B-154559, MAY 7, 1965

B-154559: May 7, 1965

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TO THE CHEMICAL AND INDUSTRIAL CORPORATION: REFERENCE IS MADE TO THE JOINT LETTER DATED MARCH 15. FOUR OF THE SEVEN CONTRACTS WERE SECURED BY PERFORMANCE BONDS EXECUTED BY THE TRAVELERS INDEMNITY COMPANY UPON APPLICATIONS CONCERNING WHICH THE CHEMICAL AND INDUSTRIAL CORPORATION. WHICH APPEARS TO HAVE OWNED APPROXIMATELY 80 PERCENT OF THE COMMON STOCK OF THE DELANEY COMPANY. THE TRAVELERS INDEMNITY COMPANY WAS ADVISED IN JUNE 1962 OF DEFAULTS UNDER THREE OF THE FOUR CONTRACTS AND THE DELANEY COMPANY SUBSEQUENTLY BECAME INVOLVED IN A BANKRUPTCY PROCEEDING. THE GOVERNMENT FOUND IT NECESSARY TO PERFORM CERTAIN CORRECTIVE WORK ON THE EQUIPMENT DELIVERED UNDER TWO OF THE THREE CONTRACTS WHICH WERE TERMINATED FOR DEFAULT IN JUNE 1962.

B-154559, MAY 7, 1965

TO THE CHEMICAL AND INDUSTRIAL CORPORATION:

REFERENCE IS MADE TO THE JOINT LETTER DATED MARCH 15, 1965, RECEIVED FROM YOUR COMPANY AND THE TRAVELERS INDEMNITY COMPANY, HARTFORD, CONNECTICUT, OFFERING TO ACCEPT THE AMOUNT OF $26,935.62 IN FULL SETTLEMENT OF THEIR CLAIMS IN THE AGGREGATE OF $37,962.97, REPRESENTING THE BALANCES REPORTEDLY DUE FROM THE GOVERNMENT ON SEVEN CONTRACTS ENTERED INTO BY THE BUREAU OF RECLAMATION, DEPARTMENT OF THE INTERIOR, WITH THE DELANEY COMPANY, HOUSTON, TEXAS, FOR THE FURNISHING OF CERTAIN ITEMS OF EQUIPMENT.

FOUR OF THE SEVEN CONTRACTS WERE SECURED BY PERFORMANCE BONDS EXECUTED BY THE TRAVELERS INDEMNITY COMPANY UPON APPLICATIONS CONCERNING WHICH THE CHEMICAL AND INDUSTRIAL CORPORATION, WHICH APPEARS TO HAVE OWNED APPROXIMATELY 80 PERCENT OF THE COMMON STOCK OF THE DELANEY COMPANY, AGREED TO INDEMNIFY THE SURETY FOR CONTRACTOR DEFAULTS. THE TRAVELERS INDEMNITY COMPANY WAS ADVISED IN JUNE 1962 OF DEFAULTS UNDER THREE OF THE FOUR CONTRACTS AND THE DELANEY COMPANY SUBSEQUENTLY BECAME INVOLVED IN A BANKRUPTCY PROCEEDING, BANKRUPTCY NO. 2744, UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION.

THE CHEMICAL AND INDUSTRIAL CORPORATION, ACTING FOR THE SURETY UNDER TAKE -OVER AGREEMENTS BETWEEN THE SURETY AND THE BUREAU OF RECLAMATION, TWO WRITTEN AND ONE ORAL, ASSISTED THE DELANEY COMPANY IN MAKING DELIVERY UNDER ONE OF THE THREE CONTRACTS BY ADVANCING FUNDS AND PAYING THE COST OF TRANSPORTATION OF THE EQUIPMENT TO THE JOB SITE. THE CHEMICAL AND INDUSTRIAL CORPORATION ALSO ARRANGED FOR COMPLETION OF THE OTHER TWO CONTRACTS BY THE JOHNSON MACHINE WORKS, CHARITON, IOWA, WHICH COMPLETED THE FABRICATION OF THE EQUIPMENT REQUIRED FOR DELIVERY UNDER ONE CONTRACT AND REPAIRED THE EQUIPMENT PREVIOUSLY DELIVERED BY THE DELANEY COMPANY UNDER ANOTHER CONTRACT. THE GOVERNMENT FOUND IT NECESSARY TO PERFORM CERTAIN CORRECTIVE WORK ON THE EQUIPMENT DELIVERED UNDER TWO OF THE THREE CONTRACTS WHICH WERE TERMINATED FOR DEFAULT IN JUNE 1962, AND IT PERFORMED OTHER CORRECTIVE WORK ON THE EQUIPMENT DELIVERED BY THE DELANEY COMPANY UNDER THE FOURTH CONTRACT SECURED BY A PERFORMANCE BOND. THE BUREAU OF RECLAMATION DETERMINED THAT THERE WAS A BALANCE OF $26,935.62 DUE FROM THE GOVERNMENT UNDER THE FOUR CONTRACTS, AFTER DEDUCTIONS COVERING LIQUIDATED DAMAGES FOR DELAYS IN DELIVERY, PAYMENTS MADE TO THE DELANEY COMPANY AND CHARGES FOR THE CORRECTIVE WORK PERFORMED BY THE GOVERNMENT.

