A-37415, DECEMBER 12, 1931, 11 COMP. GEN. 224

A-37415: Dec 12, 1931

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THAT BIDDERS ARE EXCEPTED TO EXAMINE THE WORK AND DECIDE FOR THEMSELVES AS TO ITS CHARACTER AND MAKE BIDS ACCORDINGLY. " THE CONTRACT PRICE WAS FIXED WITH RESPECT TO THE ENTIRE OPERATION AND NO ADDITIONAL AMOUNT MAY BE ALLOWED FOR A PORTION OF THE WORK WHICH THE CONTRACTOR CLAIMS TO HAVE FOUND MORE DIFFICULT THAN WAS CONTEMPLATED. A SURETY ON THE BOND OF A DEFAULTING GOVERNMENT CONTRACTOR WHO CLAIMS TO HAVE SUFFERED A LOSS IN COMPLETING THE CONTRACT WORK MUST ESTABLISH THE EXTENT OF THE LOSS BY COMPETENT EVIDENCE. IN A CASE IN WHICH THE PRINCIPAL CONTRACTOR AT THE TIME OF ITS DEFAULT WAS INDEBTED TO THE UNITED STATES FOR TAXES. NOTWITHSTANDING THAT THE SURETY CLAIMS TO HAVE SUFFERED A LOSS IN COMPLETING THE CONTRACT WORK.

A-37415, DECEMBER 12, 1931, 11 COMP. GEN. 224

CONTRACTS - DEFAULT - SUBROGATION OF SURETY WHERE THE SPECIFICATIONS, SUBSEQUENTLY EMBODIED IN A FORMAL CONTRACT FOR DREDGING, PROVIDED ,THAT BIDDERS ARE EXCEPTED TO EXAMINE THE WORK AND DECIDE FOR THEMSELVES AS TO ITS CHARACTER AND MAKE BIDS ACCORDINGLY," THE CONTRACT PRICE WAS FIXED WITH RESPECT TO THE ENTIRE OPERATION AND NO ADDITIONAL AMOUNT MAY BE ALLOWED FOR A PORTION OF THE WORK WHICH THE CONTRACTOR CLAIMS TO HAVE FOUND MORE DIFFICULT THAN WAS CONTEMPLATED. A SURETY ON THE BOND OF A DEFAULTING GOVERNMENT CONTRACTOR WHO CLAIMS TO HAVE SUFFERED A LOSS IN COMPLETING THE CONTRACT WORK MUST ESTABLISH THE EXTENT OF THE LOSS BY COMPETENT EVIDENCE, AS WELL AS THE RIGHT TO SUBROGATION, BEFORE ANY RECOGNITION CAN BE GIVEN ITS CLAIMS FOR AMOUNTS EARNED BY ITS PRINCIPAL PRIOR TO DEFAULT. A SURETY ON THE BOND OF AN INSOLVENT GOVERNMENT CONTRACTOR WHO HAS DEFAULTED AND HAS BEEN ADJUDICATED A BANKRUPT MAY NOT BE PAID ANY SUM EARNED BY THE PRINCIPAL CONTRACTOR PRIOR TO THE DEFAULT, IN A CASE IN WHICH THE PRINCIPAL CONTRACTOR AT THE TIME OF ITS DEFAULT WAS INDEBTED TO THE UNITED STATES FOR TAXES, IN A GREATER SUM THAN THE UNPAID AMOUNT EARNED UNDER THE CONTRACT, NOTWITHSTANDING THAT THE SURETY CLAIMS TO HAVE SUFFERED A LOSS IN COMPLETING THE CONTRACT WORK, IN EXCESS OF SUCH UNPAID AMOUNT EARNED BY ITS PRINCIPAL.

DECISION BY COMPTROLLER GENERAL MCCARL, DECEMBER 12, 1931:

THE SOUTHERN SURETY CO. OF NEW YORK HAS APPLIED FOR REVIEW OF GENERAL ACCOUNTING OFFICE SETTLEMENT NO. 0254453, DATED MAY 27, 1931, WHEREIN $6,637.97 CLAIMED BY THE SURETY COMPANY AND REPRESENTING PERCENTAGES RETAINED BY THE GOVERNMENT FROM AMOUNTS EARNED BY ITS PRINCIPAL, THE WALDECK-DEAL DREDGING CO., A FLORIDA CORPORATION, PRIOR TO THE LATTER'S DEFAULT UNDER CONTRACT NO. W-982-ENG-254, DATED APRIL 5, 1929, AND ADJUDICATION IN INVOLUNTARY BANKRUPTCY ON DECEMBER 9, 1929, AND WAS SET OFF AGAINST A BALANCE OF $37,410.39 DUE THE UNITED STATES FROM THE CONTRACTOR FOR DELINQUENT TAXES--- $20,305.49 FOR THE TAXABLE YEAR 1926, $7,068.15 FOR THE TAXABLE YEAR 1925, AND $2,036.75 FOR THE TAXABLE YEAR 1924. THE SETTLEMENT WAS MADE UNDER THE PROVISIONS OF SECTIONS 236, 3466, AND 3467 OF THE REVISED STATUTES, AS AMENDED (U.S.C. 31:71, 191 AND 192), OF SECTION 15 OF THE ACT OF MAY 27, 1926, 44 STAT. 666, AMENDING SECTION 64 OF THE BANKRUPTCY ACT (U.S.C. 11:104), AND OF SECTION 68 (A) OF THE BANKRUPTCY ACT OF JULY 1, 1898, 30 STAT. 565 (U.S.C. 11:108).

