A-67969, OCTOBER 1, 1938, 18 COMP. GEN. 301

A-67969: Oct 1, 1938

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WHERE A TRUSTEE IN BANKRUPTCY OF A BANKRUPT AND DEFAULTING CONTRACTOR ENTERS INTO A SUPPLEMENTAL AGREEMENT WITH ADMINISTRATIVE OFFICIALS UNDER THE TERMS OF WHICH IT IS AGREED THAT THE COMPLETING SURETY SHALL COMPLETE THE CONTRACT AND FOR SO DOING SHALL NOT ONLY RECEIVE PAYMENT AT THE ORIGINAL CONTRACT RATE FOR WORK PERFORMED BY IT BUT ALSO SHALL RECEIVE RETAINED PERCENTAGES REPRESENTING MONEYS EARNED BY THE CONTRACTOR PRIOR TO DEFAULT (THE SURETY CONSENTING TO THE AGREEMENT). WAS MERELY PERFORMING ITS EXISTING BONDED OBLIGATION AND AN AGREEMENT TO PAY ADDITIONAL COMPENSATION THEREFOR WAS VOID FOR WANT OF CONSIDERATION. RETAINED PERCENTAGES REPRESENTING MONEYS EARNED BY A CONTRACTOR PRIOR TO ITS BANKRUPTCY AND ATTENDANT CONTRACT DEFAULT ARE NOT FOR DISTRIBUTION AS PART OF BANKRUPT'S ESTATE IN ACCORDANCE WITH PRIORITIES LISTED IN BANKRUPTCY ACT.

A-67969, OCTOBER 1, 1938, 18 COMP. GEN. 301

CONTRACTS - DEFAULT - RETAINED PERCENTAGES - INVALIDITY OF SUPPLEMENTAL AGREEMENT FOR PAYMENTS TO COMPLETING SURETY; GOVERNMENT RIGHT OF SET OFF; LIENS OF LABORERS AND MATERIALMEN; ETC. WHERE A TRUSTEE IN BANKRUPTCY OF A BANKRUPT AND DEFAULTING CONTRACTOR ENTERS INTO A SUPPLEMENTAL AGREEMENT WITH ADMINISTRATIVE OFFICIALS UNDER THE TERMS OF WHICH IT IS AGREED THAT THE COMPLETING SURETY SHALL COMPLETE THE CONTRACT AND FOR SO DOING SHALL NOT ONLY RECEIVE PAYMENT AT THE ORIGINAL CONTRACT RATE FOR WORK PERFORMED BY IT BUT ALSO SHALL RECEIVE RETAINED PERCENTAGES REPRESENTING MONEYS EARNED BY THE CONTRACTOR PRIOR TO DEFAULT (THE SURETY CONSENTING TO THE AGREEMENT), THE SURETY IN COMPLETING THE CONTRACT, WAS MERELY PERFORMING ITS EXISTING BONDED OBLIGATION AND AN AGREEMENT TO PAY ADDITIONAL COMPENSATION THEREFOR WAS VOID FOR WANT OF CONSIDERATION, AS CONTRARY TO PUBLIC POLICY, AND AS BEING MADE BY ADMINISTRATIVE OFFICIALS WHO ACTED WITHOUT AUTHORITY. RETAINED PERCENTAGES REPRESENTING MONEYS EARNED BY A CONTRACTOR PRIOR TO ITS BANKRUPTCY AND ATTENDANT CONTRACT DEFAULT ARE NOT FOR DISTRIBUTION AS PART OF BANKRUPT'S ESTATE IN ACCORDANCE WITH PRIORITIES LISTED IN BANKRUPTCY ACT, BUT ARE FOR SET-OFF, PURSUANT TO THE MUTUAL DEBTS AND CREDITS PROVISION OF THE BANKRUPTCY ACT, AGAINST INDEBTEDNESS TO THE UNITED STATES OF SAID CONTRACTOR ARISING UNDER OTHER DEFAULTED CONTRACTS EVEN THOUGH SAID INDEBTEDNESS WAS UNLIQUIDATED AT TIME OF BANKRUPTCY, EXCEPT AS SUCH RETAINED PERCENTAGE ARE IMPRESSED WITH VALID LIENS (AS IN FAVOR OF UNPAID LABORERS AND MATERIALMEN), IN WHICH INSTANCE THESE FUNDS TO THE EXTENT OF SUCH LIENS DO NOT PASS TO THE TRUSTEE OF THE BANKRUPT'S ESTATE AND, THEREFORE, ARE NOT FOR DISTRIBUTION AS A PART OF SAID ESTATE. RETAINED PERCENTAGES EARNED BY CONTRACTOR PRIOR TO DEFAULT MAY NOT BE PAID TO A COMPLETING SURETY ON THE THEORY THAT UNPAID LABORERS AND MATERIALMEN HAD AN EQUITABLE LIEN THEREIN AND THAT SAID SURETY BY VIRTUE OF HAVING PAID THE CLAIMS OF THESE LABORERS AND MATERIALMEN WAS SUBROGATED TO THEIR RIGHTS TO THE FUND, IT NOT BEING ESTABLISHED THAT EQUITABLE LIENS OF THIS NATURE ARE SUPERIOR TO PRIORITIES ENJOYED BY THE UNITED STATES UNDER REVISED STATUTES 3466, AND ACCOUNTING OFFICERS OF THE GOVERNMENT BEING PRECLUDED FROM GIVING EFFECT TO EQUITABLE LIENS, OR MAKING PAYMENTS IN ACCORDANCE THEREWITH, EQUITABLE LIENS BEING SUCH AS EXIST IN EQUITY AND OF WHICH COURTS OF EQUITY ALONE TAKE COGNIZANCE.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE UNITED STATES FIDELITY AND GUARANTY COMPANY, OCTOBER 1, 1938:

