
    362 F. 2d 805
    UNITED PACIFIC INSURANCE COMPANY v. THE UNITED STATES
    [No. 119-61.
    Decided June 10, 1966]
    
      
      Edward Gallagher, attorney of record; for plaintiff.
    
      Gerson B. Kramer, with whom was Assistant Attorney General John W. Douglas, for defendant.
    Before Cowen, Chief Judge, LakamoRe, Duffee, Davis and Collins, Judges.
    
   Cowen, Chief Judge,

delivered the opinion of the court:

Plaintiff, a surety company which issued payment and performance bonds on two Government construction contracts under the Miller Act (40 U.S.C. § 270a), sues to recover from the United States the proceeds of a check alleged to have been illegally disbursed by the Government to the contractor, who proceeded to cash the same and retain the funds.

Fred H. Stegeman, an individual doing business as Fred H. -Stegeman and Associates, entered into two contracts with the Federal Bureau of Public Boads for the grading, surfacing, and bridging of certain roads in Oregon, respectively designated the Mt. Hood and Whittaker Creek projects. Under the Mt. Hood contract plaintiff furnished a performance bond, guaranteeing performance of the work, in a penalty of $249,680.65, and under the Whittaker Creek contract, a performance bond in a penalty of $53,501.10. Payment bonds were executed under both, contracts, assuring payment of all labor and material bills incurred in connection with the work. The two pro j ects were eventually completed, but the contractor left unpaid material bills that plaintiff, pursuant to its surety obligation, was compelled to satisfy. A total of $46,586.51 was paid by plaintiff to materialmen, $17,000 on the Mt. Hood job, and $29,586.51 on the Whit-taker Creek. At issue in the case is the Government’s final payment of $41,624.79 to the contractor under the Mt. Hood contract. Plaintiff hopes, in short, to recoup the bulk of its loss on the two payment bonds by recovering the full amount of this check from defendant.

At the trial in this court, it was stipulated by defendant’s attorney and the attorney for the trustee in bankruptcy that out of the proceeds of the aforesaid check cashed by the contractor, $36,500 has not come into the possession of the trustee. It was also agreed that consideration of the question of whether any portion of the balance of $5,124.79 came into the possession of the trustee will be deferred until determination of the primary issue herein between the surety and the Government.

Plaintiff’s claim to recovery is based upon the contention that the authorized officials of the Bureau of Public Hoads, after receiving due notice of facts giving rise to an equitable right to the contract proceeds in the surety over the contractor, and after being notified of plaintiff’s assertion of such a right, paid out the proceeds in question to the contractor without any legal justification for so doing. Plaintiff claims that the facts of the present case are analogous to those in Newark Insurance Co. v. United States, 144 Ct. Cl. 655, 169 F. Supp. 955 (1959), wherein this court, confronted with issues somewhat similar to those now framed 'by plaintiff, awarded judgment for a surety against the United States. To decide the merits of the above contention a review of the salient facts of the case is necessary.

Alfred G. Mansfield, an insurance agent specializing in contract bonds and insurance for contractors, wrote the bonds for Stegeman, the contractor, on both the Mt. Hood and Whittaker Creek contracts. Sometime in September of 1960, Mansfield received a copy of a letter from the Bureau of Public Hoads to Stegeman acknowledging receipt of an attempted assignment of contract proceeds by Stegeman to one of his employees. Although the proposed transfer of proceeds was not effected and was ultimately rejected by the Bureau, the mere fact that such a transaction had been attempted aroused concern on Mansfield’s part that Stegeman might be experiencing some financial difficulty. Consequently, he telephoned the local office of the Bureau and objected to the proposed assignment, stating that plaintiff would never consent to such action. Shortly thereafter, Mansfield was informed by an official of the Bureau that a claim had been asserted by a supplier to a subcontractor of Stegeman. No request was made by Mansfield that payments under the Stegeman contracts be withheld.

