PEARLMAN v. RELIANCE INS. CO.

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Argument of Raymond T. Miles

Chief Justice Earl Warren: Number 78, Chester A. Pearlman, Trustee, Petitioner, versus Reliance Insurance Company.

Mr. Miles, you may proceed with your arguments.

Mr. Raymond T. Miles: Mr. Chief Justice and may it please the Court.

This Court on Monday of this week issued some orders, permitting the amicus curiae.

Murphy, Mr. Murphy from Oregon and the Association of Surety Company represented by Mr. Morgulas to file amicus curiae brief.

That brief was served on the -- late last night as far as the amicus curiae, Mr. Morgulas, the other brief has not been served of course and I would like to ask that this Court give us a short period of time say 10 or 12 days to have an opportunity to examine the one brief that has been submitted and to make any reply that we deemed necessary.

Chief Justice Earl Warren: You may do so.

Mr. Raymond T. Miles: Thank you.

Now, well this case is here before this Court pursuant to a writ of certiorari then in directing the review of the judgment of the Second Circuit Court of Appeals.

The Second Circuit Court of Appeals affirmed a judgment of the United States District Court for the Western District of New York which in turn had reversed a decision of the referee in bankruptcy in that Court.

I would like to review very briefly the facts which will only take about a minute or a minute and a half but will put the matter in proper focus.

The Dutcher Construction Corporation entered into a contract with the United States Core of Engineers for the doing of certain work from the St. Lawrence Seaway project.

This was in April of 1955.

At that time, the Dutcher Construction Corporation secured from the Fire Association of Philadelphia the issuance of two bonds.

These bonds were issued pursuant to the Miller Act.

There's one as a performance bond and the other is a payment bond.

They run in favor of the United States Core of Engineers.

Subsequently, the Fire Association of Philadelphia changed its name to the Reliance Insurance Company and that is the name of the respondent in this matter today.

In April of 1956, the Core of Engineers terminated the contract being performed by the Dutcher Construction Corporation on the St. Lawrence Seaway.

It did so for the convenience of the Government and at that time the bankrupt corporation was not in default.

However, there was owed to suppliers and materialmen, some $329,000 which the Reliance Insurance Company has since paid.

As a matter of fact, the Reliance Insurance Company had certainly tended the expenses and then later discovered, I believe that there was another supplier that came under the roof that was known to the Reliance Insurance Company at the time of the termination of the contract so that the Reliance Insurance Company also paid that supplier and the total amount paid by the Reliance Insurance Company to date is approximately $389,000.

The contract was terminated in April of 1956 and Dutcher Construction Corporation became and adjudged bankrupt in August of 1956.

At that time and when I say at that time, I mean the time of the contract was terminated, that was due to the Dutcher Construction Corporation by way of retainages upon the Government contract the sum of $127,000, but the engineers took the position that there should be some additional work done by the bankrupt contractor.

And accordingly an arrangement was entered into between the trustees in bankruptcy of Dutcher Construction Corporation, the Reliance Insurance Company representatives and representatives of the Corp of Engineers by which a group of joint venturers went in and did certain work which the Corp of Engineers said should have been done by the Dutcher Construction Corporation.

And this was pursuant to an agreement whereby the joint venturers whether to receive not over $40,000 upon the completion of the work by the joint venturers on the St. Lawrence Seaway.

The joint venturers received the sum of $40,000 from the United States Core of Engineers.

Justice William J. Brennan: Out of the 127,000 that is retained?

Mr. Raymond T. Miles: Yes sir and the balance of $87,000 is the amount that has been contended for today.

Now the position of the trustee in bankruptcy is that this $87,000 should come into his hands as part of the general assets in the bankruptcy and be subject to the claims of general creditors of whom the Reliance Insurance Company would be one.

The position however of the Reliance Insurance Company is that it has a right to these $87,000 which is superior to the rights of the general creditors of the bankruptcy.

Now primarily we res -- we rely in our positions --

Justice Arthur J. Goldberg: [Inaudible]

Mr. Raymond T. Miles: I think that all of this is for the suppliers and materialmen as distinct from wages.

Justice Arthur J. Goldberg: Those -- those men are laborers?

Mr. Raymond T. Miles: I don't believe that there's any laborers.

Now, our position is that we are sustained by three cases primarily the -- in the case of the United States against the Munsey Trust Company which was decided in this Court in 1947.

Now that case was decided by Mr. Justice Jackson who wrote the opinion.

