B-135823, MAY 29, 1958, 37 COMP. GEN. 808

B-135823, MAY 29, 1958, 37 COMP. GEN. 808

SET-OFF - CONTRACT PAYMENTS - ASSIGNMENTS - TAX DEBTS A CONTRACTOR'S DEBT FOR WITHHOLDING TAXES AND FEDERAL INSURANCE CONTRIBUTIONS ACT TAXES, PENALTY AND INTEREST FOR THE THIRD QUARTER 1953, WHICH DID NOT HAVE TO BE PAID BY THE CONTRACTOR UNTIL OCTOBER 31, 1953, THE LAST DAY OF THE MONTH FOLLOWING THE CLOSE OF THE TAX QUARTER, WHICH WAS SEVERAL WEEKS AFTER NOTICE OF ASSIGNMENT OF THE CONTRACT PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, 31 U.S.C. 203, IS TO BE REGARDED AS A DEBT IN EXISTENCE PRIOR TO NOTICE OF ASSIGNMENT AND A MATURED CLAIM AT THE TIME OF SET-OFF SO THAT SET-OFF OF THE TAXES, PENALTY AND INTEREST FOR AMOUNTS DUE THE ASSIGNEE WAS PROPER. INTEREST AND PENALTIES FOR FAILURE OF A CONTRACTOR TO PAY WITHHOLDING TAXES AND FEDERAL INSURANCE CONTRIBUTIONS ACT TAXES WHICH WERE COMPUTED TO A PERIOD SUBSEQUENT TO THE DATE WORK UNDER A CONTRACT WAS COMPLETED AND WHICH WERE SET OFF AGAINST AMOUNTS DUE UNDER AN ASSIGNED CONTRACT SHOULD BE RECOMPUTED SINCE SET-OFF ACTION, WHICH IS ESSENTIALLY AN EQUITABLE ACTION, REQUIRES THE SIMULTANEOUS ADJUSTMENT BETWEEN THE PARTIES OF THEIR MUTUAL DEBTS SO THAT SET-OFF FOR DELINQUENT TAX INTEREST AND PENALTIES SHOULD BE MADE AS OF THE DATE OF COMPLETION OF THE CONTRACT.

TO HUDSON, CREYKE AND LIPSCOMB, MAY 29, 1958:

WE REFER TO YOUR LETTER OF MARCH 24, 1958, AND PRIOR CORRESPONDENCE REQUESTING RECONSIDERATION OF NOTICE OF SETTLEMENT OF CLAIM NO. Z 1355761 ISSUED SEPTEMBER 12, 1957, ON BEHALF OF UNION TRUST COMPANY OF MARYLAND AS ASSIGNEE OF HARRY R. BYERS, INC.

THE RECORD SHOWS THAT HARRY R. BYERS, INC., WAS AWARDED CONTRACT NO. ACPP -398, DATED MARCH 16, 1951, BY THE ARCHITECT OF THE CAPITOL FOR INSTALLATION OF THREE DUST COLLECTORS AT THE CAPITOL POWER PLANT. PAYMENTS DUE OR TO BECOME DUE UNDER THE CONTRACT WERE ASSIGNED PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED, 31 U.S.C. 203, BY THE CONTRACTOR TO THE UNION TRUST COMPANY OF MARYLAND ON OCTOBER 9, 1953. RECEIPT OF NOTICE OF THE ASSIGNMENT WAS ACKNOWLEDGED BY THE ARCHITECT OF THE CAPITOL ON OCTOBER 10, 1953. PERFORMANCE UNDER THE CONTRACT WAS SATISFACTORILY COMPLETED ON SEPTEMBER 10, 1954, AND FINAL PAYMENT WAS FOUND TO BE DUE IN THE AMOUNT OF $36,758.78. BY THE CERTIFICATE OF SETTLEMENT CITED ABOVE, THAT AMOUNT WAS SET OFF AGAINST THE WITHHOLDING AND FICA TAXES PLUS PENALTY AND INTEREST COMPUTED TO FEBRUARY 28, 1957, IN THE AMOUNT OF $37,993.80 DUE TO THE GOVERNMENT BY THE CONTRACTOR. THE WITHHOLDING AND FICA TAXES COVERED THE FOURTH QUARTER OF 1952 AND THE FIRST THREE QUARTERS OF 1953. IT IS CONTENDED IN YOUR LETTER OF MARCH 24, 1958, THAT THE TAXES FOR THE THIRD QUARTER OF 1953 PLUS PENALTY AND INTEREST TOTALING $10,753.54 ARE NOT PROPERLY FOR SET-OFF AGAINST THE ASSIGNEE, SINCE THEY DID NOT CONSTITUTE A MATURED ACTIONABLE CLAIM AGAINST THE CONTRACTOR UNTIL OCTOBER 31, 1953, SEVERAL WEEKS AFTER RECEIPT OF THE NOTICE OF ASSIGNMENT BY THE GOVERNMENT.