THERE HAS BEEN EXAMINED YOUR CLAIM FOR $11,785.99 BALANCE OF RETAINED PERCENTAGES UNDER CONTRACT NO. W-272-ENG-187 DATED NOVEMBER 19, 1932, BETWEEN UNITED STATES AND THE CONSTRUCTION MATERIALS CORPORATION.

THE PROPER SETTLEMENT OF YOUR CLAIM RESTS LARGELY UPON AN ACCURATE DETERMINATION OF WHETHER THESE RETAINED PERCENTAGES, REPRESENTING MONEYS EARNED BY THE CONSTRUCTION MATERIALS CORPORATION PRIOR TO ITS BANKRUPTCY AND ATTENDING DEFAULT, MAY BE PAID TO YOU AS COMPLETING SURETY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED APRIL 16, 1934, SUPPLEMENTAL TO THE PRINCIPAL CONTRACT AND, IF NOT, WHETHER THEY MAY BE PAID TO YOU THROUGH PROPER APPLICATION OF THE DOCTRINE OF SUBROGATION, OR OTHERWISE.

THE FACTS PERTINENT TO THE CONTROVERSY ARE THESE:

UNDER THE TERMS OF THE CITED CONTRACT THE CONSTRUCTION MATERIALS CORPORATION AGREED TO PERFORM CERTAIN DREDGING WORK NECESSARY TO DEEPEN BALLARD'S REEF CHANNEL IN THE DETROIT RIVER; ALSO TO CONSTRUCT APPROXIMATELY 6,800 LINEAL FEET OF COMPENSATING DYKE. ON OR ABOUT JANUARY 18, 1934, AND WHEN THE CONTRACT WORK WAS ONLY PARTIALLY COMPLETE, THE CONTRACTOR WENT INTO RECEIVERSHIP AND THE TRUSTEES IN BANKRUPTCY THEREAFTER GAVE NOTICE OF FINANCIAL INABILITY TO COMPLETE THE WORK. UPON RECEIPT OF THIS NOTICE THE DISTRICT ENGINEER'S OFFICE BY LETTER OF MARCH 13, 1934, TERMINATED THE CONTRACTOR'S RIGHT TO PROCEED, NOTIFIED YOU, AS SURETY, OF THE ACTION THUS TAKEN, AND REQUESTED INFORMATION AS TO WHETHER YOU WISHED TO TAKE OVER THE WORK AND PROSECUTE IT TO COMPLETION. LETTER OF MARCH 18, 1934, YOU REPLIED THAT YOU "HEREBY ELECT AS SURETY TO COMPLETE SAID CONTRACT" BUT THAT "THIS ACTION ON OUR PART TO COMPLETE SAID CONTRACT IS BASED ON THE CONDITION THAT THE UNITED STATES GOVERNMENT WILL ENTER INTO A SUPPLEMENTAL AGREEMENT WITH US STIPULATING THAT ALL MONEYS EARNED AND TO BE EARNED ON SAID CONTRACT WILL BE PAID TO US AS PER THE TERMS THEREOF.' AT THE TIME OF DEFAULT BY THE CONSTRUCTION MATERIALS CORPORATION THERE HAD BEEN DEDUCTED AND RETAINED BY THE UNITED STATES, IN MAKING PAYMENTS TO THE COMPANY OF AMOUNTS OTHERWISE EARNED AND DUE, A TOTAL OF $13,269.46, AND IT WAS THIS FUND TO WHICH THE ABOVE CONDITION APPARENTLY REFERRED--- AND TO WHICH THE PRESENT CLAIM RELATES.

