Pearlman v. Reliance Insurance Company

PETITIONER:Pearlman
RESPONDENT:Reliance Insurance Company
LOCATION:Beaumont Mills

DOCKET NO.: 78
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 371 US 132 (1962)
ARGUED: Oct 09, 1962 / Oct 10, 1962
DECIDED: Dec 03, 1962

Facts of the case

Question

  • Oral Argument – October 09, 1962
  • Audio Transcription for Oral Argument – October 09, 1962 in Pearlman v. Reliance Insurance Company

    Audio Transcription for Oral Argument – October 10, 1962 in Pearlman v. Reliance Insurance Company

    Earl Warren:

    — Chester A. Pearlman, Trustee, Petitioner, versus Reliance Insurance Company.

    Mr. Miles, you may continue with your argument.

    Raymond T. Miles:

    Mr. Chief Justice, may it please the Court.

    Yesterday, at the conclusion of the session, I had pointed out how we, representing the trustee in bankruptcy were favored by three decisions of recent vintage including the decision of this Court, United States against the Munsey Trust Company decided in 1947, and the decisions of two Circuit Courts which clearly favor us.

    One of the being an all force with the case before Your Honors.

    I had also pointed out that time that the surety here claimed support from two cases of this Court, one decided 1896, the Prairie State National Bank against United States and the other, the case of Henningsen against United States Fidelity and Guarantee Company decided in 1907.

    I’ll repeat what I said yesterday that we have no quarrel whatsoever with the case of Prairie State against National Bank.

    I’ve also pointed out I believe that there is an attack being made directly here on the Henningsen case.

    Now we’ve shown how the courts have wandered around in an effort to sustain the results which have favored the surety in these cases which of course preceded the case as which we cite are supporting us since 1947.

    Now, it would seem to me that it might be interesting to look to the position of the Government.

    The Government, under the standard contract that it had in this case and it has in all of these types of cases, has a provision that the contracting officer is under no obligation to see that the laborers and the materialmen are paid, the suppliers and the materialmen are paid where 50% of the contract has been performed.

    We think that this is indicative of the fact that either the Government has concluded there is no equitable obligation upon the Government to see that they are paid or that it is the Government’s thought that the equitable obligation has been satisfied by the passage of the Miller Act.

    Now, it might also be of some interest to look to the statements made in the Congress at the time that this Act was before the Congress.

    I think it’s clearly stated there that the passage of the Miller Act served two purposes.

    The performance bond was to satisfy the obligation to the Government and the passage of the provision regarding the payment bond was to satisfy any obligation or any duty, call it what you will, to the suppliers and the materialmen.

    Would the — could I ask you a question?

    Would the Government have had the right to use moneys in it’s possession when it becoming new under the contract to the prime contractor to satisfy the claims of the materialmen?

    Raymond T. Miles:

    I do not think that they — that there would be such a right.

    I’ve never seen a statement made to that effect, but I would conclude that it would not have such a right because the materialmen have no enforceable rights directly against the Government.

    It would almost seem that if they were doing so, it was in the nature of a gift.

    Well, the answer to my question would turn whether the materialmen had rights against the Government, would it?

    Raymond T. Miles:

    Well, I don’t think that the Government —

    The Government could contract certainly with the — with the prime contractor who give the right to that, asked you whether it might have.

    Raymond T. Miles:

    Oh, you mean to have an entirely different type of contract?

    Well, I don’t know whether it is or not.

    Raymond T. Miles:

    Well, it would be an entirely different con — contract.

    The contract —

    You mean under this contract —

    Raymond T. Miles:

    Yes sir, the contract —

    The Government would have no such right?

    Raymond T. Miles:

    That’s right.

    The contract runs exclusively to the contractor.

    There are no rights included to the materialmen and the laborers.

    It would have to be an entirely different thing that has ever been done before.

    Oh, what if the — does the contract exclude as between the Government and the prime contractor, does it — the contract expressly exclude the Government’s right to utilize funds to satisfy the claims of this paid materialmen.

    Raymond T. Miles:

    It says nothing about it.

