Material Supplier Recovers on Payment Bond Despite Receiving Assignment from General Contractor

H. Verby Co., Inc. v. United States Fire Ins. Co.,
1996 E.S. Dist. LEXIS 3056 (March 13, 1996) (U.S.D.C., S.D.N.Y.).

A material supplier was entitled to recover on the general contractor’s payment bond even though it had received an assignment of two debts from general contractor; supplier had not made an “election of remedies” in accepting the assignment and there was no evidence that the contractor’s assignment discharged the underlying debt upon which the supplier sued the surety.

H. Verby Co., Inc. (“Supplier”) contracted with a Contractor to supply roofing waterproofing and insulations materials for a school roof replacement project. The Defendant, United States Fire Ins. Co. (“Surety”) and the Contractor executed a labor and material payment bond in favor of the Owner. After the Contractor refused the Supplier’s demands for payments, the Supplier brought the present action against the Surety for $61,068.44, the amount of the outstanding balance due.

Prior to bringing this action, however, the Contractor assigned two debts owed to the Contractor to the Supplier. The first assignment was of $20,000 on a different owned to Contractor on a different construction project and the second assignment was of $40,000 of the debt that the Owner on the present construction project owed to the Contractor. The Supplier was unable to collect on either of the debts that had been assigned to it.

In the present action, the Supplier seeks from the Surety the entire amount owed to it by the Contractor. In response to the Supplier’s claims, the Surety asserts that the Supplier’s acceptance of two assignments from the Contractor constituted an election of remedies precluding the Supplier from recovering under the payment bond. The Plaintiff moved for summary judgment arguing that it is entitled to recover the amount owed to it by the Contractor. The Surety opposed the Motion arguing that issues of fact remain concerning whether the two assignments were accepted in complete satisfaction of the Contractor’s obligation to the Surety.

The court began its analysis by noting that where a claim is assigned in payment of a pre-existing debt, acceptance of the assignment does not extinguish the underlying debt, absent an agreement to the contrary. And, further, the assignment of third party debts to pay a pre-existing debt will discharge that debt only if the parties agree that the assignment discharges the debt.

Thus, the court concluded that the Surety must show that the Supplier agreed to accept the assignments in absolute payment of the amount owed by the Contractor. The Surety did not disagree with the court’s statement of the law, but argued that genuine issues of fact existed which precluded summary judgment. The court examined the assignments themselves and the parties’ conduct and found no evidence of an agreement that the assignments constituted absolute payment. The court noted that “it makes no sense that [the Supplier] would have agreed to accept the assignments in satisfaction of a $61,068.44 obligation without any assurance that the assigned debts would be paid. There simply is no evidence that [the Supplier] agreed to accept the assignments in full satisfaction of the Contractor’s debt.” The court, therefore, granted the Supplier’s motion for summary judgment.

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