ON APRIL 16, 1934, A SO-CALLED SUPPLEMENTAL AGREEMENT WAS ACCORDINGLY CONSUMMATED BETWEEN WAR DEPARTMENT OFFICIALS AND THE TRUSTEES IN BANKRUPTCY OF THE PRINCIPAL CONTRACTOR IN WHICH--- AFTER RECITING THAT THE SURETY "IS DESIROUS OF ASSUMING THE COMPLETING OF THE AFORESAID CONTRACT FOR ITS OWN PROTECTION"--- IT WAS AGREED THAT THE SURETY SHOULD COMPLETE THE CONTRACT WORK, RECEIVE PAYMENTS AS AUTHORIZED THEREIN AND, IN ADDITION,"THAT ANY AMOUNTS HERETOFORE RETAINED FROM PAYMENTS MADE TO THE CONTRACTOR SHALL BE PAID TO SAID SURETY AFTER DEDUCTING THEREFROM THE AMOUNT OF ANY DAMAGES SUFFERED BY THE UNITED STATES.' ATTACHED TO THIS AGREEMENT IS A "CONSENT OF SURETY" BY WHICH YOU GAVE "FULL CONSENT TO THE ATTACHED SUPPLEMENTARY ARTICLES OF AGREEMENT.'

IF THIS SO-CALLED "SUPPLEMENTARY AGREEMENT" IS VALID AND BINDING UPON ALL PARTIES IN INTEREST, THE RETAINED PERCENTAGES IN QUESTION ARE OF COURSE FOR PAYMENT TO YOU; IF ON THE OTHER HAND THIS AGREEMENT IS OF NO EFFECT, THEN THE MONEY IS FOR DISPOSITION WITHOUT REGARD THERETO, AND IN ACCORDANCE WITH THE GENERAL LAW APPLICABLE TO SUCH RETAINED FUNDS.

AS SURETY UNDER THE PERFORMANCE BOND YOU WERE OBLIGATED TO THE EXTENT OF $490,084 TO PROTECT THE UNITED STATES AGAINST LOSS RESULTING FROM FAILURE OF THE ORIGINAL CONTRACTOR TO CONFORM TO THE TERMS OF THE CONTRACT AND COMPLETE THE WORK IN ACCORDANCE THEREWITH. UPON BANKRUPTCY AND DEFAULT OF THE CONSTRUCTION MATERIALS CORPORATION, YOUR INTERESTS AND RESPONSIBILITIES PROBABLY WERE AFFECTED, BECAUSE THE PROTECTION AFFORDED TO THE GOVERNMENT BY YOUR BOND WAS THEN CALLED DIRECTLY INTO PLAY. BEFORE ARRANGING FOR COMPLETION OF THE WORK BY A NEW CONTRACTOR, THE GOVERNMENT, THEREFORE, RECOGNIZING YOUR INTEREST IN THE MATTER, PROVIDED YOU WITH OPPORTUNITY TO ELECT BETWEEN SATISFYING YOUR BONDED OBLIGATION BY COMPLETING THE WORK YOURSELF OR THROUGH A CONTRACTOR OF YOUR OWN CHOOSING; OR OF ASSUMING TO THE EXTENT OF YOUR BOND THE EXCESS COSTS WHICH MIGHT RESULT FROM THE GOVERNMENT SECURING A COMPLETION OF THE WORK ELSEWHERE. THIS ELECTION WAS FOR YOUR BENEFIT; NOT FOR BENEFIT OF THE UNITED STATES. THERE IS NO EVIDENCE WHATEVER THAT IF THE UNITED STATES HAD SECURED COMPLETION OF THE WORK THROUGH A CONTRACTOR OF ITS SELECTION AFTER COMPETITIVE BIDDING THAT THE EXCESS COSTS WOULD HAVE BEEN GREATER THAN YOUR BONDED LIABILITY NOR THAT THE WORK WOULD HAVE BEEN DONE LESS EXPEDITIOUSLY. AS A MATTER OF FACT, THERE IS NOTHING TO INDICATE THAT THE INTERESTS OF THE UNITED STATES, FINANCIALLY OR OTHERWISE, WERE BETTER SERVED BY COMPLETION OF THE WORK THROUGH YOU THAN THEY WOULD HAVE BEEN HAD THE UNITED STATES SECURED COMPLETION ELSEWHERE IN THE REGULAR MANNER. ACCORDING TO THE PRECISE TERMS OF THE SO-CALLED SUPPLEMENTAL AGREEMENT TO WHICH YOU CONSENTED, YOU ELECTED TO COMPLETE THE WORK FOR YOUR "OWN PROTECTION" INSTEAD OF THE UNITED STATES HAVING IT DONE ELSEWHERE.

