sunnnaryjudgmentis wholly consistent with the rules of this Court, whichare "designed to secure a just, speedy, and inexpensive determination of each and every action." ~ Levetin~Contractors, 19 C1. Ct. at 89. Much the law applicable to this argumentis set forth abovein support of our of demonstration that plaintiff failed to state a claim uponwhichrelief can be wanted. Considerationof that law, in the context of summary judgment,further indicates that evenif the Court should find that the complaintstates a claim, the Govermnent nevertheless entitled to is summary judgmentin its favor as a matter of law. Commercial Casualty maynot claim a right to equitable subrogation whereit failed to pay fully the subcontractors uponthe contract. United States Fidelit,/& Guar. Co. v. United States, 201 Ct. CI. 1,475 F.2d 1377, 1381, 1385(1973) (surety had no claim to progress payments retained funds wheresurety had not paid subcontractors in full); See also or Restatement(Third) of Suretyship & Guaranty§ 28 cmt. c (the surety "is not entitled subrogationunless the underlyingobligation is totally satisfied"); Restatement~irst) of Security § 141cmt. e ("[t]he surety in such cases is subrogatedonly after every duty protected by the security has beenfully satisfied"). This principle wasapplied in UnitedStates FideliW&Guar. Co. v. UnitedStates, in which the surety sued to recover a progress paymentpaid by the Government the prime to contractor after the Government received notice from the surety that laborers and suppliers had -14-

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not been paid. The surety also claimed entitlement to the contract retainage. TheCourt of Claimsdenied recovery of either anlotmt becausethe surety did not pay all of the outstanding claims of the laborers and suppliers. United States Fidelity & Guar. Co., 475 F.2d at 1381 ("[u]ntil the surety undertakesto pay all of the outstanding claims owedby [the prime contractor], it will not be permitted to share in retainages still held by the Government"). With respect to the progress payment,the court said: even if the court wouldallow evidence to be received whichclearly proved that the contracting officer abusedhis discretion in making the progress paymentafter being given notice by the surety of the contractor's default in payingthe subcontractors, we wouldbe powerlessunder the authorities cited, suora, to require that the Government makea paymentof $29,000 to the surety whenit is clear that the surety has not paid these subcontractorsin full. United States Fidelity & Guar. Co., 475 F.2d at 1385. The undisputed facts demonstratethat Commercial Casualty failed to pay the full amount owedto the two subcontractors uponthis contract. Rogers Electric has never been paid. On August6, 2002, FAS informedRogersElectric that it had received the subcontractor's invoices in the mnountof$11,565.00, and had forwarded the invoices to Commercial Casualty for payment. Def. App. 26. Indeed, on Septembert6, 2002, CommercialCasualty, through its counsel, informed the Navythat Rogers Electric was owedpaymentand provided a copy of Rogers Electfic's demandfor paymentto the Navy. Def. App. 24. OnOctober 16, 2003, after repeated efforts to persuade Commercial Casualty to honor its debt, RogersElectric submitted another letter requesting payment.Def. App.35. Despite being awareof its obligation to Rogers Electric for over a year, Commercial Casualty refused to pay the amountowedto the subcontractorbecausethe one year statute of limitations for filing a cause of action in Federal -15-

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court against the surety to recover the debt had passed. Def. App.38-39. CommercialCasualty only madepaymentto FCX Systems after the subcontractor hired a debt collection agency. OnJuly 31, 2003, Connnercial Casualty sent a paymentto Hatmakerand Associates, a debt collection agencyhired by FCX Systems, in the amountof $25,644.00for the labor and materials it provided upon the contract. Def. App. 33-34. However,Hatmakerand Associates kept 20 percent of the paymentowedto FCX Systemsas its fee for debt collection. Def. App. 40. Accordingly, FCXSystemsonly received $20,515.20 of the anaount owedto it uponthe contract. Id__~. Thus, FCX Systemshas not beenfully paid by tl~e surety for the labor and supplies it provideduponthe contract. Becauseneither subcontractor has beenfully paid, the surety cannot claim equitable subrogation here. Jurisdiction over a surety's claim of equitable subrogationis exercised only uponan equitable basis. See Ar~, 434 F.2d at 1367 ("the subrogation right claimed by plaintiff is

