## Facts

- The Small Business Administration (SBA) contracted with Innovative PBX Services, Inc. (IPBX) to replace a telephone system at a Department of Veterans Affairs facility.
- As required by the Miller Act, IPBX furnished performance and payment bonds, with National American Insurance Company (NAICO) as surety.
- IPBX subcontracted work to Nortel (later succeeded by Wiltel Communications, LLC), which completed performance but was not fully paid (about $675,000).
- Wiltel asserted a claim against NAICO under the Miller Act payment bond.
- NAICO settled and paid Wiltel, thereby discharging IPBX’s debt to Wiltel.
- NAICO notified the government that no further payments should be made to IPBX and that remaining contract funds should be held for NAICO’s benefit.
- Despite the notice, the government made the final contract payment to IPBX.
- NAICO sued the United States in the Court of Federal Claims (CFC) to recover the remaining contract funds (about $280,000).

## Issues

1. Whether a Miller Act payment-bond surety that pays subcontractor claims is equitably subrogated only to the subcontractor’s rights, or also to the prime contractor’s rights in the unpaid contract balance held by the government.
2. Whether equitable subrogation to the contractor’s rights permits the surety to sue the United States in the CFC under the Tucker Act notwithstanding the usual privity requirement.
3. Whether the government breaches a stakeholder duty by paying the contractor after receiving notice of the surety’s asserted entitlement to remaining contract funds.

## Decision

- The Federal Circuit affirmed the CFC’s grant of summary judgment for NAICO.
- The court held that NAICO, having paid the payment-bond claim and discharged the contractor’s debt, was equitably subrogated to the contractor’s rights in the remaining contract funds.
- The court held that this subrogation placed NAICO within a recognized surety exception to the privity requirement, so the Tucker Act waiver supported CFC jurisdiction over NAICO’s claim.
- The court held that, after receiving notice of NAICO’s asserted interest, the government violated its duty as stakeholder by making final payment to IPBX, and was liable for the funds that should have been preserved for the surety.

## Legal Principles

- A Miller Act surety that pays and discharges the contractor’s payment obligations may obtain equitable subrogation to the contractor’s rights in the unpaid contract balance held by the United States.
- In Tucker Act litigation, a surety equitably subrogated to the contractor’s rights may sue the United States for the contract balance under a recognized exception to strict privity.
- When the government holds contract funds and has notice of a surety’s subrogation claim, it must act as a stakeholder and may incur liability if it disburses funds to the contractor in derogation of the surety’s superior equitable interest.

## Conclusion

The Federal Circuit held that a Miller Act payment-bond surety that paid a subcontractor could stand in the prime contractor’s shoes to claim remaining contract funds from the United States, that the Tucker Act permitted the suit in the CFC, and that the government was liable for paying the contractor after receiving notice of the surety’s claim.


Nat’l Am. Ins. Co. v. United States, 498 F.3d 1301 (Fed. Cir. 2007)