THE SURETY COMPANY HAS APPLIED FOR REVIEW, ALSO, OF GENERAL ACCOUNTING OFFICE SETTLEMENT NO. 0296939 (1) DATED JUNE 10, 193J1, WHEREIN WAS DISALLOWED ITS DIRECT CLAIM FOR $6,287.71 ASSERTED TO BE DUE AS ADDITIONAL COMPENSATION, OVER AND ABOVE THE CONTRACT PRICE, FOR WORK ACTUALLY PERFORMED BY THE PRINCIPAL CONTRACTOR, PRIOR TO ITS INVOLUNTARY BANKRUPTCY, BETWEEN STATIONS 09:75 AND 138:00 ON THE DREDGING PROJECT, DUE TO THE DIFFICULTY EXPERIENCED IN DREDGING THE MATERIAL FOUND BETWEEN THOSE TWO STATIONS. THIS CLAIM WAS CORRECTLY DISALLOWED FOR THE REASON THAT THE SPECIFICATIONS, SUBSEQUENTLY EMBODIED IN THE FORMAL CONTRACT, CONTAINED NO WARRANTY ON BEHALF OF THE GOVERNMENT CONCERNING THE CHARACTER OF THE MATERIAL TO BE DREDGED AND ARTICLE 14 THEREOF EXPRESSLY ADVISED THE BIDDERS THAT THE GOVERNMENT DID NOT GUARANTEE THE ACCURACY OF THE DESCRIPTION OF THE MATERIAL TO BE REMOVED BUT "THAT BIDDERS ARE EXPECTED TO EXAMINE THE WORK AND DECIDE FOR THEMSELVES AS TO ITS CHARACTER AND TO MAKE THE BIDS ACCORDINGLY.' THE CONTRACT PRICE WAS FIXED WITH RESPECT TO THE ENTIRE PROJECT AND THERE IS NO MORE AUTHORITY FOR ADJUSTING THE PRICE UPWARD IN REFERENCE TO DIFFICULT PARTS OF THE WORK THAN FOR ADJUSTING THE PRICE DOWNWARD WITH REFERENCE TO THE LESS DIFFICULT PARTS.

THE CONTRACT WITH THE WALDECK-DEAL DREDGING CO. WAS FOR THE DREDGING OF APPROXIMATELY 1,689,375 CUBIC YARDS OF SECTION V OF THE INTRACOASTAL WATERWAY, BEAUFORT TO THE CAPE FEAR RIVER, NORTH CAROLINA, AT $0.1173 PER CUBIC YARD, OR FOR AN APPROXIMATE TOTAL CONSIDERATION OF $198,163.69. GUARANTEE THE PERFORMANCE OF THE CONTRACT THE CONTRACTOR FURNISHED A BOND DATED APRIL 15, 1929, ON WHICH THE PRESENT CLAIMANT IS SURETY, IN THE SUM OF $100,000, PAYING THEREFOR A PREMIUM OF $1,486.23. THE CONDITIONS OF THIS BOND WERE THAT THE CONTRACTOR SHOULD FAITHFULLY PERFORM ALL OF THE COVENANTS, ETC., OF THE CONTRACT AND SHOULD PROMPTLY MAKE PAYMENT TO ALL PERSONS SUPPLYING HIM WITH LABOR AND MATERIALS IN THE PROSECUTION OF THE WORK AND AS SPECIAL SECURITY TO THE SURETY THE CONTRACTOR IN HIS APPLICATION FOR THE BOND AGREED AS FOLLOWS:

* * * FOR THE BETTER PROTECTION OF SAID COMPANY, AND AS COLLATERAL SECURITY HERETO AND FOR ALL CLAIMS OF SAID SURETY AGAINST THE UNDERSIGNED, WE * * * ASSIGN, TRANSFER, AND CONVEY TO THE SAID COMPANY, ALL THE RIGHT, TITLE, AND INTEREST OF THE UNDERSIGNED IN AND TO ALL THE TOOLS, PLANT, AND EQUIPMENT AND MATERIALS OF EVERY NATURE AND DESCRIPTION THAT WE MAY NOW OR HEREAFTER HAVE UPON SAID WORK, OR IN, ON, OR ABOUT THE SITE THEREOF, INCLUDING AS WELL MATERIALS PURCHASED FOR OR CHARGEABLE TO SAID CONTRACT WHICH MAY BE IN PROCESS OF CONSTRUCTION, IN STORAGE ELSEWHERE, OR IN TRANSPORTATION TO SAID SITE. AND ALSO, * * * DO HEREBY CONVEY AND ASSIGN UNTO THE SAID COMPANY ANY AND ALL PAYMENTS, FUNDS, MONEYS, OR PROPERTY DUE OR TO BECOME DUE TO THE UNDERSIGNED AS PROVIDED IN SAID CONTRACT, AND ALSO ALL OF OUR RIGHTS IN AND TO ALL SUBCONTRACTS WHICH MAY HAVE BEEN OR MAY HEREAFTER BE ENTERED INTO, AND THE MATERIALS EMBRACED THEREIN, AND ALSO ALL OUR RIGHTS, CLAIMS, AND DEMANDS AGAINST ANY SURETY OR SURETIES ON BONDS FURNISHED BY SUCH SUBCONTRACTORS. * * *

