B-100314, SEPTEMBER 24, 1951, 31 COMP. GEN. 103

B-100314: Sep 24, 1951

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TO THE RETAINED PERCENTAGES AND UNPAID PROGRESS ESTIMATES BY THE CONTRACTOR PRIOR TO DEFAULT ARE DERIVED PRIMARILY FROM THE SURETIES SUBROGATION TO THE RIGHTS OF THE CONTRACTOR AND ARE INFERIOR TO THE GOVERNMENT'S RIGHT OF SET-OFF FOR AN INDEPENDENT DEBT OF THE CONTRACTOR. 1951: REFERENCE IS MADE TO YOUR LETTER OF DECEMBER 21. BOTH VESSELS WERE REQUIRED TO BE COMPLETED ON OR BEFORE MAY 20. 304 EACH WERE FURNISHED BY THE CONTRACTOR. ITS RIGHT TO PROCEED FURTHER WITH PERFORMANCE WAS TERMINATED BY WRITTEN NOTICE DATED NOVEMBER 7. NEGOTIATIONS WERE BEGUN WITH THE SURETIES TO COMPLETE THE VESSELS. THERE WAS A BALANCE DUE UNDER THE CONTRACT OF $20. SEVERAL CONFERENCES WERE HELD BETWEEN THE SURETIES AND THE GOVERNMENT WITH RESPECT TO COMPLETING THE WORK.

B-100314, SEPTEMBER 24, 1951, 31 COMP. GEN. 103

CONTRACTS - DEFAULTS - PAYMENTS TO COMPLETING SURETIES THE RIGHTS OF SURETIES, WHO COMPLETE THE WORK OF A DEFAULTING CONTRACTOR, TO THE RETAINED PERCENTAGES AND UNPAID PROGRESS ESTIMATES BY THE CONTRACTOR PRIOR TO DEFAULT ARE DERIVED PRIMARILY FROM THE SURETIES SUBROGATION TO THE RIGHTS OF THE CONTRACTOR AND ARE INFERIOR TO THE GOVERNMENT'S RIGHT OF SET-OFF FOR AN INDEPENDENT DEBT OF THE CONTRACTOR, HOWEVER, THE GOVERNMENT MAY BY AGREEMENT REIMBURSE THE SURETY FOR COMPLETION COSTS OUT OF SUCH FUNDS.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF THE TREASURY, SEPTEMBER 24, 1951:

REFERENCE IS MADE TO YOUR LETTER OF DECEMBER 21, 1959, REQUESTING A DECISION AS TO THE PROPRIETY OF CERTAIN PROPOSED PAYMENTS TO THE MAINE BONDING AND CASUALTY COMPANY AND THE SEABOARD SURETY COMPANY, SURETIES ON THE PERFORMANCE AND PAYMENT BONDS FURNISHED BY RICE BROTHERS CORPORATION, EAST BOOTHBAY, MAINE, UNDER CONTRACT NO. TEG-37743, DATED JANUARY 13, 1949.

BY THE TERMS OF THE CONTRACT THE RICE BROTHERS CORPORATION AGREED TO CONSTRUCT TWO LIGHTSHIPS FOR THE UNITED STATES COAST GUARD FOR THE TOTAL SUM OF $909,256.12, INCLUDING CHANGE ORDERS. BOTH VESSELS WERE REQUIRED TO BE COMPLETED ON OR BEFORE MAY 20, 1950, WITH FINISHED PLANS AND SPECIFICATIONS THEREFOR TO BE DELIVERED BY AUGUST 19, 1950. THE CONTRACT CONTAINED A PROVISION FOR THE ASSESSMENT OF LIQUIDATED DAMAGES AT THE RATE OF $150 PER SHIP FOR EACH CALENDAR DAY'S DELAY IN DELIVERY, AND $150 PER DAY FOR EACH DAY'S DELAY IN DELIVERY OF THE PLANS AND SPECIFICATIONS. PERFORMANCE AND PAYMENT BONDS IN THE SUM OF $451,304 EACH WERE FURNISHED BY THE CONTRACTOR.

