B-153505, MAR. 26, 1964

B-153505: Mar 26, 1964

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800 OF THIS CONTRACT IS UNCOMPLETED AT THE PRESENT TIME. CORVALLIS NOTIFIED THE BONNEVILLE POWER ADMINISTRATION OF THE CONTRACTOR'S ASSIGNMENT OF THE FUNDS UNDER THIS CONTRACT AND THAT RECEIPT OF NOTICE OF THIS ASSIGNMENT WAS ACKNOWLEDGED BY THE ADMINISTRATION ON MAY 2. LETTER TO YOU THAT THE SURETY WAS NOT NOTIFIED OF THE ASSIGNMENT TO CORVALLIS. IN REGARD TO THIS ISSUE WE HAVE NO EVIDENCE IN THE RECORD BEFORE US. IT HAS BEEN HELD THAT THE RIGHTS OF A SURETY ON A PERFORMANCE BOND FOR COMPLETING A CONTRACT ARE SUPERIOR TO THE RIGHTS OF A BANK AS THE CONTRACTOR'S ASSIGNEE. AS BETWEEN THE RIGHTS OF A SURETY ON A PAYMENT BOND AND THE RIGHTS OF A CONTRACTOR'S ASSIGNEE THE COURTS ARE NOT IN AGREEMENT.

B-153505, MAR. 26, 1964

TO MR. J. E. PERRY, BONNEVILLE POWER ADMINISTRATION, DEPARTMENT OF THE INTERIOR:

WE REFER TO YOUR LETTER DATED FEBRUARY 11, 1964, REQUESTING OUR DECISION WHETHER PAYMENT, PURSUANT TO THE ENCLOSED VOUCHER, OF $2,435 REPRESENTING AN AMOUNT IN EXCESS OF THE RETAINED PERCENTAGES DUE UNDER CONTRACT NO. 14- 03-34798, MAY PROPERLY BE PAID TO THE CITIZENS BANK OF CORVALLIS, P.O. BOX 30, CORVALLIS, OREGON, AS ASSIGNEE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940, 54 STAT. 1029 AS AMENDED, 31 U.S.C. 203, OF ALL FUNDS DUE OR TO BECOME DUE UNDER THE SUBJECT CONTRACT OR WHETHER PAYMENT SHOULD BE MADE TO THE CONTRACTOR'S SURETY WHICH HAS ADVANCED FUNDS UNDER THE ABOVE CONTRACT. THE RECORDS INDICATES THAT APPROXIMATELY $6,800 OF THIS CONTRACT IS UNCOMPLETED AT THE PRESENT TIME, AND THAT RETAINED PERCENTAGES WITHHELD FROM COMPLETED PORTIONS OF THE WORK AMOUNT TO $16,787.48.

ON JANUARY 2, 1964, THE ATTORNEYS FOR PENNSYLVANIA INSURANCE COMPANY, THE SURETY ON THE PAYMENT AND PERFORMANCE BONDS, ADVISED YOU THAT THE CONTRACTOR HAD INADEQUATE FUNDS TO COMPLETE THE CONTRACT, THAT THE SURETY WOULD ADVANCE FUNDS NECESSARY TO COMPLETE THE SUBJECT CONTRACT, AND THAT PAYMENTS WOULD BE MADE BY THE SURETY OF CERTAIN OUTSTANDING LABOR AND MATERIAL BILLS. THE SURETY CLAIMS AN EQUITABLE LIEN ON ALL FUNDS REMAINING IN THE HANDS OF THE GOVERNMENT. A LETTER FROM THE SURETY'S ATTORNEYS TO OUR OFFICE DATED FEBRUARY 28, 1964, CONTAINS SUBSTANTIALLY THE SAME ALLEGATIONS.

ON JANUARY 13, 1964, THE SURETY'S ATTORNEYS DIRECTED A LETTER TO YOU QUESTIONING THE VALIDITY OF THE CORVALLIS ASSIGNMENT ALLEGING THAT THE BANK DID NOT GIVEN NOTICE OF THE ASSIGNMENT TO THE CONTRACTING OFFICER AS REQUIRED BY THE ASSIGNMENT OF CLAIMS ACT OF 1940, AND THAT A SUBSEQUENT ASSIGNMENT BY THE CONTRACTOR TO THE UNITED STATES NATIONAL BANK OF PORTLAND SHOULD BE RECOGNIZED BY THE GOVERNMENT. THE RECORD, HOWEVER, INDICATES THAT ON APRIL 25, 1963, CORVALLIS NOTIFIED THE BONNEVILLE POWER ADMINISTRATION OF THE CONTRACTOR'S ASSIGNMENT OF THE FUNDS UNDER THIS CONTRACT AND THAT RECEIPT OF NOTICE OF THIS ASSIGNMENT WAS ACKNOWLEDGED BY THE ADMINISTRATION ON MAY 2, 1963. THE SURETY'S ATTORNEYS ALSO CONTEND IN THE JANUARY 13, 1964, LETTER TO YOU THAT THE SURETY WAS NOT NOTIFIED OF THE ASSIGNMENT TO CORVALLIS. IN REGARD TO THIS ISSUE WE HAVE NO EVIDENCE IN THE RECORD BEFORE US.

