Suretyship-Subrogation-Rights of Surety to Funds Withheld Under A Government Contract

Petitioner surety, under the terms of its payment bond, paid laborers and materialmen of a government contractor, who was later adjudicated bankrupt. The Government paid to the trustee in bankruptcy funds it had retained but which had been earned prior to termination of the contract. The district court1 reversed the referee’s ruling denying the surety’s petition for an order directing the trustee to transfer the retained funds to the surety. On appeal, held, affirmed. The surety was entitled to the funds, in preference to the trustee in bankruptcy, by subrogation to the laborers’ and materialmen’s equitable priority in the retained payments. In the Matter of Dutcher Constr. Corp., 298 F.2d 655 (2d Cir.), cert. granted sub nom. Pearlman v. Reliance Ins. Co., 82 Sup. Ct. 936 (1962).