A-4025/17), SEPTEMBER 23, 1935, 15 COMP. GEN. 238

A-4025/17): Sep 23, 1935

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CONTRACTS - REFORMATION - ADMINISTRATIVE OFFICERS OF THE GOVERNMENT ADMINISTRATIVE OFFICERS OF THE GOVERNMENT ARE WITHOUT AUTHORITY TO REFORM CONTRACTS UNDER WHICH THE UNITED STATES HAS OBTAINED VESTED RIGHTS. THE ADMINISTRATIVE OFFICE IS OF OPINION THAT A CONTRACT SHOULD BE ADJUSTED. AS FOLLOWS: RECEIPT IS ACKNOWLEDGED OF YOUR LETTER OF JULY 1. IN WHICH YOU STATE THAT YOU ARE OF THE OPINION THERE IS NO LEGAL BASIS FOR THE SURRENDER BY THE UNITED STATES OF ANY RIGHTS IT MAY HAVE AGAINST THE NATIONAL SURETY CORPORATION UNDER THE ASSUMPTION AGREEMENT OF AUGUST 8. I DESIRE TO CALL YOUR ATTENTION TO CERTAIN FACTS WHICH HAVE BEEN PERSUASIVE IN THE ADOPTION OF THE VIEW ENTERTAINED BY THE TREASURY CONCERNING THE ACTUAL INTENT OF THE PARTIES IN EXECUTING THIS AGREEMENT.

A-4025/17), SEPTEMBER 23, 1935, 15 COMP. GEN. 238

CONTRACTS - REFORMATION - ADMINISTRATIVE OFFICERS OF THE GOVERNMENT ADMINISTRATIVE OFFICERS OF THE GOVERNMENT ARE WITHOUT AUTHORITY TO REFORM CONTRACTS UNDER WHICH THE UNITED STATES HAS OBTAINED VESTED RIGHTS. THE ADMINISTRATIVE OFFICE IS OF OPINION THAT A CONTRACT SHOULD BE ADJUSTED, THE FACTS SHOULD BE SUBMITTED TO THE GENERAL ACCOUNTING OFFICE FOR CONSIDERATION AND ADJUSTMENT, IF ADJUSTMENT BE FOUND JUSTIFIED.

COMPTROLLER GENERAL MCCARL TO THE SECRETARY OF THE TREASURY, SEPTEMBER 23, 1935:

THERE HAS BEEN RECEIVED LETTER OF AUGUST 27, 1935, FROM THE GENERAL COUNSEL, TREASURY DEPARTMENT, AS FOLLOWS:

RECEIPT IS ACKNOWLEDGED OF YOUR LETTER OF JULY 1, 1935, ADDRESSED TO THE SECRETARY OF THE TREASURY, IN WHICH YOU ADVISE THAT THE CLAIM OF THE GOVERNMENT AGAINST THE R.F.B. MANUFACTURING COMPANY HAS BEEN DISCONTINUED ON YOUR RECORDS. WITH PARTICULAR REFERENCE TO THAT PART OF YOUR LETTER, IN WHICH YOU STATE THAT YOU ARE OF THE OPINION THERE IS NO LEGAL BASIS FOR THE SURRENDER BY THE UNITED STATES OF ANY RIGHTS IT MAY HAVE AGAINST THE NATIONAL SURETY CORPORATION UNDER THE ASSUMPTION AGREEMENT OF AUGUST 8, 1933, I DESIRE TO CALL YOUR ATTENTION TO CERTAIN FACTS WHICH HAVE BEEN PERSUASIVE IN THE ADOPTION OF THE VIEW ENTERTAINED BY THE TREASURY CONCERNING THE ACTUAL INTENT OF THE PARTIES IN EXECUTING THIS AGREEMENT. THE AGREEMENT STATES:

"THE NATIONAL SURETY CORPORATION HEREBY AGREES TO ASSUME AND IT DOES HEREBY ASSUME THE LIABILITY FOR ANY LOSSES AND CLAIMS THAT HAVE ARISEN * * * OR THAT MAY HEREAFTER ARISE UNDER OR IN CONNECTION WITH ANY BOND, CONTRACT, UNDERTAKING, OR OTHER FORM OF OBLIGATION ENTERED INTO AND ASSUMED BY THE NATIONAL SURETY COMPANY IN WHICH THE GOVERNMENT HAS OR MAY HAVE AN INTEREST, DIRECT OR INDIRECT, EXCEPT LIABILITY FOR ANY LOSSES OR CLAIMS * * * AS SET FORTH IN THE LIST WHICH IS ATTACHED HERETO.'

