B-176890 April 18, 1973

B-176890: Apr 18, 1973

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Fadel: This is in reply to your letter of March 13. Was awarded on April 14. 241.33 was made to the contractor on June 23. 037 and a prompt payment discount of $91.67 were deducted. Was prepared but was not paid because the contracting officer learned that the contractor's progress had been unsatisfactory. The contract was terminated for default on August 7. A take-over agreement was entered into by the Bureau and the surety pursuant to which the surety has been completing the work called for by the contract. The Interior Department has advised us that periodic progress payments have been made to the surety for work completed after execution of the take-over agreement. That the second progress payment is still being retained as part of the contract fund.

B-176890 April 18, 1973

Alfred Fadel, Esquire 9418 Wilshire Boulevard Suite 300 Beverly Hills, California 90212

Dear Mr. Fadel:

This is in reply to your letter of March 13, 1973, and prior correspondence, requesting that certain funds be paid to the Houston General Insurance Company, performance and payment bond surety for Earth Engineers, Incorporated, under contract No. 52500CG2-212, awarded by the Bureau of Land Management, Department of the Interior.

The contract, for the construction of a road, was awarded on April 14, 1972. A progress payment in the net amount of $18,241.33 was made to the contractor on June 23, 1972, after a retainage of $2,037 and a prompt payment discount of $91.67 were deducted. A second net progress payment of $10,500 dated July 26, 1972, was prepared but was not paid because the contracting officer learned that the contractor's progress had been unsatisfactory. On August 3, 1972, the contract was terminated for default on August 7, 1972, a take-over agreement was entered into by the Bureau and the surety pursuant to which the surety has been completing the work called for by the contract. The Interior Department has advised us that periodic progress payments have been made to the surety for work completed after execution of the take-over agreement, but that the second progress payment is still being retained as part of the contract fund. We have also been advised that on August 21, 1972, the Internal Revenue Service requested that the contract proceeds be subjected to offset for Earth Engineers' tax liability in the amount of $35,467.55.

Paragraph 7e of the take-over agreement provides that reimbursement by the Government of the surety for discharging its obligations under the payment bond "shall be made only on authority of (1) mutual agreement between the Government, the defaulting contractor, and the surety; (2) determination of the Comptroller General as to payee and amount; or (3) order of a court of competent jurisdiction." Citing this provision, you request our determination that the second progress payment be paid directly to the surety and that all future payments for completion of the project be based on the contract price and not on the basis of costs incurred as provided by the take-over agreement. In support of your request, you state that the surety, "in consideration of writing the surety bond in question, obtained a complete assignment of all funds earned on this project," and that this assignment provides the basis for the requested action.

Our file indicates that performance is not yet complete, that the total expenditures to be incurred by the surety in completing the contract have not been determined, and that there are outstanding obligations under the payment bond. Under these circumstances, neither 21 U.S.C. 71, which authorizes us to settle claims by or against the United States, nor 31 U.S.C. 74, under which we advise certifying officials and heads of executive agencies as to the legality of proposed payments of public funds, grants us authority to provide you with a decision at this time. B- 176905, November 1, 1972.

Accordingly, we are unable to comply with your request for a decision. We believe, however, that the legal principles applicable to this type of situation are clear. The right of a completing surety to retained funds and remaining progress payments in the hands of Government is well established. Prairie State Bank v. United States, 164, U.S. 227 (1896); Trinity Universal Insurance v. United States, 382 F. 2d 317 (5th Cir. 1967), cert. denied 390 U.S. 906 (1968); Security Insurance Co. of Hartford v. United States, 192 Ct. Cl. 754, 428 F. 2d 838 (1970). Thus, if the remaining contract balance is insufficient to reimburse the surety for costs incurred in completing performance of the defaulted contract, the surety may have a paramount right to the retained monies to the extent necessary to reimburse it. On the other hand, if the surety's claim to retained funds is based on its expenditures under a payment bond, that claim is subject to set-off for debts owed by the defaulted contractor to the Government. United States v. Munsey Trust Co., 332 U.S. 234 (1947); Aetna Insurance Co. v. United States, 197 Ct. Cl. 713, 456 F. 2d 773 (1972); B-169420, September 4, 1970; B-169264, June 10, 1971; FPR 1- 18.803-6(c)(1). As noted above, the Internal Revenue Service has levied upon any funds due to Earth Engineers under the contract. While a set-off could not be made to defeat the rights of an assignee under the Assignment of Claims Act of 1940, as amended, 31 U.S.C. 203, and 41 U.S.C. 15, the assignee is so protected only to the extent that the assignment is valid under the Act. The assignment executed in connection with the giving of the surety bond, while effective between the parties, may not be valid against the Government under the Act. See B-169420, September 4, 1970.

With respect to the method of determining the amounts to be paid to the surety, the take-over agreement, which states that the remaining work will be completed by the surety "under the terms and conditions stated herein," provides that the surety will be reimbursed for its actual expenditures, pursuant to monthly expenditures statements it is to furnish the Government. The take-over agreement was entered into pursuant to FPR 1- 18.903-6(c), which states that the agreement shall provide that "the Government will pay the surety in the manner provided by the contract, but not in excess of the surety's costs and expenses, the balance of the contract price unpaid at the time of default ***."

We hope this information will be useful to you.

Sincerely yours,

Paul G. Dembling General Counsel