B-157957, FEB. 16, 1966, 45 COMP. GEN. 504

B-157957: Feb 16, 1966

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SET-OFF - DEPOSIT REFUNDS - INDEBTEDNESS OF CONTRACTORS GENERALLY WHERE A DEPOSIT IS REQUIRED IN LIEU OF A SECURITY BOND OR IS INTENDED TO SECURE ONE OR MORE PARTICULAR OBLIGATIONS. WHERE AN AMOUNT IS INTENDED TO APPLY ON THE CONTRACT PRICE. IS NOT OTHERWISE RESTRICTED. ANY RESIDUAL AMOUNT IS NOT A SECURITY DEPOSIT AND MAY BE USED TO OFFSET ANY OBLIGATION TO THE GOVERNMENT AND. THERE IS NO LEGAL OR PRACTICAL OBJECTIONS TO USING A CONTRACT CLAUSE TO AUTHORIZE THE APPLICATION OF DEPOSIT REFUNDS TO DEBTS ARISING OUT OF PRIOR TRANSACTIONS. OR ONE RESTRICTING THE USE OF DEPOSITS TO TRANSACTIONS ARISING UNDER THE CONTRACT IS PREFERRED. 1966: REFERENCE IS MADE AGAIN TO THE LETTER DATED NOVEMBER 1.

B-157957, FEB. 16, 1966, 45 COMP. GEN. 504

SET-OFF - DEPOSIT REFUNDS - INDEBTEDNESS OF CONTRACTORS GENERALLY WHERE A DEPOSIT IS REQUIRED IN LIEU OF A SECURITY BOND OR IS INTENDED TO SECURE ONE OR MORE PARTICULAR OBLIGATIONS, THAT AMOUNT MAY NOT BE RETAINED AFTER FULL PERFORMANCE OF THE SECURED OBLIGATIONS, AND WHERE AN AMOUNT IS INTENDED TO APPLY ON THE CONTRACT PRICE, AND IS NOT OTHERWISE RESTRICTED, ANY RESIDUAL AMOUNT IS NOT A SECURITY DEPOSIT AND MAY BE USED TO OFFSET ANY OBLIGATION TO THE GOVERNMENT AND, ALTHOUGH, IN VIEW OF THE VARIOUS REASONS FOR REQUIRING DEPOSITS COVERING THE SALE OF NATIONAL FOREST TIMBER AND OTHER RESOURCE PRODUCTS, EACH REFUND MUST BE CONSIDERED ON ITS MERITS IN LIGHT OF EXISTING CIRCUMSTANCES, THERE IS NO LEGAL OR PRACTICAL OBJECTIONS TO USING A CONTRACT CLAUSE TO AUTHORIZE THE APPLICATION OF DEPOSIT REFUNDS TO DEBTS ARISING OUT OF PRIOR TRANSACTIONS; HOWEVER, WHETHER SUCH A CLAUSE, OR ONE RESTRICTING THE USE OF DEPOSITS TO TRANSACTIONS ARISING UNDER THE CONTRACT IS PREFERRED, THE CLAUSE USED SHOULD BE IDENTICAL IN ALL CONTRACTS REQUIRING DEPOSIT PAYMENTS BY CONTRACTORS.

TO THE SECRETARY OF AGRICULTURE, FEBRUARY 16, 1966:

REFERENCE IS MADE AGAIN TO THE LETTER DATED NOVEMBER 1, 1965, WITH ENCLOSURES, FROM THE ASSISTANT SECRETARY, REQUESTING OUR ADVICE WITH RESPECT TO THE RESPONSIBILITY AND AUTHORITY OF ADMINISTRATIVE OFFICERS TO WITHHOLD OR APPLY REFUNDS OF DEPOSITS MADE UNDER CONTRACTS AND PERMITS COVERING SALE OF NATIONAL FOREST TIMBER AND OTHER RESOURCE PRODUCTS. YOU OUTLINE SEVERAL SITUATIONS LIKELY TO ARISE IN THIS MATTER AND REQUEST OUR COMMENTS.

GENERALLY, THESE ADVANCE DEPOSITS ARE REQUIRED OF PURCHASERS TO COVER PAYMENTS AND GUARANTEE CERTAIN OBLIGATIONS UNDER THE CONTRACT. THE PROBLEM APPARENTLY ARISES UNDER TWO SITUATIONS--- THE FIRST BEING WHERE THE PURCHASER BECOMES INDEBTED TO THE FOREST SERVICE UNDER THAT CONTRACT BUT FOR A REASON NOT SPECIFIED IN THE TERMS OF THE DEPOSIT, AND THE SECOND ARISING WHERE THE PURCHASER IS ALREADY INDEBTED TO THE FOREST SERVICE OR SUBSEQUENTLY BECOMES INDEBTED UNDER ANOTHER CONTRACT. IN BOTH THESE SITUATIONS, THE CONTRACT IS SILENT AS TO THE AVAILABILITY OF THESE DEPOSITED FUNDS FOR APPLICATIONS TO OTHER DEBTS NOT SPECIFIED THEREIN.

