In Count I of the complaint, brought pursuant to the Miller
Act, 40 U.S.C. § 270a et seq., Brandt alleges that the
Defendant has violated the duty of a creditor to apply funds
from a government bonded job to obligations incurred in
generating those funds. Count II alleges misrepresentation and
breach of fiduciary relationship. After oral argument,
Defendant's motion for summary judgment as to Count II was
denied based on the Court's finding that genuine issues of
material fact exist. Both parties seek summary judgment with
respect to Count I.
In October of 1981, Brandt, as general contractor, entered
into two subcontracts with DeVolder Brothers Roofing
Contractors, Inc. ("DeVolder") pertaining to the repair of two
buildings at the Rock Island Arsenal. Pursuant to these
contracts and in compliance with the Miller Act, Brandt
executed payment and performance bonds on which it was the
principal. DeVolder did not have sufficient funds to pay its
suppliers and others and needed to obtain capital from a third
party. DeVolder went to Uptown National Bank, to which it was
already indebted on other obligations. The Bank and DeVolder
worked out an agreement whereby the Bank would finance
DeVolder on the Arsenal project and DeVolder would thereafter
apply the profit from that job on its previously existing
indebtedness to the Bank. DeVolder represented to the Bank
that the profit would be approximately $60,000 and that it
would come in the form of a retainage fee paid at the time the
job was finished.
In April of 1982, representatives of the Bank, Brandt and
DeVolder met. Brandt at that time was made aware of the
Uptown-DeVolder agreement. The parties discussed how Uptown
was to be repaid its monthly advances to DeVolder and worked
out an agreement whereby Brandt made checks payable jointly to
DeVolder and Uptown.
On October 28, 1982 Brandt made its final payment to
DeVolder by a check in the amount of $64,734.56, payable
jointly to DeVolder and Uptown. At the time that payment was
made, Brandt was unaware that certain firms which had supplied
material for the Arsenal project had not been paid, including
Owens-Corning. The final payment was in an amount sufficient
to pay the balance due all firms supplying material. DeVolder
advised Uptown that it was necessary to use the final payment
from Brandt to satisfy its obligation to the suppliers and
requested that the Bank not take the check as previously
agreed. Uptown refused to comply with DeVolder's request and
applied the sums to DeVolder's pre-existing indebtedness.
DeVolder was thus unable to pay Owens-Corning. DeVolder
subsequently filed bankruptcy. Owens-Corning filed a claim
against Brandt and the surety on its bond, pursuant to the
terms of the Miller Act, and this Court subsequently entered
judgment against Brandt. Brandt paid Owens-Corning $59,853.62
in satisfaction of the judgment.
CROSS-MOTIONS FOR SUMMARY JUDGMENT
Although this is not a Miller Act proceeding, Brandt
suggests it is a case seeking recovery of the amount paid to
a successful Miller Act claimant and it arises because of
Uptown's deliberate misappropriation of funds. Brandt argues
that despite the Bank's knowledge that the funds in question
were derived from a bonded government project and that certain
suppliers were unpaid, Uptown appropriated the funds and
applied the payment on the note of DeVolder, an indebtedness
totally unrelated to the government project. Brandt contends
that the Bank thus violated the rule that a creditor who knows
that funds are derived from a government bonded job is
obligated to apply the funds to obligations incurred in
generating those funds as opposed to an unrelated transaction.
See United States for the Use of C.H. Benton, Inc. v. Roelof
Construction Co., 418 F.2d 1328 (9th Cir. 1969); United States
for the Use of Hyland Electrical Supply Co. v. Franchi Brothers
Construction Corp., 378 F.2d 134 (2nd Cir. 1967).
Uptown argues that the traditional remedies available to a
surety or general contractor who has been exposed to liability
under its payment bond are subrogation and indemnification.
Under either of these theories of recovery, Defendant contends
that Brandt has a cause of action against the subcontractor
DeVolder but that there is no basis in law for Brandt to in
effect waive any rights it has against DeVolder and instead
plead a cause of action against the Defendant.