WITH RESPECT TO THE THREE CONTRACTS WITH THE DELANEY COMPANY WHICH WERE NOT SECURED BY PERFORMANCE BONDS, PAYMENT ON ONE OF THE CONTRACTS WAS WITHHELD DURING A PERIOD THAT THE GOVERNMENT WAS PERFORMING CORRECTIVE WORK ON ALL OF THE EQUIPMENT DELIVERED. THERE WAS EVENTUALLY FOUND TO BE DUE THE COMPANY A BALANCE OF $11,027.35. IN SUPPORT OF YOUR CLAIM FOR THAT AMOUNT, THERE WAS FURNISHED A COPY OF AN ORDER OF THE REFEREE IN BANKRUPTCY DIRECTING THE DISPOSITION OF CERTAIN ACCOUNTS RECEIVABLE IN THE ESTATE OF THE BANKRUPT, INCLUDING A RECORDED BALANCE OF $12,617 AS BEING DUE ON THE CONTRACT JUST REFERRED TO.

IN OUR CONSIDERATION OF THE MATTER, IT WAS ASCERTAINED THAT THE ASSETS OF THE DELANEY COMPANY HAVE BEEN DISTRIBUTED AND THAT THE BANKRUPTCY PROCEEDING HAS BEEN CLOSED. THE ONLY PREVIOUSLY KNOWN OUTSTANDING CLAIM OF A SUBCONTRACTOR HAS BEEN SETTLED THROUGH PAYMENT BY YOUR COMPANY BUT THERE ARE CERTAIN CLAIMS OF THE GOVERNMENT AGAINST THE DELANEY COMPANY WHICH REMAIN UNSETTLED. THE INTERNAL REVENUE SERVICE HAS REPORTED THAT THE COMPANY IS INDEBTED TO THE UNITED STATES IN THE AMOUNT OF $9,138.70 ON ACCOUNT OF VARIOUS TAX LIABILITIES, WITH INTEREST COMPUTED TO OCTOBER 9, 1964. ALSO, THE SMALL BUSINESS ADMINISTRATION HAS REPORTED THAT THERE IS A BALANCE DUE OF $47,344.99, WITH INTEREST COMPUTED TO NOVEMBER 19, 1963, ON A SMALL BUSINESS LOAN TO THE DELANEY COMPANY. SUIT HAS BEEN FILED BY THE UNITED STATES AGAINST CECIL DELANEY, JR., AND J. C. DELANEY, IN THE UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, FOR RECOVERY OF THE DEFICIENCY BALANCE FROM THE DEFENDANTS AS INDIVIDUAL GUARANTORS ON A NOTE EXECUTED BY THE DELANEY COMPANY AS SECURITY FOR ALL OR A PART OF THE LOAN OBTAINED FROM THE SMALL BUSINESS ADMINISTRATION.

IN DISCUSSIONS WITH YOUR REPRESENTATIVES, IT WAS INDICATED THAT OUR OFFICE WOULD BE REQUIRED TO APPLY THE AMOUNT OF $11,027.35 AGAINST THE CLAIMS OF THE GOVERNMENT, SINCE IT DID NOT APPEAR THAT THE GOVERNMENT'S RIGHT OF SETOFF WAS AFFECTED IN ANY MANNER BY THE ASSIGNMENT OBTAINED IN THE BANKRUPTCY PROCEEDING, OR BY ANY SUPPOSED DISCHARGE OF THE BANKRUPT BY REASON OF THE REFEREE'S ORDER CLOSING THE ESTATE AND DISCHARGING THE TRUSTEE, OR BY ANY ASSIGNMENTS GIVEN BY THE DELANEY COMPANY TO YOUR FIRM PRIOR TO THE FILING OF THE PETITION IN BANKRUPTCY. HOWEVER, THERE WAS RECOGNIZED THE POSSIBILITY THAT WE MIGHT DETERMINE THAT YOUR COMPANY AND THE SURETY ARE ENTITLED TO PAYMENT OF THE SUM OF $26,935.62, CLAIMED UNDER THE FOUR CONTRACTS SECURED BY PERFORMANCE BONDS.