YOU STATE THAT, ALTHOUGH THE POLICY AND INSTRUCTIONS IN CHAPTERS 2000, 5500 AND 6500 OF TITLE 4 OF GAO MANUAL FOR GUIDANCE OF FEDERAL AGENCIES MAKE NO DISTINCTION BETWEEN AMOUNTS OWED BY THE GOVERNMENT FOR SUPPLIES OR SERVICES AND THOSE OWED FOR REFUND OF DEPOSITS, IN 33 COMP. GEN. 262 THIS OFFICE INDICATED THAT DIFFERENT RULES APPLY TO REFUNDS OF DEPOSITS MADE BY CONTRACTORS FOR SPECIFIED PURPOSES THAN APPLY TO AMOUNTS OWED BY THE GOVERNMENT FOR GOODS OR SERVICES FURNISHED.

YOUR INTERPRETATION OF 33 COMP. GEN. 262 IS CORRECT. AN AMOUNT OWED BY THE GOVERNMENT FOR GOODS OR SERVICES FURNISHED MAY BE SET OFF AGAINST A MUTUAL DEBT OWED TO THE GOVERNMENT BY THAT CREDITOR. UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234; BARRY V. UNITED STATES, 229 U.S. 47; 43 COMP. GEN. 772. ON THE OTHER HAND, SECURITY DEPOSITS GENERALLY ARE GIVEN IN LIEU OF A BOND AND ARE A PLEDGE OR COLLATERAL TO SECURE AN OBLIGATION UNDER THE CONTRACT, SUCH AS PERFORMANCE OR PAYMENT. AS WE SAID IN 33 COMP. GEN. 262, AT PAGE 263, SUCH A PLEDGE OR COLLATERAL MAY NOT BE HELD AS SECURITY FOR SOME OTHER OBLIGATION. BIEBINGER V. CONTINENTAL BANK, 99 U.S. 143; REYNES V. DUMONT, 130 U.S. 354; HANOVER NATIONAL BANK V. SUDDATH, 215 U.S. 110; RESTATEMENT OF THE LAW OF SECURITY, SECS. 22 (2) AND 37 (3); 72 C.J.S. PLEDGES SEC. 48. SEE, ALSO, 40 COMP. GEN. 213. OTHER WORDS, THE GOVERNMENT COULD NOT RETAIN A SECURITY-TYPE DEPOSIT TO APPLY ON AN INDEBTEDNESS NOT ARISING OUT OF THE SAME CONTRACT OR NOT WITHIN THE TERMS OF THE DEPOSIT. IN 38 COMP. GEN. 476, WE HELD, NOTWITHSTANDING OUR PREVIOUS DECISION IN 33 COMP. GEN. 262, THAT WHERE THE PLEDGER HAD NO INTENTION OF SATISFYING HIS INDEBTEDNESS TO THE GOVERNMENT, IT WOULD NOT BE IN THE BEST INTERESTS OF THE GOVERNMENT TO RETURN A BID DEPOSIT ON ANOTHER CONTRACT BUT THAT WE SHOULD APPLY THAT MONEY TO THE PRIOR OBLIGATION. WE SUBSEQUENTLY HELD IN 41 COMP. GEN. 86, WHERE THE AMOUNTS INVOLVED WERE RELATIVELY SMALL, THAT THE POSITION TAKEN IN 38 COMP. GEN. 476 WAS NOT PRACTICAL AND SHOULD NOT BE FOLLOWED THEREAFTER. IN OUR DECISION OF MAY 6, 1963, B-150897, WE REAFFIRMED OUR POSITION THAT A SECURITY DEPOSIT UNDER ONE CONTRACT CANNOT BE USED TO EXTINGUISH A DEBT UNDER ANOTHER CONTRACT. IF, ON THE OTHER HAND, A DEPOSIT OF THIS NATURE COULD BE GIVEN UNDER A CONTRACT AND WITHOUT A STATEMENT AS TO ITS PURPOSE, IT FOLLOWS THAT THIS WOULD BE A GENERAL DEPOSIT AND COULD BE APPLIED AGAINST ANY DEBT OR OBLIGATION ARISING UNDER THAT CONTRACT.

