B-125305, SEPTEMBER 15, 1955, 35 COMP. GEN. 149

B-125305, SEPTEMBER 15, 1955, 35 COMP. GEN. 149

CONTRACTS - ASSIGNMENTS - SET-OFF RIGHTS AN ASSIGNMENT OF THE PROCEEDS OF A CONTRACT, WHICH CONTAINED A NO SET-OFF CLAUSE, TO A BANK PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, AT A TIME WHEN THE CONTRACTOR WAS DELINQUENT IN ITS DELIVERIES UNDER THE CONTRACT MAY NOT DEFEAT THE RIGHT OF THE GOVERNMENT TO DECLARE THE CONTRACTOR IN DEFAULT, TO PURCHASE THE DEFAULTED ITEMS FROM OTHER SOURCES AND TO HOLD CONTRACTOR LIABLE FOR DAMAGES, AND, THEREFORE, ANY AMOUNTS DUE UNDER THE CONTRACT ARE FOR SET-OFF AGAINST THE CONTRACTOR'S INDEBTEDNESS ARISING OUT OF THE DEFAULT.

TO HOWARD T. PEAT, DEPARTMENT OF THE ARMY, SEPTEMBER 15, 1955:

THERE HAS BEEN RECEIVED BY REFERENCE FROM THE OFFICE OF THE CHIEF OF FINANCE, FINEY 167/22, YOUR LETTERS OF JULY 22 AND AUGUST 11, 1955, ACCOMPANIED BY BUREAU VOUCHER NO. 92-56, FOR $8,465.53, IN FAVOR OF THE BANK OF RED BAY, ALABAMA, A (C) INTERSTATE BOX COMPANY, COLUMBUS, MISSISSIPPI, PROPOSING PAYMENT ON SEVERAL OF THE CONTRACTOR'S INVOICES COVERING DELIVERIES MADE DURING MAY 1955 PURSUANT TO ITS CONTRACT NO. DAI- 01-021-.506-ORD-/P/-213, DATED MARCH 21, 1955, WITH THE BIRMINGHAM ORDNANCE DISTRICT, ALABAMA. YOU HAVE REQUESTED AN ADVANCE DECISION AS TO WHETHER ANY OF THE AMOUNTS CLAIMED ON THE INVOICES ARE FOR PAYMENT TO THE ASSIGNEE, OR WHETHER THE AMOUNT OF THE VOUCHER SHOULD BE APPLIED AS A PARTIAL OFF-SET AGAINST THE CONTRACTOR'S INDEBTEDNESS TO THE UNITED STATES ARISING OUT OF ITS DEFAULT UNDER THE CONTRACT.

BY THE TERMS OF THE CONTRACT, THE PARTNERSHIP FIRM OF INTERSTATE BOX COMPANY UNDERTOOK TO SUPPLY THE REDSTONE ARSENAL, ALABAMA, WITH 300,000 WOOD AMMUNITION PACKING BOXES, AS SPECIFIED, AT THE QUOTED PRICE OF $1.588 EACH, OR FOR THE TOTAL SPECIFIED CONSIDERATION OF $476,400 FOR THE FULL CONTRACT QUANTITY. AN INITIAL DELIVERY OF 30,000 UNITS WAS SCHEDULED TO BE MADE WITHIN 35 DAYS AFTER THE AWARD, OR BY APRIL 25, 1955, WITH THE SUCCEEDING LOT DELIVERIES OF 30,000 AND 35,000 UNITS SCHEDULED TO BE MADE AT 30-DAY INTERVALS UNTIL COMPLETION, 275 DAYS AFTER THE AWARD.

FROM THE FACTS OF RECORD, IT APPEARS THAT UNDER A COMBINED ASSIGNMENT AND POWER OF ATTORNEY EXECUTED MAY 14, 1955, UNDER AUTHORITY OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, 54 STAT. 1029, 31 U.S.C. 203, OSCAR BLOOM AND DONALD LACOST, DOING BUSINESS AS THE INTERSTATE BOX COMPANY, UNDERTOOK, FOR VALUABLE CONSIDERATION, TO ASSIGN AND TRANSFER TO THE BANK OF RED BAY, ALABAMA, ALL MONEYS THEN AND THEREAFTER TO BECOME DUE UNDER THE INSTANT CONTRACT, AND TO APPOINT AND CONSTITUTE THE BANK AS THEIR AGENT AND ATTORNEY-IN-FACT TO COLLECT AND RECEIVE ALL AMOUNTS OR OTHER THINGS OF VALUE WHICH MAY BECOME DUE THEREUNDER. IT APPEARS FURTHER THAT THE ASSIGNMENT WAS ACCEPTED BY THE ASSIGNEE IN DUE COURSE, AND THAT FORMAL NOTICES AND COPIES OF THE INSTRUMENT WERE FILED WITH THE ARMY FINANCE OFFICER AT ATLANTA, GEORGIA, AND THE CONTRACTING OFFICER AT BIRMINGHAM, ALABAMA, UNDER DATES OF MAY 17 AND MAY 31, 1955, RESPECTIVELY.