    It says nothing about it?

    Raymond T. Miles:

    That’s right.

    The reason I asked you the question is because the Court of Claims dealt with the somewhat similar situation, analyzed it that way.

    Raymond T. Miles:

    Yes, sir.

    I might add that the Court of Claims is presently awaiting the decision of this Court because it has a matter before it in which this — which this matter has been cited and it’s aware of the fact that this decision is up for consideration for the members of this Court.

    And finally, I know that there’s been a great deal set about various equities here and we’d like to point out the fact that there are certain equities held by the trustee in bankruptcy in some of these cases.

    And this has been notably apparent in the fact that you now have two amicus curiae, who represent trustees in bankruptcy who are presenting briefs to this Court.

    One of them has already presented a brief to this Court and another one will shortly present a brief to this Court.

    Both of those gentlemen represent trustees in bankruptcy who have gone ahead and performed the contract, completed the contract with the funds of the bankrupt, that is the general assets of the bankrupt, and if the decision of this Court is that under the circumstances are paid for by the surety, if the surety is successful then I take it that the trustees in bankruptcy will be foreclosed from recovering any of the retainages presently held by the Government in those particular cases and will have the anomalous situation that the trustee who did the work did not recover any of the retainages, but the surety who didn’t do the work and didn’t complete the job did recover the retainages.

    Thank you.

    Arthur J. Goldberg:

    Mr. Miles, thinking back to what the Government said [Inaudible] did not pay the laborer materialmen for the work that they have done in mentioning the [Inaudible]

    Raymond T. Miles:

    I would think that they could not pay.

    The Government could not pay.

    Arthur J. Goldberg:

    They could not pay even though the work is done is directly related to [Inaudible]

    Raymond T. Miles:

    That is right but as I — but as I pointed out, Mr. Justice Goldberg, it is not a separate identifiable fund that’s part of the general assets of the Government.

    It’s not a fund that’s been set aside and appropriated.

    And in addition, the Government would then be in a position that it would be paying these people but it would be on a no obligation because the people could not assert any kind of a lien.

    They could not bring any kind of a lawsuit and prevail.

    Arthur J. Goldberg:

    What do you make out of the statement [Inaudible]

    Raymond T. Miles:

    I think it’s an effort to sustain a position where that surety recovered and the first time that I saw — ever sought was in the case of the Henningsen case.

    And there, the Court seemingly decided, first, how it wanted to decide.

    That is that the Surety Company was obligated by contract and then set but the assetee bank in that particular case was a mere volunteer, so it created a certain equitable appearance on behalf of the surety.

    And then apparently in an effort to sustain the decision which seemingly had been made on the basis of the voluntariness or the lack of voluntariness of these particular parties went ahead and said that the Government had equitable obligation even though it had no legal obligation.

    And seemingly, try to justify its reasoning on that basis and it was subsequent to that these cases seized upon the equitable obligation theory.

    Raymond T. Miles:

    But clearly, nobody even knows that it said that the Government actually could be sued or would — could be made to pay that.

    Arthur J. Goldberg:

    You equate the word equitable under those circumstances with more obligation?

    Raymond T. Miles:

    With an ought-to-pay situation, they ought to pay, yes sir.

    Earl Warren:

    Mr. Turner.

    Mark N. Turner:

    Mr. Chief Justice, and may it please the Court.

    I would request, if I may, the opportunity to review the brief of the amicus curiae from Oregon which has not been filed or served if I may have just a few days in which to reply to what efforts received?

    Earl Warren:

    Yes, you may.

    I’d suggest you do it as promptly as you can Mr. Turner.

    Mark N. Turner:

    I’ll do it within a week.

    Earl Warren:

    Yes.

    Mark N. Turner:

    That would be satisfactory?

    Earl Warren:

    Yes.

    Mark N. Turner:

    If the Court please, at the outset I would like to discuss very briefly some of the matters which I feel are landmarks, so to speak, which we feel the Court in the Hinds and Earle cases overlooked or misconceived.