IN SPITE OF THESE FACTS, HOWEVER, IT WAS AGREED UNDER THE TERMS OF THE SUPPLEMENTAL AGREEMENT THAT FOR COMPLETING THE WORK YOU SHOULD RECEIVE NOT ONLY THE AMOUNT WHICH THE UNITED STATES HAD AGREED TO PAY THE CONTRACTOR, WHOSE PLACE YOU WERE TAKING, BUT ALSO AND IN ADDITION THE RETAINED PERCENTAGES PREVIOUSLY EARNED BY THE CONTRACTOR AMOUNTING TO $13,269.46. IN THE ABSENCE OF THIS SUPPLEMENTAL AGREEMENT YOU HAD AT BEST, SO FAR AS THESE RETAINED PERCENTAGES WERE CONCERNED, A MERE POSSIBLE, VAGUE AND CONDITIONAL RIGHT TO PRIORITY OR SUBROGATION NOT PRESENTLY PERFECT OR ENFORCEABLE--- AND WHICH MIGHT NEVER BECOME ENFORCEABLE. THUS YOU WERE TO RECEIVE AS A SORT OF ,BONUS" OR "GRATUITY" THE DIFFERENCE IN VALUE BETWEEN THIS UNCERTAIN RIGHT (IF INDEED IT MAY PROPERLY BE CALLED A RIGHT), AND A PRESENTLY SUBSISTING TITLE TO THE FUND, MERELY FOR PERFORMING AN OBLIGATION WHICH YOU WERE ALREADY REQUIRED TO PERFORM ANYWAY. IN RETURN FOR THIS ADDITIONAL COMPENSATION THE UNITED STATES RECEIVED NO ADDITIONAL RIGHTS OR BENEFITS NOT COVERED BY YOUR BOND. THAT YOU ELECTED TO PERFORM YOUR OBLIGATION IN A MANNER WHICH IN YOUR JUDGMENT WOULD BEST PROTECT YOUR INTERESTS CERTAINLY CANNOT SERVE AS CONSIDERATION TO SUPPORT ADDITIONAL PAYMENTS TO YOU.

AN AGREEMENT TO PAY A SURETY AN ADDITIONAL AMOUNT FOR MERELY PERFORMING AN OBLIGATION WHICH IT HAD ALREADY ASSUMED UNDER ITS BOND WOULD APPEAR TO BE VOID BOTH FOR WANT OF CONSIDERATION AND AS BEING CONTRARY TO PUBLIC POLICY. J. J. PREIS AND COMPANY V. UNITED STATES, 58 CT.CLS. 81, 86; VULCANITE CEMENT COMPANY V. UNITED STATES, 74 CT. CLS. 692, 705. FURTHERMORE "IT NEEDS NO RGUMENT" SAID THE COURT IN THE LAST CITED CASE TO SHOW THAT NO OFFICER OF THE UNITED STATES HAS ANY AUTHORITY "TO MAKE A CONTRACT ON BEHALF OF THE GOVERNMENT FOR WHICH IT RECEIVED NO BENEFIT OR CONSIDERATION.' SEE, ALSO, ALASKA PACKERS ASSOCIATION V. DOMENICO, ET AL., 117 FED. 99.

THE VALIDITY OF THE ARRANGEMENT IS ALSO OPEN TO QUESTION UPON ANOTHER GROUND. IN ORDINARY CIRCUMSTANCES AND IN THE ABSENCE OF ANY SUPPLEMENTAL AGREEMENT OR QUESTION OF COLLATERAL INDEBTEDNESS TO THE UNITED STATES UNDER OTHER CONTRACTS, YOU WERE NOT ENTITLED UNDER THE DOCTRINE OF SUBROGATION, OR OTHERWISE, TO RECEIVE THE RETAINED PERCENTAGES IN QUESTION EVEN IN A COURT OF EQUITY UNLESS AND UNTIL IT WAS ESTABLISHED THAT THE COST TO YOU OF COMPLETING THE WORK EXCEEDED THE AMOUNT WHICH THE UNITED STATES HAD AGREED TO PAY THEREFOR UNDER THE TERMS OF THE ORIGINAL CONTRACT, AND THAT ALL LABORERS AND MATERIALMEN HAD BEEN FULLY PAID. AMERICAN SURETY COMPANY V. ELECTRIC COMPANY, 296 U.S. 133. AT THE VERY OUTSET, THEREFORE, IT IS TO BE NOTED THAT THE NET EFFECT OF THE SUPPLEMENTAL AGREEMENT, IF ANY, WOULD BE THE DEFEAT OF PRIORITIES WHICH OTHERWISE ARE ESTABLISHED UNDER THE LAW. THIS FACTOR ALONE RAISES GRAVE DOUBT AS TO THE VALIDITY OF THE AGREEMENT FROM THE STANDPOINT OF PUBLIC POLICY. NOR CAN THIS DOUBT BE CURED BY A SHOWING THAT A LOSS WAS IN FACT SUSTAINED BY THE SURETY IN COMPLETING THIS AGREEMENT AND THAT ALL LABORERS AND MATERIALMEN HAVE BEEN PAID. IT IS THE TENDENCY AND CHARACTER OF AN AGREEMENT AND NOT THE ACTUAL RESULTS WHICH FLOW FROM IT WHICH ARE CONTROLLING WHERE A QUESTION OF PUBLIC POLICY IS INVOLVED. MCMULLEN V. HOFFMAN, 174 U.S. 639, 647; WEIL V. NEARY, 278 U.S. 160, 173.