THE CONTRACTOR FURTHER AGREED THAT IN EVENT OF ITS DEFAULT OR FAILURE IN CARRYING OUT ITS VARIOUS AGREEMENTS IT APPOINTED THE PRESIDENT OR ANY VICE PRESIDENT OF THE SURETY WITH FULL AUTHORITY TO SIGN THE CONTRACTOR'S NAME TO ANY CHECK, RELEASE, BILL OF SALE, ETC., NECESSARY OR DESIRED TO CARRY INTO EFFECT THE PURPOSES OF THE ASSIGNMENT AND "TO ENTER UPON AND TAKE POSSESSION OF SAID TOOLS, PLANT, EQUIPMENT,MATERIALS, AND SUBCONTRACTS, AND ENFORCE, USE, EMPLOY, AND DISPOSE THEREOF.'

ON OR ABOUT OCTOBER 22, 1929, A PETITION IN INVOLUNTARY BANKRUPTCY WAS FILED AGAINST THE CONTRACTOR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA AND A TEMPORARY RECEIVER WAS APPOINTED. ANCILLARY RECEIVERSHIP PROCEEDINGS INSTITUTED ABOUT THE SAME TIME, IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NORTH CAROLINA, AT WILMINGTON, NORTH CAROLINA, NEAR WHICH MUST OF THE DREDGING EQUIPMENT, ETC., OF THE CONTRACTOR WAS LOCATED, THE FLORIDA RECEIVER WAS APPOINTED A CO-ANCILLARY RECEIVER. WHEN THE CONTRACTOR WAS ADJUDICATED A BANKRUPT IN THE FLORIDA FEDERAL COURT ON DECEMBER 9, 1929, THIS SAME RECEIVER WAS APPOINTED AS TRUSTEE IN BANKRUPTCY.

THE CONTRACTOR BEING UNABLE TO PROCEED WITH HIS CONTRACT BY REASON OF BANKRUPTCY, AND OTHER CAUSES, THE WAR DEPARTMENT DISTRICT ENGINEER, AFTER NOTICE TO THE COANCILLARY RECEIVERS, OF WHOM THE TRUSTEE IN BANKRUPTCY WAS ONE, TERMINATED THE ORIGINAL CONTRACT, EFFECTIVE DECEMBER 16, 1929, AT WHICH TIME THE PRINCIPAL CONTRACTOR IS REPORTED TO HAVE DREDGED 565,897 CUBIC YARDS OF MATERIAL FOR WHICH PAYMENT HAS BEEN MADE AT THE FULL CONTRACT PRICE, IN THE SUM OF $66,379.72, LESS RETAINED PERCENTAGES, AUTHORIZED UNDER THE CONTRACT, OF $6,637.97, OR THE NET SUM OF $59,741.75, OF WHICH $5,393.52 APPEARS TO HAVE BEEN PAID TO THE COANCILLARY RECEIVERS, APPOINTED BY THE NORTH CAROLINA DISTRICT COURT, ON THE NOVEMBER VOUCHERS NOS. 50492 AND 589 OF MAJ. W. A. SNOW, CORPS OF ENGINEERS, UNITED STATES ARMY, DRAWN FOR $5,331.34 AND $68.18, RESPECTIVELY.

THE ARMY ENGINEER CORPS IN OCTOBER AND NOVEMBER, 1929, PERFORMED CONSIDERABLE OF THE MOST DIFFICULT DREDGING WORK COVERED BY THE ORIGINAL CONTRACT, AND NO CHARGE AGAINST THE SURETY HAS BEEN MADE ON ACCOUNT OF THIS WORK PERFORMED BY THE GOVERNMENT--- THE ARRANGEMENT BEING PURSUANT TO ARTICLE 4 OF THE CONTRACT. THE CLAIMANT SURETY, AFTER NOTICE OF ITS PRINCIPAL'S DEFAULT, ELECTED TO COMPLETE THE WORK REMAINING TO BE PERFORMED, AFTER THE GOVERNMENT THUS HAD COMPLETED THE MOST DIFFICULT PORTION, WHEREUPON A SEPARATE CONTRACT WAS ENTERED INTO WITH THE SURETY ON JANUARY 16, 1930, UNDER WHICH IT BECAME OBLIGATED TO COMPLETE THE WORK AT THE UNIT PRICE OF $0.1173 PER CUBIC YARD AS AGREED UPON IN THE CONTRACT WITH ITS PRINCIPAL. THE SURETY IS UNDERSTOOD TO HAVE COMPLETED OR CAUSED TO BE COMPLETED THE WORK IN A MANNER SATISFACTORY TO THE ARMY ENGINEER OFFICERS HAVING THE MATTER IN CHARGE, AND THE OFFICIAL ACCOUNTING RECORDS SHOW THAT IT HAS BEEN PAID ON BEHALF OF THE GOVERNMENT AT THE FULL CONTRACT PRICE FOR ALL OF THE MATERIAL WHICH IT CAUSED TO BE REMOVED; THAT IS, IN THE SUM OF $84,139.42.

THE PRESENT CLAIMS OF THE SURETY, TO PAYMENT OF AMOUNTS ALLEGED TO HAVE BEEN EARNED BY ITS PRINCIPAL, ARE BASED, FIRST, ON THE ASSIGNMENT HEREINBEFORE QUOTED, CONTAINED IN THE PRINCIPAL'S APPLICATION FOR THE BOND AND, SECOND, ON ITS ALLEGED RIGHT TO SUBROGATION.