    In the first place, I would like to repeat and emphasize that the respondent surety here has paid all of the job creditors on this job.

    And the stipulation further provides that there are no known unpaid job creditors, so that the other creditors who are in the picture here have claims entirely unrelated to this St. Lawrence Seaway job which the Reliance Insurance Company bonded.

    Secondly, I would like to reemphasize the fact that the payment and performance bonds here as in all contract surety cases is not any form of insurance or protection to the contractor.

    The contractor is and remains to — remains the principle obligor or debtor.

    It is his first obligation to pay his debts and complete the job.

    A surety stands secondarily liable only, true as to a creditor, a surety is liable equally with the contractor but as between themselves, the surety is secondarily liable.

    And following that, if a surety pays or discharges an obligation of the principle, the surety is entitled so far as may be possible to be made whole by the contractor.

    Now, the trustee in this situation represents or stands in the shoes of the contractor.

    Earl Warren:

    Represents what?

    Mark N. Turner:

    The trustee in bankruptcy stands in the shoes of the contractor.

    Earl Warren:

    Oh, yes.

    Mark N. Turner:

    So that whatever rights may so, as between the Reliance Insurance Company, the respondent, and the petitioner are in favor of the surety and against the contractor rather than vice-versa.

    One other matter is this, that the payment and performance bond, and we are dealing here primarily with a payment bond, is an undertaking by the surety and the principle in favor of the United States, but for the benefit of a selected group of the contractor’s creditors, not his general creditors.

    It is an obligation confined by its terms to the suppliers, the laborers and materialmen on that particular job.

    Mr. Miles the other day made a remark that there were some general creditors whose claims antedated the making of this contract.

    I don’t recall any evidence one way or the other in the record.

    However, I feel that is of little or no moment because we are agreeing that there are no unpaid job creditors.

    Mark N. Turner:

    One other matter and that is this.

    It is our position to what — that whatever rights the laborers and materialmen had under the common-law are not cut down or limited by the furnishing of this bond or these bonds that like the mechanic’s lien laws in most — it’s not all of the states, those remedies are supplemental remedies and merely because there is a bond present in the case, should not be similar and tend to diminish or cut down the laborer and materialmen’s rights in a situation merely because there is a bond.

    Hugo L. Black:

    I don’t have a [Inaudible]

    Mark N. Turner:

    That is correct, that is correct, Your Honor.

    But I say —

    Hugo L. Black:

    [Inaudible]

    Mark N. Turner:

    Only the — only this as I see it that the argument is, is made here that the Government may have had some moral or equitable obligation to be sure that the laborers and materialmen were paid.

    But that it fully discharge that obligation by the requirement of a bond.

    I cite it that — only for this reason that our argument is that despite the giving of the bond, that there still exists the same moral or equitable obligation on the part of the Government to see that the laborers and materialmen are paid.

    The parallel — I urge no farther than that.

    Arthur J. Goldberg:

    [Inaudible] in the normal situation would never to play with the completion bond and the payment bond is required?

    Mark N. Turner:

    Yes, Your Honor.

    And here, I would like to allude to the question you asked of Mr. Miles as to whether or not, if the surety were in some —

    Arthur J. Goldberg:

    After one situation?

    Mark N. Turner:

    That is in that type of situation because in the McKinley case, decided by the Court of Claims and certiorari denied in this — in this Court, we have that very situation, the surety was insolvent, the contractor was insolvent.

    There the rights of the laborers and materialmen were given effect by letting them share to the exclusion of other creditors, the job moneys, the earned — the earned contract moneys —

    Hugo L. Black:

    [Inaudible]

    Mark N. Turner:

    Perhaps in a manner of speaking, but it’s a matter of fairness and equity also.

    And in the Westinghouse case decided by this Court, there we had a situation where the amount of the undertaking by the surety was insufficient to pay all of the job creditors.

    The surety paid the full amount of its penalty — of the penalty of its bond and then sought to share in the bankrupt estate pro-rata along with the other unpaid creditors, but there were unpaid job creditors.

    And this Court, very properly, it seems to me, said to the surety, “You must stand aside until all the job creditors are paid.

