A-21123, MARCH 16, 1928, 7 COMP. GEN. 576

A-21123: Mar 16, 1928

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THE COMMON-LAW RIGHT OF EVERY CREDITOR TO APPLY THE MONEYS OF HIS DEBTOR IN HIS HANDS IN EXTINGUISHMENT OF CLAIMS DUE HIM FROM THE DEBTOR IS EQUALLY APPLICABLE TO THE GOVERNMENT AS TO INDIVIDUALS. THE APPOINTMENT OF A TRUSTEE IN BANKRUPTCY FOR A CORPORATION WHICH IS BOTH DEBTOR AND CREDITOR OF THE UNITED STATES DOES NOT AFFECT THE RIGHT OF SET-OFF THEN EXISTING IN THE GOVERNMENT TO THE AMOUNT OF MONEY DUE THE CORPORATION NECESSARY TO LIQUIDATE THE INDEBTEDNESS DUE THE UNITED STATES. 080.78 THEREIN FOUND DUE TO SAID BANKRUPT WAS OFFSET AGAINST AND APPLIED IN LIQUIDATION OF ITS PRIOR INDEBTEDNESS TO THE UNITED STATES IN THAT SUM. CONTENDING THAT SUCH INDEBTEDNESS IS A CLAIM DUE THE UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION.

A-21123, MARCH 16, 1928, 7 COMP. GEN. 576

SET-OFF - BANKRUPTCY THE UNITED STATES HAS THE RIGHT TO SET OFF AGAINST AN AMOUNT DUE A CLAIMANT ANY SUM THE SAME PERSON, COMPANY, OR CORPORATION OWES TO THE GOVERNMENT EITHER UNDER THE SAME OR OTHER CONTRACTS OR OBLIGATIONS. THE COMMON-LAW RIGHT OF EVERY CREDITOR TO APPLY THE MONEYS OF HIS DEBTOR IN HIS HANDS IN EXTINGUISHMENT OF CLAIMS DUE HIM FROM THE DEBTOR IS EQUALLY APPLICABLE TO THE GOVERNMENT AS TO INDIVIDUALS. THE APPOINTMENT OF A TRUSTEE IN BANKRUPTCY FOR A CORPORATION WHICH IS BOTH DEBTOR AND CREDITOR OF THE UNITED STATES DOES NOT AFFECT THE RIGHT OF SET-OFF THEN EXISTING IN THE GOVERNMENT TO THE AMOUNT OF MONEY DUE THE CORPORATION NECESSARY TO LIQUIDATE THE INDEBTEDNESS DUE THE UNITED STATES.

DECISION BY COMPTROLLER GENERAL MCCARL, MARCH 16, 1928:

GEORGE A. KEARSLEY, TRUSTEE IN BANKRUPTCY OF THE MARINE ENGINEERING CO., APPLIED DECEMBER 13, 1927, FOR REVIEW OF SETTLEMENT NO. 089439-T, DATED AUGUST 3, 1925, WHEREIN THE SUM OF $945.01 OUT OF A TOTAL OF $6,080.78 THEREIN FOUND DUE TO SAID BANKRUPT WAS OFFSET AGAINST AND APPLIED IN LIQUIDATION OF ITS PRIOR INDEBTEDNESS TO THE UNITED STATES IN THAT SUM.

THE TRUSTEE OF THE BANKRUPT CORPORATION QUESTIONS THE RIGHT OF THE UNITED STATES TO APPLY SAID $945.01 IN LIQUIDATION OF THE INDEBTEDNESS OF $945.01 FOUND TO BE DUE THE GOVERNMENT, AS HAS BEEN DONE, CONTENDING THAT SUCH INDEBTEDNESS IS A CLAIM DUE THE UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION, A PRIVATE CORPORATION, AND NOT ONE DUE THE UNITED STATES, AND THAT THE ENTIRE AMOUNT OF $6,080.78 OTHERWISE FOUND DUE THE MARINE ENGINEERING CO. FROM THE UNITED STATES CONSTITUTES AN ASSET BELONGING TO THE BANKRUPT'S ESTATE.

THE TRUSTEE IN BANKRUPTCY OF THE MARINE ENGINEERING CO. REQUESTS THAT THE $945.01 INVOLVED HERE BE PAID TO HIM.