IN SO FAR AS THE ASSIGNMENT AND THE GIVING OF THE POWER OF ATTORNEY THEREIN ARE CONCERNED, RESPECTING MONEYS EARNED FROM THE UNITED STATES BY THE PRINCIPAL CONTRACTOR PRIOR TO ITS DEFAULT, AND WHICH WOULD HAVE BEEN PAYABLE TO IT, OR TO ITS TRUSTEE IN BANKRUPTCY, BUT FOR ITS INDEBTEDNESS TO THE UNITED STATES, AND/OR TO THE SURETY, UNDER THE PRINCIPLE OF SUBROGATION, THE ASSIGNMENT IS "ABSOLUTELY NULL AND VOID," AND NO RIGHTS CAN BE RECOGNIZED IN THE SURETY BY REASON OF SUCH ASSIGNMENT OR THE GIVING OF A POWER OF ATTORNEY. (SEC. 3477, REV. STAT., AS AMENDED; U.S.C. 31:203.) ANY CLAIMS WHICH THE CLAIMANT SURETY MAY HAVE TO BE PAID MONEY BY THE UNITED STATES WHICH OTHERWISE MIGHT BE PAYABLE TO ITS PRINCIPAL'S TRUSTEE IN BANKRUPTCY DEPEND FOR THEIR VALIDITY SOLELY ON THE SURETY'S RIGHT TO PRIORITY BY REASON OF SUBROGATION AND A SHOWING THAT IT ACTUALLY HAS BEEN OBLIGED TO SUSTAIN A LOSS, BY REASON OF ITS CONTRACT OF SURETYSHIP, WHICH HAS NOT BEEN SATISFIED.

THE CLAIMANT REPRESENTS THAT UPON THE EXECUTION OF ITS CONTRACT OF JANUARY 16, 1930, IT FORTHWITH SUBLET THE DREDGING WORK IT HAD OBLIGATED ITSELF TO PERFORM TO THE ATLANTIC GULF AND PACIFIC CO. AT THE PRICE OF $0.1375 PER CUBIC YARD, OR AT AN INCREASE OF OVER 2 CENTS PER CUBIC YARD; THAT IS, AN INCREASE OF MORE THAN 17 PERCENT OVER THE UNIT PRICE FIXED IN THE ORIGINAL CONTRACT OF APRIL 5, 1929, AND THAT IT HAS PAID TO ITS SUBCONTRACTOR $98,610.36 FOR PERFORMING THE WORK, OR $14,470.94 MORE THAN IT HAS RECEIVED FROM THE UNITED STATES IN PAYMENT FOR THE WORK, AND THAT, IN ADDITION, IT HAS INCURRED EXPENSES FOR TRAVEL, ATTORNEYS' FEES, TELEPHONING, ETC., IN CONNECTION WITH COMPLETING THE WORK, IN THE NET AMOUNT OF $3,253.62, THUS MAKING ITS TOTAL CLAIM, ON ACCOUNT OF WHICH IT INSISTS ON SUBROGATION, AMOUNT TO $17,724.56.

IT DOES NOT APPEAR THAT THE CLAIMING SURETY HAS PAID, OR IS OBLIGATED TO PAY, FOR ANY LABOR OR MATERIAL FURNISHED THE PRINCIPAL CONTRACTOR IN CONNECTION WITH THE WORK THE LATTER HAD ACTUALLY PERFORMED PRIOR TO DEFAULT. NEITHER HAS THERE BEEN PRESENTED TO THIS OFFICE ANY ACKNOWLEDGMENT ON THE PART OF THE ORIGINAL CONTRACTOR, NOR HAS THERE BEEN OTHERWISE SATISFACTORILY ESTABLISHED BY ANY VOUCHER OR PAPER TRANSMITTED, THAT IT WAS NECESSARY FOR THE SURETY, IN A TIME OF GENERALLY FALLING PRICES, IN JANUARY, 1931, TO SUBLET THE CONTRACT WORK AT AN ADVANCE OF OVER 2 CENTS PER CUBIC YARD OVER THE ORIGINAL CONTRACT PRICE FIXED IN APRIL, 1929; THAT IS, AT AN ADVANCE OF OVER 17 PERCENT. IT DOES APPEAR, HOWEVER, FROM A COPY OF ANY ORDER WHICH HAS BEEN FURNISHED, ENTERED FEBRUARY 14, 1931, BY THE REFEREE IN BANKRUPTCY IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA, THAT THE REFEREE, ON THE CLAIM OF THE SURETY FOR SUBROGATION, FOUND THAT THE SURETY HAD SUSTAINED A LOSS OF $14,470 IN COMPLETING THE CONTRACT AND ORDERED, ADJUDGED, AND DECREED, IN THAT CONNECTION, THAT THE SURETY, THEREFORE, WAS SUBROGATED TO ANY AND ALL RIGHT, CLAIM, OR DEMAND WHICH THE PRINCIPAL CONTRACTOR HAD OR MAY HAVE HAD AGAINST THE UNITED STATES, AUTHORIZED THE SURETY TO DEMAND, RECEIVE, AND ACCEPT THE SAID SUM FROM THE UNITED STATES, AND, WHEN RECEIVED, TO HAVE IT APPLIED AS A CREDIT ON THE LOSS IT HAD SUSTAINED. IT APPEARS, ALSO, THAT THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NORTH CAROLINA, HAVING PREVIOUSLY DIRECTED THE PRINCIPAL CONTRACTOR (BANKRUPT) TO DELIVER "ALL OF ITS PROPERTY, ASSETS, AND EFFECTS," ETC., TO THE COANCILLARY RECEIVERS APPOINTED BY THAT COURT AND HAVING DIRECTED THEM TO MAKE CLAIM ON THE OFFICIALS OF THE WAR DEPARTMENT ENGINEER CORPS FOR SUMS DUE FROM THE UNITED STATES FOR WORK PERFORMED BY THE PRINCIPAL CONTRACTOR, ENTERED A "FINAL DECREE" ON MAY 6, 1931, IN WHICH IT WAS ORDERED, ADJUDGED, OR DECREED THAT, AS BETWEEN THE COANCILLARY RECEIVERS AND THE CLAIMANT SURETY, THE SURETY IS ENTITLED TO THE PERCENTAGES RETAINED UNDER THE CONTRACT AND THAT IF THE GOVERNMENT SHALL PAY SUCH RETAINED PERCENTAGES TO THE ANCILLARY RECEIVERS THE SAID RECEIVERS SHALL ENDORSE, TRANSFER, AND ASSIGN THE VOUCHER OR THE CHECK FOR THE SAME TO THE SURETY.