IT IS ALSO QUESTIONABLE WHETHER THE TRUSTEES OF THE BANKRUPT'S ESTATE WERE POSSESSED OF AUTHORITY TO ENTER INTO AN AGREEMENT BY THE TERMS OF WHICH THE BANKRUPT'S ASSETS WERE RELEASED TO THE SURETY.

UNDER THE FACTS HERE PRESENT IT MUST BE HELD THAT THE RECORD FAILS TO DISCLOSE EVIDENCE WILL WILL SUPPORT THE CONCLUSION THAT THE CONTRACT IN QUESTION IS VALID AND BINDING. ACCORDINGLY, THE RETAINED PERCENTAGES HERE IN QUESTION ARE FOR DISPOSITION WITHOUT REGARD TO THE PROVISIONS OF THIS SUPPLEMENTAL AGREEMENT AND IN ACCORDANCE WITH THE USUAL PROCEDURE GOVERNING THE DISTRIBUTION OF SUCH FUNDS.

THE CONTRACTOR'S DEFAULT, AS PREVIOUSLY NOTED, WAS CAUSED BY ITS BANKRUPTCY. THIS NOT ONLY CAUSED DEFAULT UNDER THE CONTRACT IN QUESTION BUT ALSO UNDER CERTAIN OTHER CONTRACTS THEN IN PROCESS OF PERFORMANCE BETWEEN THE CONSTRUCTION MATERIALS CORPORATION AND THE UNITED STATES. THE COMPLETION OF THESE OTHER AGREEMENTS INCREASED COSTS, ETC., WERE INCURRED WHICH RESULTED IN AN INDEBTEDNESS TO THE UNITED STATES BY THE CONTRACTOR GREATLY IN EXCESS OF THE RETAINED PERCENTAGES HERE UNDER DISCUSSION. TO THE EXTENT THAT THESE RETAINED PERCENTAGES WERE AN ASSET OF THE CONTRACTOR'S ESTATE AT THE TIME OF BANKRUPTCY, THEY OF COURSE REPRESENTED A DEBT DUE IT FROM THE UNITED STATES. SINCE MUTUAL DEBTS AND CREDITS THUS EXISTED THERE ARE FOR APPLICATION THE PROVISIONS OF SECTION 68 OF THE BANKRUPTCY ACT (11 U.S.C. 108) WHICH PROVIDES:

IN ALL CASES OF MUTUAL DEBTS OR MUTUAL CREDITS 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.

NOR CAN IT BE SUCCESSFULLY CONTENDED THAT THIS PROVISION DOES NOT COVER MUTUAL DEBTS AND CREDITS OF THE TYPE HERE INVOLVED. IT IS WELL SETTLED THAT BANKRUPTCY PROCEEDINGS AMOUNT TO AN ANTICIPATORY BREACH OF AN EXECUTORY CONTRACT AND THAT DAMAGES, THOUGH UNLIQUIDATED, ARISING OUT OF SUCH BREACH MAY BE PROVED AGAINST THE BANKRUPT'S ESTATE (CENTRAL TRUST COMPANY OF ILLINOIS V. CHICAGO AUDITORIUM ASSOCIATION, 240 U.S. 581; IN RE BISSENGER COMPANY, 5 F./2D) 106, 113), AND MAY, WHEN LIQUIDATED, BECOME THE SUBJECT OF SET-OFF. MORGAN V. WORDELL, 178 MASS. 350, 354-5.