THE INDEBTEDNESS CHARGED AGAINST THE MARINE ENGINEERING CO. RESULTED FROM ITS TRANSACTIONS WITH THE UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION, IN 1918 AND 1919, AND CONSISTS OF THE FOLLOWING ITEMS:

(1) FREIGHT CHARGES ON FOUR BRONZE PROPELLER BLADES, WEIGHTING 15,455 POUNDS, SHIPPED FROM BALTIMORE, MD., TO BOSTON, MASS., ON APR. 29, 1918, ON THE U.S. STEAMSHIP PHILIPPINES -------------------------- ------------- ----- $75.61

CREDIT CASH PAYMENT ON SEPT. 9, 1921 ------------------ 33.27

UNPAID BALANCE OF FREIGHT CHARGES --------------------- 42.34

(2) OVERPAYMENTS BY OPERATING AGENTS FOR REPAIRS ON UNITED STATES VESSELS, AND SUBSEQUENTLY DISALLOWED, AS FOLLOWS:

CHART

REPAIR PAYMENTS REPAIR

DATE VESSEL MADE BY PAYMENTS OVERPAYMENTS

OPERATING AGENTS DUE FOR

SERVICES FEB. 12, 1919 LAKE JESSUP ------

$8,126.35$7,298.05 $828.30 FEB. 28, 1919 LAKE AKKRA ------ 847.28 772.91

74.37

OVERPAYMENTS

FOR REPAIRS ------------------------------ 902.67

TOTAL

INDEBTEDNESS ----------------------------- 945.01

THE RECORD DISCLOSES THAT THE MARINE ENGINEERING CO. WAS ADJUDGED A BANKRUPT IN THE DISTRICT COURT OF THE UNITED STATES FOR THE DISTRICT OF MASSACHUSETTS ON MAY 22, 1923, AND THAT GEORGE A. KEARSLEY WAS DULY APPOINTED AND QUALIFIED AS THE TRUSTEE OF THE ESTATE OF SAID BANKRUPT.

THE $6,080.78 FOUND DUE THE BANKRUPT BY SETTLEMENT NO. 089439-T, DATED AUGUST 3, 1925, REPRESENTS ALLOWANCES MADE BY THE COMMISSIONER OF INTERNAL REVENUE ON CERTIFICATE OF OVERASSESSMENT NO. 595542, SCHEDULE NO. 13460, DATED JUNE 1, 1925, ON A CLAIM OF THE MARINE ENGINEERING CO., FOR REFUND OF INCOME TAXES ILLEGALLY COLLECTED FOR THE YEAR 1918, AMOUNTING TO $5,178.13, AND THE ACCRUED INTEREST THEREON, AMOUNTING TO $902.65. THUS, IT APPEARS THAT THE INDEBTEDNESS OF $6,080.78 DUE THE MARINE ENGINEERING CO. FROM THE UNITED STATES AROSE MORE THAN FOUR YEARS PRIOR TO THE DATE ON WHICH SAID CORPORATION WAS ADJUDGED A BANKRUPT, ALTHOUGH THE ALLOWANCE OF THE CLAIM THEREFOR WAS NOT MADE UNTIL AFTER SUCH DATE.

THE GENERAL RULE IS THAT A TRUSTEE IN BANKRUPTCY TAKES THE PROPERTY OF THE BANKRUPT IN THE SAME PLIGHT AND CONDITION AND SUBJECT TO THE SAME EQUITIES AND LIENS AS HE FINDS IT IN THE HANDS OF THE PERSON OR CORPORATION OUT OF WHOSE POSSESSION IT IS TAKEN. A TRUSTEE IN BANKRUPTCY CAN ACQUIRE NO OTHER, GREATER, OR BETTER INTEREST THAN THE BANKRUPT HAD IN THE PROPERTY AT THE DATE HE WAS ADJUDGED A BANKRUPT. THE BANKRUPTCY ACT, IN GENERAL TERMS, VESTS THE TRUSTEE WITH TITLE TO ALL PROPERTY WHICH, PRIOR TO THE FILING OF THE PETITION, THE BANKRUPT COULD BY ANY MEANS HAVE TRANSFERRED, OR WHICH MIGHT HAVE BEEN LEVIED UPON AND SOLD UNDER JUDICIAL PROCESS AGAINST HIM. THE TRUSTEE CAN SET UP NO RIGHTS AGAINST CLAIMS WHICH THE BANKRUPT COULD NOT HAVE SET UP AND CAN TAKE NO RIGHT OR TITLE WHICH WAS EXTINGUISHED BEFORE HIS APPOINTMENT. THE FACT THAT A DEBTOR IS ADJUDGED A BANKRUPT AND A TRUSTEE APPOINTED TO ADMINISTER HIS ESTATE DOES NOT AFFECT A RIGHT OF SET-OFF THEN EXISTING. THE CHOSES IN ACTION PASS TO THE TRUSTEE SUBJECT TO THE EQUITABLE RIGHT OF SET-OFF THEN EXISTING, SO THAT A DEBTOR OF THE BANKRUPT WHO HAS SUCH RIGHT IS NOT BOUND TO PAY WHAT HE OWES AND TAKE HIS CHANCE WITH OTHER CREDITORS, BUT IS BOUND TO PAY ONLY THE BALANCE. IN THIS CONNECTION SEE 7 CORPUS JURIS 114; COLLIER ON BANKRUPTCY (5TH ED.), P. 554; BRAND ON BANKRUPTCY (3D ED.), SEC. 1148; LOVELAND ON BANKRUPTCY (2D ED.), P. 367; HEWIT V. BERLIN MACHINE WORKS, 194 U.S. 296; SOUTH PINE CO. OF GA. V. SAVANNAH TRUST CO., 141 FED.REP. 808.