WHILE THIS LANGUAGE OF THE AGREEMENT STANDING ALONE INDICATES THAT THE NATIONAL SURETY CORPORATION (HEREINAFTER REFERRED TO AS THE "CORPORATION") INTENDED TO ASSUME THE LIABILITY ON ALL BONDS OF THE NATIONAL SURETY COMPANY (HEREINAFTER REFERRED TO AS THE "COMPANY"), EXCEPT THOSE SPECIFICALLY SET FORTH IN THE LIST ATTACHED THERETO, IT WAS UNDERSTOOD BY THE PARTIES THAT THIS LIST SHOULD CONTAIN ALL BONDS UPON WHICH CLAIMS HAD BEEN MADE BY THE GOVERNMENT PRIOR TO APRIL 30, 1933, OR NOTICE GIVEN PRIOR TO SAID DATE THAT CLAIMS WOULD BE MADE AGAINST THE COMPANY.

PRIOR TO THE EXECUTION OF THIS AGREEMENT, THE GOVERNMENT PREPARED AN AGREEMENT CONTAINING NO LIST OF EXCEPTED BONDS WHICH WAS TO BE EXECUTED BY THE CORPORATION AS A CONDITION PRECEDENT TO THE TREASURY'S APPROVAL OF THE CORPORATION AS AN ACCEPTED SURETY COMPANY UNDER THE ACT OF AUGUST 13, 1894. AT THE TIME OF THESE NEGOTIATIONS THE CORPORATION WAS OPERATING UNDER A TEMPORARY LICENSE.

THE CORPORATION REFUSED TO EXECUTE THIS AGREEMENT, AND FURNISHED THE TREASURY WITH A BRIEF IN SUPPORT OF ITS POSITION, ITS CHIEF CONTENTION BEING THAT SINCE NO CONSIDERATION HAD BEEN GIVEN TO THE CORPORATION BY THE INSURANCE COMMISSIONER OF NEW YORK ON BEHALF OF THE COMPANY, FOR THE ASSUMPTION OF THE LIABILITY OF BONDS UPON WHICH CLAIMS HAD BEEN MADE PRIOR TO APRIL 30, 1933, THE PURPOSE OF THE REORGANIZATION AND THE FORMATION OF A NEW CORPORATION MIGHT BE DEFEATED, IF THE CORPORATION SHOULD BE REQUIRED BY THE GOVERNMENT TO ASSUME THE LIABILITY ON ALL BONDS OF THE COMPANY. THE GOVERNMENT, BELIEVING THIS POSITION JUSTIFIED, PREPARED THE PRESENT AGREEMENT AND FORWARDED IT TO THE COMPANY JUST PRIOR TO THE TERMINATION OF THE TEMPORARY LICENSE REFERRED TO ABOVE. IT WAS, OF COURSE, NECESSARY FOR THE CORPORATION TO OBTAIN THE APPROVAL OF THE TREASURY IN ORDER FOR IT TO QUALIFY AS SOLE SURETY ON FEDERAL SURETY BONDS, AND FOR THIS REASON THE PRESENT AGREEMENT WAS EXECUTED BY THE CORPORATION IN GREAT HASTE AND RETURNED TO THE TREASURY. UPON THE RECEIPT OF THE AGREEMENT, THE CORPORATION WAS LICENSED BY THE TREASURY TO ACT AS SOLE SURETY PURSUANT TO THE SAID ACT OF AUGUST 13, 1894. THE EXECUTIVE DEPARTMENTS HAVING ADMINISTRATIVE CONTROL OVER THE BONDS CONTAINED IN THE EXCEPTED LIST ATTACHED TO THE AGREEMENT, WERE THEN NOTIFIED TO PROCURE NEW BONDS IN PROPER CASES.