THE CONTRACTOR HAVING FAILED TO COMPLETE THE WORK WITHIN THE TIME SPECIFIED, ITS RIGHT TO PROCEED FURTHER WITH PERFORMANCE WAS TERMINATED BY WRITTEN NOTICE DATED NOVEMBER 7, 1950, AS PERMITTED BY ARTICLE 9 OF THE CONTRACT, AND NEGOTIATIONS WERE BEGUN WITH THE SURETIES TO COMPLETE THE VESSELS. AT THAT TIME THE CONTRACTOR'S INVOICES FOR WORK PERFORMED DURING THE MONTHS OF AUGUST, SEPTEMBER, AND OCTOBER 1950, TOTALING $39,204.99, HAD NOT BEEN PAID. FOR WORK PERFORMED PRIOR TO AUGUST 1950, TOTALING $849,307 IN INVOICE VALUE, THE CONTRACTOR HAD BEEN PAID $764,376.30 AND THE GOVERNMENT HAD RETAINED THE SUM OF $84,930.70 AS PERMITTED BY ARTICLE 16 OF THE CONTRACT. IN ADDITION TO THE $84,930.70 IN RETAINED PERCENTAGES AND THE $39,204.99 IN UNPAID PROGRESS ESTIMATES, THERE WAS A BALANCE DUE UNDER THE CONTRACT OF $20,744.13, MAKING A TOTAL OF $144,879.82 OF THE FULL CONTRACT PRICE STILL IN THE HANDS OF THE GOVERNMENT.

SEVERAL CONFERENCES WERE HELD BETWEEN THE SURETIES AND THE GOVERNMENT WITH RESPECT TO COMPLETING THE WORK, AND BY LETTER OF NOVEMBER 13, 1950, THE SURETIES ADVISED THE COAST GUARD, IN PERTINENT PART, AS FOLLOWS:

* * * YOU ARE HEREBY NOTIFIED THAT THE SURETIES ELECT TO TAKE OVER AND COMPLETE THE WORK UNDERTAKEN BY RICE BROTHERS CORPORATION UNDER THE ABOVE- NUMBERED CONTRACT DATED JANUARY 18, 1949, UPON THE FOLLOWING CONDITIONS AND FOR THE FOLLOWING CONSIDERATIONS:

1. THAT THE GOVERNMENT WILL AGREE TO ACCEPT THE ARRANGEMENTS FOR COMPLETING THE WORK, NAMELY, THAT THE SUPERVISION AND MANAGEMENT FOR SUCH WORK SHALL BE PERFORMED BY MR. WILLIAM ADAMS IN THE YARDS OF RICE BROTHERS CORPORATION IN EAST BOOTHBAY, MAINE. * * *

2. THAT THE GOVERNMENT WILL MAKE ALL FUTURE PAYMENTS UNDER THE ABOVE- DESCRIBED CONTRACT TO THE SURETIES, JOINTLY, INCLUDING ALL RETAINED PERCENTAGES, EXCEPT THOSE REQUIRED TO BE RETAINED BY THE CONTRACT TERMS. SUCH PAYMENTS SHALL BE MADE UPON SUBMISSION OF THE FIRST PROGRESS ESTIMATE, PROVIDING SATISFACTORY PROGRESS IS BEING MADE WITH THE WORK, AND SHALL INCLUDE ALL PAYMENT ESTIMATES UP TO DATE.

IT IS UNDERSTOOD BY THE ACTION OF THE GOVERNMENT IN TERMINATING THE CONTRACTOR'S RIGHT TO PROCEED UNDER ARTICLE 9 OF THE ABOVE DESCRIBED CONTRACT ON NOVEMBER 7, 1950 (RECEIPT OF WHICH WAS ACKNOWLEDGED BY THE CONTRACTOR, RICE BROTHERS CORPORATION) AND BY THE ELECTION OF THE SURETIES TO TAKE OVER AND COMPLETE THE REMAINING WORK UNDER THE CONTRACT THAT THE SURETIES ASSUME AND ARE ENTITLED TO EXERCISE ALL OBLIGATIONS AND/OR RIGHTS UNDER THE CONTRACT, AS AMENDED TO DATE, AND THAT LIKEWISE, THE GOVERNMENT MAY NOW LOOK TO THE SURETIES FOR COMPLETION OF ALL WORK REQUIRED BY SUCH CONTRACT.

