B-180271, AUG 22, 1974, 54 COMP GEN 137

B-180271: Aug 22, 1974

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IS NOT FULLY REPAID THE AMOUNT OF ITS LOAN OUT OF FUNDS OF CONTRACT AND/OR RECEIVABLES OF CONTRACTOR. ASSIGNEE IS ENTITLED TO AMOUNT OF SUCH FUND WHICH WILL CAUSE LOAN TO BE FULLY REPAID WITHOUT SETOFF BY GOVERNMENT. IS NOT DETERMINATIVE OF GOVERNMENT'S OBLIGATION TO PAY ASSIGNEE-PRINCIPAL OR THAT BANK'S RIGHTS TO RECEIVE ADDITIONAL MONIES. AS GOVERNMENT IS STRANGER TO TRANSACTIONS BETWEEN ASSIGNEE-PRINCIPAL AND THIRD PARTY. WHICH LOANED MONEY TO CONTRACTOR AFTER SUBJECT CONTRACT WAS COMPLETED IS NOT ENTITLED TO PROTECTION OF THE NO-SETOFF PROVISION OF ASSIGNMENT OF CLAIMS ACT AS BENEFICIARY OF TRUST ARRANGEMENT WITH ASSIGNEE BANK WHICH ACTED IN AGENCY AND/OR TRUSTEE CAPACITY SINCE BANK DID NOT PROVIDE ANY FINANCIAL ASSISTANCE WHICH FACILITATED PERFORMANCE OF THIS PARTICULAR CONTRACT.

B-180271, AUG 22, 1974, 54 COMP GEN 137

CLAIMS - ASSIGNMENTS - CONTRACTS - ASSIGNEE'S RIGHT TO PAYMENT - WITHOUT GOVERNMENT SET-OFF WHERE ASSIGNEE BANK, ACTING IN ITS OWN CAPACITY, MAKES LOAN TO CONTRACTOR AND IN RETURN RECEIVES ASSIGNMENT OF CONTRACTOR'S CLAIM AGAINST GOVERNMENT ON SPECIFIC CONTRACT AND PLEDGE OF FUTURE RECEIVABLES, BUT IS NOT FULLY REPAID THE AMOUNT OF ITS LOAN OUT OF FUNDS OF CONTRACT AND/OR RECEIVABLES OF CONTRACTOR, IF FURTHER FUNDS BECOME DUE UNDER CONTRACT, ASSIGNEE IS ENTITLED TO AMOUNT OF SUCH FUND WHICH WILL CAUSE LOAN TO BE FULLY REPAID WITHOUT SETOFF BY GOVERNMENT. CLAIMS - ASSIGNMENTS - CONTRACTS - VALIDITY OF ASSIGNMENT - ASSIGNEE'S RIGHT TO PAYMENT FACT THAT THIRD PARTY REPAID ASSIGNEE BANK (A PRINCIPAL IN LOAN TO CONTRACTOR) THE SUM OUTSTANDING ON LOAN MADE BY BANK TO GOVERNMENT CONTRACTOR, WHO IN TURN ASSIGNED BANK ITS GOVERNMENT CONTRACT AND ALSO PLEDGED ALL FUTURE RECEIVABLES, IS NOT DETERMINATIVE OF GOVERNMENT'S OBLIGATION TO PAY ASSIGNEE-PRINCIPAL OR THAT BANK'S RIGHTS TO RECEIVE ADDITIONAL MONIES, AS GOVERNMENT IS STRANGER TO TRANSACTIONS BETWEEN ASSIGNEE-PRINCIPAL AND THIRD PARTY. CLAIMS - ASSIGNMENTS - CONTRACTS - THIRD PARTY RIGHTS THIRD PARTY DEALING WITH ASSIGNEE BANK UNDER ASSIGNMENT OF CLAIM CAN OBTAIN SAME BUT HAS NO GREATER RIGHTS THAN ASSIGNEE BANK HAD. CLAIMS - ASSIGNMENTS - CONTRACTS - VALIDITY OF ASSIGNMENT - ASSIGNEE'S LOAN NOT FOR CONTRACT PERFORMANCE BANK, NOT ASSIGNEE OF CLAIM UNDER ASSIGNMENT OF CLAIMS ACT, WHICH LOANED MONEY TO CONTRACTOR AFTER SUBJECT CONTRACT WAS COMPLETED IS NOT ENTITLED TO PROTECTION OF THE NO-SETOFF PROVISION OF ASSIGNMENT OF CLAIMS ACT AS BENEFICIARY OF TRUST ARRANGEMENT WITH ASSIGNEE BANK WHICH ACTED IN AGENCY AND/OR TRUSTEE CAPACITY SINCE BANK DID NOT PROVIDE ANY FINANCIAL ASSISTANCE WHICH FACILITATED PERFORMANCE OF THIS PARTICULAR CONTRACT.