    This fund is for their primary protection.”

    And there, I submit is a shining example of how the Court, sitting as a court of equity reaches through and protects those who are entitled to the proceeds of the, of the contract moneys.

    Also, in the — in the Samson case, the Court did the same thing.

    And in the Martin case, the surety had an assignment but became bankrupt.

    He filed the assignment and said it was for the benefit of the job creditors as this Court had no hesitancy in allocating to the job creditors the proceeds of the job money.

    Our opponents concede that if the surety in this case paid out its money in physically completing the job, we would be entitled to the contract moneys assuming there are loss equaled or exceeded the balance on hand.

    I maintain and suggest that in the fundamental nature of things, there is no basic difference whether the surety pays out his money under a payment bond or a performance bond.

    I like to use this simple formally illustration, a brick wall is being built —

    William O. Douglas:

    It was a performance bond in the 208 U.S. case, was it?

    Mark N. Turner:

    The 208 is the –-

    William O. Douglas:

    Under the Heard Act case?

    I don’t recognize the case for that — for that citation, Your Honor.

    208 is the — of with the Henningsen case, it was a, it was a payment bond.

    The Henningsen case is 208 U.S. and that was a payment bond, a situ —

    It was a payment bond?

    Mark N. Turner:

    That was a payment bond.

    The Prairie — the Prairie State Bank case was the —

    William O. Douglas:

    What was the in the —

    Mark N. Turner:

    It was a performance bond.

    William O. Douglas:

    The Hen — Henningsen case was the —

    Mark N. Turner:

    Straight payment bond case.

    William O. Douglas:

    Payment bond covering all of the claims or was it a payment bond covering the claims of laborers and materialmen?

    Mark N. Turner:

    It was a bond covering the laborers and materialmen, similar to the one here involved at the — it was a bond given under the old Heard Act which was the predecessor of the Miller Act.

    And the only difference as I see it there is that under the Heard Act, the obligation of the surety was expressed in one piece of paper, whereas under the Miller Act, it’s two.

    It had — the old Heard Act had certain procedural difficulties requiring the laborers and materialmen to stand aside until the — until the claims of the Government were satisfied.

    And if the claims of the Government exhausted the penalty to bond, the laborers and materialmen took nothing.

    Under the — under the Miller Act, there are two separate bonds, one running to the Government with respect to — to performance or completion, the other one in favor of the laborers and materialmen only for their protection.

    I would like to reemphasize that basically, I see no difference between a payment and a performance bond, so far as the rights of the surety are concerned.

    A brick wall is being built.

    I maintain — it is of no consequence legally whether the surety contracts in advance to have the brick lay or whether it pays for the brick after the brick is laid, pursuant to its obligation previously under taken.

    In either the work is done and paid for by the surety’s money acting under compulsion or pursuant to its obligation under the bond.

    So that basically, I see no fundamental difference legally as to whether the payment is made by the surety under the payment or the performance bond.

    Now, I would like to treat this case in discussion under two general branches, one, the affirmative rights of the Surety Company and secondly, the absence of any right to the fund by the trustee in bankruptcy.

    The early case of course was the — was the Prairie National Bank case which was a payment bond case, followed by the Henningsen case which is a — of the — the Prairie Bank case was a performance case, the Henningsen case, a payment bond case.

    William O. Douglas:

    I just have — looking at the Henningsen case, again it says that the bond — describing the bond for the faithful performance of the contract and can promptly make the full payments to all persons applying labor or material so apparently its both?

    Mark N. Turner:

    Well, that is correct, Your Honor, nut that was at a time when both obligations were physically embraced within one bond.

    William O. Douglas:

    I understand that.

    Mark N. Turner:

    Yes.

    The bond itself was both a performance and payment bond, but the question issued related to the surety’s payment of labor and material bills as distinguished from physical completion of the job.

    Mark N. Turner:

    With respect to the — to the rights of the — of the surety here, there have been announced three general avenues of recovery; one, by subrogation to the rights of the owner or the Government to see to it that the laborers and materialmen are paid.

