B-144941, FEB. 27, 1961

B-144941, FEB. 27, 1961

TO JOHN A. GRAMBLING, ESQUIRE:

REFERENCE IS MADE TO YOUR LETTER DATED JANUARY 20, 1961, TRANSMITTING A POWER OF ATTORNEY EXECUTED BY THE TRINITY UNIVERSAL INSURANCE COMPANY UNDER DATE OF JANUARY 17, 1961, AUTHORIZING YOU TO ACT ON ITS BEHALF IN CONNECTION WITH ITS CLAIM FOR THE SUM OF $44,599.95, REPRESENTING THE BALANCE DUE UNDER CONTRACT NO. DA-29-005 ENG-2338, DATED MARCH 16, 1959, BETWEEN THE PHELPS CONSTRUCTION COMPANY AND H. CLINTON RODGERS, GENERAL CONTRACTOR, A JOINT VENTURE, AND THE CORPS OF ENGINEERS, COVERING UP-RANGE SERVICE AREA DEVELOPMENT, WHITE SANDS MISSILE RANGE, NEW MEXICO.

IN YOUR LETTER OF OCTOBER 24, 1960, YOU REPORTED, AMONG OTHER THINGS, THAT IN CONNECTION WITH THE EXECUTION OF ITS BOND AN AGREEMENT WAS REACHED BETWEEN YOUR CLIENT AND THE CONTRACTOR TO THE EFFECT THAT MESSRS. PHELPS AND RODGERS WOULD INDEMNIFY AND KEEP THE SURETY INDEMNIFIED AND WOULD SAVE IT HARMLESS AGAINST ALL LIABILITIES AND LOSS ARISING OUT OF THE CONTRACT; ALSO, THAT PHELPS AND RODGERS ASSIGNED AND TRANSFERRED TO TRINITY UNIVERSAL ALL PAYMENTS WHICH WERE DUE UNDER THE CONTRACT. IN THE CONCLUDING PARAGRAPH OF YOUR LETTER REFERENCE WAS MADE TO AN ORDER DATED JULY 5, 1960, BY THE REFEREE IN BANKRUPTCY, AUTHORIZING THE TRUSTEE IN BANKRUPTCY FOR H. CLINTON RODGERS TO ENTER INTO AN AGREEMENT WITH HOWARD C. PHELPS AND THE SURETY PROVIDING FOR PAYMENT TO THE LATTER OF THE BALANCE DUE UNDER THE CONTRACT INVOLVED HEREIN, FREE AND CLEAR OF ANY CLAIM BY THE PARTIES TO THE AGREEMENT. ON THAT BASIS YOU INSISTED THAT YOUR CLIENT IS ENTITLED TO PRIORITY OF PAYMENT OVER A CLAIM OF THE UNITED STATES FOR TAXES, CITING THE CASES OF UNITED STATES FIDELITY AND GUARANTY COMPANY V. UNITED STATES, 201 F.2D 118, AND MASSACHUSETTS BONDING AND INSURANCE COMPANY V. STATE OF NEW YORK, 259 F.2D 33.

IN A FURTHER LETTER DATED NOVEMBER 17, 1960, YOU REPORTED THAT UNDER DATE OF JANUARY 28 (1960), MESSRS. PHELPS AND RODGERS DIRECTED THE CONTRACTING OFFICER TO MAKE ALL PAYMENTS ARISING OUT OF THE CONTRACT DIRECTLY TO THE SOUTHWEST NATIONAL BANK; THAT BY ANOTHER AGREEMENT OF THE SAME DATE, THE SOUTHWEST NATIONAL BANK WAS DIRECTED THAT ALL CHECKS SO RECEIVED WERE TO BE FORWARDED AND PAID TO THE TRINITY UNIVERSAL INSURANCE COMPANY, AND THAT BOTH AGREEMENTS WERE SIGNED BY MR. PHELPS, MR. RODGERS, AND MR. TOM DABNEY OF THE TRINITY UNIVERSAL INSURANCE COMPANY. IN VIEW OF THE FOREGOING, YOU REQUESTED THAT PAYMENT OF THE BALANCE DUE UNDER THE CONTRACT OF MARCH 16, 1959, BE MADE TO THE SURETY.

UNDER DATE OF AUGUST 25, 1960, THE OFFICE OF THE CHIEF OF FINANCE, DEPARTMENT OF THE ARMY, INDIANAPOLIS, INDIANA, FORWARDED TO OUR CLAIMS DIVISION FOR DIRECT SETTLEMENT A VOUCHER IN FAVOR OF THE PHELPS CONSTRUCTION COMPANY AND H. CLINTON RODGERS, GENERAL CONTRACTORS, A JOINT VENTURE, IN THE AMOUNT OF $44,599.95, COVERING THE 14TH AND FINAL PAYMENT UNDER THE INDICATED CONTRACT. IN RESPONSE TO AN INQUIRY FROM OUR OFFICE AS TO WHETHER THERE WERE OF RECORD ANY OUTSTANDING UNPAID TAXES DUE THE GOVERNMENT BY THE CONTRACTOR ARISING OUT OF THE PROJECT INVOLVED, THE INTERNAL REVENUE SERVICE REPORTED THAT JEOPARDY ASSESSMENTS HAD BEEN MADE AGAINST THE PHELPS CONSTRUCTION COMPANY AND H. CLINTON RODGERS FOR UNPAID TAXES, PENALTIES AND INTEREST, IN AMOUNTS AGGREGATING APPROXIMATELY $37,000, REPRESENTING LIABILITIES WHICH ACCRUED IN CONNECTION WITH PERFORMANCE OF THE CONTRACT. ALSO, UNDER DATE OF JANUARY 6, 1961, THE OFFICE OF THE CHIEF OF FINANCE TRANSMITTED HERE A COPY OF A "NOTICE OF LEVY," DATED DECEMBER 13, 1960, SERVED ON THE CORPS OF ENGINEERS AT ALBUQUERQUE BY THE DISTRICT DIRECTOR OF INTERNAL REVENUE AT AUSTIN, TEXAS, SHOWING H. CLINTON RODGERS, GENERAL CONTRACTOR, TO BE INDEBTED TO THE UNITED STATES FOR UNPAID TAXES, INCLUDING STATUTORY ADDITIONS, FOR AMOUNTS AGGREGATING APPROXIMATELY $37,000. THE TAX LIABILITY WAS FURTHER CONFIRMED BY THE INTERNAL REVENUE SERVICE IN A LETTER DATED FEBRUARY 10, 1961, WHICH REPORTED UNPAID ASSESSMENTS, INCLUDING PENALTIES, OF $25,702.30 FOR WITHHOLDING AND FICA TAXES FOR THE THIRD AND FOURTH QUARTERS OF 1959 AND FIRST TWO QUARTERS OF 1960, AND $9,909.59 FOR FEDERAL UNEMPLOYMENT TAXES FOR THE YEAR 1959 AND THE PERIOD JANUARY 1, 1960, TO MAY 5, 1960.