THE LETTER OF MARCH 15, 1965, STATES THAT IT IS THE CONTENTION OF THE TRAVELERS INDEMNITY COMPANY AND THE CHEMICAL AND INDUSTRIAL CORPORATION THAT THEY ARE IN THE POSITION OF A SURETY WHICH COMPLETED WORK UNDER A CONTRACT. THE LETTER ALSO INDICATES THAT THE COMPANIES ARE UNABLE TO PERCEIVE ANY EQUITY IN A REFUSAL TO PAY THE ENTIRE CLAIMED AMOUNT OF $37,962.97, DETERMINED AS DUE FROM THE GOVERNMENT ON ALL SEVEN CONTRACTS WITH THE DELANEY COMPANY, SINCE THE EXPENDITURES OF THE SURETY AND YOUR COMPANY EXCEEDED THAT AMOUNT. HOWEVER, IT IS STATED THAT, SOLELY FOR THE PURPOSE OF EXPEDITING SETTLEMENT AND AVOIDING THE TIME AND EXPENSE WHICH WOULD ATTEND POSSIBLE LITIGATION, THE COMPANIES ARE NOW PREPARED TO ACCEPT, IN FULL SETTLEMENT OF THE CLAIM FOR $37,962.97, THE SUM OF $26,935.62, REPRESENTING THE UNPAID BALANCES OF THE FOUR CONTRACTS WHICH WERE SECURED BY PERFORMANCE BONDS AND WHICH ARE MORE SPECIFICALLY IDENTIFIED AS CONTRACT INVITATION NOS. DS-5587, DS-5612, DS-5375, AND DS- 5473.

SINCE THE RECEIPT OF THE SETTLEMENT OFFER WE HAVE MADE A DETAILED ANALYSIS OF THE REPORTED FACTS AND OTHER EVIDENCE IN THE CASE, PARTICULARLY IN RELATION TO THE AMOUNTS ALLEGEDLY EXPENDED BY YOUR COMPANY IN COMPLETING THREE OF THE FOUR CONTRACTS WHICH WERE SECURED BY PERFORMANCE BONDS, AND WITH RESPECT TO THE QUESTION AS TO WHAT AMOUNTS SHOULD BE CONSIDERED AS HAVING BEEN EARNED BY THE DELANEY COMPANY UNDER THE THREE CONTRACTS WHICH WERE TERMINATED FOR DEFAULT IN JUNE 1962.

THE RECORD SHOWS THAT ALL OF THE THREE CONTRACTS CONTAINED PARTIAL PAYMENT PROVISIONS PERMITTING PARTIAL PAYMENTS TO BE MADE EITHER ON A LUMP -SUM BILLING FOR EQUIPMENT DELIVERED BUT NOT YET INSTALLED AT THE PROJECT SITE, OR ON BILLINGS BASED UPON VALUES OF COMPLETED COMPONENTS AS DETERMINED BY APPROVED ALLOCATIONS OF THE CONTRACT PRICE IN REGARD TO PARTS OR GROUPS OF PARTS OF THE EQUIPMENT TO BE DELIVERED. UNDER TWO OF THE THREE CONTRACTS THE PARTIAL PAYMENT RATE WAS 90 PERCENT OF BILLING AND UNDER THE THIRD CONTRACT THE PARTIAL PAYMENT RATE WAS 85 PERCENT.