RELATIVE TO THE CONTENTION OF THE TRUSTEE THAT THE $945.01 INDEBTEDNESS CHARGED AGAINST THE BANKRUPT IS NOT A CLAIM OF THE UNITED STATES, INASMUCH AS IT IS A DEBT DUE THE UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION, ATTENTION IS DIRECTED TO SECTION 4 OF THE MERCHANT MARINE ACT OF JUNE 5, 1920, 41 STAT. 988, WHICH TRANSFERRED TO THE UNITED STATES SHIPPING BOARD ALL PROPERTY HELD BY THE UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION, WITH THE EXCEPTION OF VESSELS IN THE MILITARY OR NAVAL SERVICE OF THE UNITED STATES. IT HAS BEEN HELD THAT THE RELATIONS BETWEEN THE UNITED STATES SHIPPING BOARD AND THE UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION ARE SUCH THAT IN THE MATTER OF PROPERTY HELD BY THE FLEET CORPORATION THE OWNERSHIP IS THAT OF THE UNITED STATES. 1 COMP. GEN. 279; 2 ID. 38. THE UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION HAS BEEN HELD TO BE AN AGENCY OF THE GOVERNMENT IN THE FOLLOWING COURT CASES: SOUTHERN BRIDGE CO. V. FLEET CORP., 266 FED.REP. 747; SLOAN SHIPYARDS CORP. V. FLEETCORP., 268 FED.REP. 624; 272 ID. 132; ASTORIA MARINE IRON WORKS V. FLEET CORP., 270 FED.REP. 635; U.S.S.B. FLEET CORP. V. WESTERN U.TEL.CO., DECISION DATED JANUARY 3, 1928, BY THE SUPREME COURT OF THE UNITED STATES.

IN THE DECISION OF THE SUPREME COURT OF THE UNITED STATES IN THE CASE OF U.S.S.B. FLEET CORP. V. WESTERN U.TEL.CO., SUPRA, THE FACTS CONCERNING THE ORGANIZATION AND ACTIVITIES OF THE FLEET CORPORATION WERE REVIEWED AT LENGTH, AS FOLLOWS:

THE FLEET CORPORATION WAS ORGANIZED BY THE UNITED STATES SHIPPING BOARD PURSUANT TO SPECIFIC AUTHORITY CONFERRED BY THE ACT OF SEPTEMBER 7, 1916, C. 451, SEC. 11, 39 STAT. 728, 731. THE LEGISLATION CONCERNING IT, ITS RELATION TO THE SHIPPING BOARD, ITS CHARACTER, AND THE SCOPE OF ITS ACTIVITIES ARE SHOWN IN THE LAKE MONROE, 250 U.S. 246; UNITED STATES V. STRANG, 254 U.S. 491; SLOAN SHIPYARDS CORPORATION V. UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION, 258 U.S. 549; UNITED STATES V. WALTER, 263 U.S. 15; AND UNITED STATES EX REL. SKINNER AND EDDY CORPORATION V. MCCARL, 275 U.S. 1. BESIDES POWERS CONFERRED UPON THE FLEET CORPORATION BY THE GENERAL CORPORATION LAW OF THE DISTRICT OF COLUMBIA, IT VESTED BY DELEGATION FROM THE PRESIDENT WITH THE POWERS CONFERRED UPON HIM BY ACTS OF JUNE 15, 1917, C. 29, 40 STAT. 182; APRIL 22, 1918, C. 62, 40 STAT. 535; AND NOVEMBER 4, 1918, C. 201, 40 STAT. 1020, 1022. EXECUTIVE ORDERS NO. 2664, JULY 11, 1917; NO. 2888, JUNE 18, 1918; NO. 3018, DECEMBER 3, 1918; NO. 3145, AUGUST 11, 1919. THESE SPECIFIC POWERS AND DUTIES WERE TRANSFERRED TO THE SHIPPING BOARD BY MERCHANT MARINE ACT, 1920, JUNE 5, 1920, C. 250, 41 STAT. 988.