IT FURTHER APPEARS FROM THE RECORDS FURNISHED THAT THE CONTRACT REMAINED IN FORCE AS ORIGINALLY EXECUTED UNTIL COMPLETION OF THE WORK, WITHOUT DEFAULT, AND THAT BY A LETTER DATED JULY 11, 1960, THE DISTRICT ENGINEER ADVISED THE CONTRACTOR THAT THE WORK HAD BEEN INSPECTED AND WAS FOUND TO BE IN ACCORDANCE WITH THE CONTRACT PLANS AND SPECIFICATIONS, AND WAS ACCEPTED AS OF APRIL 23, 1960. FINAL PAYMENT STATEMENT WAS APPROVED BY THE CONTRACTING OFFICER ON JULY 21, 1960. THE LAST PRIOR PAYMENT OF $23,380.55 WAS MADE BY CHECK TO THE ORDER OF THE CONTRACTOR, AND MAILED ON MAY 16, 1960, TO THE SOUTHWEST NATIONAL BANK, 305 MILLS AVENUE, EL PASO, TEXAS, AS REQUESTED BY THE CONTRACTOR.

IT IS OUR VIEW THAT THE PURPORTED ASSIGNMENT MADE BY THE CONTRACTOR TO YOUR CLIENT IN CONNECTION WITH THE EXECUTION OF THE BONDS UNDER THE CONTRACT IS INVALID AS AGAINST THE UNITED STATES UNDER THE PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, 54 STAT. 1029, AS AMENDED. SEE MARTIN V. NATIONAL SURETY COMPANY, 300 U.S. 588, 594. IT HAS BEEN HELD THAT AN ATTEMPTED ASSIGNMENT OF A CLAIM AGAINST THE UNITED STATES DOES NOT FORFEIT THE CLAIM, BUT LEAVES THE CLAIM WHERE IT WAS BEFORE THE ASSIGNMENT. COLONIAL NAVIGATION COMPANY V. UNITED STATES, 181 F.SUPP. 237. AS TO THE AUTHORITY OF THE GENERAL ACCOUNTING OFFICE TO SET OFF THE AMOUNT OF THE REPORTED UNPAID TAXES IN THIS CASE, AND THE PRIORITY OF THE GOVERNMENT'S CLAIM TO THE SURETY'S RIGHTS OF SUBROGATION, SEE THE CASE OF MUNSEY TRUST COMPANY V. UNITED STATES, 332 U.S. 234. THE CASE OF U.S. FIDELITY AND GUARANTY CO. V. UNITED STATES, 201 F. 2D 118, IS BELIEVED TO HAVE NO APPLICABILITY, SINCE IN THAT CASE THE TAX DEBT WAS OWED BY A SUBCONTRACTOR, TO WHOM THERE WAS NO DEBT DUE BY THE GOVERNMENT, AND THE PRIME CONTRACTOR WAS NOT LIABLE FOR THE TAXES OF THE SUBCONTRACTOR. THE OTHER CASE CITED BY YOU APPEARS TO SUPPORT THE RIGHT OF THE GOVERNMENT TO SET OFF AGAINST THE CONTRACT PROCEEDS THE TAXES DUE FROM THE CONTRACTOR AT THE TIME THE CONTRACT BALANCE BECAME PAYABLE.

UPON THE BASIS OF THE FACTS APPEARING IN THIS CASE AND IN VIEW OF THE AUTHORITY CITED ABOVE, ACTION WILL BE TAKEN BY OUR CLAIMS DIVISION TO WITHHOLD FROM THE AMOUNT PAYABLE UNDER THE CONTRACT SUM SUFFICIENT TO LIQUIDATE THE CONTRACTOR'S TAX LIABILITY, INCLUDING INTEREST COMPUTED TO JULY 21, 1960. THE BALANCE WILL BE CERTIFIED FOR PAYMENT TO PHELPS CONSTRUCTION COMPANY AND WILLIAM V. MORRISON, TRUSTEE IN BANKRUPTCY FOR H. CLINTON RODGERS, THE CONTRACTOR, THE CHECK TO BE TRANSMITTED IN YOUR CARE. IN VIEW OF THE AGREEMENT BETWEEN THE PARTIES DATED JUNE 23, 1960, IT APPEARS THAT NO DIFFICULTY SHOULD BE EXPERIENCED IN OBTAINING AN ENDORSEMENT OF THE CHECK TO YOUR CLIENT.