The attempted assignment came to the attention of Seymour W. Tanner, an underwriter in plaintiff’s Portland, Oregon, office, at about the same time and led him, also, to suspect that Stegeman was in some distress. As a result, he began to keep check on Stegeman’s financial status by making periodic inquiries to determine whether he was paying his bills promptly. In the middle of November 1960, Tanner learned that a creditor, McNeilus, had a claim for approximately $6,000 against Stegeman on the Whittaker Creek contract. On November 14,1960, Tanner, concerned by this clear indication of financial difficulty, communicated with W. T. Peterson, chief of the Administrative Audit Section in the Portland office of the Bureau of Public Hoads, and informed him of the McNeilus claim. Peterson, who was apparently unaware of the claim, responded by advising Tanner about another claim against Stegeman on the Mt. Hood contract by F. H. McEwen, in the amount of $4,800. Peterson further informed Tanner that the final voucher for the Mt. Hood contract was still in his possession and was about to be approved and paid to the contractor. Tanner requested Peterson to delay payment of the final voucher, and Peterson accommodated by agreeing to delay final payment until November 18,1960.

Tanner also inquired as to whether it would be possible to have a representative of the surety present when the proceeds were ultimately disbursed to the contractor, but Peterson informed him that under the Bureau’s normal procedure the check would be mailed directly to Stegeman.

Tanner did not make a written request to Peterson to permanently withhold final payment under the Mt. Hood contract. Peterson did not, in any case, have authority on his own to indefinitely withhold payment merely because he had discovered or had been informed that the contractor was experiencing a certain amount of financial irregularity. Approval of the contracting officer would first have to be obtained before such a serious step could be taken. At the trial here, Peterson stated that he did not recall having received a verbal request from Tanner to stop payment and noted that if he had been so requested, he would undoubtedly have automatically discussed the matter with the contracting officer and have advised the surety to make a formal request in writing.

After the above conversation had been concluded, Tanner, in accordance with company procedure, sent a preliminary loss notice to plaintiff’s Tacoma, Washington, home office for the purpose of encouraging the company’s claim department to protect its interests by filing a formal request for the withholding of all payments to Stegeman until appropriate action could be taken to make the company joint payee of the proceeds still due. Under plaintiff’s procedure, a request to withhold payments from a contractor emanates from plaintiff’s home office in Tacoma and not from the local underwriter. In this November 14,1960, communication, the home office was informed by Tanner of the relevant facts in the case, including the exact date when final payment would be made by the Government to Stegeman. The notice contained the following statement: “Final voucher totaling $41,000 on the Mt. Hood job ready for payment this date, but Bureau has agreed to hold it until Nov. 18th. Stegeman should receive this Nov. 22nd or 23rd. Final on Whittaker Creek j ob will run about $6,000 and will be forwarded to Stegeman in about two weeks. We feel that Stegeman should perhaps be consulted prior to his receipt of the $41,000 next Tuesday or Wednesday.”

The final voucher was approved by the contracting officer on the next day, but Peterson, pursuant to his agreement with Tanner, held the voucher until November 18,1960. At that time, it was scheduled for payment and forwarded to a central disbursing office. On November 22, 1960, the check for $41,624.79 was issued to the contractor, and on November 30,1960, it was cashed by Stegeman. The proceeds have never been recovered, as Stegeman promptly disappeared (apparently to Canada) and has not been heard from since.

Not until March of the next year (some 4 months after Tanner’s conversation with Peterson) did plaintiff’s home office make demand upon the Bureau of Public Eoads for the contract proceeds. On March 16, 1961, plaintiff’s claim department wrote a letter to the Bureau requesting that it either pay the remaining funds assertedly still in its possession or take appropriate action to insure that they be disbursed for no purpose other than the payment of outstanding labor and material bills incurred and unpaid by Stegeman on the two projects. The Bureau responded, on March 27, 1961, by informing plaintiff that final settlements had already been made on both the Mt. Hood and Whittaker Creek contracts— on the Mt. Hood job by final payment to the contractor on November 23,1960, and on the Whittaker Creek job, by final payment to the contractor’s trustee in bankruptcy on March 15,1961. The Bureau concluded by stating that as a result of the above payments it had fully discharged all liability of the Government on the two contracts. Two days later, on March. 29, 1961, plaintiff commenced its litigation in this court.

