Agency’s motion to dismiss surety’s claims for equitable subrogation and contract adjustment is, for the most part, denied. The surety alleged that its subrogation rights had been triggered when the agency notified it about problems with the contractor’s performance. Thus, the surety argued, any payments made to the contractor should have been made to the surety. The agency, on the other hand, contended that the surety’s subrogation rights had not been triggered until the underlying contract had been terminated. The court split the baby, finding that the first communication between the agency and the surety did not trigger the surety’s subrogation rights, but other communications that occurred before termination did. The surety had thus stated a claim with respect to some of the payments made to the subcontractor. The court also denied the agency’s motion with respect to the contract adjustment claims, finding that the surety had sufficiently pleaded adjustment claims.
Redstick, Inc. had a contract to renovate an Army gym. The contract required Redstick to provide performance and payment bods. Redstick obtained these bonds from Capitol Indemnity Corporation, a surety.
Redstick performed much of the of the renovation work, and the Army paid the company nine progress payments representing 90% of the contract price. But by the end of the contract, the Army was having problems with Redstick’s performance. In September 2015, the Army sent correspondence to Redstick, identifying deficiencies. Around the same time, the Army also advised Capitol as surety that it was having problems with Redstick.
The Army continued to have problems with Redstick’s performance over the next several months. In December 2015, the Army notified Capitol that Redstick’s work was not complete and it should expect payment bond claims from Redstick’s subcontractors. On January 4, 2016, the Army suspended Redstick’s contract.
Shortly thereafter, Capitol and the Army negotiated a takeover agreement under which Capitol would step in to complete Redstick’s work. After finishing the work, Capitol submitted three claims to the Army: (1) an equitable subrogation claim for funds that the Army wrongly paid to Redstick after it knew Redstick had defaulted; (2) a claim for a contract change for work that Redstick performed, but that Capitol had to redo; and (3) costs for work performed outside the scope of the contract.
The Army denied the claims. Capitol re-asserted its claims in a suit against the government in the Court of Federal Claims. The government moved to dismiss for lack of jurisdiction and failure to state a claim.
A claim for equitable subrogation is based on the theory that the triggering of a surety’s bond obligation gives rise to an implied assignment of rights whereby the surety is subrogated to the contractor’s rights in to the contract balance. Capitol alleged that its bond obligation had been triggered in September 2015, when the government notified it of problems with Redstick’s performance. The government therefore should not have continued to make contract payments to Redstick after September 2015. Capitol alleged that the Army had violated (1) FAR 52.232-16(a) by making progress payments to Redstick in excess of 80% of the contract price, and (2) FAR 52.232-16(c) by failing to suspend payments after Redstick had defaulted.
The Army alleged the court lacked jurisdiction over the portion of the subrogation claim based on FAR 52.232-16(a) because Capitol had failed to raise that claim before the contracting officer as required by the Contracts Dispute Act. But the court found that equitable subrogation claims are brought under the court’s original jurisdiction and thus do not have to be raised as a CDA claim before the contracting officer. Moreover, even if this claim had to have been raised before the CO, Capitol had effectively done so even though the claim was asserted under a different subsection of the FAR.
Next, the Army contended that Capitol had failed to state a claim for equitable subrogation because it rights as a surety—and consequently any claim it had to payments made to Redstick—were not triggered until the Army formally terminated Redstick’s contract in March 2016. Capitol, on the other hand, claimed that that its subrogation rights were triggered in September 2015 when the Army first informed it of problems with Redstick.
The court split the baby. It found that the September 2015 communication with Capitol could not have triggered Capitol’s subrogation rights because Capitol did not take any action at that time to acknowledge its potential liability as surety. The court, however, found that Capitol’s subrogation rights were triggered in December 2015 when the Army informed the company that it should expect to receive payment bond claims from Redstick’s subcontractors. Thus, while Capitol could not make a claim for any payments made to Redstick before December 2015, it could assert an equitable subrogation claim for the ninth payment that was made to Redstick after December 2015.
Aside from the equitable subrogation claim, Capitol claimed it was entitled to a contract adjustment for having to redo a gym floor that Redstick had previously installed. The Army argued that this claim was barred by the takeover agreement, in which Capitol agreed to reinstall the floor in exchange for the remaining contract funds. The court, however, found that government’s argument was contradicted by allegations in the complaint stating that Capital had expressly informed the Army it was not relinquishing any claims for reinstalling the gym floor.
Finally, Capital argued it was entitled to an adjustment for a modification that the Army made to the scope of work. Capital alleged that Redstick had assigned this claim to it. The Army claimed that Redstick had released the Army from liability for this claim. The court found that this claim could only be resolved by considering evidence outside the complaint. Therefore, dismissal at the pleadings stage was premature.
Capitol is represented by Ian Michael McLin. The government is represented by Daniel K. Greene, Joseph H. Hunt, Robert E. Kirschman, Jr., and Deborah A. Bynam of the U.S. Department of Justice as well as Major Adrian Allison of the Army.