ON THE OTHER HAND, WHERE MONEY IS ADVANCED ON THE CONTRACT PRICE, AS IN THE CASE OF A BID DEPOSIT TO BE APPLIED ON THE TOTAL PAYMENT OR A PARTIAL PAYMENT MADE BEFORE OR DURING PERFORMANCE OF THE CONTRACT, SUCH AMOUNT IS NOT A SECURITY DEPOSIT BUT IS PART OF THE CONTRACT PAYMENT AND MAY BE USED TO OFFSET ANY OBLIGATION OF THAT PARTY TO THE GOVERNMENT. UNITED STATES V. MUNSEY TRUST CO., SUPRA; BARRY V. UNITED STATES, SUPRA; B-150897, DATED APRIL 15, 1963; B-154380, DATED JUNE 24, 1964. OF COURSE, IF THE CONTRACT CONTAINS A RESTRICTION AS TO THE APPLICATION OF THE ADVANCED PAYMENT, SUCH LIMITATION GOVERNS THE POWER OF THE UNITED STATES TO APPLY THAT MONEY TO OTHER DEBTS.

IN VIEW OF THE VARIOUS REASONS FOR REQUIRING THESE DEPOSITS, OR PAYMENTS, AND THE NUMEROUS CLAUSES GOVERNING THE DISPOSITION OF THEIR UNUSED PORTIONS, WE ARE UNABLE TO GIVE CATEGORICAL ANSWERS TO THE QUESTIONS POSED IN YOUR SUBMISSION. EACH CASE MUST BE CONSIDERED ON ITS OWN MERITS IN LIGHT OF THE EXISTING CIRCUMSTANCES. WE CAN ONLY STATE GENERALLY THAT WHERE AN AMOUNT IS REQUIRED IN LIEU OF A SECURITY BOND OR IS INTENDED TO SECURE ONE OR MORE PARTICULAR OBLIGATIONS, THAT AMOUNT MAY NOT BE RETAINED AFTER FULL PERFORMANCE OF THE SECURED OBLIGATIONS; HOWEVER, WHERE AN AMOUNT IS INTENDED TO APPLY ON THE CONTRACT PRICE, AND IS NOT OTHERWISE RESTRICTED, ANY RESIDUAL AMOUNT MAY BE RETAINED FOR EXTINGUISHMENT OF OTHER OBLIGATIONS OF THE PARTY.

IT HAS BEEN BROUGHT TO OUR ATTENTION THAT THE DEFENSE SUPPLY AGENCY (DSA) INSERTS THE FOLLOWING CLAUSE IN ITS SURPLUS SALES CONTRACT:

THE BIDDER OR PURCHASER HEREBY AGREES THAT THE DEFENSE SUPPLY AGENCY MAY USE ALL OR ANY PORTION OF ANY REFUND DUE HIM TO SATISFY, IN WHOLE OR IN PART, ANY DEBT ARISING OUT OF PRIOR TRANSACTIONS WITH THE DEFENSE SUPPLY AGENCY.

SEE OUR DECISION B-153100, DATED OCTOBER 27, 1965. WE HAVE FOUND NO LEGAL OR PRACTICAL OBJECTIONS TO THE USE OF SUCH A CLAUSE LIMITED TO THE AGENCY CONCERNED, AND WE SUGGEST THE USE OF SIMILAR PROVISIONS AS A MEANS OF SATISFYING THE INDEBTEDNESS OF PURCHASERS OR CONTRACTORS WITHOUT THE BURDENSOME PROCEDURE OF NUMEROUS DEMANDS AND, ULTIMATELY, INSTITUTION OF COURT ACTION.

YOU HAVE ALSO STATED THAT ON JULY 1, 1965, YOUR DEPARTMENT ADOPTED A NEW STANDARD CONTRACT WITH A DEPOSITS CLAUSE RESTRICTING ITS USE TO COVER OBLIGATIONS OF THE PARTICULAR CONTRACT UNDER WHICH THE DEPOSITS WERE MADE, BUT THAT THERE ARE STILL OTHER TYPES OF CONTRACTS OR PERMITS, INVOLVING THE RENTAL OF LAND AND GRAZING PRIVILEGES, WHICH ARE SILENT AS TO THE SUBJECT OF APPLICATION OF DEPOSITS TO OTHER DEBTS. SHOULD YOU DECIDE TO USE A CLAUSE SIMILAR TO THAT NOW USED BY DSA, OR THE MORE RESTRICTIVE CLAUSE ADOPTED FOR USE IN YOUR PRESENT CONTRACTS, WE SUGGEST THAT CONSIDERATION BE GIVEN TO USING SUCH A CLAUSE CONSISTENTLY IN ALL CONTRACTS WHICH REQUIRE THE PAYMENT OF DEPOSITS BY THE CONTRACTORS.