There was a situation there in which a contractor had a number of jobs to do for the United States Government and there were bonds furnished in all of these jobs.

The jobs were completed, but the materialmen and the suppliers were not paid.

The contractor also had another job to do for the Government.

There was no bond furnished.

There is no indication in the opinion itself as to why no bond was furnished, but that was the case that the contractor never went into the performance of this particular contract.

Consequently, the Government had to secure another contractor which it did, but the other contractor succeeded the first contractor, did the job at a cost to the Government which exceeded the cost which would have been the Government's cost if the first contractor had gone through with the job.

Consequently, the Government took the position that it was entitled to setoff the excess completion cost for the performance of this unbonded job against the amounts which the contractor had earned and which were being held by the Government as retained for certitudes and this Court held with the Government's position.

It stated that it did so for two reasons.

The first was the strength of the Government's position as a creditor which had a setoff against that which it owed to its debtor.

But the second reason and the reason which we stress and which was stressed by Mr. Justice Jackson in his opinion was the weakness of the surety's position.

You pointed out that the surety had paid the materialmen, the suppliers, laborers, and that is therefore succeeded only to the materialmen and the laborers and consequently could rise no higher than they could and they had no enforceable rights against the Government.

So on those two basis, the position of the Government was sustained.

Now, along in 1958 came the American Surety Company against Hinds case which was decided in the Tenth Circuit and that case is an all force was the case before this Court today.

Justice Arthur J. Goldberg: Well then you won't be --

Mr. Raymond T. Miles: -- certainly.

Justice Arthur J. Goldberg: [Inaudible] if you look at the records on one -- the petitioners filed [Inaudible] argument that that's what they're asking, what complication you think [Inaudible]

Mr. Raymond T. Miles: Well, I think -- I think that the answer -- the thrust is that those persons who have wages within the connotation of Bankruptcy Act can all pay in particular case.

Justice Arthur J. Goldberg: So it was there with the Act?

Mr. Raymond T. Miles: Yes sir.

Justice Arthur J. Goldberg: And the laborers could have preferred to be here with the other laborers other than those who had their [Inaudible]

Mr. Raymond T. Miles: That's right.

Now the American Surety Company case against -- American Surety Company against Hinds decided in the Tenth Circuit was a situation in which there was a contract with the United States Government.

The contractor did some of the work but failed to finish.

Accordingly, the trustee went ahead and actually performed the work and finished the job.

The Surety Company, one of the moneys that had been retained by the Government for the performance of the contractor up until the time that he failed to continue in his performance and the Court held that the surety would have to fail.

The surety hadn't established its right to priority.

It had all the cases that the respondent has cited in this matter before it, a large number of which were Court of Claims cases, a large number were state cases applying state law.

And in fact, the Court and the Tenth Circuit stated that the position of the surety in a matter before it was not unsupported by authority.

But on the basis or the second basis set forth by Mr. Justice Jackson it held against the surety and made this statement.

We're not convinced however of the merit of reason which limits the clear holding of Munsey to factual situations where the Government is a direct claimant.

Mr. Justice Jackson speaking for the Court notes that claim with the surety must fail for two reasons, both the strength of the Government's right to setoff and the weakness of the surety's claim to equitable rights in the fund.

The reasoning of the opinion in a latter regard is in no way dependent upon the United States being the claimant.

Now we have one other case that we rely on to sustain our position, that's the case of Phoenix Indemnity Company against Earle which was decided in 1955 in the Ninth Circuit.

And there, the United States Government tried to assert certain tax liens against funds which had come into the hands of the trustee in bankruptcy.

The trustee in bankruptcy had retained these funds from the Government that they were previously been retainages.

In that case too, the surety had paid the laborers and materialmen, but the Court held that the Government's tax liens were impressed upon the moneys received by the trustee in bankruptcy and stated that an assertion to the contrary which seems to have been laid to rest by the Munsey case.

Now these are the three doc -- cases that we rely upon and as against that, the surety has in this case characterized the Munsey case as a violent doctrine seeking to discredit the Munsey case except to those situations where the Government is a party and seeking to discredit these two cases which had followed.

Now primarily the surety's position is that it follows the cases set forth as the Prairie State National Bank against the United States and the case of Henningsen against the United States Fidelity & Guaranty Company.

The Prairie State case was decided in 1896.

We have no argument whatsoever with that case.

