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B-155332, SEP. 30, 1965

B-155332 Sep 30, 1965
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R. STUBBLEFIELD FINANCE AND ACCOUNTING OFFICER DEPARTMENT OF THE ARMY: WE HAVE RECEIVED YOUR REQUEST FOR AN ADVANCE DECISION UNDER 31 U.S.C. 74 ON THE QUESTION OF WHO IS ENTITLED TO THE FINAL PAYMENT DUE AND OWING FROM THE GOVERNMENT PURSUANT TO CONTRACT NO. NOTICE TO PROCEED WITH THE WORK WAS RECEIVED BY MR. THE CONTRACT PROCEEDS WERE ASSIGNED TO A MATERIALMAN. NOTICE OF THE ASSIGNMENT WAS RECEIVED BY THE CONTRACTING INSTALLATION ON AUGUST 4. IS CLAIMED BY THE SERVICE UPON THE PROPERTY OF THE DEBTOR. THE CONTRACTOR'S RIGHT TO PROCEED WITH PERFORMANCE WAS TERMINATED FOR DEFAULT BY A NOTICE DATED OCTOBER 9. IT IS FURTHER AGREED AND UNDERSTOOD THAT ALL PAYMENTS HEREAFTER MADE BY GOVERNMENT SHALL BE MADE TO SURETIES OR THEIR DESIGNEE.'.

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B-155332, SEP. 30, 1965

TO CAPTAIN J. R. STUBBLEFIELD FINANCE AND ACCOUNTING OFFICER DEPARTMENT OF THE ARMY:

WE HAVE RECEIVED YOUR REQUEST FOR AN ADVANCE DECISION UNDER 31 U.S.C. 74 ON THE QUESTION OF WHO IS ENTITLED TO THE FINAL PAYMENT DUE AND OWING FROM THE GOVERNMENT PURSUANT TO CONTRACT NO. DA-41-184-AIV 507 FOR THE REPLACEMENT OF ASPHALT STRIP SHINGLES ON CERTAIN BUILDINGS LOCATED AT FORT WOLTERS, MINERAL WELLS, TEXAS.

NOTICE TO PROCEED WITH THE WORK WAS RECEIVED BY MR. I. C. THREATT, DOING BUSINESS AS THE I. C. THREATT MAINTENANCE SERVICE, ON JULY 14, 1964. THE CONTRACT PROCEEDS WERE ASSIGNED TO A MATERIALMAN, CASTLEBERRY LUMBER COMPANY, INCORPORATED, ON JULY 15, 1964, AND NOTICE OF THE ASSIGNMENT WAS RECEIVED BY THE CONTRACTING INSTALLATION ON AUGUST 4, 1964. THE INTERNAL REVENUE SERVICE SERVED THE ACCOUNTING AND FINANCE OFFICE WITH A NOTICE OF LEVY ON SEPTEMBER 8, 1964, COVERING ASSESSMENTS MADE IN NOVEMBER AND DECEMBER, 1963, FOR WITHHOLDING TAXES AND SOCIAL SECURITY CONTRIBUTIONS UNPAID BY THE CONTRACTOR. A LIEN DERIVING FROM SECTION 6321, INTERNAL REVENUE CODE OF 1954, 26 U.S.C. 6321, IN THE TOTAL AMOUNT OF $5,721.14, IS CLAIMED BY THE SERVICE UPON THE PROPERTY OF THE DEBTOR.

THE CONTRACTOR'S RIGHT TO PROCEED WITH PERFORMANCE WAS TERMINATED FOR DEFAULT BY A NOTICE DATED OCTOBER 9, 1964. BY AN AGREEMENT OF THE SAME DATE SIGNED BY THE CONTRACTING OFFICER, THE INDIVIDUAL SURETIES, MESSERS. THURMAN E. HARBIN AND ROGER W. THREATT, UNDERTOOK TO COMPLETE PERFORMANCE OF THE WORK UNDER THE CONTRACT IN EXCHANGE FOR THE STIPULATION MADE THEREIN THAT:

"3. IT IS FURTHER AGREED AND UNDERSTOOD THAT ALL PAYMENTS HEREAFTER MADE BY GOVERNMENT SHALL BE MADE TO SURETIES OR THEIR DESIGNEE.'

SIX PROGRESS PAYMENTS FOR A TOTAL OF $21,414.78 HAVE ALREADY BEEN PAID OUT UNDER THE CONTRACT, $18,336.78 TO THE ASSIGNEE AND $3,078 TO THE SURETIES.

IT IS CERTIFIED IN THE RECORD THAT A FINAL BALANCE IN THE AMOUNT OF $1,229.14 REMAINS TO BE PAID OUT UNDER THE CONTRACT WHICH IS BY NOW FULLY PERFORMED. THERE ARE THREE CLAIMANTS TO THE MONEY WHOSE RESPECTIVE RIGHTS THERETO WILL BE EXAMINED IN TURN: THE ASSIGNEE; THE INTERNAL REVENUE SERVICE; AND THE INDIVIDUAL SURETIES.