IT HAS BEEN HELD THAT THE RIGHTS OF A SURETY ON A PERFORMANCE BOND FOR COMPLETING A CONTRACT ARE SUPERIOR TO THE RIGHTS OF A BANK AS THE CONTRACTOR'S ASSIGNEE. SEE NATIONAL SURETY CORPORATION V. UNITED STATES, 132 CT.CL. 724 (1955). HOWEVER, AS BETWEEN THE RIGHTS OF A SURETY ON A PAYMENT BOND AND THE RIGHTS OF A CONTRACTOR'S ASSIGNEE THE COURTS ARE NOT IN AGREEMENT. COMPARE COCONUT GROVE EXCHANGE BANK V. AMSTERDAM CASUALTY CO., 149 F.2D 73 (5TH CIR. 1945) AND GENERAL CASUALTY CO. OF AMERICA V. SECOND NATIONAL BANK OF HOUSTON, 178 F.2D 679 (5TH CIR. 1949) WITH ROYAL INDEMNITY COMPANY V. UNITED STAES, 117 CT.CL. 736 (1950), AND NATIONAL SURETY CORPORATION V. THE UNITED STAES, 132 CT.CL. 724 (1955). THE LATTER CASE WAS CITED IN THE LETTER FROM THE SURETY'S ATTORNEYS TO THIS OFFICE AS AUTHORITY FOR MAKING PAYMENT TO THE SURETY AT THIS TIME. WE NOTE THAT THE COCONUT GROVE AND GENERAL CASUALTY CASES, SUPRA, GAVE PRIORITY TO THE RIGHTS OF AN ASSIGNEE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940, OVER THE RIGHTS OF THE SURETY ON THE PAYMENT BOND, WHILE THE ROYAL INDEMNITY AND NATIONAL SURETY CASES, SUPRA, GAVE PRIORITY TO THE RIGHTS OF THE SURETY ON THE PAYMENT BOND OVER THE RIGHTS OF THE ASSIGNEE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940. IN THIS REGARD THE NATIONAL SURETY CASE, SUPRA, SPECIFICALLY RECOGNIZES THAT THE FIFTH CIRCUIT TAKES THE CONTRARY VIEW IN THE COCONUT GROVE AND GENERAL CASUALTY CASES, SUPRA, IN SITUATIONS INVOLVING THE RIGHTS OF A SURETY UNDER A PAYMENT BOND AND THE RIGHTS OF AN ASSIGNEE BANK. THE RECORD DOES NOT ESTABLISH WHETHER THE SURETY'S CLAIM FOR THE AMOUNTS DUE UNDER THIS CONTRACT IS BASED ON FUNDS ADVANCED UNDER ITS OBLIGATIONS ON THE PERFORMANCE OR PAYMENT BONDS SINCE THE SURETY ALLEGES THAT FUNDS ARE BEING ADVANCED TO COMPLETE THE CONTRACT AND ALSO THAT PAYMENTS WILL BE MADE TO LABOR AND MATERIALMEN. IN THESE CIRCUMSTANCES WE DO NOT FIND THE NATIONAL SURETY CASE, SUPRA, AUTHORITY FOR AUTHORIZING PAYMENT TO THE SURETY.

MOREOVER, AN ADMINISTRATIVE DETERMINATION REGARDING THE VALIDITY OF THE CORVALLIS ASSIGNMENT WOULD NOT BE RES JUDICATA, AND THE RECORD DOES NOT INDICATE WHETHER THE SURETY HAS SATISFIED ALL CLAIMS FOR LABOR AND MATERIAL WHICH IS A USUAL PREREQUISITE TO THE RIGHT OF SUBROGATION UNDER THE PAYMENT BOND. SEE UNITED STATES V. NATIONAL SURETY CO., 254 U.S. 73 (1920), AND AMERICAN SURETY COMPANY V. WESTINGHOUSE ELECTRIC CO., 296 U.S. 133 (1935). THEREFORE, AND IN VIEW OF THE DISAGREEMENT BY THE COURTS REGARDING THE RIGHTS OF A SURETY UNDER A PAYMENT BOND AGAINST THOSE OF AN ASSIGNEE BANK, IT WOULD NOT BE POSSIBLE TO CONCLUSIVELY ADJUDICATE THE RIGHTS OF ALL PARTIES. SINCE THE ASCERTAINMENT OF THE FACTS REGARDING THESE ISSUES ARE PROPERLY FOR DETERMINATION BY A COURT, THE GOVERNMENT MIGHT BE SUBJECTED TO DOUBLE LIABILITY IF PAYMENT WERE MADE TO EITHER THE SURETY OR ASSIGNEE. IN THESE CIRCUMSTANCES PAYMENT SHOULD NOT BE MADE TO EITHER THE ASSIGNEE OR THE SURETY EXCEPT PURSUANT TO AGREEMENT BY THE PARTIES OR PURSUANT TO AN ORDER OF A COURT OF COMPETENT JURISDICTION.

WE ALSO CALL YOUR ATTENTION TO THE POSSIBILITY THAT THERE MAY BE A TAX LIABILITY OWED BY THE CONTRACTOR FOR UNPAID FEDERAL WITHHOLDING AND FICA TAXES DUE UNDER THIS CONTRACT. SINCE THE GOVERNMENT MIGHT HAVE A RIGHT TO SET-OFF IF SUCH LIABILITY WERE FOUND TO EXIST, THE INTERNAL REVENUE SERVICE SHOULD BE CONTACTED BY YOU TO ASCERTAIN THE CONTRACTOR'S LIABILITY FOR FEDERAL TAXES UNDER THIS CONTRACT, AND DEDUCTIONS FROM THE AMOUNT PAYABLE SHOULD BE MADE FOR SUCH TAX LIABILITY.