BY ISSUANCE OF THE TERMINATION OF CONTRACTOR'S RIGHT TO PROCEED, THE GOVERNMENT HAS, IN ACCORDANCE WITH THE DECISION OF U.S. V. AMERICAN SURETY CO. 322 U.S. 96, WAIVED ITS RIGHT TO THE COLLECTION OF LIQUIDATED DAMAGES ACCRUED TO DATE. NO OTHER OFFSETS OR COLLECTIONS ARE WAIVED BY SUCH DECISION.

IN REPLY TO THAT LETTER THE CONTRACTING OFFICER, BY LETTER DATED NOVEMBER 14, 1950, AFTER QUOTING THE PARAGRAPHS THEREOF NUMBERED 1 AND 2, STATED AS FOLLOWS:

THE ABOVE STATED ARRANGEMENTS ARE SATISFACTORY TO THE COAST GUARD WITH THE DISTINCT UNDERSTANDING THAT THEY SHALL NOT CONSTITUTE A CHANGE OR MODIFICATION IN THE TERMS OF THE BASIC CONTRACT. IN CONNECTION WITH 2 ABOVE, PAYMENTS WILL BE MADE WHEN, IN THE JUDGMENT OF THE COAST GUARD, PROGRESS IS SATISFACTORY.

THE COAST GUARD NOTES THE MATTER CONTAINED IN THE NEXT TO THE LAST PARAGRAPH OF YOUR LETTER REFERRING TO THE DECISION IN THE CASE OF THE U.S. V. AMERICAN SURETY COMPANY, 322 U.S. 96. THE COAST GUARD ALSO DOES NOT CONSIDER THAT SAID DECISION IN ANY WAY HAS THE EFFECT OF MODIFYING THE TERMS AND CONDITIONS OF THE AFOREMENTIONED CONTRACT.

UPON RECEIPT OF THE LETTER DATED NOVEMBER 14, 1950, FROM THE CONTRACTING OFFICER, THE SURETIES BEGAN WORK ON COMPLETION OF THE VESSELS. THEREAFTER, ON NOVEMBER 17, 1950, THE COMMISSIONER OF INTERNAL REVENUE ADDRESSED A LETTER TO THE COAST GUARD STATING THAT THE RICE BROTHERS CORPORATION WAS INDEBTED TO THE UNITED STATES IN THE AMOUNT OF $230,880.74 PLUS INTEREST FOR UNPAID INCOME AND EXCESS PROFITS TAXES FOR THE YEARS 1941, 1942, AND 1943, AND REQUESTING THAT ANY MONEYS DUE RICE BROTHERS CORPORATION UNDER THE CONTRACT INVOLVED BE WITHHELD AND APPLIED AGAINST ITS TAX LIABILITY. IT IS UNDERSTOOD THAT BOTH VESSELS NOW HAVE BEEN COMPLETED BY THE SURETIES AND ACCEPTED BY THE COAST GUARD.

YOU REQUEST A DECISION AS TO WHETHER PAYMENT MAY BE MADE TO THE SURETIES OF THE $39,204.99 IN PROGRESS ESTIMATES FOR AUGUST, SEPTEMBER, AND OCTOBER, 1950, IN ACCORDANCE WITH THE TERMS OF THE COMPLETION AGREEMENT, AND ALSO WHETHER THE SURETIES ARE ENTITLED TO RECEIVE ANY PORTION OF THE $84,930.70 RETAINED FROM PAYMENTS MADE TO RICE BROTHERS CORPORATION FOR WORK PERFORMED PRIOR TO AUGUST 1, 1950.

ASIDE FROM THE AGREEMENT WITH THE GOVERNMENT THE SURETIES' RIGHTS TO ANY PART OF THE ABOVE-MENTIONED PROGRESS ESTIMATES AND RETAINED PERCENTAGES ARE FOUNDED SOLELY UPON THE EQUITABLE DOCTRINE OF SUBROGATION, AND THE QUESTION ARISES WHETHER THE GOVERNMENT'S RIGHT TO COLLECT THE CONTRACTOR'S TAX DEBT BY SET-OFF AGAINST SUCH FUNDS IS SUPERIOR TO THE SURETIES' RIGHTS THERETO BY SUBROGATION. THIS PRECISE POINT WAS CONSIDERED IN THE CASE OF STANDARD ACCIDENT INSURANCE COMPANY V. UNITED STATES, DECIDED BY THE COURT OF CLAIMS JUNE 5, 1951, C.1CLS. NO. 46116. THERE, AS HERE, CLAIM WAS MADE BY A COMPLETING SURETY TO RETAINED PERCENTAGES IN THE HANDS OF THE GOVERNMENT. THE COURT RULED THAT THE GOVERNMENT HAD A RIGHT TO SET OFF THE CONTRACTOR'S TAX LIABILITY AGAINST SUCH RETAINED PERCENTAGES DESPITE THE SURETY'S CLAIM, STATING IN ITS OPINION AS FOLLOWS:

* * * THE RATIONALE OF THE MUNSEY CASE APPLIES AND WOULD POSTPONE PLAINTIFF'S RIGHT TO THE RETAINED PERCENTAGES TO THAT OF THE UNITED STATES EVEN IF THE CONTRACTOR HAD NOT BEEN FORMALLY DECLARED INSOLVENT AND EVEN IF THE CONTRACTOR'S DEBT TO THE UNITED STATES BORE NO RELATION TO THE CONTRACT FROM WHICH THE RETAINED PERCENTAGES DERIVED. * * *

THE COURT STATED, IN EFFECT, THAT THE SURETY'S RIGHTS DERIVED PRIMARILY FROM ITS SUBROGATION TO THE CONTRACTOR, AND THAT IT COULD NOT CLAIM RIGHTS UNDER THE CONTRACT BY SUBROGATION TO THE GOVERNMENT WITHOUT ASSUMING THE CONTRACTOR'S LIABILITIES AS WELL. UNDER THE RULE ESTABLISHED BY THE STANDARD ACCIDENT CASE, IT IS EVIDENT THAT ANY RIGHTS THE SURETIES MAY HAVE TO PAYMENT OF ANY PART OF THE RETAINED PERCENTAGES DEPEND ENTIRELY UPON THE COMPLETION AGREEMENT BETWEEN THE SURETIES AND THE GOVERNMENT. THIS IS EQUALLY TRUE AS FAR AS THE UNPAID PROGRESS ESTIMATES ARE CONCERNED. CF. MODERN INDUSTRIAL BANK V. UNITED STATES, 101 C.1CLS. 808.

WE MUST THEN DECIDE WHAT RIGHTS THE COMPLETION AGREEMENT PURPORTS TO GIVE THE SURETIES, AND WHETHER THE AGREEMENT IS ENFORCEABLE AGAINST THE GOVERNMENT. THE LANGUAGE USED IN THE AGREEMENT IS NOT AS SPECIFIC AS IT MIGHT BE. THE GOVERNMENT AGREED THEREBY TO "MAKE ALL FUTURE PAYMENTS" UNDER THE CONTRACT TO THE SURETIES,"INCLUDING ALL RETAINED PERCENTAGES, EXCEPT THOSE REQUIRED TO BE RETAINED BY THE CONTRACT TERMS.' THE ONLY "PERCENTAGES" REQUIRED TO BE RETAINED WERE THE TEN PERCENT DEDUCTIONS FROM PROGRESS ESTIMATES WHICH ARTICLE 16 (B) OF THE CONTRACT REQUIRED TO BE RETAINED UNTIL FINAL COMPLETION AND ACCEPTANCE OF ALL WORK UNDER THE CONTRACT. IT SEEMS CLEAR, THEREFORE, THAT THE PHRASE "INCLUDING ALL RETAINED PERCENTAGES" WAS INTENDED TO COVER SOMETHING OTHER THAN THESE TEN PERCENT RETENTIONS. IT IS INDICATED BY YOUR LETTER THAT THIS LANGUAGE WAS INTENDED TO COVER THE UNPAID PROGRESS ESTIMATES FOR THE MONTHS OF AUGUST, SEPTEMBER, AND OCTOBER, 1950, TOTALING $39,204.99. THIS INTERPRETATION FINDS SUPPORT IN THE SUCCEEDING SENTENCE OF THE AGREEMENT WHICH PROVIDES THAT PAYMENTS TO THE SURETIES SHALL INCLUDE "ALL PAYMENT ESTIMATES UP TO DATE.' REASONABLY CONSTRUED, THE AGREEMENT APPEARS TO CALL FOR PAYMENT TO THE SURETIES OF THE $39,204.99 IN UNPAID PROGRESS ESTIMATES, LESS TEN PERCENT THEREOF, WHEN SATISFACTORY PROGRESS TOWARD COMPLETION OF THE CONTRACT HAD BEEN MADE BY THEM. THE AGREEMENT DOES NOT APPEAR TO HAVE BEEN INTENDED TO MAKE ANY DISPOSITION OF THE TEN PERCENT RETENTIONS, HOWEVER, SINCE THE GOVERNMENT'S PROMISE TO MAKE ALL FUTURE CONTRACT PAYMENTS TO THE SURETIES SPECIFICALLY EXCEPTED SUCH RETAINED PERCENTAGES. IT MAY ALSO BE NOTED THAT THE COAST GUARD APPARENTLY DID NOT AT THAT TIME AGREE WITH THE SURETIES' CONTENTION THAT THE LIQUIDATED DAMAGES WHICH ACCRUED PRIOR TO TERMINATION OF THE CONTRACTOR'S RIGHT TO PROCEED WERE FORFEITED UPON SUCH TERMINATION, AND THAT THE ONLY FUNDS IN HAND FROM WHICH SUCH LIQUIDATED DAMAGES, TOTALING OVER $60,000, COULD BE COLLECTED WERE THE RETAINED PERCENTAGES EARNED BY THE CONTRACTOR PRIOR TO TERMINATION.