Based upon equitable considerations, a surety which has satisfied debts of a contractor to materialmen under the terms of a payment bond concededly possesses a right of subrogation to the proceeds due a Government contractor and retained by the United States. Henningsen v. United States Fidelity & Guaranty Co., 208 U.S. 404 (1908) ; National Surety Corp. v. United States, 132 Ct. Cl. 724, 133 F. Supp. 381 (1955), cert denied, 350 U.S. 902. See also Prairie State Bank v. United States, 164 U.S. 227 (1896).

The right of subrogation of the surety, though superior to claims of other private parties, does not normally prevail over claims of the United States based upon debts of the contractor to it or extend to prior payments lawfully disbursed under the contract to the contractor before his default. United States v. Munsey Trust Co., 332 U.S. 234 (1947) ; Schmoll v. United States, 105 Ct. Cl. 415, 63 F. Supp. 753 (1946), cert. denied, 329 U.S. 724 ; National Union Fire Ins. Co. v. United States, 157 Ct. Cl. 696, 304 F. 2d 465 (1962).

In Newark Ins. Co. v. United States, supra, upon which plaintiff relies, the surety had advised the Government’s representatives that various laborers and materialmen had not been paid by the contractor and requested that no further payments be made to him pending an investigation. Shortly thereafter, the Government was notified by the contractor, who was performing ten contracts, that he was unable to continue performance. Then the surety’s officials again conferred with the Government’s representatives and were assured that no further payments would be made on the contracts until the question of priority between the contractor, the contractor’s assignee, and the surety had been decided by the General Accounting Office. After these events, the Government learned that two of the contracts had been satisfactorily completed, and it made final payment thereon to the contractor’s assignee. When the surety brought suit for the amount it had been compelled to pay laborers and materialmen involved in the performance of tbe two contracts, tbe court beld that it was entitled to recover. Tbe decision was grounded upon the determination that tbe Government bad paid the money in dispute to a third party, i.e., tbe assignee, after having received due notice of facts giving rise to the superior equitable right of the surety, after the surety’s assertion of that right, and without a valid reason for so making the payment. The facts of the case at bar, however, fall far short of what was considered necessary in Newark to impose a duty on the Government to withhold the payment of any balance due on the contracts. Plaintiff has failed to establish that defendant had due notice of sufficient facts to indicate that plaintiff possessed an equitable right before the final payment of the proceeds to the contractor.

Prior to the time the final check of $41,624.79 on the Mt. Hood contract was forwarded to the disbursing office of the Bureau of Public Hoads for payment to the contractor, the surety knew only that the contractor was late in paying the claims of two suppliers for the Whittaker Creek contract. At that time, neither plaintiff nor defendant knew that the Eogers Super Tread Tire Company would thereafter assert a claim against Stegeman in the amount of $17,000 for material furnished on the Mt. Hood contract. Neither plaintiff nor defendant could have then known that ultimately the contractor would be unable to pay his suppliers or would in fact abscond with the proceeds of the contract.

Under the circumstances recited, there is no factual or legal basis for holding that defendant knew that plaintiff had or would acquire an equitable right of payment superior to that of Stegeman. It is undisputed that at the time the final payment was made, Stegeman had not defaulted in the performance of his contract. Although Article 25 of the contract gave the contracting officer the right to withhold from the contractor amounts that might be necessary to pay the wages of laborers and mechanics employed on the work, the record is devoid of any evidence that there were any unpaid wages. In short, the facts which were known to the Government at the time were not such as to require it to withhold the final payment and thereby assume the risk of breaching its contractual obligations to Stegeman, or depart from its normal disbursement procedures. Plaintiff’s right of subrogation at that time was only a potential one conditioned upon a default by the contractor on the payment bond, National Union Fire Ins. Co. v. United States, supra.

The final payment to the .contractor was an act in the course of usual contract administration. Unlike the situation in Newark, defendant was not disbursing a fund which was disputed by rival claimants, or unilaterally acting as an arbiter of a controversy between such claimants. The controversy had not yet arisen, and defendant was entitled to believe that the contractor who had already completed performance and had submitted his final voucher was the only legitimate claimant to the amount due.