SIX INDIVIDUAL DELIVERIES, AGGREGATING 5,331 BOXES IN ALL, WERE EFFECTED BY THE CONTRACTOR THROUGHOUT THE PERIOD MAY 12 THROUGH 24, 1955, FOR WHICH SIX SEPARATE INVOICES DATED MAY 12, 16, 17, 18, 20 AND 24, 1955, RESPECTIVELY, WERE SUBMITTED IN AMOUNT TOTALING $8,465.64. OF COURSE, HAD THE CONTRACTOR COMPLIED WITH THE DELIVERY REQUIREMENTS OF ITS CONTRACT, THERE WOULD HAVE BEEN DELIVERED DURING THE 65-DAY INTERVAL FOLLOWING THE AWARD, OR BY MAY 25, 1955, A TOTAL OF AT LEAST 65,000 BOXES. HOWEVER, BY REASON OF THE CONTRACTOR'S UNSATISFACTORY PERFORMANCE RECORD, THE CONTRACTOR WAS SERVED WITH A NOTICE DATED MAY 27, 1955, OF THE GOVERNMENT'S INTENTION OF TERMINATING THE CONTRACT FOR DEFAULT, WHICH ACTION WAS SUPERSEDED BY THE ISSUANCE ON JUNE 7, 1955, OF A FORMAL NOTICE OF TERMINATION, PURSUANT TO THE DEFAULT CLAUSE OF THE CONTRACT. IN THE TERMINATION NOTICE THE CONTRACTING OFFICER MADE CERTAIN FINDINGS AND DETERMINATIONS TO THE EFFECT THAT THE CONTRACTOR HAD FAILED TO MEET THE DELIVERY SCHEDULE OF ITS CONTRACT; THAT IT HAD COMMUNICATED TO THE GOVERNMENT ITS INTENTION NOT TO CONTINUE WITH PERFORMANCE; AND THAT THE CONTRACTOR'S FAILURE TO MEET THE DELIVERY REQUIREMENTS "WAS NOT DUE TO CAUSES BEYOND THE CONTROL AND WITHOUT THE FAULT OR NEGLIGENCE OF THE CONTRACTOR.' THE CONTRACTOR WAS SERVED WITH NOTICE THEREIN OF THE GOVERNMENT'S INTENTION TO PROCURE THE DEFAULTED ITEMS FROM OTHER SOURCES, HOLDING IT LIABLE FOR ANY EXCESS COSTS RESULTING TO THE GOVERNMENT FROM ITS DEFAULT, AS SPECIFICALLY PROVIDED FOR IN ARTICLE 11 OF THE CONTRACT.

THEREAFTER THE CONTRACTING OFFICER REPURCHASED THE DELINQUENT QUANTITIES FROM TWO OTHER SOURCES--- WEST POINT MANUFACTURING COMPANY AND THE NEWMAN CONSTRUCTION COMPANY--- AT A TOTAL EXCESS COST TO THE UNITED STATES OF $39,892.25 ON THE 294,669 UNITS AS TO WHICH THE CONTRACTOR WAS IN DEFAULT, AND ON JUNE 17, 1955, SERVED THE CONTRACTOR WITH A FORMAL " NOTICE OF EXCESS COSTS" SHOWING THE EXACT MANNER IN WHICH SUCH EXCESS COSTS WERE COMPUTED, AND ADVISING THE CONTRACTOR THAT THE WITHHELD AMOUNT OF $8,465.64 DUE FOR THE ARTICLES DELIVERED UNDER THE DEFAULTED CONTRACT WOULD BE APPLIED AGAINST THE AMOUNT OF ITS REPORTED INDEBTEDNESS, LEAVING A BALANCE OF $31,426.61 DUE THE UNITED STATES.