THE QUESTION THEN ARISES WHETHER THE COMPLETION AGREEMENT IS BINDING UPON THE GOVERNMENT. IT IS A FAMILIAR PRINCIPLE OF THE LAW OF GOVERNMENT CONTRACTS THAT NO FEDERAL OFFICER OR AGENT HAS AUTHORITY TO BIND THE UNITED STATES BY A CONTRACT DETRIMENTAL TO ITS INTERESTS EXCEPT IN RETURN FOR LEGAL CONSIDERATION ACCRUING TO THE GOVERNMENT. BY VIRTUE OF SECTION 3670, INTERNAL REVENUE CODE, 26 U.S.C. 53, STAT. 448, THE TAX DEBT INVOLVED WAS A LIEN UPON "ALL THE PROPERTY AND RIGHTS TO PROPERTY" BELONGING TO THE CONTRACTOR, AND, BUT FOR THE COMPLETION AGREEMENT, THE RETAINED PERCENTAGES AND UNPAID PROGRESS ESTIMATES EARNED BY THE CONTRACTOR COULD BE SET OFF AGAINST THE TAX DEBT. BY THE TERMS OF THE AGREEMENT THE SURETIES PROMISED, IN RETURN FOR THE PAYMENTS TO BE MADE TO THEM "TO TAKE OVER AND COMPLETE THE WORK," TO "ASSUME * * * ALL OBLIGATION AND/OR RIGHTS UNDER THE CONTRACT," AND THAT "THE GOVERNMENT MAY NOW LOOK TO THE SURETIES FOR COMPLETION OF ALL WORK REQUIRED BY SUCH CONTRACT.' MIGHT BE ARGUED THAT THE SURETIES THEREBY ASSUMED NO OBLIGATIONS WHICH THEY WERE NOT ALREADY REQUIRED TO PERFORM UNDER THEIR PERFORMANCE BOND, AND THAT THE UNITED STATES RECEIVED NO RIGHTS OR BENEFITS IN ADDITION TO THOSE ALREADY SECURED TO IT BY SUCH BOND. THIS ARGUMENT OVERLOOKS THE FACT THAT THE SURETIES WERE NOT OBLIGATED UNDER THEIR PERFORMANCE BOND TO COMPLETE THE CONTRACT. THEIR SOLE OBLIGATION, AS STATED IN THE BOND, WAS TO PAY TO THE UNITED STATES THE PENAL SUM OF $451,304. HENCE, PRIOR TO THE EXECUTION OF THE COMPLETION AGREEMENT, THE ONLY RIGHT OF THE UNITED STATES AGAINST THE SURETIES WAS TO COLLECT FROM THEM THE DAMAGES ATTRIBUTABLE TO THE CONTRACTOR'S DEFAULT, INCLUDING EXCESS COMPLETION COSTS UP TO BUT NOT IN EXCESS OF THE PENAL SUM OF THE BOND. AT THE TIME OF THE CONTRACTOR'S DEFAULT IT COULD NOT BE KNOWN WHAT IT MIGHT COST TO COMPLETE THE VESSELS IF THE WORK SHOULD BE PERFORMED BY ANOTHER CONTRACTOR OR BY THE GOVERNMENT ITSELF. BARRING UNFORESEEN CONTINGENCIES, THE EXCESS COMPLETION COST REASONABLY COULD BE ANTICIPATED TO BE MUCH LESS THAN THE PENALTY OF THE SURETIES' BOND. THERE WAS THE POSSIBILITY, HOWEVER, THAT THE VESSELS MIGHT BE ACCIDENTALLY DESTROYED BEFORE COMPLETION UNDER CIRCUMSTANCES WHICH WOULD IMPOSE THE LOSS UPON THE GOVERNMENT, IN WHICH EVENT THE PENAL SUM OF THE BOND WOULD BE INADEQUATE TO COMPENSATE THE UNITED STATES. OF COURSE, IF THE SURETIES HAD NOT UNDERTAKEN TO COMPLETE THE WORK, THERE COULD BE NO EXCESS COMPLETION COSTS CHARGEABLE AGAINST THEM UNTIL THE ENTIRE CONTRACT BALANCE IN THE HANDS OF THE GOVERNMENT HAD BEEN APPLIED TOWARD COMPLETION. IN OTHER WORDS, COLLECTION OF THE TAX DEBT COULD HAVE BEEN EFFECTED ONLY FROM THE SURPLUS, IF ANY, REMAINING AFTER PAYMENT OF THE COMPLETING CONTRACTOR AND SATISFACTION OF ANY OTHER DAMAGES OCCASIONED THE GOVERNMENT BY THE CONTRACTOR'S DEFAULT. THERE IS ALSO FOR CONSIDERATION THE