THE VALUE OF ASSETS, MACHINERY, EQUIPMENT CHOSES IN ACTION, ETC., TAKEN OVER BY THE SURETY, UNDER ITS ASSIGNMENT, UPON THE DEFAULT OF THE PRINCIPAL CONTRACTOR, HAS NOT BEEN ESTABLISHED OR INDICATED BY ANY OF THE PAPERS SUBMITTED TO THIS OFFICE NOR DOES IT APPEAR WHAT PAYMENTS HAVE BEEN MADE TO IT BY THE TRUSTEE IN BANKRUPTCY AND/OR BY THE COANCILLARY RECEIVERS. EVIDENCE IS LACKING AS TO THE DISPOSITION MADE BY THE COANCILLARY RECEIVERS OF THE PAYMENTS IN EXCESS OF $5,000 WHICH APPEAR TO HAVE BEEN MADE TO THEM BY THE ARMY ENGINEER CORPS ON ACCOUNT OF WORK PERFORMED BY THE ORIGINAL CONTRACTOR, AND INFORMAL ADVICES FROM THE BUREAU OF INTERNAL REVENUE ARE TO THE EFFECT THAT ALTHOUGH IT IS UNDERSTOOD THAT NO QUESTION WAS RAISED IN THE BANKRUPTCY COURT AS TO THE CORRECTNESS OF THE TAX INDEBTEDNESS FOUND BY THE COMMISSIONER, AND THE BANKRUPTCY COURT IS UNDERSTOOD TO HAVE ALLOWED THE CLAIMS IN FULL, THE TRUSTEE IN BANKRUPTCY HAS MADE BUT ONE PAYMENT, OF $11.03, OUT OF THE BANKRUPT'S ESTATE ON ACCOUNT OF THE TAX CLAIMS, WHICH PAYMENT WAS MADE IN OCTOBER, 1931, IN CONNECTION WITH CLOSING THE BANKRUPTCY PROCEEDINGS. WERE THERE NO UNSATISFIED TAX CLAIMS ON THE PART OF THE UNITED STATES, THEREFORE, THE BURDEN STILL WOULD BE UPON THE CLAIMANT SURETY TO ESTABLISH BY EVIDENCE THAT IT HAS NOT RECEIVED, IN PROPERTY, DIVIDENDS AND/OR INCHOATE RIGHTS AGAINST OTHERS, AMOUNTS SUFFICIENT TO COVER ITS ACTUAL NECESSARY LOSSES SUSTAINED THROUGH ITS HAVING TO COMPLETE ITS PRINCIPAL'S CONTRACT. UNDER THE VIEW WHICH MUST BE TAKEN OF THE CASE, HOWEVER, THE ESTABLISHMENT OF THESE FACTS IS NOT ESSENTIAL TO A PROPER DISPOSITION OF THE CLAIMS OF THE SURETY, FOR THE QUESTION AS TO THE VALIDITY OF THESE CLAIMS MUST BE DETERMINED UNDER THE PLAIN TERMS OF THE STATUTES DEFINING THE PRIORITIES OF THE UNITED STATES, AND OF THE SURETIES ON THE BONDS OF DEFAULTING GOVERNMENT CONTRACTORS, RESPECTIVELY, WITH RESPECT TO DEBTS OWING FROM SUCH CONTRACTORS WHO HAVE BECOME INSOLVENT OR HAVE BEEN ADJUDICATED BANKRUPTS.