INCLUDED AMONG THE OFFICIAL PAPERS IN THE CASE IS A WRITTEN STATEMENT, EXECUTED JUNE 16, 1955, RECORDING WHAT TRANSPIRED DURING THE COURSE OF AN INTERVIEW CONDUCTED ON OR ABOUT JUNE 7, 1955, BETWEEN MR. L. N. FLIPPO, AN OFFICER OF THE BANK OF RED BAY--- THE ASSIGNEE--- AND SEVERAL OFFICIALS OF THE CONTRACTING AGENCY. FROM THE REPORT OF THIS MEETING, IT APPEARS THAT THE ASSIGNEE ADVANCED $8,000 TO MESSERS. BLOOM AND LACOST, OPERATING UNDER THE TRADE NAME OF THE INTERSTATE BOX COMPANY, TO ASSIST THEM IN THE PERFORMANCE OF THE INSTANT CONTRACT; THAT THE ASSIGNMENT MADE BY THOSE PARTIES TO THE BANK OF RED BAY WAS EXECUTED UNDER AUTHORITY OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, AND THAT IT CONTAINED THE USUAL RESERVATION RELATIVE TO SET-OFF, AS REQUIRED BY THE ACT. FURTHER, IT APPEARS THAT THE BANK MADE THE LOAN TO THESE PARTIES SOLELY UPON THE STRENGTH OF THE GOVERNMENT CONTRACT WHICH HAD BEEN AWARDED THEM, BELIEVING IT TO BE SAFE TO ACCEPT THE ASSIGNMENT AND LOOK TO THE GOVERNMENT FOR PAYMENT OF THE AMOUNTS DUE UNDER THE CONTRACT. DURING THE COURSE OF THE INTERVIEW MR. FLIPPO CONCEDED THAT HE WAS UNFAMILIAR WITH THE PROVISIONS AND REQUIREMENTS OF THE STATUTE AND MADE NO EFFORT "TO LOOK INTO THE MATTER.' HE DID, HOWEVER, FILE NOTICES AND COPIES OF THE ASSIGNMENT WITH THE FINANCE OFFICER AND THE GOVERNMENT CONTRACTING OFFICER ON THE RESPECTIVE DATES MAY 17 AND 31, 1955. MR. FLIPPO FURTHER POINTED OUT THAT HE REPRESENTED A SMALL BANK AND THAT A LOSS IN THE AMOUNT ADVANCED BY IT TO THE COMPANY WOULD BE "CONSIDERABLE TO THE BANK AND TO THE TOWN.' DURING THE COURSE OF THE INTERVIEW THE ASSIGNEE REPRESENTED THAT HE HAD HEARD OF ANOTHER BOX COMPANY IN THAT VICINITY WHICH MANUFACTURED THIS TYPE OF AMMUNITION BOX AT A MUCH CHEAPER PRICE, BUT UPON ADMINISTRATIVE INVESTIGATION INTO THE MATTER, IT WAS FOUND THAT THE BOX BEING MANUFACTURED BY THIS OTHER COMPANY WAS A SMALLER AND LESS EXPENSIVE TYPE THAN THAT CONTRACTED FOR HERE.

WITH RESPECT TO THE CONTENTIONS RAISED BY THE ASSIGNEE, IT IS TO BE NOTED THAT G.S.A. STANDARD FORM NO. 32, NOVEMBER 1949 EDITION, WAS BE REFERENCE MADE AN ESSENTIAL PART OF THE CONTRACT. ARTICLE 8 OF THIS FORM SPECIFICALLY AUTHORIZED THE ASSIGNMENT TO A BANK, TRUST COMPANY OR OTHER FINANCIAL INSTITUTION OF CLAIMS FOR MONEYS DUE THE CONTRACTOR UNDER THIS CONTRACT, AND ALSO PROVIDED THAT PAYMENT TO AN ASSIGNEE OF ANY CLAIM ASSERTED UNDER THE CONTRACT SHALL NOT BE SUBJECT TO REDUCTION OR SET-OFF FOR ANY INDEBTEDNESS OF THE CONTRACTOR TO THE GOVERNMENT "ARISING INDEPENDENTLY OF THIS CONTRACT.' THE BASIS FOR THE LATTER PROVISO MAY BE FOUND IN THE ASSIGNMENT OF CLAIMS ACT OF 1940, 54 STAT. 1029, PAGE 1030, WHICH READS, IN PERTINENT PART:

ANY CONTRACT ENTERED INTO BY THE WAR DEPARTMENT OR THE NAVY DEPARTMENT MAY PROVIDE THAT PAYMENTS TO AN ASSIGNEE OF ANY CLAIM ARISING UNDER SUCH CONTRACT SHALL NOT BE SUBJECT TO REDUCTION OR SET OFF, AND IF IT IS SO PROVIDED IN SUCH CONTRACT, SUCH PAYMENTS SHALL NOT BE SUBJECT TO REDUCTION OR SET-OFF FOR ANY INDEBTEDNESS OF THE ASSIGNOR TO THE UNITED STATES ARISING INDEPENDENTLY OF SUCH CONTRACT. ( ITALICS SUPPLIED.)