IN THE MATTER OF TRILON RESEARCH CORPORATION - REQUEST FOR AN ADVANCE DECISION, AUGUST 22, 1974:

STATEMENT OF FACTS

TRILON RESEARCH CORPORATION (TRILON) WAS AWARDED CONTRACT N00156-67-C 1620, EFFECTIVE DECEMBER 28, 1966, BY THE NAVAL AIR ENGINEERING CENTER, PHILADELPHIA. THE CONTRACT WAS A FIRM FIXED-PRICE SUPPLY CONTRACT IN THE AMOUNT OF $87,318.46 FOR FURNISHING AND UPDATING OPERATION MANUALS. THE FIRST PROGRESS PAYMENT UNDER THE CONTRACT ($46,527.43) WAS MADE TO TRILON ON APRIL 19, 1967.

IN MAY 1967, TRILON SUBMITTED A NOTICE OF ASSIGNMENT OF THE REMAINING PAYMENTS UNDER THE CONTRACT TO THE FRANKLIN NATIONAL BANK (FRANKLIN), NEW YORK, NEW YORK. FRANKLIN AND THE SMALL BUSINESS ADMINISTRATION (SBA) HAD MADE A SO-CALLED JOINT LOAN TO TRILON OF $250,000. THE LOAN WAS SECURED BY TRILON'S PLEDGE OF ALL PRESENT AND FUTURE RECEIVABLES. THE RISK OF LOSS UNDER THE LOAN WAS EQUALLY DIVIDED BETWEEN FRANKLIN AND SBA BUT REPAYMENT OF THE FIRST $125,000 WAS AT FRANKLIN'S RISK AND THE LAST HALF OF THE LOAN WAS AT SBA'S.

THE BALANCE OF THE ORIGINAL CONTRACT, $40,791.03, WAS THEREAFTER PAID TO FRANKLIN ($4,155.08 ON AUGUST 10, 1967, AND $36,635.95 ON NOVEMBER 1, 1968).

IN SEPTEMBER OR OCTOBER 1969, THE FIRST NATIONAL CITY BANK COMMENCED MAKING LOANS TO TRILON. THE INITIAL LOAN WAS IN EXCESS OF $250,000. FIRST NATIONAL CITY REQUESTED THAT BOTH SBA AND FRANKLIN SUBORDINATE THEIR RESPECTIVE SECURITY INTERESTS IN ALL RECEIVABLES OF TRILON INCLUDING GOVERNMENT CONTRACTS TO THE INTEREST OF FIRST NATIONAL CITY BANK. INDEED, BY A LETTER DATED OCTOBER 15, 1969, SBA AGREED TO "*** THE RELEASE OF ALL ACCOUNTS RECEIVABLE, INVENTORY AND CONTRACTS (INCLUDING GOVERNMENT CONTRACTS) ALL WHETHER NOW OWNED OR HEREAFTER ACQUIRED, ASSIGNED, PLEDGED AND/OR SET OVER TO *** (FRANKLIN NATIONAL BANK) BY TRILON RESEARCH CORP."

IN SEPTEMBER OF 1971, FRANKLIN CALLED IN ITS LOANS AND THREATENED TO CALL THE BALANCE OF THE SBA LOAN. TRILON ATTEMPTED TO FORESTALL THESE ACTIONS BY MAKING PAYMENT TO FRANKLIN WITH A CHECK FOR $45,000 DRAWN ON FIRST NATIONAL CITY. HOWEVER, FIRST NATIONAL CITY INDICATES THAT IN VIEW OF TRILON'S ALREADY HEAVY INDEBTEDNESS TO IT, THE CHECK WOULD NOT HAVE BEEN HONORED BUT RATHER THE BANK WOULD HAVE EXERCISED ITS RIGHT TO SET OFF DEBTS OWING IT AGAINST THE ASSETS OF TRILON IN ITS POSSESSION.

ON SEPTEMBER 30, 1971, AN ARRANGEMENT WAS REACHED BETWEEN FRANKLIN AND FIRST NATIONAL CITY WHEREBY FRANKLIN AGREED TO TRANSFER ALL OF ITS SECURITY INTEREST IN TRILON'S RECEIVABLES TO FIRST NATIONAL CITY. EXCHANGE FIRST NATIONAL CITY AGREED TO PAY FRANKLIN $52,812, THE UNPAID BALANCE OF FRANKLIN'S SOLE RISK LOANS, AND REDUCED THE OUTSTANDING BALANCE ON THE FRANKLIN/SBA $250,000 LOAN TO LESS THAN $125,000, THUS RELIEVING FRANKLIN OF ANY FURTHER RISK THEREON. THESE PAYMENTS WERE MADE BY (1) RELEASING TRILON'S $45,000 CHECK PAYABLE TO FRANKLIN, DRAWN ON AND ALSO SUBJECT TO THE FIRST LIEN OF FIRST NATIONAL CITY, AND (2) BY DIRECT PAYMENT TO FRANKLIN OF $7,812 TO PAY OFF FRANKLIN'S RISK PORTION OF THE FRANKLIN/SBA LOAN ARRANGEMENT. FRANKLIN, IN ACCORDANCE WITH ITS CONTRACT, HOWEVER, CONTINUED AS AGENT FOR SBA, WHICH ADVISES THAT WITH RESPECT TO THE INSTANT CONTRACT IT IS IN THE POSITION OF A MERE UNSECURED CREDITOR.