Although plaintiff argues that it had asserted its equitable right and had given due notice to the defendant to stop final payment, the record does not support the contention. The only such notice that can be inferred is to be found in the conversation of November 14, 1960, between the underwriter, Tanner, and defendant’s representative, Peterson. As a result of that conversation, both clearly understood that Peterson had agreed to delay the payment of the final amount due on the contract for 4 days in order to permit Tanner to notify plaintiff’s home office and encourage it to file a formal claim to the proceeds. It is significant that under the procedures employed by plaintiff, requests to withhold payments from a contractor emanated from plaintiff’s home office in Tacoma and not from Tanner, the local underwriter. Plaintiff, however, failed to take advantage of Peterson’s accommodating-action, and the check was ultimately disbursed in accordance with normal procedure. Although plaintiff was fully informed of all the facts necessary for it to take action for the protection of its rights, it waited for some 4 months (until March 16, 1961) before communicating with the defendant and making a demand for payment. Stegeman had cashed the check and converted the proceeds long before that time, and a trustee in bankruptcy had been appointed for his estate. In short, plaintiff slept on its rights in a situation where time was a critical factor and failed to make an adequate demand on defendant to withhold contract payments pending resolution of the question regarding priorities. In the light of all the facts, it is concluded that the Government’s payment to the contractor on November 22, 1960, was lawful and valid and that plaintiff’s petition must be dismissed.

Having thus determined that plaintiff is not entitled to recover on account of the payment made to the contractor on the Mt. Hood contract, we do not reach the issue of whether plaintiff, by virtue of its indemnity agreement with Stege-man regarding the Whittaker Creek contract, is entitled to apply the proceeds of the Mt. Hood contract in satisfaction of the amounts it expended on the Whittaker Creek contract.

Defendant's Gownterdlaim

The facts with respect to defendant’s counterclaim have been stipulated by the parties and reveal that on January 10, 1955, Clarence A. Sorrells was injured on the streets of Fresno, California. Plaintiff was the insurer of the city of Fresno. On Sorrells’ application, the Railroad Retirement Board paid him sickness benefits in the sum of $749. Within a short time thereafter, the Board filed with the city of Fresno a written notice of its lien, giving notice of its right to reimbursement of any sum paid by the city on account of its liability to Sorrells — all in accordance with the provisions of the Railroad Unemployment Insurance Act, 45 U.S.C. § 362 (o). A similar notice was sent to plaintiff. Thereafter plaintiff entered into a written settlement with Sorrells in the amount of $3,750 but has failed and has refused to reimburse defendant for the $749 sickness benefits previously paid to Sorrells. Later, the Board received from Sorrells a reimbursement of $150, which reduced the Board’s claim to $599. In view of the provisions of the cited statute and the stipulated facts, plaintiff’s liability is clear and defendant is entitled to recover $599 on its counterclaim. United States v. Luquire Funeral Chapel, 199 F. 2d 429 (5th Cir. 1952). During oral argument before the court, plaintiff announced that it was no longer contesting defendant’s counterclaim.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Lloyd Fletcher, and the briefs and argument of counsel, makes findings of fact as follows:

1. The plaintiff, United Pacific Insurance Company, is a corporation duly organized and existing under the laws of the State of Washington with principal offices in Tacoma, Washington, and is now and has been duly qualified to act as surety upon payment and performance bonds given by contractors upon public works of the United States under the provisions of the Miller Act (40 U.S.C. § 270a).

2. Fred H. Stegeman, an individual, doing business as Fred H. Stegeman and Associates, at the last-known address of 455 A Street, Lebanon, Oregon (hereinafter sometimes referred to as “contractor”), entered into two contracts with the United States acting through the Bureau of Public Eoads, as follows:

(a) Mt. Hood Highway — Grading and bridge — Oregon Forest Highway Project No. 49-B3, D-contract, Contract No. CPE-8-9412, dated December 15, 1958 (hereinafter called the Mt. Hood contract).
(b) Whittaker Creek Eoad, Grading, Surfacing, and Bridge, Oregon Timber Access Eoad Project BLM 26-C, Contract No. CPE-8-9461, dated April 4, 1960 (hereinafter called the Whittaker Creek contract).

