B-134044, NOV. 27, 1957

B-134044: Nov 27, 1957

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NATIONAL GUARD BUREAU: REFERENCE IS MADE TO YOUR LETTER OF OCTOBER 8. OF WHICH APPROXIMATELY 75 PERCENT WAS DESIGNATED AS THE FEDERAL SHARE. THE CONTRACTS WERE ENTERED INTO PURSUANT TO AGREEMENTS NOS. WHEREBY IT WAS AGREED THAT THE STATE SHOULD EXECUTE THE PERTINENT CONSTRUCTION AND SUPPLY CONTRACTS. IF THE STATE SHALL HAVE PAID THE FULL AMOUNT OF SUCH PARTIAL PAYMENT. IN YOUR LETTER IT IS STATED THAT THE ARMORIES WERE CONSTRUCTED UNDER THE PROVISIONS OF SECTION 3 (C) OF THE NATIONAL DEFENSE FACILITIES ACT OF 1950. A COPY OF WHICH WAS ENCLOSED WITH YOUR LETTER. SHALL BE DONE IN ACCORDANCE WITH LAWS OF THE STATE IN WHICH THE PROJECT IS LOCATED. THE STATE DECLARED THE CONTRACTORS IN DEFAULT AND THE CONTRACT WORK WAS SATISFACTORILY COMPLETED BY THE SURETY.

B-134044, NOV. 27, 1957

TO MAJOR GENERAL EDGAR C. ERICKSON, CHIEF, NATIONAL GUARD BUREAU:

REFERENCE IS MADE TO YOUR LETTER OF OCTOBER 8, 1957, WITH ITS ENCLOSURES, REQUESTING A DECISION AS TO THE PROPER DISPOSITION OF THE SUM OF $21,602.99 NOW HELD BY THE UNITED STATES PROPERTY AND FISCAL OFFICER OF THE STATE OF TEXAS AS THE BALANCE DUE FROM THE UNITED STATES UNDER TWO CONTRACTS FOR THE CONSTRUCTION OF ARMORIES AT CISCO AND RANGER, TEXAS.

BY CONTRACTS NOS. DA-41-292-NG-436 AND DA-41-292-NG-437 DATED JUNE 12, 1956, SMITH-MCGRAW AND ASSOCIATES AGREED WITH THE STATE OF TEXAS TO CONSTRUCT THE ARMORIES AT CISCO AND RANGER, RESPECTIVELY, FOR CONSIDERATIONS OF $80,020.00 AND $79,570.00, OF WHICH APPROXIMATELY 75 PERCENT WAS DESIGNATED AS THE FEDERAL SHARE. THE CONTRACTS WERE ENTERED INTO PURSUANT TO AGREEMENTS NOS. DA-41-292-NG-404 AND DA-41 292-NG-405 BETWEEN THE UNITED STATES AND THE STATE OF TEXAS, WHEREBY IT WAS AGREED THAT THE STATE SHOULD EXECUTE THE PERTINENT CONSTRUCTION AND SUPPLY CONTRACTS. IN ARTICLE II, PARAGRAPH 3, OF THE AGREEMENTS, THE UNITED STATES AGREED "TO PAY THE CONSTRUCTION CONTRACTOR AS THE WORK PROGRESSES FOR THE GOVERNMENT'S SHARE OF SAID COST ON THE BASIS OF THE PERCENTAGE WHICH ITS PORTION BEARS TO THE TOTAL COST OR, IF THE STATE SHALL HAVE PAID THE FULL AMOUNT OF SUCH PARTIAL PAYMENT, TO REIMBURSE THE STATE FOR THE GOVERNMENT'S SHARE: PROVIDED, THE TOTAL AMOUNT PAID TO THE CONSTRUCTION CONTRACTOR OR TO THE STATE OR TO BOTH, BY THE GOVERNMENT SHALL AT NO TIME EXCEED 75 PERCENTUM OF THE COST OF THE FACILITY CONSTRUCTED UNDER THIS REEMENT.'