The rule has been established that "once it has been
determined that a supplier has knowingly misapplied funds, the
misapplied funds must be reallocated to the proper accounts
(citations omitted)." United States for the Use of General
Electric Supply Co. v. Wiring, Inc., 646 F.2d 1037, 1040 (5th
"The rationale for this rule is that it would be
unfair to the principal and surety on the Miller
Act bond to permit a supplier to collect old
debts out of monies paid on a current government
project, secure in the knowledge that he will be
able to collect for the material furnished on the
government project by filing a claim against the
bond." 646 F.2d at 1040.
This rule and the rationale behind it do not provide support
for the argument advanced by Brandt in this case.
A bank or financial institution which advances money for a
government project has no Miller Act protection. The injection
of capital into a government project does not constitute the
furnishing of labor or materials, and therefore such a
creditor has no cause of action against the general
contractor's bond. See First National of Dothan v. American
Surety Co. of New York, 53 F.2d 746 (5th Cir. 1931); U.S. for
the Use of First Continental National Bank & Trust Co. v.
Western Contracting Corp., 341 F.2d 383 (8th Cir. 1965).
Roelof, supra, and Franchi Brothers, supra, involve factual
situations in which a materialman or supplier applied money
from a government job to a prior delinquent account and then
attempted to assert a Miller Act proceeding on the general
contractor's bond. These cases do not establish that any
creditor who knows that funds are derived from a bonded job is
obligated to apply the amount to that account as opposed to an
unrelated obligation. See American Fidelity Co. v. National
City Bank of Evansville, 266 F.2d 910 (D.C. Cir. 1959) (where
contractor borrowed money from bank and as security therefor
legally assigned proceeds of government construction to the
bank, in the absence of fraud, sureties on the contractor's
performance and payment bonds could not recover progress
payments from bank to reimburse them for sums paid by them
because of contractor's default after bank had collected
progress payments), Coconut Grove Exchange Bank v. New
Amsterdam Casualty Co., 149 F.2d 73 (5th Cir. 1945).
Contrary to Brandt's suggestion, the status of the recipient
of the funds is an important consideration. The restrictions
in the Miller Act exist not only to protect a general
contractor from making double payments, but also to ensure
that obligations owing to suppliers and materialmen arising
from government projects are satisfied. Further, policy
considerations militate against acceptance of Brandt's
position. Uptown entered into a contract with the
subcontractor DeVolder and obtained assignment of the monies
due to DeVolder from Brandt. Under Brandt's logic, once Brandt
found out about the diversion of funds by its subcontractor,
it could recoup these funds from Uptown and use the money to
pay suppliers. If financial institutions do not receive the
benefit of their contractual agreements when financing public
works, however, they may be dissuaded from becoming involved
in public works projects.
Brandt is not entitled to recover against Uptown under the
remedies of subrogation or indemnification. Under the
principles of subrogation, once Brandt pays the claim of the
supplier, Brandt stands in the shoes of that supplier and can
gain no better position than the supplier had.
There is no allegation that any materialman had an action
against Uptown as well as against DeVolder. If it is assumed
that Uptown breached some portion of its contract with
DeVolder concerning the application of the retainage, Brandt
has no right to assert a breach on behalf of DeVolder. There
is neither privity of contract nor is there any specific
subrogation right contained in the Brandt-DeVolder subcontract
which would allow Brandt to assert against Uptown any defenses
which DeVolder may have against the Bank. Additionally, there
exists in section 8 of the Brandt-DeVolder subcontracts an
indemnity agreement by which DeVolder promises to pay for all
material furnished under the subcontract and to indemnify
Brandt and hold him harmless from any and all claims by those
other than the subcontractor. There is no such indemnity
agreement between Brandt and Uptown.
Accordingly, Plaintiff's Motion for Summary Judgment is
DENIED. Defendant's Motion for Summary Judgment is GRANTED as
to Count I.
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