AS A FURTHER INDICATION OF THE INTENT OF THE PARTIES, IT SHOULD BE NOTED THAT THE AGREEMENT OF AUGUST 8, 1933, HAS BEEN AMENDED FOUR TIMES TO CORRECT ERRORS CONCERNING THE EXCEPTED LIST THAT WERE MADE BY MUTUAL MISTAKE OF THE PARTIES. IN THREE OF THE AMENDMENTS BONDS WERE REMOVED FROM THE LIST ON THE GROUNDS THAT THEY HAD BEEN INCLUDED THEREIN THROUGH MISTAKE. THE CORPORATION INTENDED TO ASSUME THE LIABILITY ON THESE BONDS, AND THE GOVERNMENT ACQUIESCED IN THAT INTENT. THE OTHER AMENDMENT, HOWEVER, CONSTITUTED AN ADDITION TO THE LIST OF EXCEPTED BONDS ON THE GROUND THAT THE CLAIMS HAD BEEN MADE PRIOR TO APRIL 30, 1933, AND THAT FAILURE TO INCLUDE THAT BOND WAS DUE TO INADVERTENCE. SINCE THE MISTAKE WAS APPARENTLY MUTUAL, THE TREASURY FELT THAT THE AGREEMENT SHOULD BE REFORMED TO CONFORM TO THE INTENT OF THE PARTIES. IN VIEW OF THIS WELL- DEFINED INTENT, THE TREASURY IS OF THE OPINION THAT, AT LEAST IN SOME OF THE CASES NOW PRESENTED BY THE CORPORATION, THE AGREEMENT OF AUGUST 8, 1933, MIGHT BE SUBJECT TO REFORMATION, WHERE THE FACTS OF ANY CASE DISCLOSE THAT A MUTUAL MISTAKE, OF WHICH THE PARTIES NOW HAVE NOTICE, HAD PREVIOUSLY BEEN MADE.

IF THIS VIEW BE CORRECT, IT FOLLOWS THAT THE TREASURY IN AMENDING THE AGREEMENT WOULD NOT THEREBY BE SURRENDERING ANY RIGHTS THAT THE GOVERNMENT HAS AGAINST THE CORPORATION. IN ORDER THAT THE GOVERNMENT MIGHT BE IN A POSITION TO ASSERT ITS CLAIM AGAINST THE COMPANY IF ADDITIONAL BONDS ARE ADDED TO THE LIST OF EXCEPTIONS, THE TREASURY, THROUGH THE DEPARTMENT OF JUSTICE, FILED A BLANKET PROOF OF CLAIMS WITH THE LIQUIDATOR OF THE COMPANY ON MARCH 30, 1935, THE LAST DAY OF THE PERIOD DURING WHICH CLAIMS MIGHT BE FILED. THIS PROOF OF CLAIMS COVERS ALL OF THE BONDS WHICH THE CORPORATION CONTENDS SHOULD BE ADDED TO THE LIST OF EXCEPTIONS.

PRIOR TO THE FILING OF THIS PROOF OF CLAIMS, THE CORPORATION AGREED WITH THE GOVERNMENT THAT SUCH ACTION WOULD IN NO MANNER BE CONSIDERED AS A WAIVER BY THE GOVERNMENT OF ANY RIGHT OR CLAIM IT MIGHT HAVE AGAINST THE CORPORATION. (SEE THE AGREEMENT DATED MARCH 30, 1935, A COPY OF WHICH IS ATTACHED FOR YOUR CONVENIENCE.)