IN SUPPORT OF YOUR CONTENTION, YOU CITED 20 C.F.R. 405.601, IN EFFECT DURING THAT PERIOD, WHICH PROVIDES IN SUBSTANCE THAT THE TAXES IN QUESTION NEED NOT HAVE BEEN PAID BY THE CONTRACTOR PRIOR TO OCTOBER 31, 1953, THE LAST DAY OF THE MONTH FOLLOWING THE CLOSE OF THE TAX QUARTER. YOU ALSO CITE SEVERAL DECISIONS OF OUR OFFICE WHICH INDICATE THAT, UNLESS IT AROSE UNDER THE SAME CONTRACT, A CLAIM BY A DEBTOR AGAINST THE ASSIGNOR CAN BE SET OFF AGAINST PAYMENTS OTHERWISE DUE THE ASSIGNEE ONLY IF SUCH CLAIM HAD MATURED BY THE TIME THE ASSIGNMENT HAD BEEN MADE OR AT THE LATEST WHEN THE TIME NOTICE OF ASSIGNMENT HAD BEEN RECEIVED BY THE DEBTOR. SEE 20 COMP. GEN. 458 AND 37 COMP. GEN. 318. THE EARLIER DECISION, 20 COMP. GEN. 458, DEFINES A MATURE CLAIM AS AN ACTIONABLE RIGHT. SINCE THE SUPREME COURT'S DECISION IN CENTRAL BANK V. UNITED STATES, 345 U.S. 639, IT IS CLEAR THAT THE TAXES, PENALTY AND INTEREST HERE INVOLVED MUST BE REGARDED AS HAVING ARISEN INDEPENDENTLY OF THE CONTRACT IN QUESTION. ACCORDINGLY, IT IS YOUR CONTENTION THAT THE TAXES, PENALTY AND INTEREST FOR THE THIRD QUARTER OF 1953 ARE NOT PROPERLY FOR SET-OFF AND THAT THE AMOUNT DUE UNDER THE CONTRACT SHOULD BE PAID TO THE ASSIGNEE BANK.

IT IS CONCEDED THAT A JUDICIAL LINE OF AUTHORITY EXISTS TO SUPPORT THE CONTENTION THAT ONLY THOSE CLAIMS ARISING INDEPENDENTLY OF THE CONTRACT WHICH HAD MATURED, I.E., WERE ACTIONABLE PRIOR TO RECEIPT OF NOTICE OF ASSIGNMENT BY THE DEBTOR, CAN BE SET OFF AGAINST THE ASSIGNEE. THAT LINE OF AUTHORITY WAS FOLLOWED AND CITED IN THE DICTA CONTAINED IN OUR DECISIONS AT 20 COMP. GEN. 458 AND 37 COMP. GEN. 318. ALSO, THAT LINE OF AUTHORITY APPEARS TO HAVE BEEN FOLLOWED BY THE FEDERAL COURTS. FIRST NATIONAL BANK OF BIRMINGHAM V. UNITED STATES, 117 F.1SUPP. 486. IN THIS CASE, TOO, THE MATTER WAS NOT AT ISSUE AND THE COURT'S STATEMENTS WITH REGARD TO THE MATURITY OF THE CLAIMS TO BE SET OFF AGAINST THE ASSIGNEE MUST BE REGARDED AS DICTA.