CONTRACT NO. 14-06-D-4002 (DS-5587) PROVIDED FOR DELIVERY OF EQUIPMENT AT A PRICE OF $10,889 ON OR BEFORE JANUARY 22, 1962, OR210 DAYS AFTER RECEIPT OF NOTICE OF AWARD. THE CONTRACT PERFORMANCE TIME WAS EXTENDED FOR A PERIOD OF 10 DAYS FOR AN EXCUSABLE CAUSE OF DELAY AND IT WAS AGREED THAT THE SURETY WOULD NOT BE CHARGED FOR AN ADDITIONAL PERIOD OF 15 DAYS OF DELAY. DELIVERY WAS ACCOMPLISHED ON JULY 17, 1962, AND IN THE COMPUTATION OF THE BALANCE OF $3,820.90, DETERMINED TO BE DUE UNDER THAT CONTRACT, THERE WAS DEDUCTED FROM THE CONTRACT PRICE THE SUM OF $3,775 AS LIQUIDATED DAMAGES FOR 151 DAYS OF THE 176 DAYS OF DELAY IN DELIVERY. THERE WAS ALSO DEDUCTED THE SUM OF $3,303.10 FOR CORRECTIVE WORK PERFORMED BY THE GOVERNMENT AFTER THE EQUIPMENT WAS DELIVERED.

NO PARTIAL PAYMENT UNDER THE CONTRACT HAD BEEN MADE BEFORE THE CONTRACTOR DEFAULTED AND THE SURETY AGREED TO COMPLETE THE CONTRACT. IN YOUR INVOICE TO THE SURETY YOU LISTED DISBURSEMENTS OF $10,960, DESCRIBED AS PAYMENTS OF $7,000 AND $3,000 TO THE DELANEY COMPANY ON JUNE 20 AND JULY 10, 1962, RESPECTIVELY, AND A PAYMENT OF $960 FOR TRANSPORTATION OF THE EQUIPMENT TO THE JOB SITE.

CONTRACT NO. 14-06-D-4034 (DS-5612) PROVIDED FOR DELIVERY OF AN 11 FOOT BY 18.5-FOOT FIXED WHEEL GATE AT A PRICE OF $56,000 ON OR BEFORE MARCH 17, 1962, OR 240 DAYS AFTER RECEIPT OF NOTICE OF AWARD. THE EQUIPMENT WAS SHIPPED ON OCTOBER 12, 1962, AND YOU INVOICED THE TRAVELERS INDEMNITY COMPANY FOR THE AMOUNT OF $24,061.41 (CORRECT AMOUNT - $24,060.41), REPRESENTING THE DIFFERENCE BETWEEN THE CONTRACT PRICE OF $56,000 AND PROGRESS PAYMENTS OF $31,939.59 WHICH HAD BEEN MADE TO THE DELANEY COMPANY BEFORE THE CONTRACT WAS TERMINATED FOR DEFAULT. YOUR INVOICE LISTED DISBURSEMENTS OF $24,105.10 AND $2,385.01, COVERING PAYMENT TO THE JOHNSON MACHINE WORKS FOR COMPLETION OF THE WORK ON THE EQUIPMENT DELIVERED UNDER THE CONTRACT, AND PAYMENTS OF FREIGHT CHARGES FOR SHIPMENT OF THE EQUIPMENT FROM CHARITON, IOWA, TO THE PROJECT SITE.

THE BUREAU OF RECLAMATION FOUND A BALANCE OF $16,884.46 TO BE DUE UNDER THE CONTRACT AFTER DEDUCTING FROM THE $56,000 PRICE THE PROGRESS PAYMENTS OF $31,939.59, THE AMOUNT OF $7,100 AS LIQUIDATED DAMAGES FOR 142 DAYS OF THE 209 DAYS OF DELAY IN DELIVERY, AND THE SUM OF $75.95 FOR CORRECTIVE WORK PERFORMED BY THE GOVERNMENT AFTER THE EQUIPMENT WAS DELIVERED. LIQUIDATED DAMAGES WERE NOT CHARGED FOR 67 DAYS OF THE DELAY IN DELIVERY SINCE THE CONTRACTING OFFICER HAD GRANTED A 10-DAY EXTENSION OF TIME FOR AN EXCUSABLE CAUSE OF DELAY AND IT HAD BEEN AGREED WITH THE SURETY THAT LIQUIDATED DAMAGES WOULD NOT ACCRUE DURING A PERIOD OF 57 DAYS, JUNE 29 TO AUGUST 24, 1962, INCLUSIVE. THE PROGRESS PAYMENTS OF $31,939.59 REPRESENTED 85 PERCENT OF APPROVED ALLOCATED PRICES OF COMPONENTS ON HAND, TOTALING $37,575.98, AND THE RETENTION OF 15 PERCENT AMOUNTED TO $5,636.39. THE PROGRESS PAYMENTS WERE MADE ON JANUARY 23, 1962, AND APRIL 2, 1962, AND THE RECORD DOES NOT SHOW HOW MUCH, IF ANY, ADDITIONAL WORK ON THE EQUIPMENT WAS PERFORMED BY THE DELANEY COMPANY FROM THE TIME OF SUBMISSION OF ITS LAST PROGRESS-PAYMENT BILLING UNTIL THE CONTRACT WAS TERMINATED FOR DEFAULT.

