National American Insurance Company v. United States

Innovative PBX Services (IPBX) entered into a contract with the United States Small Business Administration (government) (plaintiff) to replace the telephone system at a Veterans Affairs Medical Center. IPBX subcontracted part of the contract work to Wiltel Communications, LLC. As required by the Miller Act, IPBX executed a payment bond and a performance bond in favor of the government with National American Insurance Company (NAICO) (defendant) acting as surety. After Wiltel finished its work under the subcontract, Wiltel notified NAICO that IPBX owed Wiltel approximately $675,000 for materials and labor costs. NAICO covered Wiltel’s claim under the payment bond and notified the government that no further contract payments should be made directly to IPBX and that future payments should instead be held on NAICO’s behalf. Despite NAICO’s notification, the government issued the final contract payment to IPBX. NAICO filed for damages in the Court of Federal Claims. The Court of Federal Claims granted NAICO summary judgment, holding that because NAICO, acting as surety, had satisfied Wiltel’s claim under the payment bond, NAICO was equitably subrogated to IPBX’s rights as contractor and entitled to collect against contract funds payable to IPBX. The government appealed, arguing that NAICO was only equitably subrogated to Wiltel, the subcontractor, and therefore did not have the requisite privity of contract required to sue the government.