IN CONNECTION WITH THE FOREGOING, I SHOULD BE NOTED THAT THE ASSIGNMENT OF CLAIMS ACT, AS AMENDED BY THE ACT OF MAY 15, 1951, 65 STAT. 41, 31 U.S.C. 203, CONTAINS A SIMILAR PROVISO PROHIBITING THE APPLICATION BY SET- OFF OF AMOUNTS DUE AND ASSIGNED UNDER THE CONTRACT TOWARDS THE LIQUIDATION OF ANY LIABILITY OF THE ASSIGNOR TO THE UNITED STATES "ARISING INDEPENDENTLY OF SUCH CONTRACT," OR ON ANY LIABILITY UPON HIS PART FOR FINES OR PENALTIES IMPOSED IN CONNECTION THEREWITH, EXCLUSIVE, HOWEVER, OF "AMOUNTS WHICH MAY BE COLLECTED OR WITHHELD FROM THE ASSIGNOR IN ACCORDANCE WITH OR FOR FAILURE TO COMPLY WITH THE TERMS OF THE CONTRACT," SUCH AS APPEARS TO BE THE SITUATION HERE.

IT APPEARS THAT, AS OF MAY 14, 1955, OR WHEN THE BANK OF RED BAY MADE ITS LOAN OF $8,000 TO THE TWO PARTNERS COMPRISING THE INTERSTATE BOX COMPANY, THE COMPANY WAS SERIOUSLY DELINQUENT IN ITS DELIVERIES UNDER THE CONTRACT, THERE HAVING BEEN MADE AS OF THAT DATE MERELY A TOKEN DELIVERY OF ONLY 897 BOXES, AS COMPARED TO THE CONTRACT REQUIREMENT FOR THE DELIVERY OF 30,000 BOXES ON OR BEFORE APRIL 25, 1955, WITH ANOTHER 35,000 UNITS SCHEDULED TO BE DELIVERED ONLY A FEW DAYS LATER ON MAY 25, 1955. AS A MATTER OF FACT, WHEN THE REQUIRED NOTICES OF ASSIGNMENT WERE FILED BY THE ASSIGNEE DURING THE LATTER PART OF MAY 1955, THERE HAD BEEN DELIVERED A TOTAL OF ONLY 5,331 BOXES, INSTEAD OF 65,000, AS CALLED FOR UNDER THE TERMS OF THE CONTRACT. THUS, IT SEEMS READILY APPARENT THAT THE ASSIGNEE BANK, BY MERELY REFERRING TO THE CONTRACT, COULD HAVE ASCERTAINED THAT THE DELIVERIES UNDER THE CONTRACT WERE IN DEFAULT AT THE TIME THE LOAN IN QUESTION WAS MADE. IN THE CIRCUMSTANCES, THE CONCLUSION IS INESCAPABLE THAT ANY LOSS RESULTING TO THE ASSIGNEE OUT OF THIS TRANSACTION WAS ATTRIBUTABLE SOLELY TO ITS FAULT OR NEGLIGENCE IN HAVING ADVANCED MONEY UPON A CONTRACT WHICH THEN WAS IN DEFAULT, AND UNDER WHICH THE GOVERNMENT ALREADY HAD ACQUIRED CERTAIN VESTED RIGHTS TO COLLECT FROM THE CONTRACTOR THE DAMAGES OCCASIONED BY ITS BREACH.