CONTRACT NO. 14-06-D-3595 (DS-5375), AS AMENDED BY A CHANGE ORDER AND PERFORMANCE TIME EXTENSIONS GRANTED BY THE CONTRACTING OFFICER, PROVIDED FOR DELIVERY OF A 6-FOOT BY 13-FOOT FIXED WHEEL GATE AT A PRICE OF $38,301.07, ON OR BEFORE AUGUST 13, 1961. SHIPMENT WAS MADE ON DECEMBER 29, 1961, BUT FINAL PAYMENT WAS WITHHELD BECAUSE THE CONTRACTOR HAD FAILED TO MAKE REQUESTED REPAIRS. PROGRESS PAYMENTS OF $15,968.70 AND $7,942.50 HAD BEEN MADE IN MAY AND JUNE 1961, AND THE TOTAL OF $23,911.20 REPRESENTED 90 PERCENT OF APPROVED ALLOCATED PRICE OF $26,568 FOR COMPONENTS. THE RETAINED 10 PERCENT AMOUNTED TO $2,656.80. WHEN NOTIFIED THAT THE INSPECTION OF THE GATE DISCLOSED SUBSTANTIAL MISFABRICATION, THE DELANEY COMPANY ELECTED TO MAKE ITS OWN ARRANGEMENTS FOR REPAIRS AND IT ADVISED THE CONTRACTING OFFICER THAT TRUCKS WOULD PICK UP THE GATE IN TWO SECTIONS OF MAY 10 AND MAY 18, 1962. THE FIRST GATE SECTION WAS PICKED UP BY TRUCK ON MAY 14 BUT THE COMPANY FAILED TO SEND A TRUCK FOR THE REMAINING SECTION. AFTER THE CONTRACT WAS TERMINATED FOR DEFAULT, THE TWO SECTIONS APPARENTLY WERE DELIVERED TO THE JOHNSON MACHINE WORKS. CONSTRUCTION CONTRACTOR AT THE JOB SITE PRESENTED A BILLING IN THE AMOUNT OF $653.72 FOR SERVICES IN PREPARING THE TWO SECTIONS FOR TRUCK TRANSPORTATION PRIOR TO MAY 14, 1962, AND THE CONSTRUCTION CONTRACTOR SUBSEQUENTLY ACKNOWLEDGED THAT IT HAD BEEN PAID THE SUM OF $653.72 BY YOUR COMPANY. YOU INVOICED THE TRAVELERS INDEMNITY COMPANY FOR THE AMOUNT OF $14,389.87, REPRESENTING THE DIFFERENCE BETWEEN THE AMENDED CONTRACT PRICE OF $38,301.07 AND THE PROGRESS PAYMENTS OF $23,911.20. YOU LISTED DISBURSEMENTS OF $14,868.07, INCLUDING AN ALLEGED $7,000 ADVANCED TO THE DELANEY COMPANY IN JULY 1962, PAYMENT OF $6,641.82 TO THE JOHNSON MACHINE WORKS AND PAYMENT OF $1,226.25 FOR TRANSPORTATION OF THE EQUIPMENT FROM CHARITON, IOWA, TO THE JOB SITE. THE BUREAU OF RECLAMATION FOUND A BALANCE OF $7,489.87 TO BE DUE UNDER THE CONTRACT AFTER DEDUCTING FROM THE AMENDED CONTRACT PRICE OF $38,301.07 THE PROGRESS PAYMENTS OF $23,911.20 AND LIQUIDATED DAMAGES IN THE AMOUNT OF $6,900 FOR 138 DAYS OF DELAY IN MAKING THE ORIGINAL SHIPMENT OF EQUIPMENT.

