Industry Papers

“LOOK WHO’S BRINGING HOME THE BACON” — HOW RECENT DECISIONS INTERPRETING THE DAVIS-BACON ACT CAN NEGATIVELY AFFECT THE SURETY

Is the citadel of the surety’s right to equitable subrogation under attack? Recent decisions from the Court of Federal Claims, Eleventh Circuit and Department of Labor have taken the view that Davis-Bacon Act claims have priority over the surety’s right to equitable subrogation in remaining contract funds, even a performance bond surety. Properly determining the remaining amount of contract funds which can be recovered by the surety can have significant impact on the surety’s decision making process with respect to determining the course of action upon default of the principal. Evaluation of the surety’s options upon default must be made in light of the remaining money under the contract which potentially can be available to fund completion or provide salvage…

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Introduction

There is an enormous market in the United States for commercial surety bonds of all types and to cover a wide variety of obligations. For the purposes of this paper, commercial surety bonds will include: judicial bonds, fiduciary/probate bonds, license and permit bonds, various statutory bonds, release and discharge bonds, commercial surety performance bonds (subdivision bonds, reclamation bonds and others), nonstatutory guaranty and/or faithful performance bonds, public official bonds, and others. Because of the nature of the commercial surety bond obligations, the surety may require, either at the inception of the suretyship relationship and the execution of the commercial surety bonds, or later when the surety demands to be “placed in funds,” that the surety receive collateral in some form from the principal in order to secure the surety for its obligations under the commercial surety bonds. The surety’s intent generally is to use the collateral to exonerate and/or reimburse itself in the event the surety faces a loss under the commercial surety bonds. However, the surety’s ability to use the collateral, and even maintain its rights in the collateral, may change when the principal files a bankruptcy case.

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