SINCE THE PASSAGE OF THE MERCHANT MARINE ACT, 1920, THE FLEET CORPORATION HAS BEEN THE AGENCY THROUGH WHICH THE SHIPPING BOARD HAS PERFORMED ITS PRINCIPAL FUNCTIONS. THE ACTIVITIES HAVE CONSISTED LARGELY OF MAINTAINING AND LIQUIDATING PROPERTY ACQUIRED FOR THE UNITED STATES DURING THE WORLD WAR, OF SETTLING CLAIMS ARISING THEREFROM, AND OF OPERATING, OR CAUSING TO BE OPERATED, VESSELS NOT DISPOSED OF. BESIDES OTHER ACTIVITIES, THE FLEET CORPORATION HAS OPERATED DIRECTLY AND HAS BEEN INTERESTED IN THE OPERATION OF VESSELS OWNED BY THE UNITED STATES. SOME OF THESE GOVERNMENT VESSELS HAVE BEEN OPERATED IN COMPETITION WITH AMERICAN VESSELS PRIVATELY OWNED. BUT IN OPERATING VESSELS, AS IN MAKING SALES, THE SHIPPING BOARD AND THE FLEET CORPORATION WERE REQUIRED BY THE MERCHANT MARINE ACT TO PROCEED WITH A VIEW TO AIDING IN THE DEVELOPMENT OF AN ADEQUATE MERCHANT MARINE TO SERVE, AMONG OTHER THINGS,"AS A NAVAL AND MILITARY AUXILIARY IN TIME OF WAR OR NATIONAL EMERGENCY, ULTIMATELY TO BE OWNED AND OPERATED PRIVATELY BY CITIZENS OF THE UNITED STATES.' THESE SERVICES OF THE FLEET CORPORATION WERE OBVIOUSLY OF A PUBLIC NATURE. IT HAS NEVER DONE ANY BUSINESS OR CONDUCTED ANY OPERATION EXCEPT ON BEHALF OF THE UNITED STATES.

THIS OFFICE IS UNABLE TO VIEW FAVORABLY THE CONTENTION OF THE TRUSTEE THAT THE UNITED STATES IS NOT ENTITLED TO ASSERT ITS RIGHT OF SET-OFF IN ORDER TO LIQUIDATE ITS $945.01 CLAIM AGAINST THE DEBTOR, AS WAS DONE, BECAUSE OF THE REFEREE'S DISALLOWANCE ON JULY 1, 1925, OF SAID CLAIM. APPEARS THAT SUCH DISALLOWANCE WAS MADE FOR THE REASON THAT THE PROOF OF CLAIM HAD NOT BEEN FILED AGAINST THE BANKRUPT'S ESTATE WITHIN ONE YEAR FROM THE DATE THAT DEBTOR WAS ADJUDGED A BANKRUPT, AS REQUIRED BY THE BANKRUPTCY ACT, BASED ON THE REFEREE'S DETERMINATION THAT SUCH STATUTE OF LIMITATION APPLIED INASMUCH AS HE CONSIDERED THE CLAIM AS ONE DUE TO THE UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION INSTEAD OF ONE DUE TO THE UNITED STATES. THE PROVISION OF THE BANKRUPTCY ACT LIMITING THE TIME FOR THE PROOF OF THE CLAIMS OF CREDITORS HAS NO APPLICATION TO A CLAIM WHERE THE OWNERSHIP OF THE PROPERTY INVOLVED IS ADVERSE TO THE BANKRUPT AND HIS ESTATE, AND A REFEREE IN BANKRUPTCY IS WITHOUT JURISDICTION TO DETERMINE SUCH OWNERSHIP. 7 CORPUS JURIS, 102; IN RE FLYNN, 126 FED.REP. 422; NAUMAN V. BRADSHAW, 193 FED.REP. 350; SPEARS V. FRENCHTON B.R.CO. 213 FED.REP. 784. IT HAS BEEN HELD THAT A PERSON WHO IS INDEBTED TO THE BANKRUPT IS ENTITLED, AS AGAINST THE TRUSTEE, TO ASSERT AND ENFORCE ANY SET-OFF OR COUNTERCLAIM WHICH HE MIGHT HAVE ASSERTED AND ENFORCED AS AGAINST THE BANKRUPT, AND IF THE CLAIM IS SUCH AS WOULD BE PROVABLE AGAINST THE ESTATE, THE FACT THAT PROOF THEREOF HAS NOT BEEN MADE DOES NOT AFFECT HIS RIGHT TO ASSERT IT AS A SET-OFF OR COUNTERCLAIM IN AN ACTION AGAINST HIM BY THE TRUSTEE TO RECOVER HIS INDEBTEDNESS TO THE BANKRUPT. SEE 7 CORPUS JURIS, 114, 143; NORFOLK AND W.RY.CO. V. GRAHAM, 145 FED.REP. 809. WHERE QUESTIONS OF FACT ARE INVOLVED RELATIVE TO THE TITLE AND RIGHT OF POSSESSION OF PROPERTY IN THE HANDS OF THIRD PERSONS, THERE IS NO JURISDICTION IN THE BANKRUPTCY COURT TO DETERMINE SUCH QUESTIONS, AND THE RIGHT OF POSSESSION MUST BE TRIED IN A PLENARY ACTION. 7 CORPUS JURIS, 106-107, AND CASES THEREIN CITED, INCLUDING IN RE GILL, 190 FED.REP. 726; IN RE LUKEN, 216 FED.REP. 890. INASMUCH AS THE QUESTIONS AS TO THE OWNERSHIP OR TITLE TO THE FUNDS INVOLVED HERE AND THE GOVERNMENT'S RIGHT OF SET-OFF WERE NOT BEFORE THE BANKRUPTCY COURT WHEN THE CLAIM OF THE GOVERNMENT FOR $945.01 WAS DISALLOWED, AND, IN VIEW OF THE FACT THAT THE MERITS OF THE CLAIM WERE NOT QUESTIONED BUT THE DISALLOWANCE WAS MADE SOLELY ON ACCOUNT OF CLAIMANT'S FAILURE TO FILE THE PROOF OF CLAIM WITHIN THE YEAR REQUIRED BY THE BANKRUPTCY ACT, THE RIGHT OF THE UNITED STATES TO APPLY SUCH FUNDS TO THE EXTINGUISHMENT OF ITS CLAIM AGAINST THE DEBTOR WAS NOT AFFECTED BY SAID DISALLOWANCE.

