B-155944, FEB. 10, 1965

B-155944: Feb 10, 1965

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

DEPARTMENT OF THE INTERIOR: REFERENCE IS MADE TO YOUR TELETYPE DATED JANUARY 14. YOU STATE THAT YOU HAVE BEEN APPRISED THAT WHEELWRIGHT IS NOT NOW. THE ASSIGNMENT WAS TAKEN FOR THE SOLE BENEFIT OF THE SURETY. THE QUESTION PRESENTED IS AS TO THE ORDER OF ENTITLEMENT BETWEEN THE SURETY AND THE SMALL BUSINESS ADMINISTRATION TO ANY FUNDS WHICH ARE NOW. SINCE CONTRACTOR WAS NOT INDEBTED TO THE BANK AND EXECUTED THE ASSIGNMENT AT THE BEHEST OF THE SURETY. TO HAVE BEEN MADE TO THE SURETY ITSELF. OF MONEYS OWING OR TO BECOME DUE UNDER A CONTRACT WITH THE FEDERAL GOVERNMENT IS UNENFORCEABLE INSOFAR AS THE LATTER IS CONCERNED. A SURETY IS NOT A "FINANCING INSTITUTION" WITHIN THE MEANING OF THE ACT.

B-155944, FEB. 10, 1965

TO MR. R. L. NEWMAN, DEPARTMENT OF THE INTERIOR:

REFERENCE IS MADE TO YOUR TELETYPE DATED JANUARY 14, 1965, AND YOUR LETTER DATED JANUARY 19, 1965, REQUESTING OUR OFFICE TO ADVISE WHETHER A VOUCHER IN THE AMOUNT OF $22,765.87 PRESENTED BY THE WHEELWRIGHT CONSTRUCTION COMPANY MAY BE CERTIFIED FOR PAYMENT. THE COMPANY HAS BEEN PERFORMING WORK UNDER CONTRACT NO. 14-06-D-4656, SPEC. DC-5865, IN THE AMOUNT OF $798,400.50, ISSUED ON JANUARY 15, 1963, FOR THE CONSTRUCTION AND COMPLETION OF THE EARTHWORK AND STRUCTURES OF THE LAYTON CANAL AND THE WILSON CANAL RELOCATION, AT WEBER BASIN PROJECT, UTAH, AND UNDER CONTRACT NO. 14-06-400-3671, SPEC. 400C-260 ISSUED IN THE AMOUNT OF $49,579.80, FOR BITUMINOUS SURFACING, CONSTRUCTION OF A COMFORT STATION, AND INSTALLATION OF UTILITIES AT THE ROCKPORT LAKE RECREATION AREA, WEBER BASIN PROJECT.

IT APPEARS FROM THE RECORD THAT THE CONTRACTOR HAS EXPERIENCED FINANCIAL DIFFICULTIES NECESSITATING COMPLETION OF THE WORK AND PAYMENT OF CERTAIN CLAIMS OF MATERIALMEN AND LABORERS BY THE SURETY ON THE APPLICABLE PAYMENT AND PERFORMANCE BONDS.

THE SMALL BUSINESS ADMINISTRATION HAS A CLAIM AGAINST WHEELWRIGHT ARISING FROM A LOAN OF $150,000 MADE TO THE COMPANY IN JUNE OF 1963, WITH THE PARTICIPATION OF COMMERCIAL SECURITY BANK OF OGDEN, UTAH. AS SECURITY FOR THE NOTE SBA HOLDS A MORTGAGE ON REAL ESTATE AND A CHATTEL MORTGAGE, BOTH DATED JUNE 4, 1963. WE UNDERSTAND THAT BY LETTER OF NOVEMBER 23, 1964, SBA INFORMED YOU OF A DELINQUENCY IN THE WHEELWRIGHT ACCOUNT OF SIX MONTHS DURATION AND ADVISED THAT THE SUM OF $118,063.83 REMAINS DUE AND OWING BY THE COMPANY.

THE CONTRACTOR ENTERED INTO AN ASSIGNMENT OF ALL AMOUNTS ACCRUING UNDER THE CONTRACTS ON SEPTEMBER 3, 1964, OSTENSIBLY TO THE PUGET SOUND NATIONAL BANK. A COPY OF THE INSTRUMENT TOGETHER WITH NOTICE OF ASSIGNMENT HAS BEEN FORWARDED TO YOUR OFFICE. YOU STATE THAT YOU HAVE BEEN APPRISED THAT WHEELWRIGHT IS NOT NOW, AND NEVER HAS BEEN, INDEBTED TO THE BANK. THE ASSIGNMENT WAS TAKEN FOR THE SOLE BENEFIT OF THE SURETY, THE BANK MERELY ACTING AS AGENT FOR THE PURPOSE OF COLLECTION.

