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Civil Resource Manual

86. Sureties

A surety seeking to write bonds payable to the government must be approved by the Treasury Department, which receives financial reports from the surety and sets maximum limits for the bonds that may be written if the surety is approved. See 31 U.S.C. § 9305. If a surety fails to make payment, the Treasury Department may suspend or revoke its privilege of writing bonds. Id. Whenever the Federal Rules of Civil Procedure, including the Supplementary Rules for Certain Admiralty and Maritime Claims, require or permit the giving of security, each surety on such an undertaking submits itself to the jurisdiction of the court and its liability may be enforced on motion without the necessity of an independent action. See Fed. R. Civ. P. 65.1.

When suit against a surety is required on an undertaking other than one provided for or permitted under the Rules, suit should be filed against the surety in the district in which the bond was entered into, or in the district where the principal office of the surety is located. See 31 U.S.C. § 9307. If a series of small claims are aggregated for suit to avoid a multiplicity of actions, suit in the district of the surety's principal office is indicated.

A surety completing performance for a contractor is subrogated to the contractor's rights as to any remaining payments due under the contract. Pearlman v. Reliance Ins. Co., 371 U.S. 132 (1962); American Surety Co. of New York v. Bethlehem Nat. Bank of Bethlehem, Pa., 314 U.S. 314 (1941). A surety must pay all of an obligation before it is entitled to enforce its principal's rights by way of subrogation. American Surety Co. of New York v. Westinghouse Electric Mfg. Co., 296 U.S. 133 (1935); Jenkins v. National Surety Co., 277 U.S. 258, 266 (1928); United States v. National Surety Co., 254 U.S. 73, 76 (1920).

The United States is not required to withhold progress payments from the contractor on the mere request of the surety without the opportunity for its own independent appraisal of the financial condition of the contractor. United States v. Continental Casualty Co., 346 F. Supp. 1239 (N.D. Ill. 1972); but see Balboa Insurance Co. v. United States, 775 F.2d 1158 (Fed. Cir. 1985); American Fidelity Fire Insurance Co. v. United States, 513 F.2d 1375 (Ct. Cl. 1975); United States v. Continental Casualty Co., 512 F.2d 475 (5th Cir. 1975), as to actions which may prejudice the surety.

"In general, a judgment against the principal is prima facie evidence against the surety." Massachusetts Bonding & Ins. Co. v. Robert E. Denike, Inc., 92 F.2d 657, 658 (3d Cir. 1937). "If the surety participates in the proceeding against its principal, it is conclusive as to the issue therein decided against its principal." Id. (quotation and citations omitted).

[cited in USAM 4-4.510]