ORDINARILY, IN THE CASE OF COMPLETION OF A GOVERNMENT CONTRACT BY A SURETY AFTER THE CONTRACTOR HAS DEFAULTED, THE SURETY ACQUIRES CERTAIN EQUITABLE RIGHTS IN THE UNPAID CONTRACT BALANCE, INCLUDING THE SUMS RETAINED (AS PERCENTAGES OF AMOUNTS EARNED BY THE CONTRACTOR) IN MAKING OF PARTIAL PAYMENTS UNDER THE CONTRACT. HOWEVER, IT HAS BEEN HELD THAT, WHERE THE CONTRACTOR IS INDEBTED TO THE UNITED STATES FOR TAXES OR OTHER DEBTS ARISING OUT OF PERFORMANCE OF THE CONTRACT OR INDEPENDENT THEREOF, THE GOVERNMENT HAS A RIGHT TO APPLY AGAINST THE CONTRACTOR'S INDEBTEDNESS THE RETAINED PERCENTAGES OF EARNINGS WHICH FORMED THE BASIS FOR THE MAKING OF PARTIAL PAYMENTS UNDER THE CONTRACT PRIOR TO THE CONTRACTOR'S DEFAULT. SEE STANDARD ACCIDENT INSURANCE COMPANY V. UNITED STATES, 119 CT.CL. 749, IN WHICH IT WAS DETERMINED THAT THE COMPLETING SURETY WAS ENTITLED TO PAYMENT ONLY OF ABOUT $10,000 OF THE UNPAID CONTRACT BALANCE OF APPROXIMATELY $15,000, ALTHOUGH THE SURETY HAD EXPENDED ABOUT $24,000 IN COMPLETING THE CONTRACT WORK. THE APPROXIMATE SUM OF $5,000 IN RETAINED PERCENTAGES OF EARNINGS BY THE CONTRACTOR PRIOR TO ITS DEFAULT WAS APPLIED AGAINST TAXES OWED TO THE GOVERNMENT BY THE CONTRACTOR. SIMILARLY IT WOULD APPEAR THAT THE GOVERNMENT'S RIGHT OF SETOFF WOULD BE SUPERIOR TO THE RIGHTS OF A SURETY WITH RESPECT TO ANY EARNINGS BY A DEFAULTING CONTRACTOR PRIOR TO DEFAULT, WHETHER OR NOT SUCH EARNINGS WERE INCLUDED IN THE COMPUTATION OF PARTIAL PAYMENTS MADE UNDER THE CONTRACT.

ALTHOUGH THE STANDARD ACCIDENT CASE INVOLVED A CONSTRUCTION CONTRACT, IT IS APPARENT THAT IT MUST BE RECOGNIZED AND FOLLOWED IN DETERMINING THE RESPECTIVE RIGHTS OF THE GOVERNMENT AND THE SURETY OR YOUR COMPANY IN THE CONTRACT BALANCES OF THESE SUPPLY CONTRACTS, PARTICULARLY SINCE, UNDER THE "PAYMENTS" CLAUSE OF THE CONTRACTS, PARTIAL PAYMENTS WERE AUTHORIZED ON THE BASIS OF AN ALLOCATION OF CONTRACT PRICE TO COMPONENTS, SUBJECT TO THE APPROVAL OF THE CONTRACTING OFFICER, AND IT WAS PROVIDED THAT THE ALLOCATION WHEN APPROVED WOULD BECOME A PART OF THE CONTRACT. HENCE, THERE APPEARS TO BE NO QUESTION BUT THAT, WHEN ALLOCATIONS OF PRICES WERE MADE AT THE TIME OF BILLINGS ON WHICH PROGRESS PAYMENTS WERE MADE UNDER TWO OF THE THREE CONTRACTS COMPLETED IN THE SURETY'S BEHALF, THE PARTIES HAD AGREED THAT THE COMPONENTS WOULD HAVE CERTAIN VALUES, AND THAT THE PARTIES WERE ALSO IN AGREEMENT THAT THE STATED VALUES OF THE COMPLETED COMPONENTS HAD BEEN EARNED. IT IS THEREFORE OUR OPINION THAT THE RETAINED PERCENTAGES OF $5,639.39 AND $2,656.80 IN THE MAKING OF PARTIAL PAYMENTS UNDER THOSE CONTRACTS ARE CLEARLY AVAILABLE FOR SETOFF AGAINST THE CLAIMS OF THE GOVERNMENT FOR TAXES AND THE BALANCE DUE ON THE SMALL BUSINESS LOAN.