THE QUESTION PRESENTED IS AS TO THE ORDER OF ENTITLEMENT BETWEEN THE SURETY AND THE SMALL BUSINESS ADMINISTRATION TO ANY FUNDS WHICH ARE NOW, OR MAY LATER BECOME, DUE TO WHEELWRIGHT UNDER THE CONTRACTS.

ALTHOUGH IT MAY BE VALID BETWEEN THE PARTIES, WE DO NOT REGARD THE ASSIGNMENT BY WHEELWRIGHT TO THE PUGENT SOUND NATIONAL BANK AS ENFORCEABLE AGAINST THE GOVERNMENT. SINCE CONTRACTOR WAS NOT INDEBTED TO THE BANK AND EXECUTED THE ASSIGNMENT AT THE BEHEST OF THE SURETY, THE ASSIGNMENT MUST BE TAKEN, IN PRACTICAL EFFECT, TO HAVE BEEN MADE TO THE SURETY ITSELF. ASSIGNMENT TO A SURETY PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, CH. 779, 54 STAT. 1029, 31 U.S.C. 203, 41 U.S.C. 15, AS AMENDED, OF MONEYS OWING OR TO BECOME DUE UNDER A CONTRACT WITH THE FEDERAL GOVERNMENT IS UNENFORCEABLE INSOFAR AS THE LATTER IS CONCERNED. A SURETY IS NOT A "FINANCING INSTITUTION" WITHIN THE MEANING OF THE ACT. GENERAL CASUALTY COMPANY V. SECOND NATIONAL BANK OF HOUSTON, 178 F.2D 679, 680; UNITED STATES CASUALTY COMPANY V. FIRST NATIONAL BANK OF COLUMBUS, 157 F.SUPP. 789. WE MUST CONCLUDE THAT THE SURETY HAS, AT BEST, THE RIGHTS OF A GENERAL UNSECURED CREDITOR OF THE CONTRACTOR HERE.

THE POSITION OF THE SMALL BUSINESS ADMINISTRATION, ON THE OTHER HAND, IS THAT OF A CREDITOR TWICE SECURED FOR PAYMENT OF THE SAME OBLIGATION. SBA HAS A SECURITY INTEREST IN THE DEBTOR'S REAL ESTATE AND CHATTELS AND MAY RESORT TO THIS PROPERTY TO SATISFY THE DEBT. BUT THE ADMINISTRATION, AS AN AGENCY OF THE FEDERAL GOVERNMENT IN GENERAL, HAS CONSTRUCTIVE POSSESSION OF ALL MONEYS WHICH HAVE BEEN EARNED BY THE CONTRACTOR UNDER THE AFOREMENTIONED CONTRACTS. THE UNAPPROPRIATED POSSESSION OF FUNDS BY ONE WHO IS BOTH A CREDITOR AND A DEBTOR OF ANOTHER CONSTITUTES A LIEN ON THE MONEYS IN THE AMOUNT OF THE RECEIVABLE OBLIGATION. UNITED STATES V. MUNSEY TRUST COMPANY, 332 U.S. 234, 240 (1947). THE SMALL BUSINESS ADMINISTRATION, THEREFORE, OCCUPIES THE STATUS OF A SECURED CREDITOR WITH RESPECT TO SUMS ACCRUING TO WHEELWRIGHT UNDER THE CONTRACTS UNTIL THE $118,063.83 HAS BEEN REPAID. AS BETWEEN A GENERAL UNSECURED CREDITOR AND A CREDITOR WITH A LIEN UPON A FUND, THE LATTER MUST BE ACCORDED PRIORITY IN THE DISPOSITION OF THE MONEY. 53 CORPUS JURIS SECUNDUM 826-880.

IN THE MUNSEY TRUST COMPANY CASE THE SUPREME COURT PERMITTED THE GOVERNMENT TO SET OFF THE EXCESS COST OF REPROCURING PAINT WORK ON FEDERAL BUILDINGS ARISING FROM THE REFUSAL OF THE LOWEST BIDDER TO ENTER INTO A CONTRACT UPON THE TERMS OF HIS BID AGAINST WITHHELD AND UNAPPROPRIATED PROGRESS PAYMENTS RETAINED BY THE GOVERNMENT IN CONNECTION WITH ANOTHER CONTRACT. THE RIGHT OF THE GOVERNMENT TO BE MADE WHOLE WAS DECLARED PARAMOUNT TO THE CLAIM OF THE SURETY BASED ON PAYMENTS MADE TO LABORERS AND MATERIALMEN.

ACCORDINGLY, YOU ARE ADVISED NOT TO CERTIFY THE DECEMBER 1964 EARNINGS VOUCHER FOR PAYMENT. THE SMALL BUSINESS ADMINISTRATION HAS A BETTER RIGHT TO ANY MONEYS OWING WHEELWRIGHT UNDER THE CONTRACTS THAN THE PUGET SOUND NATIONAL BANK OR THE SURETY. CF. 35 COMP. GEN. 104 AT PAGE 108; 37 ID. 9.