IT APPEARING THAT AT THE TIME THE MARINE ENGINEERING CO. WAS ADJUDGED A BANKRUPT, ON MAY 22, 1923, THERE WAS DUE THE UNITED STATES FROM SAID CORPORATION AN INDEBTEDNESS OF $945.01, AND THAT THE UNITED STATES WAS THEN INDEBTED TO SAID CORPORATION, ON AN UNLIQUIDATED CLAIM, IN THE SUM OF OVER $5,000 FOR INCOME TAXES ILLEGALLY COLLECTED, AS ABOVE SET FORTH, THE UNITED STATES CLEARLY HAD THE RIGHT OF SET-OFF IN THE MATTER, IT BEING WELL SETTLED THAT THE UNITED STATES HAS THE RIGHT TO SET OFF AGAINST AN AMOUNT DUE A CLAIMANT ANY SUM THE SAME PERSON, COMPANY, OR CORPORATION OWES TO THE GOVERNMENT, EITHER UNDER THE SAME OR OTHER CONTRACTS OR OBLIGATIONS. THE COMMON-LAW RIGHT OF EVERY CREDITOR TO APPLY THE MONEYS OF HIS DEBTOR IN HIS HANDS IN THE EXTINGUISHMENT OF CLAIMS DUE HIM FROM THE DEBTOR IS EQUALLY AS APPLICABLE TO THE GOVERNMENT AS TO INDIVIDUALS. WHERE A CLAIMANT IS BOTH DEBTOR AND CREDITOR TO THE UNITED STATES IN ANY FORM, THE GENERAL ACCOUNTING OFFICE, IN SETTLING THE ACCOUNTS WITHIN ITS JURISDICTION, NOT ONLY HAS THE AUTHORITY BUT IS REQUIRED, IN THE PROPER DISCHARGE OF ITS DUTIES, TO SET OFF ONE INDEBTEDNESS AGAINST THE OTHER, AND ALLOW AND CERTIFY FOR PAYMENT OR COLLECTION ONLY THE BALANCE DUE. BARRY V. UNITED STATES, 229 U.S. 47-53; ALLEN ET AL. V. UNITED STATES, 17 WALL. 207; TAGGART V. UNITED STATES, 17 CT.CLS. 322-327; 1 COMP. GEN. 605; 2 ID. 479; 3 ID. 1006; 4 ID. 117, 522, 858; 6 ID. 810; 7 ID. 186.