AS THE MATTER NOW STANDS, THE TOTAL OF THE ABOVE AMOUNT OF $5,639.39 AND $2,656.80, OR $8,296.19, PLUS THE AMOUNT OF $11,027.35, ADMINISTRATIVELY DETERMINED TO BE DUE UNDER THE THREE CONTRACTS WHICH WERE NOT SECURED BY PERFORMANCE BONDS, WOULD APPEAR TO BE AVAILABLE TO THE GOVERNMENT FOR SETOFF AS IN PARTIAL LIQUIDATION OF THE GOVERNMENT'S CLAIMS AGAINST THE DELANEY COMPANY.

IN SUPPORT OF THE SETTLEMENT OFFER THERE WAS RECENTLY SUBMITTED BY YOUR WASHINGTON REPRESENTATIVE A COPY OF A LETTER DATED MARCH 6, 1965, FROM YOUR COMPANY CONCERNING THE ASSIGNMENT OBTAINED BY YOUR FIRM IN THE CASE OF THE BANKRUPTCY PROCEEDING INVOLVING THE DELANEY COMPANY. IT IS ARGUED IN EFFECT THAT, SINCE THE GOVERNMENT DID NOT ADVISE THE TRUSTEE IN BANKRUPTCY OR THE BANKRUPTCY COURT THAT IT WAS WITHHOLDING CERTAIN AMOUNTS WHICH MIGHT BE APPLIED AGAINST A TAX LIEN AND THE SMALL BUSINESS LOAN, THE GOVERNMENT IS NOW ESTOPPED FROM ASSERTING ANY RIGHT OF SETOFF PARTICULARLY WITH REFERENCE TO THE BALANCE OF $11,027.35 WHICH HAS BEEN DETERMINED TO BE DUE UNDER THE THREE CONTRACTS NOT SECURED BY PERFORMANCE BONDS. HOWEVER, IT DOES NOT APPEAR THAT THE GOVERNMENT WAS UNDER ANY OBLIGATION TO ADVISE THE COURT OR THE TRUSTEE IN BANKRUPTCY THAT THE CLAIMS HERE INVOLVED, OR PORTIONS THEREOF, WERE AVAILABLE FOR SETOFF AGAINST THE TAX CLAIM AND THE BALANCE DUE ON THE SMALL BUSINESS LOAN, AND IT IS OBVIOUS THAT NO SUCH ADVICE WOULD HAVE BEEN APPROPRIATE WHILE THE CLAIMS FOR THE CONTRACT BALANCES REMAINED UNSETTLED. IN ANY EVENT, IT DOES NOT APPEAR THAT EITHER THE INTERNAL REVENUE SERVICE OR THE SMALL BUSINESS ADMINISTRATION HAD ANY DEFINITE INFORMATION CONCERNING THE STATUS OF THE CONTRACTS WITH THE DELANEY COMPANY UNTIL THEY WERE REQUESTED BY OUR OFFICE ONLY A FEW MONTHS AGO TO FURNISH INFORMATION AS TO ANY OUTSTANDING TAX LIABILITIES OF THE DELANEY COMPANY AND WITH RESPECT TO THE STATUS OF THE SMALL BUSINESS LOAN ACCOUNT. WE ARE ALSO OF THE OPINION THAT THE ASSIGNMENT TO YOUR COMPANY OF CERTAIN OF THE ACCOUNTS RECEIVABLE OF THE DELANEY COMPANY BY ORDER OF THE REFEREE IN BANKRUPTCY DID NOT OPERATE TO GIVE YOUR COMPANY ANY GREATER RIGHT THAN THE DELANEY COMPANY OR THE TRUSTEE IN BANKRUPTCY HAD IN THE MATTER. AS IN THE USUAL CASE OF AN ASSIGNMENT OF CLAIM PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED, WE BELIEVE THAT, UNDER AN ASSIGNMENT BY OPERATION OF LAW, THE ASSIGNEE MAY NOT RECOVER ANY MORE THAN THE ASSIGNOR COULD HAVE RECOVERED IN THE ABSENCE OF THE ASSIGNMENT. SEE MODERN INDUSTRIAL BANK V. UNITED STATES, 101 CT.CL. 808.

ACCORDINGLY, SINCE OUR OFFICE IS WITHOUT AUTHORITY TO COMPROMISE CLAIMS, AND IT DOES NOT APPEAR THAT THE TOTAL SUM OF $26,935.62 IS LEGALLY DUE EITHER YOUR COMPANY OR THE TRAVELERS INDEMNITY COMPANY, THE SETTLEMENT OFFER IN THAT AMOUNT MUST BE, AND IS HEREBY REJECTED.