WHILE THERE IS UNQUESTIONABLE AUTHORITY WITH REGARD TO YOUR POSITION AS TO THE NECESSITY THAT THE CLAIM BE MATURED PRIOR TO RECEIPT OF NOTICE OF ASSIGNMENT, THERE IS VALID AND LEARNED AUTHORITY TO THE OPPOSITE EFFECT. AT 2 WILLISTON ON CONTRACTS ( REVISED EDITION), SECTION 432 (PAGE 1246), IT IS STATED:

* * * DENIAL OF A RIGHT OF SET-OFF BECAUSE EITHER THE ASSIGNED CLAIM OR THE CROSS-CLAIM WAS NOT DUE AT THE TIME OF THE ASSIGNMENT IS, HOWEVER, NOT CONSISTENT WITH THE GENERAL PRINCIPLE ALLOWING SET-OFF AGAINST THE ASSIGNEE OF CLAIMS DUE FROM THE ASSIGNOR; AND THERE IS GOOD AUTHORITY TO SUPPORT THE RULE THAT THE ONLY QUESTION SHOULD BE, (1) DID THE CLAIM AGAINST THE ASSIGNOR EXIST, WHETHER MATURED OR NOT, BEFORE NOTICE OF THE ASSIGNMENT, AND (2) WERE BOTH CLAIMS MATURED WHEN THE SET-OFF WAS ASSERTED

TO THE SAME EFFECT SEE THE RESTATEMENT OF CONTRACTS, SECTION 167, CITED WITH APPROVAL AT 29 COMP. GEN. 40, 44. SEE, ALSO, TO THE SAME EFFECT MARYLAND COOPERATIVE MILK PRODUCERS V. BELL, 110 A.2D 661, AND NORTHWESTERN NATIONAL BANK V. COMMONWEALTH, 27 A.2D 20. UNDER THE AUTHORITY CITED ABOVE, THE TAXES, PENALTY AND INTEREST FOR THE THIRD QUARTER OF 1953 WERE PROPERLY SET OFF SINCE THE CLAIM EXISTED PRIOR TO NOTICE OF ASSIGNMENT AND HAD MATURED AT THE TIME SET-OFF WAS ACTUALLY MADE. IN VIEW OF THE GRAVE DOUBT EXISTING AS TO THE PROPER LEGAL PRINCIPLE TO BE APPLIED IN THIS MATTER, IT IS OUR DUTY TO RESOLVE THE DOUBT IN FAVOR OF THAT COURSE WHICH WILL RESULT IN THE CONSERVATION OF APPROPRIATED FUNDS AND TO LEAVE TO THE PROPER JUDICIAL AUTHORITY THE FINAL DETERMINATION OF THE MATTER. CHARLES V. UNITED STATES, 19 C.1CLS. 316 AND LONGWILL V. UNITED STATES, 17 C.1CLS. 288.

YOU ALSO CONTEND THAT NO SET-OFF SHOULD BE MADE FOR INTEREST OR PENALTIES ACCRUING AFTER SEPTEMBER 10, 1954, THE DATE WORK UNDER THE CONTRACT WAS PROPERLY COMPLETED BY THE CONTRACTOR. IN SUPPORT OF YOUR CONTENTION YOU CITE 30 COMP. GEN. 98 IN WHICH IT IS STATED THAT:

HOWEVER, FROM AND AFTER THE DATE UPON WHICH THE UNPAID BALANCES BECAME DUE UNDER THE CONTRACT, PRESUMABLY THE DATE OF FINAL ACCEPTANCE OF THE CONTRACT WORK, FUNDS WERE IN THE HANDS OF THE UNITED STATES WHICH COULD BE APPLIED AGAINST THE CONTRACTOR'S TAX LIABILITY. INASMUCH AS SET-OFF IS ESSENTIALLY AN EQUITABLE REMEDY BASED UPON THE PRINCIPLE THAT SUBSTANTIAL JUSTICE REQUIRES THE SIMULTANEOUS ADJUSTMENT BETWEEN THE PARTIES OF THEIR MUTUAL DEBTS, THE CONTRACT BALANCE SHOULD BE SET OFF AS OF THE DATE IT BECAME DUE. * * *

SINCE THE ARCHITECT OF THE CAPITOL REPORTED THAT ALL WORK ON THE CONTRACT WAS SATISFACTORILY COMPLETED BY SEPTEMBER 10, 1954, WE AGREE THAT SET-OFF SHOULD BE MADE AS OF THAT DATE WITH NO INTEREST OR PENALTIES ACCRUING THEREAFTER. THE AMOUNT FOR SET-OFF WILL BE RECOMPUTED AND THE ASSIGNEE WILL RECEIVE ANY AMOUNT OWING IN EXCESS OF THAT WHICH MAY PROPERLY BE SET OFF.