IN YOUR LETTER IT IS STATED THAT THE ARMORIES WERE CONSTRUCTED UNDER THE PROVISIONS OF SECTION 3 (C) OF THE NATIONAL DEFENSE FACILITIES ACT OF 1950, AS AMENDED (10 U.S.C. 2233 (A) (3) ). DEPARTMENT OF DEFENSE DIRECTIVE 1225.2, DATED MARCH 13, 1956, A COPY OF WHICH WAS ENCLOSED WITH YOUR LETTER, PROVIDES THAT "ALL WORK AUTHORIZED PURSUANT TO SECTION 3 (B) OR 3 (C) OF THE ACT, AS AMENDED, SHALL BE DONE IN ACCORDANCE WITH LAWS OF THE STATE IN WHICH THE PROJECT IS LOCATED, AND UNDER THE SUPERVISION OF OFFICIALS OF SUCH STATE, SUBJECT TO INSPECTION AND APPROVAL BY THE SECRETARY OF DEFENSE, OR HIS DELEGATE.'

IT APPEARS THAT ON APRIL 19, 1957, THE STATE DECLARED THE CONTRACTORS IN DEFAULT AND THE CONTRACT WORK WAS SATISFACTORILY COMPLETED BY THE SURETY, THE AETNA INSURANCE COMPANY OF HARTFORD, CONNECTICUT, ON APRIL 24, 1957. A NOTICE OF LEVY DATED JUNE 10, 1957, WAS SERVED ON THE UNITED STATES PROPERTY AND FISCAL OFFICER BY THE DISTRICT DIRECTOR OF INTERNAL REVENUE, DALLAS, TEXAS, COVERING WITHHOLDING AND UNEMPLOYMENT TAXES IN THE AMOUNT OF $9,044.08 OWING BY THE CONTRACTORS, ACCRUING UNDER THE TWO CONTRACTS BEFORE THE CONTRACT WORK WAS ASSUMED BY THE SURETY. IT IS STATED THAT CERTAIN LABORERS AND MATERIALMEN WHO NEGLECTED TO MAKE TIMELY ASSERTION OF THEIR RIGHTS AGAINST THE SURETY HAVE ASSERTED CLAIMS (INFORMALLY UNDERSTOOD TO INVOLVE THE INSTITUTION OF LITIGATION) AGAINST THE STATE OF TEXAS IN THE AMOUNT OF $55,159.43 FOR WORK PERFORMED AND MATERIALS FURNISHED UNDER THE CONTRACTS AND THAT THE STATE HAS WITHHELD A TOTAL OF $30,391.40 PENDING THE OUTCOME OF THE LITIGATION.

THE QUESTIONS PRESENTED ARE STATED AS FOLLOWS IN THE LAST PARAGRAPH OF YOUR LETTER:

"* * * (1) SHOULD THE USP AND FO OF TEXAS TURN OVER TO THE INTERNAL REVENUE BUREAU FUNDS IN THE AMOUNT OF $9,044.08 DUE UNDER THE NOTICE OF LEVY; (2) SHOULD THE USP AND FO TURN OVER TO THE STATE, PRIOR TO SETTLEMENT OF THE CLAIMS OF THE MATERIALMEN AND LABORERS AGAINST THE STATE, THE FULL AMOUNT THEY NOW HOLD OF $21,602.99; (3) DOES THE FEDERAL GOVERNMENT HAVE ANY OBLIGATION TO PAY THE AETNA INSURANCE COMPANY, AND IF IT DOES HAVE SUCH AN OBLIGATION, IS THE SURETY ENTITLED TO THE ENTIRE SUM REMAINING UNPAID ON THE CONTRACT, OR IS IT ONLY ENTITLED TO RECEIVE REIMBURSEMENT FOR THE ACTUAL AMOUNT SPENT BY IT COMPLETING THE CONTRACT AND IN SATISFYING ALL MATERIALMEN AND LABORERS; AND (4) IF IT IS CONSIDERED PROPER TO THAT USP AND FO OF TEXAS TURN OVER TO THE INTERNAL REVENUE THE $9,044.08 DUE UNDER THE NOTICE OF LEVY, WHAT DISPOSITION SHOULD BE MADE OF THE REMAINING FUNDS IN THE HANDS OF THE USP AND FO, WHICH ARE DUE UNDER THE CONTRACTS.'