It's a case where a contractor did some work then failed to complete the job, the surety ran and completed the job.

So the surety is here in a performance rather than a payment situation.

In that particular situation, the contractor had assigned moneys that were to come due from the performance of the contract to a bank and the contest therefore was whether the assignee bank should retain the retainages or whether the surety should succeed and the Court held that the surety should succeed.

Now we think that that's a logical case and we point out why it's logical and why a contrary result would be illogical.

We say this that here the surety has come in and actually performed and the first thing that occurs is it's perhaps created the fund which it subsequently gets.

It should be rewarded by the creation of its own efforts.

The second thing is that the United States by the very nature things can be forced to perform upon a contractor.

That the United States has a million dollar contract and it spends $500,000 and the job is half done, and the contractor defaults, the United States by the nature of things might be forced to go in and complete the contract, to complete the building, to protect its investments and the time and the money, but under no circumstances can the United States of America be forced to pay the materialmen and the laborers.

So as I've said before, we have no argument whatsoever with the Prairie State case, but then the next case which is cited by the surety is Henningsen against United States Fidelity & Guaranty, decided in this Court in 1908 and it again seems to be a case that is equally cited, but this is an entirely different case.

In the Henningsen case, we have a somewhat similar situation in that the contractor assigned the moneys to be earned by the contractor from a performance of the Government's bond to a bank.

The contractor did some of the work.

If the work failed to pay the suppliers and the materialmen surety stepped in paid.

Now the strange thing here is that the surety again prevailed, but the Court and the only citation contained in the text of its opinion cited the Prairie State case.

And as far as it can be determined by the opinion itself, it made no distinction between payment and performance, nevertheless the surety prevailed in that case.

The Court stated the Prairie State case controlled.

There is no reference to the arguments which we have made here that the United States can by the nature of things be forced to complete a contract but can never be forced to pay, then proceeded into the Henningsen case and made the statement that the surety was obligated to pay by contract, that the bank was a volunteer.

Well to me that which did not seem to be the cheap reason in the case is to point out a different situation in this case before this Court, we point out that we represent all of the creditors, some of whom obtained a creditor status before the issuance of these bonds and before the execution of this contract with the United States Government.

And we'd hardly think that they qualify as volunteers in the sense that the Court used that phrase in the Henningsen case.

However, the Court went along and put the basis for the recovery by the surety in this case on the basis that the surety by the payment of laborers and materialmen had released the Government from its obligation to those persons and to the same extent had released the Government from its obligation to see that the laborers and materialmen were paid.

So that at this stage, we now come into the cases which hold that the surety is subrogated to the position because of its satisfactions of the Government's equitable obligation to the materialmen and the laborers.

Now this has been a matter which has been criticized over the course of time and various law journals we've been citing University of Cincinnati Law Journal.

It's been criticized in Yale Law Journal which was published, I think, in the later part of the summer although the issue itself is dated as recently as June of 1962.

It was pointed out in that particular article that what the Court seemed to be saying was either that the surety had a claim for simple reimbursement from the Government as a secondary principle or it was stating that the satisfaction of the Government's obligation as an equitable obligor put it in the position of holding the retainages which the Government had at the time of dissatisfaction.

Well in either case we say that this isn't a proper subject for subrogation because we're only satisfying what is an equitable obligation and not a legal obligation.

And I should like to point out that at this time that in the Henningsen case that was as far as it went and that was the basis of the recovery.

It did not state in the Henningsen case that the laborers and materialmen had any equitable liens or equitable priorities as against the retainages.

That was a development of cases which followed.

Now the cases that have followed have not explained how the satisfaction of this equitable obligation as it's described in Henningsen in effect creates a legal right in the surety.

The Belknap case is probably the case most cited by attorneys in this field.

Belknap case was decided in 1921 and that case attempted to spell out the reasoning of the Henningsen case and made this statement.

The surety's claim of prior argument with the fund was sustained and this was done on the stated theory of subrogation since it cannot be the transfer of a right by subrogation unless there is a right to be transferred.

We think the necessary effect of the decision is to hold that the laborers and materialmen in spite of or in addition to the giving of the bond had an original and continuing equitable priority to the bond and it was this right to which the surety was subrogated.

So now we have an evolution, a next step where they say that there is an equitable priority to which the surety has succeeded.

Justice Arthur J. Goldberg: Yes, but this Court had not been [Inaudible] with the government that the laborers and materialmen would have been protected by their liens, is that so?