PROBABILITY THAT THE SURETIES COULD COMPLETE THE WORK FOR LESS THAN IT WOULD HAVE COST THE GOVERNMENT TO HIRE ANOTHER CONTRACTOR TO COMPLETE, SINCE THE SURETIES COULD CHARGE NO PROFIT AS COMPLETION COST AND WOULD NOT HAVE TO MOVE THE VESSELS TO ANOTHER SHIPYARD. UNDER THE CIRCUMSTANCES, IT WOULD APPEAR THAT THE SURETIES' AGREEMENT TO COMPLETE THE VESSELS REGARDLESS OF COST WAS AN ADDITIONAL OBLIGATION SUFFICIENT TO CONSTITUTE LEGAL CONSIDERATION TO THE GOVERNMENT FOR ITS PROMISE TO MAKE CERTAIN PAYMENTS TO THE SURETIES PRIOR TO COMPLETION. THE VALIDITY OF THE AGREEMENT IS NEVERTHELESS SUBJECT TO QUESTION UPON THE FOLLOWING GROUND. A COMPLETING SURETY ORDINARILY IS ENTITLED ONLY TO REIMBURSEMENT, AND MUST ACCOUNT TO HIS PRINCIPAL FOR ANY AMOUNTS RECEIVED IN EXCESS OF THOSE REQUIRED TO MAKE HIMSELF WHOLE. WITHOUT THE PRINCIPAL'S CONSENT, THEREFORE, THE OBLIGEE -- IN THIS CASE THE GOVERNMENT--- WOULD APPEAR TO HAVE NO RIGHT TO AGREE TO PAY OVER TO A COMPLETING SURETY ANY PART OF THE EARNED BUT UNPAID PROGRESS ESTIMATES OR RETAINED PERCENTAGES WHICH MIGHT BE IN EXCESS OF THE SURETY'S COST OF COMPLETION. IT MIGHT APPEAR THAT THIS IS A MATTER SOLELY BETWEEN THE SURETIES AND THE CONTRACTOR, AND THAT THE LATTER'S CONSENT TO OR REQUEST FOR PAYMENT OF ALL SUMS DUE UNDER THE CONTRACT TO THE SURETIES WOULD ANSWER THE OBJECTION. IN LEGAL EFFECT, HOWEVER, SUCH ACTION BY THE CONTRACTOR WOULD CONSTITUTE AN ASSIGNMENT OF ITS RIGHTS AGAINST THE GOVERNMENT, WHICH, BY REASON OF SECTION 3477 OF THE REVISED STATUTES, IS NOT ENFORCEABLE AGAINST THE UNITED STATES, MARTIN V. NATIONAL SURETY CO., 300 U.S. 588, AND DOES NOT AFFECT THE GOVERNMENT'S RIGHT OF SET-OFF AGAINST THE CONTRACTOR, UNITED STATES V. HARRIS ( CCA 7TH), 77 F. 821. FURTHERMORE, AT THE TIME THE AGREEMENT WITH THE SURETIES WAS EXECUTED, THE CONTRACTOR HAD A RIGHT TO SUCH PART OF THE UNPAID PROGRESS ESTIMATES AND RETAINED PERCENTAGES THEN IN THE HANDS OF THE GOVERNMENT AS MIGHT BE IN EXCESS OF THE DAMAGES SUFFERED BY THE GOVERNMENT AS A RESULT OF ITS DEFAULT, AND BY VIRTUE OF SECTION 3670 OF THE INTERNAL REVENUE CODE THE UNITED STATES THEN HAD A TAX LIEN UPON ALL PROPERTY AND RIGHTS TO PROPERTY BELONGING TO THE CONTRACTOR. THE CONTRACTOR COULD NOT, THEREFORE, ASSIGN ITS CONTINGENT RIGHTS TO SUCH FUNDS TO THE SURETIES OR TO ANYONE ELSE FREE OF THE TAX LIEN. CONSEQUENTLY, THE COMPLETION AGREEMENT MAY NOT BE CONSTRUED AS OBLIGATING THE UNITED STATES TO PAY THE PROGRESS ESTIMATES FOR AUGUST, SEPTEMBER, AND OCTOBER 1950, TO THE SURETIES UNLESS THEIR UNREIMBURSED COSTS IN COMPLETING THE CONTRACT EQUAL OR EXCEED THE AMOUNT OR AMOUNTS PROPOSED TO BE PAID TO THEM. IN THIS CONNECTION, IT SHOULD BE NOTED THAT UPON DEFAULT AND TERMINATION THE CONTRACTOR LOST ALL RIGHT TO THE CONTRACT BALANCE OF $20,744.13 THEN UNEARNED, REGARDLESS OF THE COST OF COMPLETION, AND THE TAX LIEN COULD NOT ATTACH TO THAT FUND.

