B-174201, FEB 3, 1972

B-174201, FEB 3, 1972

CONTRACTS - PAYMENTS DUE - SETOFF OF TAX LIABILITY DENIAL OF PAYMENT OF A COMMERCIAL VOUCHER TO THE TRUSTEE IN BANKRUPTCY OF THE JONKER CORPORATION. THE PAYMENT IS CLAIMED BY APPLIED DATA RESEARCH, INC. (ADR), AS ASSIGNEE OF JONKER, AND BY THE INTERNAL REVENUE SERVICE. SINCE ADR IS NOT A VALID ASSIGNEE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940, JONKER IS THE ONLY PARTY WHICH HAS A LEGAL CLAIM TO THE AMOUNT DUE. ACCORDINGLY, THE PAYMENT MAY BE APPLIED AS A SETOFF TO JONKER'S OUTSTANDING TAX LIABILITY. SEE UNITED STATES V. MUNSEY TRUST COMPANY, 332 U.S. 234 (1947).

TO MAJOR R. L. KELLEY:

REFERENCE IS MADE TO YOUR REQUEST OF AUGUST 25, 1970, FOR AN ADVANCE DECISION AS TO THE PROPRIETY OF PAYMENT FOR A COMMERCIAL VOUCHER PAYABLE TO THE TRUSTEE IN BANKRUPTCY OF THE JONKER CORPORATION.

CONTRACT NO. DAHC19-69-C-0025 WAS AWARDED TO JONKER ON APRIL 1, 1969, TO BE COMPLETED BY MARCH 31, 1970. APPLIED DATA RESEARCH, INCORPORATED (ADR) WAS A SUBCONTRACTOR PERFORMING APPROXIMATELY 50 PERCENT OF THE TOTAL EFFORT. JONKER ASSIGNED THE PROCEEDS OF THE CONTRACT TO THE MARYLAND NATIONAL BANK OF BALTIMORE, MARYLAND, ON APRIL 1, 1969.

ON JULY 23, 1969, THE SUBCONTRACTOR, ADR, COMPLAINED THAT THE PRIME CONTRACTOR WAS SEVERAL MONTHS IN ARREARS IN PAYMENT OF SERVICES RENDERED UNDER THE SUBCONTRACT. FOLLOWING SEVERAL DISCUSSIONS BETWEEN JONKER AND THE ARMY RESEARCH OFFICE, THE CONTRACTING OFFICER WAS ASSURED THAT JONKER WOULD OBTAIN FINANCIAL BACKING AND THAT ARRANGEMENTS HAD BEEN MADE WITH THE MARYLAND NATIONAL BANK TO SATISFY BOTH OVERDUE PAYMENTS AND FUTURE PAYMENTS TO ADR. THEREAFTER, PERFORMANCE CONTINUED FOR THREE MONTHS WITHOUT INCIDENT.

THE CONTRACT WAS TERMINATED ON DECEMBER 1, 1969, WHEN THE CONTRACTING OFFICER LEARNED THAT JONKER HAD FILED A PETITION IN BANKRUPTCY. FINAL PAYMENT WAS MADE ON MAY 8, 1970, TO THE ASSIGNEE IN THE AMOUNT OF $34,494.93 AFTER AN INTERNAL REVENUE SERVICE LEVY FOR PAYROLL TAXES HAD BEEN RELEASED. THE CHECK REPRESENTING FINAL PAYMENT WAS RETURNED TO THE CONTRACTING OFFICER ON JUNE 5, 1970, WITH AN EXPLANATION THAT THE ASSIGNEE'S INTEREST HAD BEEN FULLY SATISFIED.

ON JUNE 17, 1970, THE BANKRUPTCY COURT FOUND THAT NEITHER THE ASSIGNEE BANK NOR THE INTERNAL REVENUE SERVICE HAD ANY INTEREST IN THE FUNDS REMAINING DUE TO THE CONTRACTOR BY THE ARMY AND DIRECTED THE TRUSTEE IN BANKRUPTCY TO COLLECT THOSE FUNDS FROM THE ARMY. PURSUANT TO THAT ORDER, THE TRUSTEE IN BANKRUPTCY CLAIMED THE FUNDS DUE BY LETTER OF JUNE 22, 1970.

