B-150503, FEB. 27, 1963

B-150503: Feb 27, 1963

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BUCKLEY: REFERENCE IS MADE TO YOUR CORRESPONDENCE RELATIVE TO THE WITHHOLDING OF A TAX REFUND. WAS MADE FOR THE PURPOSE OF PURCHASING A PRIOR LIEN ON SAID MACHINERY AND EQUIPMENT. A REPRESENTATIVE OF OUR DALLAS REGIONAL OFFICE WAS PRESENT AND MADE AN ANNOUNCEMENT BEFORE THE SALE WAS HELD THAT THIS AGENCY HELD A LIEN ON THE MACHINERY AND EQUIPMENT. THAT THE BALANCE DUE WAS $31. THE PROPERTY WAS BID IN BY INTERNAL REVENUE SERVICE. INTERNAL REVENUE SERVICE SUBSEQUENTLY CONDUCTED AN AUCTION SALE OF SAID PROPERTY AND IT IS ANTICIPATED THAT SBA WILL RECEIVE FROM IRS FROM THE PROCEEDS OF THIS SALE THE SUM OF $27. THERE WILL REMAIN A BALANCE DUE ON THIS LOAN OF MORE THAN $1. 698.52 IS TO BE RETAINED BY THE INTERNAL REVENUE SERVICE AND THE BALANCE OF THE NET PROCEEDS.

B-150503, FEB. 27, 1963

TO MR. CHARLES F. BUCKLEY:

REFERENCE IS MADE TO YOUR CORRESPONDENCE RELATIVE TO THE WITHHOLDING OF A TAX REFUND, IN THE AMOUNT OF $3,795.87, DUE MR. TRULY M. BELGARD, ALEXANDRIA, LOUISIANA, FOR APPLICATION TO AN INDEBTEDNESS WITH THE SMALL BUSINESS ADMINISTRATION.

IN RESPONSE TO OUR REQUEST FOR A FULL REPORT ON THE INDEBTEDNESS INVOLVED, THE OFFICE OF THE GENERAL COUNSEL, SMALL BUSINESS ADMINISTRATION, IN A LETTER DATED JANUARY 28, 1963, ADVISED AS FOLLOWS:

"ON OCTOBER 16, 1958, THIS AGENCY MADE A LOAN TO TRULY M. BELGARD, D/B/A BAYOU MILLWORK COMPANY, ALEXANDRIA, LOUISIANA, IN THE AMOUNT OF $35,000, AND OBTAINED AS SECURITY A MORTGAGE LIEN ON CERTAIN MACHINERY AND EQUIPMENT. SUBSEQUENTLY, AN ADVANCE, IN THE AMOUNT OF $3,270.91, WAS MADE FOR THE PURPOSE OF PURCHASING A PRIOR LIEN ON SAID MACHINERY AND EQUIPMENT. IN THE FALL OF 1961, THE INTERNAL REVENUE SERVICE LEVIED ON ALL OF THE ASSETS OF THE BORROWER, INCLUDING THE MACHINERY AND EQUIPMENT ON WHICH THIS AGENCY HAD A MORTGAGE LIEN, AND ADVERTISED A PUBLIC SALE OF SUCH ASSETS. ON THE DAY OF THE SALE, DECEMBER 18, 1961, A REPRESENTATIVE OF OUR DALLAS REGIONAL OFFICE WAS PRESENT AND MADE AN ANNOUNCEMENT BEFORE THE SALE WAS HELD THAT THIS AGENCY HELD A LIEN ON THE MACHINERY AND EQUIPMENT, THAT THE BALANCE DUE WAS $31,110.40, WITH ACCRUED INTEREST FROM NOVEMBER 16, 1960, AND THAT ANY SALE WOULD BE SUBJECT TO SAID LIEN. THE PROPERTY WAS BID IN BY INTERNAL REVENUE SERVICE. INTERNAL REVENUE SERVICE SUBSEQUENTLY CONDUCTED AN AUCTION SALE OF SAID PROPERTY AND IT IS ANTICIPATED THAT SBA WILL RECEIVE FROM IRS FROM THE PROCEEDS OF THIS SALE THE SUM OF $27,201.48. SUCH AMOUNT, HOWEVER, HAS NOT BEEN RECEIVED. AFTER APPLYING THE $3,795.87 RECEIVED BY SET-OFF, AND THE ANTICIPATED PAYMENT OF $27,201.48 FROM INTERNAL REVENUE SERVICE, THERE WILL REMAIN A BALANCE DUE ON THIS LOAN OF MORE THAN $1,900.'