TO THE EXTENT, IF ANY, THAT THIS FUND WAS IMPRESSED WITH VALID LIENS (IN FAVOR OF LABORERS, MATERIALMEN, ETC.) CREATED MORE THAN FOUR MONTHS PRIOR TO BANKRUPTCY, IT WAS NOT A PART OF THE BANKRUPT'S ESTATE AND WAS UNAFFECTED BY THE BANKRUPTCY; FOR THE TRUSTEE TAKES THE PROPERTY OF A BANKRUPT SUBJECT TO ALL LIENS WHICH WOULD HAVE BEEN ENFORCEABLE AGAINST IT IN THE HANDS OF THE BANKRUPT HIMSELF. HURLEY, TRUSTEE V. ATCHISON, TOPEKA AND SANTA FE RAILWAY, 213 U.S. 126; UNITED STATES FIDELITY AND GUARANTY COMPANY V. SWEENEY, 80 F./2D) 235. "THE BANKRUPT ESTATE DOES NOT CONSIST, AS A PART THEREOF, OF THE ENTIRE VALUE OF THE PROPERTY UPON WHICH THERE IS A VALID LIEN, BUT ONLY THE EQUITY IN SUCH PROPERTY," AND OF COURSE IT IS ONLY THE BANKRUPT'S ESTATE WHICH IS FOR DISTRIBUTION IN ACCORDANCE WITH THE PRIORITIES OUTLINED IN SECTION 64 OF THE BANKRUPTCY ACT. IN RE DUBLIN VENEER CO., 1 F.SUP. 313.

SO FAR AS THESE RETAINED PERCENTAGES ARE CONCERNED, THEREFORE, IT IS UNNECESSARY TO CONSIDER THE QUESTION RAISED IN YOUR BRIEF OF THE PRIORITY OF DEBTS UNDER THE BANKRUPTCY ACT (11 U.S.C. 104), BECAUSE TO THE EXTENT THAT THIS FUND REPRESENTS AN ASSET OF THE BANKRUPT'S ESTATE IT IS ABSORBED AND ELIMINATED BY PROGRESS OF SET-OFF UNDER AUTHORITY OF SECTION 68 OF THE ACT, SUPRA. IT FOLLOWS THAT THE ONLY PRIORITIES RESPECTING THIS FUND WHICH ARE FOR CONSIDERATION ARE THOSE WHICH EXIST WITHOUT REFERENCE TO THE BANKRUPTCY ACT.

SURETIES ON BONDS OF INSOLVENT GOVERNMENT CONTRACTORS HAVE BEEN GIVEN CERTAIN PRIORITIES BY STATUTE (REVISED STATUTES 3468), BUT THEY ARE NOT OF SUCH NATURE AS TO OCCUPY A PREFERRED STATUS WHEN COMPARED WITH DEBTS OWING BY SAID CONTRACTORS OF THE UNITED STATES (REVISED STATUTES 3466). STATED BY THE FORMER COMPTROLLER GENERAL IN DECISION OF DECEMBER 12, 1931 (11 COMP. GEN. 224, 230):

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 F. 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.' SEE, ALSO, UNITED STATES V. NATIONAL SURETY COMPANY, 254 U.S. 73.

ASIDE FROM THE ABOVE, HOWEVER, YOU CONTEND THAT YOU ARE ENTITLED TO THIS FUND ON THE THEORY THAT YOU HAVE PAID THE CLAIMS OF ALL LABORERS AND MATERIALMEN AND ARE, THEREFORE, SUBROGATED TO THEIR RIGHTS. IT APPEARS TO BE YOUR VIEW IN THIS CONNECTION THAT (1) THE LABORERS AND MATERIALMEN HAD AN EQUITABLE LIEN ON THE RETAINED PERCENTAGES; (2) THAT A SURETY WHO PAYS LABOR AND MATERIAL CLAIMS BECOMES POSSESSED OF THIS LIEN BY SUBROGATION; AND (3) THAT THIS LIEN IS SUPERIOR TO THE RIGHT OF PRIORITY ENJOYED BY THE UNITED STATES UNDER SECTION 3466, REVISED STATUTES (31 U.S.C. 191).