Under the Mt. Hood contract described in (a) above, plaintiff executed its performance and payment bonds, both in a penalty of $249,680.65, being Bond No. 34416, naming the United States as obligee and contractor as principal, guaranteeing performance of the contract, and payment of all labor and material bills incurred in connection with the work.

Under the Whittaker Creek contract described in (b) above, plaintiff executed its performance and payment bonds, both in a penalty of $53,504.10, being Bond No. 63864, naming the United States as obligee and contractor as principal, guaranteeing performance of the contract, and payment of all labor and material bills incurred in connection with the work.

Each of the construction contracts described above contained the general provisions set forth in Standard Form 23a dated March 1953.

The aforesaid bonds were issued by the plaintiff pursuant to a written application submitted to plaintiff by the contractor, Stegeman, under date of October 13,1958, which were duly recorded with the Recorder of Linn County, Oregon, on November 29, 1960. Said application provided, among other things, that:

Fifth: Each of the undersigned does by these presents assign, transfer and convey to the Company, as of the date of execution of any such Bond, in connection with any Contract, for the Company’s protection and use and as collateral security for the full performance of the covenants and agreements herein contained and for the payment of any indebtedness or liability of the undersigned to the Company, whether heretofore or hereafter incurred, the following:
if; ‡ #
(d) All right, title and interest of the undersigned in and to any and all percentages retained by the obligee under said contract, and any and all estimates, payments, extras, final payments and other sums that, at the time of abandonment, forfeiture or breach of said contract or such Bond or ox the terms of this agreement or at the time of any advance, payment or guaranty by the Company for the purpose of avoiding such abandonment, forfeiture or breach, may be due or may thereafter become due under said contract to or on behalf of the undersigned.

3. The contractor entered into performance of, and completed all of the work under, both of the above described contracts. However, during the course of said work the contractor failed to pay certain subcontractors and suppliers who performed services and provided materials for the contract work. As a result of the contractor’s failure to make such payments, the plaintiff, pursuant to its obligation as surety under its bonds, made payments to the unpaid subcontractors and materialmen. The amounts and the dates of payment made by the plaintiff under each of the contracts involved are set forth hereinafter:

4. The contract work under the Whittaker Creek contract was completed on September 24, 1960. Under date of February 17, 1961, William Kennedy was appointed trustee in bankruptcy for the contractor by the United States District Court for the District of Oregon. Final payment in the amount of $5,239.63 was made by the defendant under the Whittaker Creek contract to said trustee in bankruptcy on March 15, 1961. The plaintiff makes no claim to said final payment by the defendant under the Whittaker Creek contract.

5. The contract work under the Mt. Hood contract was completed on July 22, 1960, and final payment under that contract was made by defendant to the contractor on or about November 23,1960 in the amount of $41,624.79.

Payment to Stegeman of the $41,624.79 is evidenced by check No. 647,730 issued by the Treasurer of the United States under date of November 22, 1960. The check was made payable to Fred H. Stegeman & Asso., 455 A St., Lebanon, Oreg. It was cashed by the Lane County Bank, Florence, Oregon, on November 30, 1960, under blank endorsements reading:

Fred H. Stegeman & Asso.
Fred H. S Stegeman
Fred H. Stegeman
lone E. Stegeman
Corda L. Gaubert

The proceeds of this check are the subject of plaintiff’s claim herein. Before said check was issued by authority of the Bureau of Public Roads, there occurred the events described hereinafter.

6. Alfred G. Mansfield was an insurance agent specializing in contract bonds and insurance for contractors. Stege-man was a customer of Mr. Mansfield, and the bonds for both the Whittaker Creek and the Mt. Hood contracts were written by Mansfield. Sometime during September 1960, Mansfield received a copy of a letter from the Bureau of Public Roads to Stegeman, which letter acknowledged receipt of an attempted assignment of contract funds to an employee of Stegeman. The proposed assignment was never consummated and was ultimately rejected by the Bureau of Public Roads. The receipt of the letter regarding the assignment occasioned concern in Mansfield’s mind about the financial status of the contractor. He therefore telephoned the local office of the Bureau of Public Roads, spoke to a party whose name he could not recall, and objected to the proposed assignment as an action to which the surety would never consent.