not a right that springs fromcontract 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"). Where surety avoids its liability to the subcontractors, as Commercial the Casualtydid here, its inequitable condnctnecessarily defeats its claim of equitable subrogation. A surety mayonly claim snbrogationto the extent it has paid the party whoserights it claims. Munsev Trust, 332 U.S. at 242 ("[o]ne whorests on subrogationstands in the place of one whoseclaim he has paid, as if the payment giving rise to the subrogationhad not been made").Otherwise, the result wouldbe a windfall to the surety. Evenif Commercial Casualty fully paid Rogers Electric and FCX Systems, the surety wouldonly stand in the shoes of the subcontractors, whohave no rights to enforce against the -16-

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Government. "Sovereign inmatmitybars subcontractors and other creditors from enforcing liens on Governmentproperty or funds to recoup their losses." Blue Fox, 525 U.S. at 265; ~ Tm_._m~st U.S. at 241("nothing is moreclear than that laborers and materiahnen not have 332 do enforceable rights against the United States for their compensation").The surety does not possess the rights or claims of FAS'ssubcontractors that have not been paid or that are otherwise barred by taw. Instead, the surety bore the risk that it waspaid to bear when waspaid the it premiums issuing the bonds. for CONCLUSION For the reasons set forth above, this Court should dismiss plaintiffs complaintpursuant to RCFC 12(b) or, in the alternative, pursuant to RCFC 56(b). Respectfully submitted, PETERD. K_EISLER Assistant Attorney General DAVID M. COHEN Director grant the Government's motion for Summary Judgment

S/JAMES M. F.SNSELLA JAMES M. KINSELLA Deputy Director

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OF COUNSEL: S/KELLY B. BLANK I~LLY B. BLANK Trial Attorney CommercialLitigation Branch Civil Division Departmentof Justice Atm: Classification Unit 8th Floor 1100 L St, N.W Waslfington, D.C. 20530 Tele: (202) 353-7961 Fax: (202) 353-7988

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

May27, 2005

Attorneys for Defendant

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CERTIFICATE OF FILING I hereby certify that on May27, 2005, a copy of the foregoing "DEFENDANT'S MOTIONTO DISMISS OR, IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT"was filed electronically. I understand that notice of this filing will be sent to all parties by operation of the Court's electronic filing system. Parties mayaccess this filing tl~oughthe Court's system.

/s/KELLY B. BLANK

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APPENDIX

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INDEX TO APPENDIX Document Contract No. N62467-01-C-3215 ................................................. Commercial Casualty Po~ver of Attorney ........................................... Payment Bond ................................................................ Performance Bond ............................................................. Letter to Marsha Tyson from Donald H. Gibbs, dated January 10, 2002 ................... February 27, 2002 Contract Modification No. 1 ..................................... June 14, 2002 Contract Modification No. 2 ......................................... Letter to Vanessa Sutton from Marsha Tyson, dated July 31, 2002 ...................... Letter to MarshaTyson from Alfred A. Malena, Jr., dated August 2, 2002 ................ August 19, 2002 Contract Modification No. 3 ...................................... FASFinal Invoice, Request for Payment, and Release, dated September 10, 2002 .......... Letter to Cathy Horan from Alfred A. Malena, Jr., dated September16, 2002 .............. Letter to Rogers Electric from FAS, dated August 6, 2002 ............................. Invoices from Rogers Electric ................................................... ~ 1 4 5 7 9 10 12 13 16 19 21 24 26 27 31 33 35 36 38 40

Invoices from FCXSystems, Inc ................................................. Facsimile from Hatmaker mad Associates .......................................... Letter to CommercialCasualty from Ken F. Webb,dated October 16, 2003 ............... Letter to Jolm D. Alexander from Robin M. Barwick, dated November 19, 2003 ........... Letter to Ken F. Webbfrom Jolm D. Alexander, dated December8, 2003 ................. Cancelled Check from Hatmaker and Associates to FCXSystems, Inc ...................