TO ESTABLISH THE FIRST PROPOSITION YOU CITE PHILADELPHIA NATIONAL BANK, ET AL. V. MCKINLEY, 72 F./2D) 89. IT IS TRUE THAT THERE WAS DICTUM IN THAT CASE TO THE EFFECT THAT "IRRESPECTIVE OF THE STATUTORY BOND, THOSE PERSONS WHO FURNISH LABOR AND DO WORK ON A GOVERNMENT PROJECT HAVE AN EQUITABLE LIEN ON THE FUND" (RETAINED PERCENTAGES). IN SUPPORT OF THIS STATEMENT THE COURT CITES A SINGLE CASE--- BELKNAP MANUFACTURING CO. V. OHIO RAILWAY CO., 271 FED. 144. THE COURT HELD IN THE BELKNAP CASE THAT UNDER THE FACTS THERE PRESENT LABORERS AND MATERIALMEN WERE "ENTITLED TO PRIORITY IN THE DISTRIBUTION OF THE FUND IN THE RECEIVER'S HANDS, AS AGAINST OTHER CREDITORS.' SINCE THE UNITED STATES IS NOT SHOWN TO HAVE BEEN A CREDITOR IN THAT CASE IT CAN HARDLY BE CONCLUDED THAT THE COURT INTENDED TO LAY DOWN A RULE THAT SUCH LABORERS AND MATERIALMEN EVEN HAD A PRIORITY (MUCH LESS A LIEN) SUPERIOR TO THAT EXPRESSLY GRANTED TO THE GOVERNMENT BY STATUTE. AS STATED BY THE SUPREME COURT IN AMERICAN SURETY COMPANY V. ELECTRIC COMPANY, SUPRA, AT PAGE 139, ,SLIGHT DIFFERENCES IN THE FACTS CAUSE THE EQUITIES TO VARY, AND THUS VARY THE RESULT.'

BUT EVEN IF IT BE CONCEDED THAT LABORERS AND MATERIALMEN HAVE AN EQUITABLE LIEN ON THE RETAINED PERCENTAGES UNDER THE FACTS HERE PRESENT, AND THAT YOU AS SURETY ARE IN POSSESSION OF THAT LIEN BY SUBROGATION OR OTHERWISE, IT DOES NOT FOLLOW AS A COROLLARY THAT THE GOVERNMENT'S RIGHT OF PRIORITY IS SUBORDINATE TO THIS EQUITABLE LIEN. WHILE THE PRIORITY OF THE UNITED STATES IS ADMITTEDLY NOT A LIEN (UNITED STATES V. OKLAHOMA, 261 U.S. 253, 259), YET NOT ALL LIENS ARE SUPERIOR TO IT.

IN SUPPORT OF YOUR CONTENTION THAT "THE GOVERNMENT'S RIGHT IS SUBORDINATE TO AN EQUITABLE LIEN" IN THE PRESENT CASE YOU CITE BRENT V. BANK OF WASHINGTON, 10 PETERS 596. IN THAT CASE THERE WAS INVOLVED NOT AN EQUITABLE LIEN BUT ONE OF A LEGAL NATURE. AS STATED BY THE COURT AT PAGE 614---

* * * TWO NOTES WERE DUE, PROTESTED, AND THE LEGAL LIEN OF THE BANK FOR THEIR PAYMENT COMPLETE; AS TO THE THIRD, THE TIME FOR PAYMENT HAD NOT ARRIVED, BEFORE SUCH RIGHT ATTACHED ON THE PROPERTY OF MR. BRENT IN THE HANDS OF HIS EXECUTORS; BUT IT WAS CONFINED TO WHAT BELONGED TO, AND WAS PART OF THE ASSETS OF THE ESTATE. THE RIGHT WAS A LEGAL ONE; THE CLAIM OF THE UNITED STATES WAS A STATUTORY ONE; * * *

IN THE CASE OF UNITED STATES V. DUNCAN, FEDERAL CASE NO. 15003, DECIDED SOME 15 YEARS AFTER THE BRENT CASE, THE COURT REVIEWED THE PRECEDENTS (INCLUDING THE BRENT CASE), AND CONCLUDED THAT:

* * * IT HAS BEEN UNIFORMLY HELD IN ALL THE CASES THAT THE PRIORITY OF THE UNITED STATES DOES NOT DISTURB ANY SPECIFIC LIEN, NOR THE PERFECTED LIEN OF A JUDGMENT, THAT IS IT DOES NOT SUPERSEDE A MORTGAGE ON LAND, NOR A JUDGMENT MADE PERFECT BY THE ISSUE OF AN EXECUTION AND A LEVY ON LAND, * * * BUT IN THE CASE OF A GENERAL LIEN IT IS NOT SO CLEAR.

