Unpublished Disposition, 922 F.2d 845 (9th Cir. 1987)

Clyde T. Hunley, a surety, appeals the district court's grant of summary judgment in favor of subcontractors Neidermeyer-Martin, PDS Construction, and N.W. Oilfield Services, Inc. Hunley contends that the district court should not have granted summary judgment to the subcontractors because the assignment of contract proceeds by J.D. Grainger Co., Inc., the general contractor and principal on the surety bond, to Centre City Funding, was a prejudicial alteration of Hunley's obligation that should discharge his obligations as a surety.

On September 24, 1987, Hunley executed a payment performance bond for the benefit of subcontractors as required under the Miller Act, 40 U.S.C. § 270a. On October 1, 1987, Grainger assigned the right to receive payments from the Navy on the project to Centre City Funding. Hunley was not given notice of the assignment and argues that an assignment of contract proceeds by a general contractor to a financially infirm entity, without notice to the surety, materially alters and thus discharges a surety's obligation under the bond.

The Assignment of Claims Act, 41 U.S.C. § 15, provides that claims against the United States are generally non-assignable. An exception exists where the assignment is made to a bank, trust company, or other financing institution. Id.; see also Central Bank v. United States, 345 U.S. 639, 642-43 (1953). Hunley does not dispute that Centre City Funding is a financing institution. Instead, Hunley argues that notice of the assignment was not given to him as required by 41 U.S.C. § 15(4) (b). However, failure of the principal to give the surety notice of an assignment does not automatically relieve a surety from its obligations under the bond. A surety is still liable unless it can prove at trial that it was "prejudiced" by lack of notice. Amsterdam Casualty Co. v. Manufacturers & Traders Trust Co., 330 F.2d 575, 576 (2d Cir. 1964).¹  As the following discussion demonstrates, Hunley failed to show prejudice.

At the time the bond was executed both parties should have known that a contractor could assign contract proceeds under 41 U.S.C. § 15. It is not uncommon for a surety to require a contractor to assign contract proceeds to the surety itself to secure the bond. See United States v. Munsey Trust Co., 332 U.S. 234, 236 (1947). Hunley, however, failed to do this. Hunley also failed to protect himself by requiring that contract proceeds be set aside to make sure that the subcontractors were paid. By failing to take these protective measures and by failing to prohibit assignment of proceeds in his agreement with Grainger, Hunley assumed the risk that Grainger might assign the proceeds from the contract to a third party. Guaranty Co. v. Pressed Brick Co., 191 U.S. 416, 425 (1903) ("If a person deliberately contracts for an uncertain liability he ought not to complain when that uncertainty becomes certain"). Therefore, the assignment was not a "prejudicial" alteration of Hunley's obligation which would discharge his duties as a surety.

AFFIRMED.