SECTION 3 OF THE NATIONAL DEFENSE FACILITIES ACT OF 1950 PROVIDES IN PERTINENT PART:

"SUBJECT TO THE PROVISIONS OF SECTION 4 OF THIS ACT, THE SECRETARY OF DEFENSE MAY, IN AN AMOUNT NOT TO EXCEED $250,000,000 OVER A PERIOD OF THE NEXT FIVE FISCAL YEARS, AFTER CONSULTATION WITH THE RESPECTIVE ARMED SERVICES COMMITTEES OF THE CONGRESS---

"/C) CONTRIBUTE TO ANY STATE SUCH FUNDS FOR THE ACQUISITION, CONSTRUCTION, EXPANSION, REHABILITATION, OR CONVERSION BY SUCH STATE OF SUCH ADDITIONAL FACILITIES AS HE SHALL DETERMINE TO HAVE BEEN MADE ESSENTIAL BY ANY INCREASE IN STRENGTH OF THE NATIONAL GUARD OF THE UNITED STATES OR THE AIR NATIONAL GUARD OF THE UNITED STATES.'

THE CONSTRUCTION CONTRACTS ARE BETWEEN THE STATE OF TEXAS AND SMITH MCGRAW AND ASSOCIATES AND THE PERTINENT BONDS ARE IN FAVOR OF THE STATE OF TEXAS.

IN 80 C.J.S. SET-OFF AND COUNTERCLAIM NO. 48, IT IS STATED:

"AS A GENERAL RULE, IN ORDER TO WARRANT A SET-OFF THE DEMANDS MUST BE MUTUAL AND SUBSISTING BETWEEN THE SAME PARTIES, AND FURTHERMORE MUST BE DUE IN THE SAME CAPACITY OR RIGHT, AND THERE MUST BE MUTUALITY AS TO THE QUALITY OF THE RIGHT.'

IT IS CONCLUDED THAT THERE IS NO SOUND BASIS FOR MAKING DIRECT SET OFF IN THIS MATTER, APPLYING AGAINST THE CONTRACTOR'S TAX INDEBTEDNESS A PORTION OF THE BALANCE OWED BY THE UNITED STATES IN THE MATTER, SINCE THE UNITED STATES WAS NOT A PARTY TO THE CONSTRUCTION CONTRACTS AND HAS NO ENFORCEABLE OBLIGATION TO THE CONTRACTORS OR TO THE SURETY OR TO LABORERS OR MATERIALMEN. ACCORDINGLY, YOUR QUESTIONS NUMBERED (1) AND (3) ARE ANSWERED IN THE NEGATIVE. SINCE ANY ACTION BY THE CONTRACTORS OR THE SURETY FOR RECOVERY OF THE UNPAID BALANCE WOULD LIE AGAINST THE STATE OF TEXAS, AND UNDER THE TERMS OF THE CONTRACTS THE UNITED STATES APPEARS TO BE LIABLE TO REIMBURSE THE STATE FOR ITS AGREED PORTION OF ANY AMOUNTS FOR WHICH JUDGMENT MIGHT BE ENTERED, WE ARE REFERRING THE MATTER TO THE ATTORNEY GENERAL, TO THE END THAT THE INTERESTS OF THE GOVERNMENT BOTH AS TO THE TAXES DUE AND AS TO THE PROPER DISPOSITION OF THE BALANCE DUE ON THE CONTRACT MAY BE PRESENTED TO AND DETERMINED IN THE PENDING LITIGATION, OR SUCH OTHER PROCEEDING AS HE MAY THINK PROPER.

ENCLOSED ARE COPIES OF LETTERS TO THE ATTORNEY GENERAL AND TO THE DIRECTOR OF INTERNAL REVENUE. THE PAPERS TRANSMITTED WITH YOUR LETTER ARE RETURNED HEREWITH.