Right of Setoff as to Debts Owed Is Inherent and Extends to Debts Owed as Result of Loan by SBA to 8(a) Subcontractor

In two instances the Small Business Administration entered into contracts with the Federal Aviation Administration for modernization and expansion of air traffic control facilities. In both instances, SBA entered into subcontracts with "8 (a)" contractors to perform the work, and in each case the subcontracts were terminated prior to completion of the work. Also, in both instances, a bonding company under contract with SBA to provide surety was required to pay laborers and materialmen as a result of the contract terminations. To further complicate matters, FAA has withheld certain payments to SBA, and the Internal Revenue Service asserted a tax lien in one of the cases. In determining the validity and priority of the numerous claims involved, GAO made the following assertions: (1) GAO will not question the indebtedness owed by the "8 (a)" subcontractors, notwithstanding allegations of fraud and breach of contract, since the allegations were unsupported and contradicted by the SBA; (2) where surety had paid only a fraction of the outstanding claims under its payment bond, surety will not be permitted to share in the retainage held by the Government; and (3) the right of set-off as to debts is inherent and extends to debts owed as a result of loans by the SBA to "8 (a)" subcontractors.