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08/29/78 FIRST NATIONAL INSURANCE COMPANY AMERICA

August 29, 1978

FIRST NATIONAL INSURANCE COMPANY OF AMERICA
v.
COMMONWEALTH



Suffolk. Civil action commenced in the Superior Court on July 19, 1976. The case was heard by Lynch, J., on a motion to dismiss. After review was sought in the Appeals Court, the Supreme Judicial Court, on its own initiative, ordered direct appellate review.

Hennessey, C.j., Kaplan, Wilkins, Liacos, & Abrams, JJ.

SYLLABUS BY THE COURT

Practice, Civil, Action against Commonwealth. Pleading, Civil, Complaint. Governmental Immunity. Surety.

The opinion of the court was delivered by: Abrams

A claim by the surety on a performance and payment bond for a public building contract, alleging that the Commonwealth had made payments to the contractor in disregard of the surety's interest in certain contract funds, was sufficient to state a cause of action against the Commonwealth under G. L. c. 258, § 1, even though the surety was not a party to a contract with the Commonwealth. [251]

First National Insurance Company of America (surety) commenced this action against the Commonwealth alleging an abuse of discretion by the Commonwealth in disregard of the surety's interest in certain contract funds. The surety's action was dismissed under Mass. R. Civ. P. 12 (b) (6), 365 Mass. 754 (1974), and it appealed. We transferred the case to this court on our own motion. We hold that the complaint sufficiently states a claim against the Commonwealth under G. L. c. 258, § 1, and we reverse the judgment dismissing the action.

The complaint alleges that on April 30, 1973, the Commonwealth entered into a contract with Allied Heating Co., Inc. (Allied), for additions to the steam distribution system at the University of Massachusetts, Amherst campus. On the same day the surety issued performance and payment bonds on the contract which named Allied as principal and the Commonwealth as obligee. On September 30, 1974, the surety notified the Commonwealth by mailgram that Allied was in default on the contract and requested that the Commonwealth make no further payments to Allied. The substance of the mailgram was confirmed in a letter dated October 3, 1974.

On October 3, 1974, the Commonwealth issued a check to Allied in the amount of $38,405.55 as a payment under the contract. Allied did not use the proceeds of the check to pay its suppliers. The payment by the Commonwealth to Allied resulted in a depletion of the contract funds and allegedly constituted an abuse of the Commonwealth's discretion in unreasonable disregard of the surety's interest in those funds. The surety seeks reimbursement of the $38,405.55 and any other relief deemed appropriate.

The surety argues that it has set forth a claim under G. L. c. 258, § 1, as amended by St. 1973, c. 1114, § 337, because by virtue of that statute the Commonwealth has waived its immunity to "claims of the character which civilized governments have always recognized," Murdock Parlor Grate Co. v. Commonwealth, 152 Mass. 28, 31 (1890); Arthur A. Johnson Corp. v. Commonwealth, 306 Mass. 347, 351 (1940), and its claim is of such a character. The Commonwealth replies that the surety's claim is not within the scope of G. L. c. 258, § 1, and that the "sovereign" has not abrogated its immunity by statute or judicial decision in regard to the allegations made in the complaint. *fn1 The trial Judge, in a well reasoned memorandum tracing the judicial interpretations of G. L. c. 258, § 1, and its predecessor statutes, declined to expand the coverage of G. L. c. 258, § 1, beyond what is generally perceived to be the governing rule.

General Laws c. 258, § 1, as amended by St. 1973, c. 1114, § 337, provides that "he superior court, except as otherwise expressly provided, shall have jurisdiction of all claims against the commonwealth." While the 1973 amendment rewrote the entire section, the effect of the amendment was to change the statute to conform to the language of the Massachusetts Rules of Civil Procedure by deleting the words "at law or in equity" which appeared in St. 1887, c. 246. This latter statute expanded the limited application of Pub. Sts. 1882, c. 195, § 1, which conferred on the Superior Court jurisdiction only of claims against the Commonwealth "which are founded on contract for the payment of money." See Murdock Parlor Grate Co. v. Commonwealth, 152 Mass. 28, 30 (1890); Morash & Sons v. Commonwealth, 363 Mass. 612, 615 (1973).

"The object of [St. 1887, c. 246, a predecessor of G. L. c. 258, § 1] . . . to provide a convenient tribunal for the determination of claims of the character which civilized governments have always recognized." Murdock Parlor Grate Co. v. Commonwealth, 152 Mass. 28, 31 (1890). The waiver of immunity thus granted by c. 258, § 1, and its predecessors has primarily been interpreted as applying only in the area of contracts. *fn2 While most cases allowing actions brought pursuant to G. L. c. 258, § 1, involved contracts to which the Commonwealth was a party, *fn3 we do not think that a direct contractual relationship is a prerequisite to maintaining a suit against the Commonwealth. Rather, a claim arising in a contractual setting, although not involving a direct contract between the plaintiff and the Commonwealth, is contemplated by the waiver of immunity under G. L. c. 258, § 1: "the effect of the statute is to make the Commonwealth answerable down to the judgment in its own courts for any just and legal claim against it, whether as trustee or otherwise, exactly as though it were a private individual." Nash v. Commonwealth,, 174 Mass. 335, 339 (1899). *fn4 Although the surety in this case was not a party to a contract with the Commonwealth, its claim arose out of the legal consequences of the acts and relationships arising from a contractual context. We therefore conclude that the surety's claim was sufficiently connected with a contract to bring it within the waiver of immunity granted by G. L. c. 258, § 1.

Other jurisdictions have also allowed actions by sureties against sovereigns in similar circumstances. See Argonaut Ins. Co. v. United States, 434 F.2d 1362 (Ct. Cl. 1970); Royal Indem. Co. v. United States, 529 F.2d 1312 (Ct. Cl. 1976); United States v. Continental Cas. Co., 512 F.2d 475 (5th Cir. 1975); United States Fidelity & Guar. Co. v. United States, 475 F.2d 1377 (Ct. Cl. 1973); United States v. Continental Cas. Co., 346 F. Supp. 1239 (N.D. Ill. 1972). See also Reliance Ins. Cos. v. Alaska State Hous. Auth., 323 F. Supp. 1370 (D. Alas. 1971).

The allowance of the motion to dismiss was therefore erroneous. We express no views, however, concerning the merits of any claim which ...


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