IN THE STILL LATER CASE OF NORTH RIVER COAL AND WHARF COMPANY V. MCWILLIAMS BROTHERS, 59 F/2D) 979, THE SECOND CIRCUIT COURT OF APPEALS HELD THAT A CLAIM OF THE UNITED STATES AGAINST AN INSOLVENT ESTATE WAS ENTITLED TO PRIORITY OVER A CLAIM OF A STATE FOR FRANCHISE AND GROSS EARNINGS TAXES WHICH CONSTITUTED LIENS ON THE PROPERTY AT THE TIME RECEIVERS WERE APPOINTED. THE COURT STATED (PAGE 981 OF THE DECISION):

IN VIEW OF THE SWEEPING PROVISIONS OF REV.ST.SEC. 3466 (31 U.S.C.A. SEC. 191), IT SEEMS UNLIKELY THAT IT WAS INTENDED TO ALLOW THE MERE STATUTORY DECLARATION BY A STATE OF A GENERAL LIEN TO GIVE THE LATTER A PREFERENCE OVER DEBTS AND TAXES DUE THE GOVERNMENT. NEITHER THE DECISIONS OF THE SUPREME COURT NOR THE SPECIFIED PRIORITIES ALLOWED THIRD PARTIES UNDER REV.ST.SEC. 3186 AS AMENDED (26 U.S.C.A. SEC. 115) INDICATE THAT SECTION 3466 IS SUBJECT TO ANY SUCH LIMITATION. WE HOLD THAT THE COURT BELOW PROPERLY AWARDED PRIORITY TO THE UNITED STATES.

THERE IS AN INDICATION IN THE RECENT CASE OF NEW YORK V. MACLAY, 288 U.S. 290, THAT THE SUPREME COURT, IN DETERMINING THE QUESTION OF WHETHER A LIEN IS SUPERIOR TO THE PRIORITY OF THE UNITED STATES IN A GIVEN CASE, LOOKS TO THE NATURE OF THE PARTICULAR LIEN, WHETHER IT IS PERFECTED AND SPECIFIC, ETC.

WHILE IT MAY BE ADMITTED, THEREFORE, THAT IN CERTAIN CIRCUMSTANCES THE COURTS DO ACKNOWLEDGE LIENS AS BEING SUPERIOR TO THE GOVERNMENT'S RIGHT OF PRIORITY, AND THAT THIS IS EVEN TRUE IN THE CASE OF CERTAIN EQUITABLE LIENS (UNITED STATES FIDELITY AND GUARANTY COMPANY V. SWEENEY, SUPRA), IT IS IMPOSSIBLE TO DETERMINE IN ADVANCE WHAT THE ATTITUDE OF A COURT MIGHT BE UNDER FACTS AND CIRCUMSTANCES SUCH AS THOSE WHICH HERE PERSIST. BUT EVEN IF A DEPENDABLE JUDICIAL PRECEDENT WAS AVAILABLE AND IT WAS CLEAR THAT UNDER THE FACTS HERE PRESENT THE LABORERS AND MATERIALMEN WERE POSSESSED OF A RIGHT TO THE FUND SUPERIOR TO THAT OF THE UNITED STATES, SUCH RIGHT COULD ONLY BE ENFORCED IN A COURT OF EQUITY. THE VERY DEFINITION OF AN "EQUITABLE LIEN" PRECLUDES THE CONCEPT THAT ACCOUNTING OFFICERS OF THE FEDERAL GOVERNMENT COULD GIVE EFFECT THERETO AND MAKE PAYMENTS IN ACCORDANCE THEREWITH EVEN IF ITS EXISTENCE WERE FULLY ESTABLISHED OR ADMITTED. "EQUITABLE LIENS ARE SUCH AS EXIST IN EQUITY, AND OF WHICH COURTS OF EQUITY ALONE TAKE COGNIZANCE.' BOUVIER'S LAW DICTIONARY. SIMILAR DEFINITIONS ARE TO BE FOUND IN ANDERSON'S DICTIONARY OF LAW, AND POPE'S LEGAL DEFINITIONS. AN EQUITABLE LIEN, SAID THE COURT IN THE RECENT CASE OF THEATRE REALTY COMPANY V. ARONBERG-FRIED COMPANY, 85 F/2D) 383, 388,"IS THE RIGHT TO HAVE PROPERTY SUBJECTED IN A COURT OF EQUITY TO THE PAYMENT OF A CLAIM.'

IT MUST BE CONCLUDED FROM THE ABOVE ANALYSIS THAT (1) THE PURPORTED SUPPLEMENTAL AGREEMENT IS NOT OF SUCH NATURE AS TO JUSTIFY RECOGNITION OF ITS VALIDITY BY THIS OFFICE, AND (2) THAT YOU AS SURETY ARE NOT SHOWN TO BE ENTITLED TO THE RETAINED PERCENTAGES IN QUESTION BY ANY RIGHT OF SUBROGATION OR OTHERWISE.

SINCE $1,483.47 OF THE RETAINED PERCENTAGES HAVE ALREADY BEEN IMPROPERLY PAID TO YOU, IT FOLLOWS THAT THIS AMOUNT SHOULD BE PROMPTLY REMITTED TO THE UNITED STATES IN ORDER THAT FURTHER ACTION TO EFFECT COLLECTION THEREOF WILL NOT BE NECESSARY.