THE TREASURY HAS TAKEN THE VIEW THAT ALTHOUGH THERE HAS BEEN AN ALLEGED MISTAKE OF FACT CONCERNING CERTAIN BONDS, THE BURDEN OF PROOF OF SHOWING THIS MISTAKE CLEARLY RESTS WITH THE CORPORATION, AND THE TREASURY DOES NOT INTEND TO PERMIT THE ADDITION OF ANY BONDS TO THE LIST OF EXCEPTIONS, IN THE ABSENCE OF CLEAR AND UNEQUIVOCABLE EVIDENCE SUSTAINING THE CONTENTION OF THE CORPORATION, NOR DOES THE TREASURY INTEND TO GRANT ANY FAVORS TO THE CORPORATION OR TO PERMIT IT TO AMEND THE AGREEMENT, IF THE GOVERNMENT'S POSITION HAS IN FACT BEEN ALTERED BY VIRTUE OF THE MISTAKE.

IT WAS FOR THE PURPOSE OF ASCERTAINING THE TRUTH OF THE ALLEGATIONS OF CORPORATION THAT THE TREASURY'S LETTER OF MAY 8, 1935, WAS ADDRESSED TO YOU. SIMILAR LETTERS WERE ADDRESSED TO THE HEADS OF EXECUTIVE DEPARTMENTS HAVING ADMINISTRATIVE CONTROL OVER VARIOUS OTHER BONDS. UPON RECEIPT OF ANSWERS TO THESE INQUIRIES, THE TREASURY FEELS THAT IT WILL BE IN POSITION TO DETERMINE WHETHER THE CORPORATION HAS MAINTAINED THE BURDEN OF PROOF ABOVE REFERRED TO, OR THE GOVERNMENT'S POSITION HAS BEEN ALTERED.

WITHOUT REPEATING AT LENGTH THE STATEMENTS MADE IN MY LETTER OF JULY 1, 1935, IT SEEMS SUFFICIENT TO SAY THAT ADMINISTRATIVE OFFICERS OF THE GOVERNMENT ARE WITHOUT AUTHORITY TO REFORM CONTRACTS UNDER WHICH THE UNITED STATES HAS OBTAINED VESTED RIGHTS AS IN THE INSTANT CASE. REFORMATION OF CONTRACTS IS A JUDICIAL, AND NOT AN ADMINISTRATIVE FUNCTION, AND MAY BE EFFECTED ONLY WHEN THE ESTABLISHED FACTS FULLY JUSTIFY SUCH ACTION. SEE HYGIENIC FIBRE CO. V. UNITED STATES, 59 CT.CLS. 892, AND AMERICAN SALES CO. CASE, 27 FED./2D) 389, AFFIRMED 32 ID. 141, AND CERTIORARI DENIED, 280 U.S. 574. WITH RESPECT TO OBLIGATIONS OF, AND THOSE IN FAVOR OF, THE UNITED STATES, HOWEVER, THE JURISDICTION BEING IN THE ACCOUNTING OFFICERS OF THE GOVERNMENT TO MAKE FINAL SETTLEMENT, THE PROCEDURE HAS LONG BEEN AND OPERATES TO SAVE THE COST AND DELAY OF LITIGATION, ON SUBMISSION TO THEM OF THE FACTS FULLY JUSTIFYING, TO AUTHORIZE ADJUSTMENTS HAVING LIKE EFFECT.

UNDER THE AGREEMENT OF AUGUST 8, 1933, THE NATIONAL SURETY CORPORATION AGREED TO, AND DID, ASSUME THE OBLIGATION OF THE NATIONAL SURETY CO. WITH THE EXCEPTION OF THE BONDS REFERRED TO IN THE LIST ATTACHED TO AND MADE A PART OF SAID AGREEMENT, AND THERE APPEARS NOTHING THEREIN SUGGESTING THAT THE LIST AS ATTACHED THERETO WAS IN ANY MANNER TENTATIVE AND SUBJECT TO CHANGE. HOWEVER, SHOULD IT BE ADMINISTRATIVELY BELIEVED THAT SAID AGREEMENT SHOULD BE ADJUSTED IN ANY CASE TO INCLUDE OR EXCLUDE OTHER BONDS, THE FACTS SHOULD BE SUBMITTED TO THIS OFFICE FOR CONSIDERATION WITH RESPECT THERETO AND SUCH ACTION AS MAY BE AUTHORIZED BY THE LAW AND THE FACTS.