YOU ARE ADVISED, THEREFORE, THAT ANY PAYMENTS WHICH HAVE BEEN OR MAY BE MADE TO THE SURETIES MUST BE CONSIDERED AS HAVING BEEN MADE FIRST FROM THE UNEARNED CONTRACT BALANCE OF $20,744.13, AND ANY ADDITIONAL PAYMENTS TO THEM MUST BE LIMITED TO THE AMOUNT OF THEIR ACTUAL UNREIMBURSED EXPENDITURES IN THE COMPLETION OF THE CONTRACT, EXCLUSIVE OF ANY EXPENDITURES UNDER THE CONTRACT PAYMENT BOND. SINCE THE COMPLETION AGREEMENT DOES NOT PURPORT TO CALL FOR PAYMENT TO THE SURETIES OF THE RETAINED PERCENTAGES, THEIR RIGHT THERETO IS INFERIOR TO THE GOVERNMENT'S RIGHT TO OFFSET SUCH PERCENTAGES AGAINST THE CONTRACTOR'S TAX DEBT. STANDARD ACCIDENT INSURANCE CO. V. UNITED STATES, SUPRA. AND, OF COURSE, NO PAYMENTS MAY BE MADE TO THE SURETIES UNLESS THE CONTRACT FUNDS REMAINING IN THE HANDS OF THE GOVERNMENT AFTER SUCH PAYMENTS ARE SUFFICIENT TO SATISFY ANY ACTUAL DAMAGES WHICH THE GOVERNMENT MAY HAVE SUFFERED BY REASON OF THE CONTRACTOR'S DEFAULT.

SUBJECT TO THE FOREGOING QUALIFICATIONS, YOU ARE ADVISED THAT NO LEGAL OBJECTION IS PERCEIVED BY THIS OFFICE TO PAYMENT TO THE SURETIES OF 90 PERCENT OF THE AMOUNT OF THE PROGRESS ESTIMATES FOR AUGUST, SEPTEMBER, AND OCTOBER 1950, AS CALLED FOR BY THE COMPLETION AGREEMENT INVOLVED.