AN ASSIGNMENT OF RIGHTS UNDER CONTRACTS WITH THE FEDERAL GOVERNMENT IS UNENFORCEABLE AGAINST THE UNITED STATES ACCORDING TO THE PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED, 31 U.S.C. 203, 41 U.S.C. 15, UNLESS MADE TO A BANK, TRUST COMPANY OR "OTHER FINANCING TITUTION.' THE DEFINITION OF "FINANCING INSTITUTION" HAS BEEN LIMITED TO MEAN A COMPANY, PARTNERSHIP, OR INDIVIDUAL REGULARLY ENGAGED IN THE FINANCING BUSINESS AND, SO FAR AS WE ARE AWARE, HAS NEVER BEEN EXTENDED BY THE COURTS TO ENCOMPASS MATERIALMEN AND SUPPLIERS WHO REGULARLY EXTEND LINES OF CREDIT TO THEIR CUSTOMERS. WITH REGARD TO THE SCOPE OF THE DEFINITION SEE 43 COMP. GEN. 138 (SMALL BUSINESS INVESTMENT COMPANIES); 40 ID. 174 (PENSION TRUSTS); 20 ID. 415 (FACTORS). AMOUNTS EXPENDED FOR CONTRACT PERFORMANCE FROM AND AFTER ASSUMPTION OF PERFORMANCE BY THE SURETIES APPEAR TO TOTAL $3,939.33 OF WHICH ALL BUT THE SUM OF $861.33 HAS BEEN REIMBURSED BY THE SIXTH PROGRESS PAYMENT. THE QUESTION THEN BECOMES WHICH HAS THE BETTER RIGHT TO RECEIVE THE $861.33, THE SURETIES ON THEIR PAYMENT BOND CLAIM OF HAVING INCURRED EXPENSES IN PAYING LABORERS AND MATERIALMEN OR THE INTERNAL REVENUE SERVICE?

THE ISSUE SEEMS TO FALL SQUARELY WITHIN THE RULES LAID DOWN IN OUR DECISIONS PUBLISHED AT 40 COMP. GEN. 85 AND 31 ID. 103. THESE DECISIONS DISTINGUISH BETWEEN MONEYS EARNED BY THE DEFAULTING PRINCIPAL, VIZ, RETAINED PERCENTAGES AND PROGRESS ESTIMATES EARNED BUT NOT INVOICED AT THE TIME THE CONTRACTOR'S RIGHT TO PROCEED IS TERMINATED, AND AMOUNTS EARNED BY THE COMPLETING SURETY. THE RULE IS ESTABLISHED THAT A CONTRACTING OFFICER IS AUTHORIZED TO ENTER INTO A COMPLETION AGREEMENT PERMITTING THE SURETY TO EARN PROGRESS PAYMENTS FOR WORK ACTUALLY PERFORMED AFTER DEFAULT OF THE ORIGINAL CONTRACTOR ON THE SURETY'S OWN ACCOUNT BUT THAT ANY UNDERTAKING TO REIMBURSE THE SURETY FOR AMOUNTS PAID OUT PURSUANT TO ITS OBLIGATION UNDER THE PAYMENT BOND IS INVALID AND DOES NOT BIND THE GOVERNMENT. FURTHERMORE THESE DECISIONS STAND FOR THE PROPOSITION THAT THE GOVERNMENT MAY NOT UNDER ANY CIRCUMSTANCES MAKE PAYMENTS TO THE SURETY FROM MONEYS EARNED BY ITS PRINCIPAL WITHOUT THE LATTER'S PERMISSION. SINCE THE GOVERNMENT CANNOT LEGALLY BE BOUND BY ITS AGREEMENT TO PAY OVER TO THE SURETIES AN AMOUNT GREATER THAN THE COSTS ACTUALLY INCURRED IN COMPLETING THE WORK, AND SINCE, AS IS OBSERVED IN 40 COMP. GEN. 85 AT PAGE 87, IT IS WELL ESTABLISHED THAT THE SURETIES CAN HAVE NO RIGHT GREATER THAN THE RIGHT OF THE GOVERNMENT TO SATISFY ANY CLAIMS IT MIGHT HAVE AGAINST THE PRINCIPAL OUT OF MONEYS REMAINING IN ITS POSSESSION EXCEPT UNDER THE TAKE OVER AGREEMENT AS PROPERLY CONSTRUED, IT WOULD APPEAR THAT THE TAX LIEN MUST PREVAIL WITH RESPECT TO THE BALANCE OF THE CONTRACT PRICE IN EXCESS OF $861.33.

IT IS INCUMBENT UPON THE INDIVIDUAL SURETIES TO PROVE THE ACCURACY OF THEIR CERTIFICATION THAT THE SUM OF $3,939.33 WAS ACTUALLY EXPENDED SOLELY IN COMPLETING PERFORMANCE OF THE CONTRACT. UPON SATISFACTION OF THIS REQUIREMENT THE FINANCE AND ACCOUNTING OFFICER IS AUTHORIZED TO MAKE PAYMENT IN THE AMOUNT OF $861.33 TO THURMAN E. HARBIN AND ROGER W. THREATT, AND TO PAY $367.81 OVER TO THE INTERNAL REVENUE SERVICE. CF. 164 A.L.R. 613, 617.

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