Mr. Raymond T. Miles: No sir.

Justice Arthur J. Goldberg: Why not?

Mr. Raymond T. Miles: Because you can't have a lien against the United States Government.

Justice Arthur J. Goldberg: Right, so this work had not been --

Mr. Raymond T. Miles: Had not been --

Justice Arthur J. Goldberg: (Inaudible) by the Government.

Mr. Raymond T. Miles: Quite right, under most all state statutes that's true, and certainly that would be true in my own statement.

Justice Arthur J. Goldberg: [Inaudible] is equitable obligation his rights and the fact that since some of the action is really been [Inaudible] on the present Government and of course [Inaudible] protections that would have enforced the [Inaudible] on the private parties.

Mr. Raymond T. Miles: That maybe the background of it, but the fact of the matter is that the Government has here done something more than would be the case what a private individual were if a contract was done in New York State, material man was not paid, he has a right to assert a mechanics lien against the property.

Here the Government we think has satisfied this equitable obligation by the payment bonds.

Justice Arthur J. Goldberg: For the two companies?

Mr. Raymond T. Miles: Yes sir.

Now what we've stated here is that the Government is asserted by the Court to be in a certain sort of ought to pay situation, that's badly said but that's the situation as we see it and we say does that create a right to payment of the laborers and if that's the position, then that position will apply in the face of all the cases that say that the laborers and the materialmen have no rights in the fund.

The strange thing about the Belknap case was that after it came to this equitable priority theory, and it had noted that the Henningsen case that favored the surety on the basis of the subrogation theory, the Belknap case then described its subrogation and so stated in the opinion itself, and made these rather interesting comments which I'd like to read to the Court but which one follows exactly after the other in the text of the opinion.

The Belknap case goes back to the Prairie State case which is the performance bond case with which petitioner in this matter has no argument whatsoever and referring to the performance bond case made in this statement.

When the surety in the later case stepped in the United States was the obligee in an unperformed contract holding security for its performance and the surety was subrogated.

We go right along, then the next sentence refers to the Henningsen case, the payment bond case and makes this statement.

When Henningsen Surety paid up, the United States, and secured creditors had been satisfied and had no further claim of the fund unless it was the duty to devote the fund to the labor and material claimants and hence the proposition must be considered as established.

In other words, Belknap jumped to the conclusion that there had to be this equitable priority without giving a basis for it and without following any subrogation theory which had been followed in the Henningsen case and then in the very next sentence made this statement.

Obviously the retained fund is devoted to the payment for such labor and material as maybe necessary to finish the work after the contractor defaults.

Whether it is devoted to pay the contractor's debts of this class is a distinctive question and the cited cases suggest to us confusion of thought.

In other words when you quarrel with all and you have the Henningsen case, a payment bond case resulting in a decision favorable to the surety on the basis of subrogation to an equitable obligation of the Government.

In the Belknap case the surety again prevails not on a theory subrogation, but on a new theory of equitable priority comparable to an equitable lien.

And we say that it can't be an equitable lien because it doesn't meet any of the elements for such a thing.

To have an equitable lien, there would have to be a debtor and creditor relationship.

There is no debtor-creditor relationship between the United States and the materialmen.

The second thing that would have to be present would be a raise.

There is no raise because the funds which are identified as retainages are only so-called, they are not a separate identifiable fund but rather they are part of the general assets of the United States.

The third thing has been no act of appropriation by the Government identifying this raise as set aside for the use of the materialmen and the laborers.

Chief Justice Earl Warren: We'll recess now.

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Argument of Raymond T. Miles

Chief Justice Earl Warren: -- Chester A. Pearlman, Trustee, Petitioner, versus Reliance Insurance Company.

Mr. Miles, you may continue with your argument.

Mr. 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.

Justice John M. Harlan: 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?

Mr. 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.

Justice John M. Harlan: Well, the answer to my question would turn whether the materialmen had rights against the Government, would it?

Mr. Raymond T. Miles: Well, I don't think that the Government --

Justice John M. Harlan: The Government could contract certainly with the -- with the prime contractor who give the right to that, asked you whether it might have.

Mr. Raymond T. Miles: Oh, you mean to have an entirely different type of contract?

Justice John M. Harlan: Well, I don't know whether it is or not.

Mr. Raymond T. Miles: Well, it would be an entirely different con -- contract.

