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September 1, 1972


The opinion of the court was delivered by: Tone, District Judge.


This is an action by the United States to enforce a Miller Act performance bond against the defendant surety on a construction contract for modification of a spillway of the Granby Dam in Colorado, upon the default by the contractor and the completion of work by the Government at an excess replacement cost of $76,261.92. The defendant claims in two separate defenses that it is entitled to a set-off of $78,199.10. Of this amount, $71,207.50 was a monthly earned progress payment which the Government paid to the contractor's assignee several months before the formal default and termination of the contract but only a few days after the Government had notice that the contractor was in financial difficulty; and $6,991.60 was a payment of amounts the Goovernment had retained from prior progress payments which it released on the basis of the contracting officer's finding that progress in performance was satisfactory. The issue is whether the Government was under a duty to withhold these payments by reason of the notice received from the surety.

Both parties have moved for summary judgment. It does not follow from this alone that the case should be decided by summary judgment (6 Moore's Federal Practice, ¶ 56.13 (2d ed. 1971), but here it appears to be conceded on both sides that there is no issue as to any material fact, and summary judgment is therefore appropriate. While the facts are undisputed, the inferences and conclusions the court is asked to draw from them are not. A rather full explication of the circumstances is therefore warranted.

The contract was awarded by the Interior Department's Bureau of Reclamation to Gardner Construction Company on June 16, 1964, all work to be completed by May 20, 1965. The estimated contract price was $464,625, and the defendant surety issued its performance and payment bonds, each for approximately half of the contract price. Shortly thereafter, Gardner assigned all monies due him to a Colorado bank. Work proceeded satisfactorily through the summer and fall of 1964. By the end of November, 80 per cent of the work had been performed to the Government's satisfaction, on or ahead of schedule.

On November 24, the contractor advised its creditors (but not its surety or the Government) by letter that it was ceasing operations and shutting down all jobs immediately, and requesting their presence at a meeting on December 2 to discuss the company's problems. The letter suggested that the company would be liquidated. The Granby Dam job in question here was shut down the next day. The Bureau official at the job site was told only that there would be no more work until November 30 or perhaps December 7. On November 30, the same official learned that the contractor was having "a meeting" on December 2, after which more news would be forthcoming.

During the next two weeks, from December 2, until December 15- the same period in which the voucher for the November progress payment in question was being processed through the various levels of Government officialdom — both the defendant surety and the various Government officials involved received confusing and contradictory information about the financial condition of the contractor and his ability and intention to complete the job. On December 3, the defendant received a copy of the contractor's first letter to creditors of November 24 warning of liquidation. On December 4, after an apparently successful meeting of those creditors, the defendant received another communication from the contractor indicating that it was not the contractor's intention to liquidate, that its jobs were shut down because of weather conditions only, and that it intended to complete all its jobs in the spring.

Similarly, the Government officials involved were hearing discordant themes from and about the contractor. On December 3, the resident engineer at the job site was informed that two materialmen had unpaid claims against the contractor. At the same time he discovered that the December 2 meeting had been a meeting of creditors and that the contractor was in financial difficulty and might have to sell some of its equipment. The next day he was told by the contractor's superintendent that the contractor's winter plans were indefinite but that it expected to begin work again on the job in April or May of 1965. In the next few days, the job site was prepared for a winter shutdown, but not a permanent cessation of operations. On December 7, the resident engineer received a copy of the contractor's second communication to its creditors, affirming that it was the intention of the contractor to complete its jobs, and characterizing its difficulties as "a temporary financial bind."

On December 10, the Bureau's contracting officer in Denver, the official in charge of the project and the only official with the authority to stop payment on a voucher or to declare a contractor in default, received a letter from the defendant surety enclosing a copy of the contractor's first letter to creditors (suggesting liquidation) and stating as follows:

  "Subsequent to the date of that letter, we have
  received correspondence from Gardner Construction
  Company refuting in part and supporting in part
  their November 24th letter. We are requesting
  further information from Gardner Construction
  Company in an effort to resolve the confusion
  regarding Gardner's intentions. Any information
  you may be able to furnish us regarding this
  matter will be appreciated.
    "In the meantime, it is our position that all
  monies payable under this contract should be
  devoted first to the performance of the contract
  and the discharge of obligations incurred
    "We therefore request that you make no further
  payments under this contract without first
  consulting and conferring with us."*fn1

Payments were made through the following procedure. A voucher was prepared and approved at the Project Office in Loveland. It was then sent to the assignee bank, which then directed the Treasury Office in Denver to draw the check. It is obvious, therefore, that the assistant contracting officer's direction to the Project Office "not to make any more payments" referred to future vouchers which would normally be prepared there, and was not a direction to stop payment or in any way to interfere with the November voucher, which had already been prepared and approved at the Project Office by the 8th or 9th of the month and, as had been the case with previous monthly vouchers, by the 10th of the ...

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