B-155444, NOV. 10, 1964

B-155444, NOV. 10, 1964

TO THE HONORABLE SECRETARY OF THE INTERIOR:

REFERENCE IS MADE TO YOUR LETTER OF OCTOBER 20, 1964, REQUESTING DECISION AS TO WHICH OF TWO CLAIMANTS, THE SURETY OR THE INTERNAL REVENUE SERVICE, SHOULD RECEIVE THE AMOUNT OF THE PAYMENT, $2,495.31, NOW DUE AND OWING UNDER CONTRACT NO. 14-20-0150-416 FOR CERTAIN CONSTRUCTION SERVICES.

IT APPEARS THAT THE ABOVE CONTRACT WAS AWARDED TO W. H. ELLIOTT ON MARCH 6, 1961, IN THE AMOUNT OF $208,868 FOR THE CONSTRUCTION OF HOSPITAL HOUSING AT GALLUP, NEW MEXICO, BY THE CHIEF, BRANCH OF PLANT DESIGN AND CONSTRUCTION, BUREAU OF INDIAN AFFAIRS. THE SURETY ON THE PERFORMANCE AND PAYMENT BONDS IS THE EMPLOYERS' FIRE INSURANCE COMPANY. BY LETTER DATED NOVEMBER 21, 1961, THE CONTRACTOR WAS NOTIFIED THAT THE HOUSING WORK WAS CONSIDERED COMPLETE AS OF SEPTEMBER 12, 1961, AND THE HOUSING PORTION OF THE WORK WAS ACCEPTED AS OF THAT DATE. CHANGES MADE IN THE CONTRACT RESULTED IN ADJUSTMENTS IN THE PRICE AND EXTENSIONS OF THE PERFORMANCE TIME TO SEPTEMBER 18, 1961. THE LAST PARTIAL PAYMENT WAS MADE IN NOVEMBER 1961. FROM THE UNPAID BALANCE OF $3,654.44 OF THE FINAL CONTRACT AMOUNT, DEDUCTIONS TOTALING $1,159.13 WERE MADE, LEAVING $2,495.31 AS THE NET AMOUNT DUE THE CONTRACTOR. THE DEDUCTIONS AROSE BY REASON OF THE CONTRACTOR'S FAILURE TO MAKE CERTAIN NECESSARY REPAIRS AND CORRECTIONS TO THE WORK AS REQUIRED BY THE TERMS OF THE CONTRACT, TO PAY THE PUBLIC HEALTH SERVICE FOR WATER OBTAINED FROM THAT AGENCY FOR CONSTRUCTION PURPOSES, AND TO PERFORM CERTAIN TRANSPLANTING OF TREES AND SHRUBS ANS REQUIRED BY THE CONTRACT DRAWINGS. BECAUSE OF CERTAIN CLAIMS FOR ADDITIONAL COMPENSATION PRESENTED BY THE CONTRACTOR IN CONSEQUENCE OF CONDITIONS ENCOUNTERED IN THE PERFORMANCE OF THE WORK AND BY REASON OF OTHER MATTERS, THE FINAL AMOUNT DUE UNDER THE CONTRACT (2,495.31) WAS ONLY RECENTLY DETERMINED (SEPTEMBER 22, 1964).

IT FURTHER APPEARS THAT BY LETTER DATED JANUARY 2, 1962, THE ATTORNEYS FOR THE SURETY NOTIFIED THE CONTRACTING OFFICER THAT ALL PROCEEDS OR PAYMENTS DUE OR TO BECOME DUE UNDER ELLIOTT'S CONTRACT HAD BEEN ASSIGNED TO A TRUSTEE FOR THE SURETY. THE CONTRACTING OFFICER IN A LETTER DATED JANUARY 9, 1962, ADVISED THE ATTORNEYS THAT THE ASSIGNMENT OF CLAIMS ACT OF 1940 AS AMENDED (41 U.S.C. 15) PERMITTED AN ASSIGNMENT OF THE CONTRACT TO BE MADE ONLY TO A BANK, TRUST COMPANY, OR OTHER FINANCIAL INSTITUTION. THE ATTORNEYS THEN REQUESTED THAT ALL CHECKS PAYABLE TO THE CONTRACTOR BE FORWARDED TO A THIRD PARTY. A LETTER DATED JANUARY 24, 1962, TO ELLIOTT BY THE CONTRACTING OFFICER SEEKING VERIFICATION OF THE ATTORNEY'SREQUEST WAS UNANSWERED.