    The rationale of those cases is — is to this effect that by requiring the contractor to furnish a labor and material bond, the Government had expressed its interest and moral obligation to see to it that the laborers and materialmen were paid.

    And that stemming from that moral obligation, they had a right, so to speak, to use those funds.

    And in that connection, we have cited the McKinley case, the Martin case, the Westinghouse case, and the Samson case as indicating that when the chips are down, so to speak, and there is no other source of recovery, by one means or another, the Government and the courts have seen to it that what we maintain is the Government’s moral obligation to see that laborer and materialmen claimed to have paid has been accomplished.

    So that while — while it is true, no laborer has a right to file a lien on a federal judge or to sue the Government, still no, there are equitable obligations existing there which under the proper setting or in a proper setting are given expression.

    And there’s one very, very interesting case, the New York Insurance Company case which illustrates rather neatly actually, it’s the Court of Claims case, the direct rights of the surety to the fund that was a case where the Government had no interest of its own to serve.

    It had no claims either for — for the completion of the job or any of that sort, A surety had paid substantial claims under its payment bond and had notified the contracting officer of the existence of its claim or that it had — had paid all these claims.

    After such notice, the Government paid over, of course the contract moneys, to an assignee bank.

    The surety then brought suit in the Court of Claims to require the Government to repay the money which had been paid to the assignee bank.

    The question arose on the pleadings to be sure but the Government made a motion to dismiss the petition or claim on the ground it failed state tax sufficient to constitute cause of action.

    That motion was denied and the court there said, if the Government with no claims of its own to assert or protect, disregard the right of a surety, it might have to pay twice.

    I only cite that as an illustration of how the court seeks a way to do what we feel is simple justice.

    Arthur J. Goldberg:

    Mr. Turner, do you know of any [Inaudible]

    Mark N. Turner:

    You mean — I mean the case here at bar?

    Not in the formal sense, Judge Goldberg, but we do feel that it is an equitable claim.

    The matter has been spoken of in various ways, equitable lien, equitable right, and it is rather hard to say this is it and nothing else.

    It has been variously characterized as derivative rights to the fund, direct rights to the fund, equitable lien, equitable claim and I hate to — I hate to give it any one name tag.

    But the McKinley case, the Martin case, the Westinghouse, the Samson cases, all do speak of the equitable rights and obligations which are given effect to in the court — in a court of bankruptcy which of course has equitable jurisdiction.

    Arthur J. Goldberg:

    Have there been cases or any Government cases where the equitable law [Inaudible]

    Mark N. Turner:

    Well there of course —

    Arthur J. Goldberg:

    They became priority on the facts.

    Mark N. Turner:

    Oh, yes.

    Oh, yes, Your Honor.

    We have cited some cases on page 11 of our brief — well, those are bankruptcy cases.

    On page — on page 21, those largely come up on the — on the second branch up to the matter I was — as to, as to the trustee’s lack of property to which he could succeed.

    They’ve — they come up in a slightly different way because there are often times, there are a mechanic’s lien statutes, and I refer particularly to the Aquilino case and the Durham Lumber Company case decided by this Court not too long ago where in a non-federal contract matter, the Court said if the — if the laws of the state under which the matter arose, provided as to the — as to the bankrupts lack of interest, that would be respected by this — by this Court.

    And in that setting, we do have a number of cases which we have — have cited on page 21 of our brief.

    The second ground of — of the surety’s rights is subrogation to the rights of the laborers and materialmen and that is the basis adopted by the District Court and the Court of Appeals.

    And there again, it springs basically from the same general situation that the contract funds, arising from the performance of the contract are in the nature of trust funds dedicated to the payment of labor and materialmen’s claims.

    Now in many of the, in many of the states, we do have the statutory lien provisions constituting trust — constituting contract moneys as trust funds.

    Mark N. Turner:

    And here at this point, I would like to allude to my adversary’s comment that there is no reece, there is no trust fund.

    I submit there is one.