SECTION 3466, REVISED STATUTES, DERIVED FROM SECTION 5 OF THE ACT OF MARCH 3, 1797, 1 STAT. 515, AND SECTION 65, ACT OF MARCH 2, 1799, 1 STAT. 676 (U.S.C. 31:191) PROVIDES, IN SO FAR AS IS HERE MATERIAL, THAT WHENEVER ANY PERSON INDEBTED TO THE UNITED STATES IS INSOLVENT, OR WHENEVER THE ESTATE OF ANY DECEASED DEBTOR, IS INSUFFICIENT TO PAY ALL THE DEBTS DUE FROM THE DECEASED, THE UNITED STATES SHALL BE FIRST SATISFIED AND, BY SECTION 3467, REVISED STATUTES, DERIVED FROM THE SAME SECTION OF THE CITED 1799 STATUTE (U.S.C. 31:192), IT IS PROVIDED THAT EVERY PERSON WHO PAYS ANY DEBT DUE BY THE INSOLVENT PERSON OR ESTATE FROM WHOM OR FOR WHICH HE ACTS BEFORE HE SATISFIED THE DEBTS DUE TO THE UNITED STATES FROM SUCH PERSON OR ESTATE, SHALL BECOME ANSWERABLE IN HIS OWN PERSON AND ESTATE FOR THE DEBTS SO DUE THE UNITED STATES OR FOR SO MUCH THEREOF AS MAY REMAIN DUE AND UNPAID. (ANNOTATION 24 A.L.R. 1502, 1505.)

THE CLAIMANT SURETY IN THIS CASE HAS SUBMITTED BRIEFS CITING THE LEADING COURT DECISIONS APPLYING THE PRINCIPLE OF SUBROGATION AND THESE BRIEFS AND THE CASES CITED THEREIN HAVE BEEN ACCORDED CAREFUL CONSIDERATION. THE MATTER WHICH THE CLAIMANT APPEARS TO HAVE OVERLOOKED IS, THAT NONE OF THESE CITED CASES INVOLVE THE PRECISE QUESTION WHICH ARISES FROM THE PRESENT CLAIMS BUT INVOLVE ONLY CLAIMS IN WHICH THE QUESTION OF PRIORITY TO HAVE DEBTS SATISFIED AROSE BETWEEN THE SURETY CLAIMING SUBROGATION AND SOME PRIVATE PERSON OR CORPORATION CREDITOR, WHEREAS THE QUESTION IN THE PRESENT CASE IS AS TO WHETHER UNDER THE LAWS OF THE UNITED STATES THE SURETY IS ENTITLED TO PRIORITY OVER THE UNITED STATES IN HAVING ITS DEBTS SATISFIED OUT OF THE ASSETS OF THE INSOLVENT OR BANKRUPT DEBTOR. QUESTION IS RAISED BY THIS OFFICE AS TO THE AUTHORITATIVE CORRECTNESS OF THE PRECEDENTS CITED BY THE CLAIMANT FOR THEY BUT DECLARE ELABORATELY WHAT IS SUCCINCTLY STATED IN THE CONTROLLING STATUTE, VIZ, SECTION 3468, REVISED STATUTES, WHICH, ALSO, IS DERIVED FROM THE CITED SECTION 65 OF THE ACT OF MARCH 2, 1799 (U.S.C. 31:193), AND PROVIDES, IN SO FAR AS IS HERE MATERIAL, THAT WHENEVER THE PRINCIPAL IN ANY BOND GIVEN TO THE UNITED STATES IS INSOLVENT, ANY SURETY ON SUCH INSOLVENT'S BOND WHO PAYS TO THE UNITED STATES THE MONEY DUE UPON SUCH BOND SHALL HAVE LIKE PRIORITY, FOR THE RECOVERY AND RECEIPT OF THE MONEY OUT OF THE ESTATE AND EFFECTS OF SUCH INSOLVENT, AS IS SECURED TO THE UNITED STATES, AND MAY BRING AND MAINTAIN A SUIT UPON THE BOND, IN LAW OR IN EQUITY, IN HIS OWN NAME, FOR THE RECOVERY OF ALL THE MONEYS PAID THEREON. THE SURETY WHO DISCHARGES THE OBLIGATION OWING TO THE UNITED STATES UPON SUCH BOND HAS BEEN RECOGNIZED TO HAVE THE SAME RIGHT OF PRIORITY TO RECOVER IN LIKE MANNER, TO THE EXTENT OF ITS NECESSARY LOSS SUFFERED IN DISCHARGING SUCH OBLIGATION.

