IRS supplied Miller Act background on government claims against bond proceeds

Plain-English summary

The memo addressed a request about collecting Miller Act performance bonds, surety bonds, and bail bonds. The author said they did not know the specific answer and provided an excerpt from IRS training materials. The excerpt explains that the Miller Act requires performance and payment bonds on certain federal construction projects and discusses when the government may set off debts owed by a contractor against amounts otherwise payable to a surety. It distinguishes cases involving payment bond obligations from cases involving performance bond obligations.

Ruling snapshot

• Question: How do Miller Act bond obligations affect the government's ability to assert claims against amounts otherwise payable to a surety?
• Outcome: Advice given
• Key authorities: IRC § 6323; 40 U.S.C. §§ 3131 and 3132; Department of the Army v. Blue Fox, Inc., 525 U.S. 255 (1999); United States v. Munsey Trust Co. of Washington, D.C., 332 U.S. 234 (1947).

Full text (IRS public release)

ID: CCA_2010051909153662 Number: 201025050
Release Date: 6/25/2010
Office: ----------------------------
UILC: 6323.00-00

From: -------------------------
Sent: Wednesday, May 19, 2010 9:15:40 AM
To: --------------
Cc:
Subject: RE: Collection of Performance bonds (Miller Act), surety bods and bail bonds

Unfortunately, I don't know anything about the collection of Miller Act performance bonds, surety bonds or
bail bonds. I am trying to find someone to help you.

In the meantime, I found the excerpt below in the GL-1 training materials. Hopefully, it will be helpful.

The Miller Act

If a subcontractor or supplier who provides labor or materials to a prime contractor is not paid
for work done on behalf of the government, then sovereign immunity would leave them without
the ability to recover directly against the government. To protect these subcontractors and
suppliers, Congress enacted the Miller Act, currently codified at 40 U.S.C. '' 3131 and 3132, in
1935. Department of the Army v. Blue Fox, Inc., 525 U.S. 255, 264 (1999). Specifically, the
Miller Act requires that the prime contractor on certain federal construction projects furnish both
a performance and a payment bond to the federal government "[b]efore any contract of more
than $100,000 is awarded for the construction, alteration, or repair of any public building or
public work of the Federal Government … ," thus allowing a subcontractor or supplier to sue on the
surety bond. 40 U.S.C. ' 3131(b).

Although the Miller Act requires payment and performance bonds for federal contracts and
provides for the right to sue on the payment bond, it does not set forth the priorities as between
any claim of the surety and any claim the government has for debts owed to it by the contractor.

However, the Supreme Court addressed this issue in the case United States v. Munsey Trust Co.
of Washington, D.C., 332 U.S. 234 (1947). In Munsey Trust, the Court first held that the
government, like any creditor, has the right to setoff amounts owed to a debtor against amounts
the debtor owes to the government. 332 U.S. at 239. The Court rejected the surety=s argument
that it was entitled to the balance due because it was subrogated to the rights of the
subcontractors, noting that subcontractors have no enforceable rights against the United States
and that, in this case, the subcontractors had been paid.

The Court also considered the result if the contracts had not been completed. It noted that, if the
government completed the job itself, the surety would be liable for any amount required to
complete the job in excess of what the government would have paid the contractor. However, if the
surety completed the job, the Court stated that the surety would be entitled to the Aretained
moneys in addition to progress payments,@ as otherwise a surety would rarely agree to complete a
job if it knew that, by doing so, it would lose more money than if it had allowed the
government to proceed. Id. at 244.

Subsequently, lower courts have cited the Supreme Court’s analysis in Munsey Trust to
distinguish between those circumstances in which the surety makes payments pursuant to its
payment bond and the government has the right to setoff, see Dependable Ins. Co., Inc. v. United
States, 846 F.2d 65, 67 (Fed. Cir. 1988); United States Fid. & Guar. Co. v. United States, 475
F.2d 1377, 1383 (Ct. Cl. 1973); Barrett v. United States, 367 F.2d 834 (Ct. Cl. 1966), and those
in which the surety satisfies its performance bond obligation and the government does not have
the right to setoff. See Aetna Cas. & Surety Co. v. United States, 845 F.2d 971, 976 (Fed. Cir.
1988); Aetna Cas. & Surety Co. v. United States, 435 F.2d 1082 (5th Cir. 1970); Trinity
Universal Ins. Co., v. United States, 382 F.2d 317, 321 (5th Cir. 1967), cert. denied, 390 U.S. 906
(1968).

Although Munsey Trust involved a setoff rather than a levy, the courts have not distinguished the
cases on the basis of whether the government asserted a right to setoff, Trinity Universal Ins.
Co., 382 F.2d at 318, or whether a levy was served. Aetna Casualty & Surety Co., 845 F.2d at
973; United States Fid. & Guar. Co. v. United States, 475 F.2d at 1379-1380. The law is the
same regardless of the method in which the government asserted its claim.