    In our case, we have $87,000 in the hands of the — of the trustee through until the actual money is segregated and paid out by the — by the Comptroller or the United States Treasury, it is in a mess but when the question comes up for decision as it is here, the fund is segregated.

    We know that these funds arose from the — from the performance by the contract of the physical work and his failure to pay for it, and the surety’s payment for that.

    And through this — throughout — throughout these cases is the — is the all pervasive idea of the courts, some adopting one theory, some adopting another.

    Here are, are contract funds which should be dedicated as though they were in formal trust funds to the beneficiaries who produced the improvement, the subcontractors, the laborers and materialmen.

    And when the Surety Company discharges those obligations, it is entitled to stand in their shoes and assert there equitable liens are priorities.

    The third ground is assignment.

    In this case, prior to — prior to the giving of the bond, the surety — the contractor execute an assignment of his rights to the surety.

    All contract moneys in the event of his default.

    We urge that also as a ground of relief and it’s interesting to note that this Court in the Martin against National Surety Company case; selected that ground as the basis for distributing the fund to laborers and materialmen and then the surety was insolvent, but the Court took it upon itself to divide that fund among the job creditors.

    And in the Munsey Trust case, which we’ve cited, the 1947 case, it’s interesting to note that footnote one of the Court’s opinion in that case said that where the rights of the Government by way of set-off, which was the Munsey case, are not involved, the assignment is valid.

    So that our feeling here is, will the Government having no interest in this fund, no claim for taxes or any other claim that Martin against the National Surety Company is a valid subsisting authority for the support of — of the — of the respondent’s position here.

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    I beg your pardon?

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    Yes, Your Honor.

    By with the bond, not the bond itself but the application for the bond and that is a part of the record before the Court.

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    No, we did not.

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    No, we did not, Your Honor.

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    In the State of New York?

    We have —

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    We have — yes, we have the usual recording statutes.

    But —

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    We did not.

    Mark N. Turner:

    Not until after bankruptcy and for entirely, entirely different purposes.

    But the, the Court in the Martin case — this Court in the Martin case makes no point of the — of the recording or filing of the assignment.

    It is treated as — as an assignment in equity valid as between the parties including the trustee and bankruptcy.

    I beg your pardon?

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    The Martin case?

    That was 1937.

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    Yes, but I — I would — I would like to point out that in the — in the 19 — in the Munsey Trust case in 1947, The Martin is cited for the proposition that if the rights, the Government were not involved.

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    I know of none, I know of none.

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    Well, under the terms of the assignment, it was not to be effective until — until default.

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    Well, it might not have been avoided because on the analogy of a mechanic’s lien which can be filed within four months or after.

    Byron R. White:

    [Inaudible]

    Mark N. Turner:

    Not in that respect, not in that respect.

    I would — I would like briefly to — to pass to the remaining matter here as to the absence of the trustee’s rights.

    The trustee here has not expended $1 of the general assets of the bankrupt to complete this contract or to pay the bills.

    Whatever payments have been made by the surety here did not deplete the bankruptcy state one iota.

    The trustee used none of the general assets.

    Now that was present in some of the cases, but here, there was not one iota of general assets used by the trustee in completing the job or paying expenses.

    So we say as a matter of equity, bearing in mind that the fundamental rights between these parties to this appeal are in favor of the surety against the contractor, who’s represented here by the trustee that the equities run in favor of the respondent against the trustee and that he should not step in here and seek what in effect is a windfall, and share in a fund to the building up of which he contributed, little or nothing, nothing, so far as the general assets of the state are concerned.

    One remark about the Hinds case, in our view of the case, the Court overlooked some of these fundamental equities and treated the case on a purely legalistic theory which as I read it here that in as much as a laborer or materialmen on a federal job had no legal or enforceable rights in the ordinary sense of the term against the Government or relating to the contract moneys that therefore, the payment surety in paying these claims were subrogated to no legal, enforceable right.

    Now that is not our concept of the law that is applicable here.

    We are dealing throughout here it seems to me, in the field of equity what is fair and right.

    We respectfully ask that the order of the Circuit Court be affirmed.