THE GENERAL ACCOUNTING OFFICE, UNDER SECTION 236, REVISED STATUTES, AS AMENDED BY SECTION 305 OF THE ACT OF JUNE 10, 1921, 42 STAT. 624, HAS THE DUTY OF ENFORCING, ADMINISTRATIVELY, THE PRIORITY OF THE UNITED STATES UNDER THESE STATUTES AND, WHERE THERE IS NO INDEBTEDNESS DUE THE UNITED STATES REQUIRED TO BE SATISFIED OUT OF AMOUNTS OTHERWISE ESTABLISHED TO BE DUE AND PAYABLE TO THE SURETY ON AN INSOLVENT GOVERNMENT CONTRACTOR'S BOND, HAS RECOGNIZED AND APPLIED THE PRIORITY OF THE SURETY AND HAS AUTHORIZED PAYMENT TO THE SURETY OF THE SUM FOUND TO BE DUE IT ON SUCH BASIS. THE RIGHT OF THE GENERAL ACCOUNTING OFFICE TO MAKE SUCH A SET-OFF, IN GIVING EFFECT TO THE PRIORITY WHICH THE STATUTES THUS PRESCRIBE, IN FAVOR OF THE UNITED STATES AND/OR THE SURETIES, IS NOT AFFECTED BY AN ADJUDICATION IN BANKRUPTCY AS TO THE INSOLVENT DEBTOR, WHICH IS THE SITUATION HERE, FOR, SECTION 68 OF THE BANKRUPTCY ACT (ACT OF JULY 1, 1898, 30 STAT. 565,--- U.S.C. 11:108), PROVIDES THAT IN ALL CASES OF MUTUAL DEBT BETWEEN THE ESTATE OF A BANKRUPT AND A CREDITOR THE ACCOUNT SHALL BE STATED AND ONE DEBT SHALL BE SET OFF AGAINST THE OTHER AND THE BALANCE, ONLY, SHALL BE ALLOWED OR PAID IN THE BANKRUPTCY PROCEEDINGS. HAS BEEN DETERMINED REPEATEDLY THAT UNDER THIS SECTION THE CREDITOR HAS THE LEGAL RIGHT TO MAKE THE SET-OFF AND IF THE CREDITOR MISTAKES HIS LEGAL RIGHT IN THE MATTER AND/OR ACTS ON INCOMPETENT ADVICE AND PAYS THE ENTIRE AMOUNT OF HIS DEBT TO THE TRUSTEE, IT HAS BEEN HELD HE IS ENTITLED TO A RETURN OF THE MONEY SO PAID TO THE EXTENT HE WAS ENTITLED TO SET-OFF.

IT HAS NEVER BEEN HELD, HOWEVER, THAT BECAUSE THE CONGRESS HAS SUBROGATED SURETIES ON THE BONDS OF GOVERNMENT DEBTORS TO THE PRIORITY PRESCRIBED BY STATUTE IN FAVOR OF THE UNITED STATES THAT THIS PRIORITY OF THE SURETY IS PARAMOUNT TO THE PRIORITY OF THE UNITED STATES TO HAVE ITS DEBTS FIRST SATISFIED, FOR, AS WAS SAID BY THE SUPREME COURT OF THE STATE OF WASHINGTON IN THE LEADING CASE OF EXCHANGE NATIONAL BANK OF SPOKANE V. UNITED STATES, 147 WASH. 176, 265 P. 722, 62 A.L.R. 139, AFFIRMED 279 U.S. 80, 73 L.ED. 359, 49 S.CT. 321,"TO HOLD THAT EVERY DEBT IS NOT MADE JUNIOR TO DEBTS DUE THE UNITED STATES UNDER SECTION 3466, SUPRA, IS TO DO VIOLENCE TO STATUTORY CONSTRUCTION.'

IN THAT CASE, IT WAS DECIDED THAT THE CLAIM OF THE UNITED STATES FOR INCOME TAXES DUE FROM AN INSOLVENT CORPORATION, IN THE HANDS OF A RECEIVER APPOINTED BY THE STATE COURT, WAS PARAMOUNT TO THE CLAIM FOR TAXES OF THE STATE OR ANY OF ITS AGENCIES, WHERE THE FUNDS IN THE RECEIVER'S HANDS WERE INSUFFICIENT TO PAY BOTH CLAIMS IN FULL.

OF ALL THE CASES WHICH HAVE BEEN DECIDED JUDICIALLY, THE CASE OF UNITED STATES V. NATIONAL SURETY CO., 254 U.S. 73, 65 L.ED. 143, SEEMS MOST NEARLY IN POINT WITH THE PRESENT CASE. THAT CASE, DECIDED NOVEMBER 8, 1920, INVOLVED A BANKRUPT GOVERNMENT CONTRACTOR WHO HAD DEFAULTED ON HIS CONTRACT AND THE SURETY HAD PAID ITS FULL LIABILITY UNDER THE CONTRACTOR'S BOND OF $3,150. THE UNITED STATES HAD SUFFERED AN ADDITIONAL LOSS OF $13,000, BY REASON OF THE DEFAULT. BOTH THE CLAIM OF THE GOVERNMENT AND THAT OF THE SURETY WERE PROVED IN THE BANKRUPTCY PROCEEDINGS, THE NET ASSETS OF THE BANKRUPT IN THE HANDS OF THE TRUSTEE NOT BEING SUFFICIENT TO SATISFY EVEN THE CLAIM OF THE UNITED STATES IN FULL. THE SURETY CLAIMED THAT ITS PRIORITY UNDER THE CITED SECTION 3468, REVISED STATUTES, WAS EQUAL TO THE PRIORITY VESTED IN THE UNITED STATES BY THE CITED SECTION 3466, REVISED STATUTES, AND THAT, THEREFORE, IT WAS ENTITLED TO A SHARE IN THE DISTRIBUTION OF THE ESTATE, PRO RATA, ON AN EQUALITY WITH THE GOVERNMENT. THE UNITED STATES SUPREME COURT ENTIRELY REPUDIATED ANY SUCH THEORY OF THE LAW, RULING ON THAT POINT, AS FOLLOWS:

* * * THE PRIORITY SECURED TO THE UNITED STATES BY SECTION 3466 IS PRIORITY OVER ALL OTHER CREDITORS; THAT IS, PRIVATE PERSONS AND OTHER PUBLIC BODIES. THIS PRIORITY THE SURETY OBTAINS UPON DISCHARGING ITS OBLIGATION. BUT WHAT THE SURETY ASKS HERE IS NOT TO ENJOY LIKE PRIORITY OVER SUCH OTHER CREDITORS, BUT EQUALITY WITH THE UNITED STATES. * * * TO ACCORD SUCH EQUALITY WOULD ABRIDGE THE PRIORITY EXPRESSLY CONFERRED UPON THE GOVERNMENT. WHILE THE PRIORITY GIVEN THE SURETY BY THE STATUTE ATTACHES AS SOON AS THE OBLIGATION UPON THE BOND IS DISCHARGED, IT CAN NOT RIPEN INTO ENJOYMENT UNLESS OR UNTIL THE WHOLE DEBT DUE THE UNITED STATES IS SATISFIED. * * *

THIS CASE CONFORMS WITH THE ESTABLISHED RULE THAT A SURETY IS NOT ENTITLED TO BE SUBROGATED TO A PRIORITY OR PREFERENCE AGAINST THE INTEREST OF THE OBLIGEE. (ANNOTATION 24 A.L.R. 1516.)

NOT ONLY MUST DEBTS IN GENERAL OWING TO THE UNITED STATES BE SATISFIED UNDER SECTIONS 3466 AND 3467, REVISED STATUTES, AHEAD OF DEBTS OWING TO SURETIES OR OTHERS WHO MAY BE ENTITLED TO PRIORITY OF PAYMENT OUT OF ASSETS OF INSOLVENTS UNDER THE LAWS OF THE UNITED STATES, BUT, WHERE THE INSOLVENT DEBTOR IS IN BANKRUPTCY AND THE ASSETS OF THE BANKRUPT ARE ALL IN THE HANDS OF THE TRUSTEE AND NOT SUFFICIENT TO PAY FULLY THE DEBTORS ENTITLED TO PRIORITY, THE DEBT FOR TAXES DUE THE UNITED STATES IS REQUIRED TO BE SATISFIED EVEN AHEAD OF OTHER DEBTS OWING TO THE UNITED STATES, BY REASON OF SECTION 15 OF THE ACT OF MAY 27, 1926, 44 STAT. 666, AMENDING SECTION 64 OF THE BANKRUPTCY ACT AS FOLLOWS:

(A) THE COURT SHALL ORDER THE TRUSTEE TO PAY ALL TAXES LEGALLY DUE AND OWING BY THE BANKRUPT TO THE UNITED STATES, STATE, COUNTY, DISTRICT, OR MUNICIPALITY, IN THE ORDER OF PRIORITY AS SET OUT IN PARAGRAPH (B) HEREOF:

(B) THE DEBTS TO HAVE PRIORITY, IN ADVANCE OF THE PAYMENT OF DIVIDENDS TO CREDITORS, AND TO BE PAID IN FULL OUT OF BANKRUPT ESTATES, AND THE ORDER OF PAYMENT SHALL BE * * * (6) TAXES PAYABLE UNDER PARAGRAPH (A) HEREOF AND (7) DEBTS OWING TO ANY PERSON WHO BY THE LAWS OF THE STATES OR THE UNITED STATES IS ENTITLED TO PRIORITY: PROVIDED, THAT THE TERM "PERSON" AS USED IN THIS SECTION SHALL INCLUDE CORPORATIONS, THE UNITED STATES AND THE SEVERAL STATES AND TERRITORIES OF THE UNITED STATES. * * *

THERE ARE, ALSO, FOR CONSIDERATION IN THIS CONNECTION, THE PROVISIONS OF SECTION 3186, REVISED STATUTES, AS AMENDED (U.S.C. 26:115) CREATING A LIEN IN FAVOR OF THE UNITED STATES FOR ALL UNPAID TAXES.

EVERY SURETY WHO OBLIGATES ITSELF ON THE BOND OF A GOVERNMENT CONTRACTOR, CONTRACTS SUBJECT TO THE CITED SPECIFIC PROVISIONS OF STATUTORY LAW MAKING THE RIGHT OF THE SURETY TO PRIORITY, BY SUBROGATION, JUNIOR TO THE PRIORITY OF THE UNITED STATES TO HAVE ITS DEBTS SATISFIED FIRST OUT OF THE CONTRACTOR'S ASSETS, IF HE BECOMES INSOLVENT OR DIES, AND THESE PROVISIONS OF LAW ARE AS MUCH A PART OF THE CONTRACT SURETYSHIP AS IF EXPRESSLY EMBODIED THEREIN.

NOT ONLY, THEREFORE, HAS THE CLAIMANT SURETY IN THE PRESENT CASE FAILED TO ESTABLISH BEFORE THIS OFFICE THE EXACT EXTENT OF THE NET LOSS IT HAS NECESSARY SUSTAINED UNDER ITS SURETY OBLIGATION FOR WHICH IT MIGHT BE ENTITLED TO PRIORITY BY SUBROGATION, EXCEPT FOR THE DEBTS OWING TO THE UNITED STATES FOR TAXES, BUT, WERE THE NET LOSS WHICH HAS BEEN CLAIMED ACTUALLY ESTABLISHED, NO AMOUNTS EARNED BY THE PRINCIPAL CONTRACTOR PRIOR TO ITS DEFAULT COULD BE PAID TO THE SURETY, ON THE RECORD BEFORE THIS OFFICE, UNTIL ALL THE DEBTS OWING TO THE UNITED STATES FROM THE PRINCIPAL CONTRACTOR HAVE BEEN FULLY SATISFIED. THE SETTLEMENTS DISALLOWING THE CLAIMS ARE SUSTAINED.