The contract --

Justice John M. Harlan: You mean under this contract --

Mr. Raymond T. Miles: Yes sir, the contract --

Justice John M. Harlan: The Government would have no such right?

Mr. 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.

Justice John M. Harlan: 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.

Mr. Raymond T. Miles: It says nothing about it.

Justice John M. Harlan: It says nothing about it?

Mr. Raymond T. Miles: That's right.

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

Mr. 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.

Justice 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]

Mr. Raymond T. Miles: I would think that they could not pay.

The Government could not pay.

Justice Arthur J. Goldberg: They could not pay even though the work is done is directly related to [Inaudible]

Mr. 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.

Justice Arthur J. Goldberg: What do you make out of the statement [Inaudible]

Mr. 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.

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

Justice Arthur J. Goldberg: You equate the word equitable under those circumstances with more obligation?

Mr. Raymond T. Miles: With an ought-to-pay situation, they ought to pay, yes sir.

Chief Justice Earl Warren: Mr. Turner.

Argument of Mark N. Turner

Mr. 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?

Chief Justice Earl Warren: Yes, you may.

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

Mr. Mark N. Turner: I'll do it within a week.

Chief Justice Earl Warren: Yes.

Mr. Mark N. Turner: That would be satisfactory?

Chief Justice Earl Warren: Yes.

Mr. 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.

Chief Justice Earl Warren: Represents what?

Mr. Mark N. Turner: The trustee in bankruptcy stands in the shoes of the contractor.

Chief Justice Earl Warren: Oh, yes.

Mr. 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.

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.

Justice Hugo L. Black: I don't have a [Inaudible]

Mr. Mark N. Turner: That is correct, that is correct, Your Honor.

But I say --

Justice Hugo L. Black: [Inaudible]

Mr. 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.

Justice Arthur J. Goldberg: [Inaudible] in the normal situation would never to play with the completion bond and the payment bond is required?

Mr. 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 --

Justice Arthur J. Goldberg: After one situation?

Mr. 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 --

Justice Hugo L. Black: [Inaudible]

Mr. 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 --

Justice William O. Douglas: It was a performance bond in the 208 U.S. case, was it?

Mr. Mark N. Turner: The 208 is the –-

Justice 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 --

Justice William O. Douglas: It was a payment bond?

Mr. Mark N. Turner: That was a payment bond.

The Prairie -- the Prairie State Bank case was the --

Justice William O. Douglas: What was the in the --

Mr. Mark N. Turner: It was a performance bond.

Justice William O. Douglas: The Hen -- Henningsen case was the --

Mr. Mark N. Turner: Straight payment bond case.

Justice William O. Douglas: Payment bond covering all of the claims or was it a payment bond covering the claims of laborers and materialmen?

Mr. 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.

Justice 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?

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

Justice William O. Douglas: I understand that.

Mr. 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.

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.

Justice Arthur J. Goldberg: Mr. Turner, do you know of any [Inaudible]

Mr. 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.

Justice Arthur J. Goldberg: Have there been cases or any Government cases where the equitable law [Inaudible]

Mr. Mark N. Turner: Well there of course --

Justice Arthur J. Goldberg: They became priority on the facts.

Mr. 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.

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.

Justice Byron R. White: [Inaudible]

Mr. Mark N. Turner: I beg your pardon?

Justice Byron R. White: [Inaudible]

Mr. 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.

Justice Byron R. White: [Inaudible]

Mr. Mark N. Turner: No, we did not.

Justice Byron R. White: [Inaudible]

Mr. Mark N. Turner: No, we did not, Your Honor.

Justice Byron R. White: [Inaudible]

Mr. Mark N. Turner: In the State of New York?

We have --

Justice Byron R. White: [Inaudible]

Mr. Mark N. Turner: We have -- yes, we have the usual recording statutes.

But --

Justice Byron R. White: [Inaudible]

Mr. Mark N. Turner: We did not.

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?

Justice Byron R. White: [Inaudible]

Mr. Mark N. Turner: The Martin case?

That was 1937.

Justice Byron R. White: [Inaudible]

Mr. 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.

Justice Byron R. White: [Inaudible]

Mr. Mark N. Turner: I know of none, I know of none.

Justice Byron R. White: [Inaudible]

Mr. Mark N. Turner: Well, under the terms of the assignment, it was not to be effective until -- until default.

Justice Byron R. White: [Inaudible]

Mr. 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.

Justice Byron R. White: [Inaudible]

Mr. 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.