On the same day, or the following day, Mr. Mansfield received a return call from the unidentified party. During the course of the telephone conversations there was discussed the claim of a supplier to a subcontractor of Stegeman. So far as the record discloses, Mr. Mansfield did not make a request of the Bureau that payments under the Stegeman contracts be withheld. Ordinarily, making of such requests is not within the province of a general agent but is a function of the appropriate branch office of the bonding or surety company.

7. During the time here involved, Seymour W. Tanner was an underwriter in the Portland, Oregon office of plaintiff. His first contact with this matter, like Mr. Mansfield, resulted from the attempted assignment by Stegeman of the contract proceeds to one of his employees. Because of this he suspected Stegeman was in difficulty, and he attempted to follow closely the financial status of Stegeman by making periodic trade checks with credit managers of suppliers to see whether Stegeman was paying bills currently, and also by seeking information from the Bureau of Public Roads. Prior to this time, he knew that Stegeman had a consistent record for generally paying his bills rather promptly.

Then in mid-November 1960, Tanner received written notice of claim from a Stegeman creditor named George R. McNeilus of North Bend, Oregon. This was a clear indication to Tamier that “all was not well,” and on November 14, 1960, he communicated with Mr. W. T. Peterson, Chief of the Administrative Audit Section in the Portland Office of the Bureau of Public Roads, to ascertain the completion status of the Stegeman contracts, particularly as to the amounts of retained percentage and final estimates. At that time he told Mr. Peterson (who was apparently unaware of it) about the McNeilus claim. At the same time Peterson reciprocated by advising Tamier about another claim that had come to the attention of Peterson, namely, the claim of one F. H. McEwen. Peterson further advised that the final voucher for the Mt. Hood contract was in his possession and he, therefore, knew the exact amount of the final payment. Although at that time the voucher had not yet been 'approved, Peterson knew the approximate date on which it would be approved as well as the expected time when the voucher would be released to the disbursing office for payment. He communicated this information to Tamier.

8. During the same conversation on November 14, Mr. Peterson and Mr. Tanner also discussed the means by which the final payment would be made under the Mt. Hood contract. Tanner requested Peterson to delay the payment of the final amount under the contract, and Peterson agreed to delay payment until November 18,1960. Tanner also asked Peterson whether or not it could be arranged to have a representative of tbe surety present when tlie moneys were paid to the contractor, but Peterson advised him that this was not consistent with Bureau procedure which contemplated direct mailing of the check to the contractor. Mr. Peterson did not receive a written request from plaintiff to withhold the final payment under the Mt. Hood contract. He did not have authority to withhold payment permanently merely because he had learned of a contractor’s financial distress. He would first have to obtain approval of the contracting officer. Mr. Peterson did not remember that he had received a verbal request from plaintiff’s representatives so to withhold said payment. He thought that if he had received such verbal request he would have automatically discussed it with the contracting officer and then advised plaintiff to put the request in writing.

9. Following the aforesaid conversations Mr. Tanner prepared and forwarded to the home office of the plaintiff in Tacoma, Washington, a form document entitled “Preliminary Loss Notice.” This notice was dated November 14, L960, and referenced the bonds under both contracts. An entry on said form contained the following statement: “Both of these road jobs are completed and are to be finaled out shortly. (See attached status reports). All claims are on the Whittaker Creek job.” Under a space entitled “Nature of Claim”, the form contained the following statement:

Notice of McEwen’s claim received by Bureau but not yet by us. McNeilus — claim for crushed rock (amount not known). McEwen — claim for equipment rental. Inter City — claim for equipment rental on Everett Bach-man, a sub of Stegeman.

Under “Remarks” there was contained the following statement :

Final voucher totaling $41,000 on Mt. Hood job ready for payment this date, but Bureau has agreed to hold it until Nov. 18th. Stegman should receive this Nov. 22nd or 23rd. Final on Whittaker Creek job will run about $6,000 and will be forwarded to Stegeman in about two weeks. We feel that Stegeman should perhaps be con-suited prior to his receipt of the $41,000 next Tuesday or Wednesday.