IT FURTHER APPEARS THAT THE CONTRACTOR ON JULY 22, 1963, FILED A BANKRUPTCY PETITION IN THE UNITED STATES DISTRICT COURT. THERE FOLLOWED A REQUEST BY LETTER DATED NOVEMBER 15, 1963, FROM THE ATTORNEY FOR THE TRUSTEE IN BANKRUPTCY FOR AN ACCOUNTING OF ANY FUNDS DUE UNDER THE CONTRACT. BY LETTER DATED FEBRUARY 20, 1964, THE INFORMATION WAS FURNISHED TOGETHER WITH INFORMATION THAT CERTAIN MINOR ITEMS REMAINED TO BE SETTLED WHICH MIGHT RESULT IN A SLIGHT ADJUSTMENT OF THE NET AMOUNT DUE THE CONTRACTOR. MEANWHILE, HOWEVER, THE ATTORNEYS FOR THE SURETY HAD CONVINCED THE ATTORNEY FOR THE TRUSTEE IN BANKRUPTCY THAT THE SURETY WAS ENTITLED TO THE UNPAID BALANCE UNDER THE CONTRACT AND AS A CONSEQUENCE ON DECEMBER 31, 1963, THERE WAS FILED A REPORT OF THE TRUSTEE IN BANKRUPTCY THAT THERE WERE NO ASSETS IN THE ESTATE. THE BANKRUPTCY PROCEEDING WAS CLOSED BY ORDER OF THE REFEREE IN BANKRUPTCY ON JANUARY 22, 1964. AUGUST 6, 1964, A NOTICE OF LEVY WAS SERVED ON THE BRANCH OF PLANT DESIGN AND CONSTRUCTION BY THE INTERNAL REVENUE SERVICE AND BY LETTER DATED AUGUST 26, 1964, THE INTERNAL REVENUE SERVICE REQUESTED THAT ANY AMOUNT DUE THE CONTRACTOR BE OFFSET AGAINST THE TOTAL LIABILITY OF $29,668, INCLUDING PENALTIES AND INTEREST.

THE ATTORNEYS FOR THE SURETY CONTEND THAT THE SURETY IS THE PROPER PARTY TO RECEIVE THE AMOUNTS WITHHELD BY THE GOVERNMENT AND NOT THE INTERNAL REVENUE SERVICE, CITING KISTLER-COLLISTER, INC. V. THE EMPLOYERS' FIRE INSURANCE CO. AND UNITED STATES OF AMERICA, CIVIL CASE NO. 5109, UNITED STATES DISTRICT COURT, DISTRICT OF NEW MEXICO, DECIDED APRIL 18, 1963. THIS CASE ELLIOTT CONTRACTED WITH KISTLER COLLISTER, WITH EMPLOYERS' FIRE INSURANCE COMPANY AS SURETY. UPON COMPLETION OF THE CONTRACT, CLAIM WAS MADE ON KISTLER-COLLISTER BY THE INTERNAL REVENUE SERVICE FOR UNPAID TAXES AND BY THE SURETY FOR AMOUNTS IT HAD PAID OUT TO MATERIALMEN AND LABORERS UNDER THE SURETY CONTRACT. THE COURT HELD, IN PART, AS FOLLOWS:

"MY FEELINGS IN THE MATTER WERE BOLSTERED BY THE CASE OF PEARLMAN V. RELIANCE INSURANCE COMPANY, 9 L. ED. (2D) 190. THAT CASE TOOK THE POSITION THAT A SURETY WHO PAYS THE DEBT OF ANOTHER STEPS INTO THE SHOES OF SUCH OTHER PERSON. IN THAT CASE IT WAS HELD THAT A PERCENTAGE OF THE CONTRACT PRICE WHICH WAS RETAINED COULD SUCCESSFULLY BE CLAIMED BY THE SURETY WHO HAD PAID THE LABORERS AND MATERIALMEN. IT AFFIRMED THE DOCTRINE THAT THE AMOUNT RETAINED WAS AS MUCH FOR THE PROTECTION OF THE PERSONS WHO GUARANTEED THE CONTRACT AS IT WAS FOR THE OWNER. IT ALSO DISTINGUISHED THE MUNSEY CASE.

"ALL THINGS CONSIDERED, I HAVE COME TO THE CONCLUSION THAT SUMMARY JUDGMENT SHOULD BE GRANTED (THE SURETY) AND THAT THE CHAPMAN AND PEARLMAN CASES GOVERN IN THIS SITUATION.'

IT WILL BE NOTED THAT THE COURT DISTINGUISHED THE CASE BEFORE IT FROM THE MUNSEY CASE. IN UNITED STATES V. MUNSEY TRUST CO., RECEIVER, 332 U.S. 234, IT WAS HELD, QUOTING FROM THE SYLLABI, THAT:

"1. NOTWITHSTANDING CLAIMS OF A SURETY ON A STATUTORY PAYMENT BOND (GIVEN UNDER 40 U.S.C. SEC. 270A) FOR REIMBURSEMENT FOR SUMS PAID TO LABORERS AND MATERIALMEN, THE GOVERNMENT MAY SET OFF, AGAINST UNAPPROPRIATED PERCENTAGES OF PROGRESS PAYMENTS WITHHELD BY IT AND DUE TO THE CONTRACTOR ON THE CONSTRUCTION CONTRACT, A DEBT OWED TO IT BY THE CONTRACTOR AS A RESULT OF A SEPARATE AND INDEPENDENT TRANSACTION. PP. 236-244.

"4. WITH REFERENCE TO WITHHELD AND UNAPPROPRIATED PERCENTAGES OF PROGRESS PAYMENTS ON A CONSTRUCTION CONTRACT, PERFORMANCE OF WHICH HAS BEEN COMPLETED AND ACCEPTED, THE GOVERNMENT IS NOT A MERE GENERAL CREDITOR BUT A SECURED CREDITOR ENTITLED TO WITHHOLD WHAT IT OWES THE CONTRACTOR UNTIL IT IS PAID WHATEVER THE CONTRACTOR OWES THE GOVERNMENT. P. 240.

"6. THE RIGHT OF THE GOVERNMENT TO RETAINED PERCENTAGES OF PROGRESS PAYMENTS ON A CONSTRUCTION CONTRACT DOES NOT DEVOLVE ON A SURETY WHO HAS PAID LABORERS AND MATERIALMEN, SO AS TO PREVENT THE GOVERNMENT FROM APPLYING THE UNAPPROPRIATED SUM TO THE SATISFACTION OF ITS OWN CLAIM GROWING OUT OF A SEPARATE AND INDEPENDENT TRANSACTION. PP. 242-243.' SEE ALSO, IN RE BRUCE CONSTRUCTION RP., ET AL. NOS. 4682 BK, 4683-BK, UNITED STATES DISTRICT COURT, S.D. FLORIDA, 217 FED.SUPP. 926, FOR A DISCUSSION AND APPLICATION OF THE PRINCIPLES OF THE PEARLMAN AND MUNSEY CASES.

ACCORDINGLY, OFFSET OF AMOUNTS DUE THE INTERNAL REVENUE SERVICE SHOULD BE MADE AGAINST SUMS WITHHELD FROM THE CONTRACTOR, AND THE CLAIM OF THE SURETY DENIED.

THE RECORDS TRANSMITTED WITH YOUR LETTER ARE RETURNED HEREWITH AS REQUESTED.