UPON FURTHER INQUIRY WE LEARNED THAT THE SUBSEQUENT SALE OF THE DEBTOR'S ASSETS LEVIED UPON GROSSED $32,000. THE NET PROCEEDS, AFTER DEDUCTION OF SALES EXPENSES INCLUDING THE HIRING OF AN AUCTIONEER, AMOUNTED TO $28,900. AS THE SMALL BUSINESS ADMINISTRATION'S LIEN DID NOT APPLY TO ITEMS OF INVENTORY INCLUDED IN THE SALE, THE SUM OF $1,698.52 IS TO BE RETAINED BY THE INTERNAL REVENUE SERVICE AND THE BALANCE OF THE NET PROCEEDS, $27,201.48, IS TO BE REMITTED TO THE SMALL BUSINESS ADMINISTRATION.

IT IS WELL ESTABLISHED THAT THE GOVERNMENT HAS THE RIGHT TO APPLY MONEYS OF ITS DEBTOR, IN ITS POSSESSION, IN EXTINGUISHMENT OF THE DEBT DUE IT. CHERRY COTTON MILLS V. UNITED STATES, 327 U.S. 563; UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234. THE QUESTION HEREIN IS AS TO THE EXISTENCE OF THE DEBT, WHETHER THE EVENTS WHICH OCCURRED DISCHARGED IT IN ITS ENTIRETY, NOTWITHSTANDING THAT THE PROCEEDS REALIZED FROM THE ULTIMATE SALE OF THE SECURITY WERE LESS THAN THE REMAINING OBLIGATION.

IT IS APPARENT FROM THE LETTER OF THE OFFICE OF THE GENERAL COUNSEL OF THE SMALL BUSINESS ADMINISTRATION THAT THAT AGENCY DOES NOT VIEW THE LOAN OBLIGATION OF MR. BELGARD AS HAVING BEEN DISCHARGED, EXCEPT TO THE EXTENT OF THE PAYMENTS RECEIVED AND THE PROCEEDS REALIZED FROM THE SALE OF THE SECURITY FOR THE LOAN. CONSEQUENTLY, STATEMENTS OF REGIONAL SMALL BUSINESS ADMINISTRATION PERSONNEL INDICATING A CONTRARY POSITION CANNOT BE VIEWED AS CONTROLLING.

PREDICATED UPON LOUISIANA LAW VARIOUS ARGUMENTS ARE ADVANCED TO SUPPORT THE CONCLUSION THAT MR. BELGARD HAD BEEN RELEASED OF HIS OBLIGATION TO REIMBURSE THE GOVERNMENT FOR THE LOAN RECEIVED UNDER THE FEDERAL PROGRAM ADMINISTERED BY THE SMALL BUSINESS ADMINISTRATION. UNFORTUNATELY SPECIFIC REFERENCE TO THE LOUISIANA STATUTES OR AUTHORITIES ARE NOT INCLUDED.

HOWEVER, AS THERE IS HERE INVOLVED A LOAN OF FEDERAL FUNDS IN CONNECTION WITH A FEDERAL PROGRAM, AND THE PARTIES INVOLVED ARE THE UNITED STATES AND THE PARTICIPANT IN THE PROGRAM, WE ARE OF THE VIEW THAT STATE LAW IS NOT CONTROLLING. WE RELY ON THE GENERAL PROPOSITION THAT THE SUBJECT MATTER OF THIS LITIGATION ARISES UNDER THE FEDERAL LAW AND CANNOT BE IMPAIRED BY A STATE STATUTE. MCKNIGHT V. UNITED STATES, 259 F.2D 540. SEE CLEAR FIELD TRUST CO. V. UNITED STATES, 318 U.S. 363; UNITED STATES V. SHIMER, 367 U.S. 374. CF. BUMB V. UNITED STATES, 276 F.2D 729.

MR. BELGARD'S OBLIGATION WAS TO REPAY THE UNITED STATES FOR THE LOAN RECEIVED. THE EVENTS INVOLVED ARE NOT CONSIDERED TO HAVE EFFECTED A LEGAL CANCELLATION OF THAT OBLIGATION. CONSEQUENTLY WE CONCUR IN THE POSITION OF THE SMALL BUSINESS ADMINISTRATION AND MUST ADVISE YOU THAT WE VIEW THE APPLICATION OF THE TAX REFUND TO THE SMALL BUSINESS ADMINISTRATION LOAN AS PROPER.