Mr. Tanner’s purpose in sending the preliminary loss notice to the home office of the plaintiff was to encourage the claim department of the company to request a withholding of all payments to the contractor until plaintiff could take appropriate action to be made joint payee of the funds due. Under the procedures of the plaintiff, a request to withhold payments from a contractor emanates from the home office of the plaintiff in Tacoma and not from the local underwriter.

10. As chief of the Administrative Audit Section, Peterson was responsible for the processing of payments to all vendors and contractors, including those made under the contracts involved here. Hence, the voucher for the final payment under the Mt. Hood contract was processed by him. On November 15, 1960, that voucher was approved by the contracting officer. As he had agreed to do, Peterson held the approved voucher for a few days and then scheduled it for payment on November 18,1960. It, along with other approved vouchers, was then consolidated on a certified paymeut schedule and forwarded to a Government disbursing office which processed payments for all Government obligations (including those of the Bureau of Public Boads) in the Portland-Vancouver area. As previously stated, the check issued on November 22, 1960, and was cashed by the contractor on November 30,1960, in Florence, Oregon.

11. As previously noted in finding 4, supra, on February 17, 1961, a trustee in bankruptcy was appointed for Stegeman. At the trial hereof, it was stipulated by the defendant’s attorney and the trustee’s attorney that out of the proceeds of the aforesaid check cashed by Stegeman on November 30, 1960, $36,500 has not come into the possession of the trustee in bankruptcy. It was further agreed that the consideration of the question of whether any portion of the balance of $5,124.79 did come into the possession of the trustee will be deferred until the determination of the primary issue between the plaintiff and the defendant herein.

12. Under date of March 16,1961, plaintiff’s claim department wrote a letter to the Bureau of Public Boads for Mr. Peterson’s attention. In that letter, plaintiff stated its understanding tbat the Bureau still bad possession of funds due Stegeman under tbe aforesaid contracts. As surety for Stegeman, plaintiff went on to demand tbat tbe Bureau either turn over to plaintiff sucli remaining funds or take steps to see that they were disbursed for no purpose other than the discharge of labor and material bills incurred by Stegeman on the jobs.

The Bureau responded to said letter by its letter dated March 27, 1961. It advised plaintiff that final settlement of both contracts had been made as follows:

* * $ qt *
Mt. Hood Highway Project, Oregon 49-B3,I>, completed on July 22, 1960 and final payment made to the contractor November 23,1960.
Whittaker Creek Project, Oregon 26-C, completed September 24, 1960 and final payment made to the Trustee in Bankruptcy March 15,1961.
‡ ‡ $

The Bureau letter concluded by stating that the Government owed no sums to the contractor or his trustee in bankruptcy. On March 29, 1961, plaintiff filed the present suit.

Defendant's Counterclaim or Offset

13. Under date of January 10, 1955, one Clarence A. Sor-rells, Social Security No. [ XXX-XX-XXXX ], fell and received injuries on the public streets of Fresno, California. The plaintiff herein was the insurer of the City of Fresno.

On February 1, 1955, Mr. Sorrells applied for sickness benefits under the Railroad Unemployment Insurance Act, 45 U.S.C. § 362 et seg. Subsequently, the Railroad Retirement Board paid him sickness benefits in an amount totaling $749. On February 14,1955, the Railroad Retirement Board sent a notice of lien to the City of Fresno, California. Said notice was sent by registered mail and was received on February 15, 1955, by the City of Fresno, the plaintiff’s assured. The text of the notice of lien stated in pertinent part:

NOTICE OF LIEN
# ‡ * *
The individual named above has applied for sickness benefits under the Railroad Unemployment Insurance Act.
This letter is notice of the Board’s right to reimbursement from any sum payable by you on account of a liability based on this individual’s infirmity. The only information available to identify the place and date of sickness or injury is shown on the enclosed Form SI-5.
Under the Railroad Unemployment Insurance Act, the Board:
1. May be entitled to reimbursement from any sum other than workmen’s compensation payable on account of any liability based on the individual’s infirmity. (See section 12(o) of the Act quoted on the other side of this letter.)
* *
If any sum has been or is to be paid to this individual, or if he has received or is to receive workmen’s compensation, please furnish us the information asked for on the enclosed Form SI-5. To protect your interest, you should withhold payment of any sum, other than workmen’s compensation, for which you may be liable. Upon receipt of Form SI-5, or the information requested on it, we will tell you the amount paid in sickness benefits which is to be deducted from such sum. If you request it, we shall be glad to give special service by telephone or telegraph.
* * * * *

14. On March 19, 1956, Mr. Nick Bogdanovich, a field investigator and representative of plaintiff, called at the regional office of the Railroad Retirement Board to inquire as to the amount of benefits paid to Mr. Sorrells. He was advised that the amount was $856. On March 22,1956, defendant sent a notice to the plaintiff advising it of the Board’s lien and right of reimbursement. On July 9, 1956, defendant made a form inquiry of plaintiff as to the status of Mr. Sorrells’ case and by means of an entry on said form was advised that settlement of Mr. Sorrells’ case was still pending.

15. On or about September 6, 1956, plaintiff entered into a settlement with Mr. Sorrells in the amount of $3,750. On May 1, 1959, defendant informed plaintiff that the correct amount of benefits paid to Mr. Sorrells was $749 instead of $856 and demanded payment thereof from plaintiff. Plaintiff, however, has failed and refused to pay defendant said amount. Subsequently defendant has received reimbursement from Mr. Sorrells in the amount of $150.

16. Defendant claims that plaintiff is indebted to defendant in tbe sum of $599 because, although, plaintiff had notice of defendant’s lien, the plaintiff failed and refused to protect defendant’s lien in connection with the settlement to Mr. Sorrells, and that, therefore, plaintiff became liable to defendant pursuant to the provisions of 45 U.S.'C. §362(o).

17. On May 7,1962, the General Accounting Office issued a certificate of indebtedness against the United Pacific Insurance Co. on the foregoing matter in the amount of $599. Plaintiff has failed and refused to make any payment thereon.

CONCLUSION OK LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is not entitled to recover, and, accordingly, the petition is dismissed.

The court further concludes as a matter of law that the defendant is entitled to recover five hundred ninety-nine dollars ($599) on its counterclaim against the plaintiff, and judgment is entered to that effect. 
      
       The Whittaker Creek contract was completed on September 24, 1960, and tie Mt. Hood contract, on July 22, 1960. A check In payment on the Mt. Hood contract of the $41,624.79 here In dispute was issued by defendant on November 22 or 23, 1960, and cashed by the contractor on November 30, 1960. Final payment under the Whittaker Creek contract was made by defendant to the contractor’s trustee in bankruptcy on March 15, 1961, in the amount of $5,239.63. By stipulation of the parties, this amount does not figure in the present case. Plaintiff has filed a claim in the bankruptcy proceedings and has received $9,663.19 from the trustee so far. Since the bankruptcy proceedings are still pending in the united States District Court for the District of Oregon, there is a possibility that plaintiff may receive an additional sum as a result of its claim.
     
      
       On February 17, 1961, William Kennedy was appointed trustee in. bankruptcy for Stegeman by tbe United States District Court for tbe District of Oregon.
     
      
       As a result of our decision, the question of tlie contingent liability of tlie trustee in bankruptcy to defendant has become moot.
     
      
       The plaintiff has filed its claim in the bankruptcy proceeding and has received $9,663.19 from the trustee in bankruptcy as a result of its claim. The bankruptcy proceedings are still pending, and there is a possibility that the plaintiff may receive more money as a result of its claim.
     
      
       The McNeilus and McEwen claims were in the approximate amounts of $6,000, and $4,800, respectively.
     
      
       On the same day Tanner prepared in Ms own handwriting a list of Stege-man’s unpaid bills of which he then had notice. He also wrote that the Bureau "received notice of claim for $4,800 last week from F. H. McEwen (equip, rental).”
     