ON JULY 2, 1970, ADR CLAIMED $19,427.69 OF THE FINAL PAYMENT AS THE CONTRACTOR'S ASSIGNEE AND AS SUBROGEE AND BENEFICIARY OF THE ASSIGNEE BANK. THE CLAIM IS FOUNDED UPON AN AGREEMENT BETWEEN JONKER AND THE ASSIGNEE BANK ON AUGUST 14, 1969, FOR THE BENEFIT OF ADR THAT PAYMENTS RECEIVED FROM THE GOVERNMENT BY THE BANK WOULD FIRST BE APPLIED TO PAST DUE ADR INVOICES, THEN TO CURRENT ADR INVOICES AND FINALLY TO THE LOAN MADE BY THE BANK TO THE CONTRACTOR. WHILE ADR CONCEDES THAT IT DOES NOT QUALIFY AS AN ASSIGNEE UNDER THE ASSIGNMENT OF CLAIMS ACT, IT IS URGED THAT THE AGREEMENT OF AUGUST 14, 1969, IS IN EFFECT AN ASSIGNMENT TO IT WHICH THE GOVERNMENT IS NOT REQUIRED TO, BUT MAY RECOGNIZE, UNDER ESTABLISHED LEGAL PRECEDENT.

AS CONCEDED, ADR IS NOT A PROPER ASSIGNEE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940. ALTHOUGH THE BANK HELD A VALID ASSIGNMENT, ITS ONLY INTEREST IN THE PROCEEDS DUE ON THE CONTRACT WAS TO SECURE THE LOANS MADE TO FINANCE PERFORMANCE. BY THE BANK'S OWN ADMISSION THE LOANS HAVE BEEN DISCHARGED; THE BANK HAS BEEN PAID IN FULL, AND IT NO LONGER HAD ANY FINANCIAL INTEREST IN THE MATTER. SINCE THE BANK'S DEBT HAS BEEN DISCHARGED IN FULL, IT NO LONGER HAS A VALID CLAIM AGAINST THE UNITED STATES EITHER FOR ITSELF OR AS A TRUSTEE FOR ADR WHO, IN ANY EVENT, WOULD HAVE NO GREATER RIGHTS THAN THE BANK POSSESSES UNDER THE FIRST ASSIGNMENT. BERKELEY V UNITED STATES, 276 F. 2D 9; 149 CT. CL. 549 (1960); UNITED STATES V MUNSEY TRUST COMPANY, 332 U.S. 234, 67 S. COURT 1599, 91 L. ED. 2022 (1947).

JONKER THUS REMAINS THE ONLY PARTY WHICH HAS A LEGAL CLAIM TO THE AMOUNT DUE UNDER THE CONTRACT. IT IS WELL ESTABLISHED THAT THE GOVERNMENT HAS THE SAME RIGHT OF SETOFF "WHICH BELONGS TO EVERY CREDITOR, TO APPLY THE UNAPPROPRIATED MONIES OF HIS DEBTOR, IN HIS HANDS, IN EXTINGUISHMENT OF THE DEBTS DUE HIM." SEE MUNSEY TRUST COMPANY, SUPRA; MCKNIGHT V UNITED STATES, 98 U.S. 179; GRATIOT V UNITED STATES, 40 U.S. 336.

ACCORDINGLY, THE AMOUNT OF $34,494.93 SHOULD BE SET OFF AGAINST JONKER CORPORATION'S TAX LIABILITY WHICH THE INTERNAL REVENUE SERVICE ADVISED OUR OFFICE BY LETTER DATED JANUARY 7, 1972, TO BE IN THE AMOUNT OF $77,447.17.