Industrial Bank of Washington v. United States

Art’s Decorating and Cleaning Company (ADCC) held a government contract to provide cleaning services for a General Services Administration (government) (defendant) building. The government took out a performance bond from Reliance Insurance Company (Reliance) (defendant) to protect against loss if ADCC defaulted. ADCC assigned its right to receive compensation from the government to Industrial Bank of Washington (Industrial Bank) (plaintiff) as security for an approximately $4,000 loan. ADCC subsequently defaulted on its contract with the government. The government terminated ADCC’s contract and hired another contractor to complete the work at a higher rate, resulting in a contract loss to the government. The government’s contract loss was covered by Reliance as the government’s surety. At the time of default, the government owed ADCC approximately $4,700 for work already performed. Industrial Bank filed a claim with the government to recover the $4,000 it loaned ADCC from the monies the government owed ADCC for work performed. The government denied Industrial Bank’s claim, stating that the unpaid balance would be used to repay Reliance for covering the government’s contract losses under the performance bond. Industrial Bank sued the government and Reliance in district court, arguing that, because ADCC assigned its right to receive compensation from the government to Industrial Bank, Industrial Bank was entitled to enforce ADCC’s compensation claim against the government as ADCC’s assignee. The government and Reliance countered and moved for summary judgment, arguing that Reliance had priority to collect against the undisbursed contract funds because, as the government’s surety, Reliance was entitled to subrogate the government’s ability to seek contract remedies and damages from ADCC for the default. The district court denied Industrial Bank’s claim. Industrial Bank appealed.