IN RULING UPON THE RIGHTS OF THE ASSIGNEE CLAIMING AMOUNTS DUE AND WITHHELD UNDER DEFAULTED GOVERNMENT CONTRACTS OF THIS KIND, THE COURTS HAVE HELD THAT, UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940, THE ASSIGNEE, BY AN ASSIGNMENT FROM THE CONTRACTOR, ACQUIRED NO GREATER RIGHTS IN RESPECT OF PAYMENTS OR CLAIMS ARISING UNDER THE ASSIGNED CONTRACT THAN ITS ASSIGNOR, THE CONTRACTOR, HAD; AND THAT THE RIGHT OF THE ASSIGNEE TO DEMAND PAYMENT BY THE GOVERNMENT OF AN AMOUNT DUE FROM IT FOR WORK PERFORMED UNDER THE CONTRACT WAS SUBJECT TO PERFORMANCE BY THE CONTRACTOR OF HIS CONTRACTUAL OBLIGATIONS. SEE HARDIN COUNTY SAVINGS BANK, ET AL. V. UNITED STATES, 106 C.1CLS. 577; MODERN INDUSTRIAL BANK V. UNITED STATES, 101 C.1CLS 808. IN OTHER WORDS, AN ASSIGNEE UNDER THE STATUTE MUST BE HELD TO "STAND IN THE SHOES" OF THE ASSIGNOR, AND HENCE, THE LATTER CANNOT TRANSFER TO AN ASSIGNEE ANY GREATER RIGHTS IN THE WITHHELD FUND THAN HE HIMSELF POSSESSES, OR AS MAY BE AUTHORIZED BY THE STATUTE ITSELF. SEE PRAIRIE STATE BANK V. UNITED STATES, 164 U.S. 227; STANDARD ACCIDENT INS. CO. V. FEDERAL NATIONAL BANK OF SHAWNEE, OKLAHOMA, 112 F.2D 692, 694. THEREFORE, EVEN THOUGH AN ASSIGNMENT SUCH AS THIS MAY BE CONSIDERED VALID FOR ALL PRACTICABLE PURPOSES, IT IS, OF COURSE, INOPERATIVE TO EXTINGUISH THE CONTRACTUAL RIGHTS WHICH THERETOFORE HAD BEEN ACQUIRED BY THE GOVERNMENT UNDER THE TERMS OF THE CONTRACT.

EVEN BEFORE THE ASSIGNMENT OF CLAIMS ACT OF 1940 WAS ENACTED, THE COURTS HAD RULED THAT A CONTRACTOR COULD NOT BY AN ASSIGNMENT OF AMOUNTS DUE UNDER HIS CONTRACT CONVEY ANY GREATER RIGHTS WITH RESPECT THERETO THAN HE POSSESSED, AND THAT AN ASSIGNEE MAKING ADVANCES ON THE FAITH OF SUCH AN ASSIGNMENT ASSUMED THE RISK INCIDENT TO THE FAILURE OF THE CONTRACTOR TO FULFILL HIS CONTRACTUAL OBLIGATIONS. SEE THE HARDIN CASE, SUPRA, PAGES 598-599, AND THE AUTHORITIES THERE CITED.

ARTICLE 11 OF THE INSTANT CONTRACT AUTHORIZED THE GOVERNMENT TO TERMINATE IT, IN WHOLE OR IN PART, IN THE EVENT THE CONTRACTOR FAILED TO MAKE DELIVERY OF THE SUPPLIES WITHIN THE PERFORMANCE TIME SPECIFIED, OR SO FAILED TO MAKE SUCH PROGRESS AS TO ENDANGER PERFORMANCE IN ACCORDANCE WITH ITS TERMS. THAT ARTICLE ALSO STIPULATED THAT, IN THE EVENT THE GOVERNMENT TERMINATED THE CONTRACT, IT COULD PROCURE SIMILAR SUPPLIES OR SERVICES FROM OTHER SOURCES, AND HOLD THE CONTRACTOR LIABLE FOR ANY EXCESS COSTS INCIDENT TO SUCH REPROCUREMENT. UPON THE CONTRACTOR'S DELINQUENCY OR DEFAULT, THE GOVERNMENT HAD ACQUIRED UNDER THE TERMS OF THE CONTRACT THE UNEQUIVOCAL RIGHT TO DECLARE THE CONTRACTOR TO BE IN DEFAULT AND TO PURCHASE THE DEFAULTED ITEMS FROM OTHER SOURCES, HOLDING THE CONTRACTOR ACCOUNTABLE FOR THE DAMAGES FLOWING FROM THE BREACH. THE LATTER COURSE OF ACTION WAS PURSUED BY THE GOVERNMENT AND THE RIGHTS WHICH IT HAD ACQUIRED UNDER THE DEFAULTED CONTRACT CANNOT LEGALLY BE DEFEATED BY THE ASSIGNMENT HERE INVOLVED.

THE PAPERS ARE RETURNED, AND YOU ARE ADVISED THAT THE WITHHELD AMOUNTS DUE FOR SUPPLIES FURNISHED UNDER THE CONTRACT MAY BE APPLIED AS A PARTIAL SET-OFF AGAINST THE CONTRACTOR'S INDEBTEDNESS TO THE UNITED STATES ARISING OUT OF ITS DEFAULT.