SUBSEQUENT TO THE PAYMENT TO FRANKLIN, FIRST NATIONAL CITY FORWARDED A NOTICE OF ASSIGNMENT OF CONTRACT -1620 TO THE AGENCY. HOWEVER, SINCE NO RELEASE OF TRILON'S PRIOR ASSIGNMENT TO FRANKLIN HAD EVER BEEN RECEIVED, THE AGENCY NEVER ACKNOWLEDGED RECEIPT OF THIS DOCUMENT.

IN FACT, ON THE SUGGESTION OF SBA, FRANKLIN DECLINED TO RELEASE THE PRIOR ASSIGNMENT. SBA APPARENTLY DESIRED TO MAINTAIN FRANKLIN AS DISBURSING AGENT FOR ALL PARTIES HAVING ANY CONTINUING INTEREST (FIRST NATIONAL CITY AND SBA).

SUBSEQUENT TO THE FIRST NATIONAL CITY LOAN, TRILON ASSERTED A CLAIM UNDER CONTRACT -1620 FOR $126,418.24 BASED UPON AN ALLEGED CONSTRUCTIVE CHANGE AND ALSO DEFECTIVE GOVERNMENT-FURNISHED PROPERTY. THE MATTER WAS SETTLED PRIOR TO HEARING BY THE ARMED SERVICES BOARD OF CONTRACT APPEALS. THE AMOUNT OF THE SETTLEMENT BETWEEN TRILON AND THE NAVY WAS $62,181.37. THIS AMOUNT WAS INCORPORATED INTO THE CONTRACT VIA MODIFICATION NO. P00004 DATED APRIL 27, 1973.

HOWEVER, AS A RESULT OF ANOTHER CONTRACT, DAAB05-69-C-1028, ON WHICH TRILON WAS DEFAULTED AS OF DECEMBER 29, 1972, THAT FIRM PRESENTLY OWES THE UNITED STATES GOVERNMENT $213,211.49 FOR UNLIQUIDATED PROGRESS PAYMENTS. THE INTERNAL REVENUE SERVICE BY ITS NOTICE OF LEVY DATED AUGUST 11, 1972, FURTHER INDICATES THAT TRILON IS ALSO $157,312.73 IN ARREARS IN ITS TAXES.

DISCUSSION OF LAW

FIRST NATIONAL CITY ASSERTS THAT THE GOVERNMENT MAY NOT ASSERT ANY RIGHT OF SETOFF AGAINST THE $62,181.37 CLAIMS SETTLEMENT FOR THE FOLLOWING REASON:

THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED, EXPRESSLY PROVIDES FOR SUCH AGENCY PAYMENTS. THE STATUTE IS EXPLICIT. THE DEFENSE SUPPLY AGENCY SEEMS TO BE ASSERTING AS ITS ONLY REASON FOR REFUSAL TO PAY, THE FACT THAT NO MONEY IS NOW DUE TO FRANKLIN NATIONAL BANK FROM TRILON. A SIMILAR CONTENTION HAS BEEN REPEATEDLY REJECTED BY THE COURTS.

(FIRST NATIONAL CITY'S SECOND CONTENTION RELATIVE TO GOVERNMENT WAIVER OF ITS SETOFF RIGHT WAS WITHDRAWN ON FEBRUARY 15, 1974.)

THE EMBODIMENT OF THE ASSIGNMENT OF CLAIMS ACT, INCORPORATED INTO THE CONTRACT PURSUANT TO PARAGRAPH 7-103.8 OF THE ARMED SERVICES PROCUREMENT REGULATION (ASPR), PROVIDES:

ASSIGNMENT OF CLAIMS (FEB. 1962)

(A) PURSUANT TO THE PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED (31 U.S.C. 203, 41 U.S.C. 15), IF THIS CONTRACT PROVIDES FOR PAYMENTS AGGREGATING $1,000 OR MORE, CLAIMS FOR MONIES DUE OR TO BECOME DUE THE CONTRACTOR FROM THE GOVERNMENT UNDER THIS CONTRACT MAY BE ASSIGNED TO A BANK, TRUST COMPANY, OR OTHER FINANCING INSTITUTION, INCLUDING ANY FEDERAL LENDING AGENCY, AND MAY THEREAFTER BE FURTHER ASSIGNED AND REASSIGNED TO ANY SUCH INSTITUTION. ANY SUCH ASSIGNMENT OR REASSIGNMENT SHALL COVER ALL AMOUNTS PAYABLE UNDER THIS CONTRACT AND NOT ALREADY PAID, AND SHALL NOT BE MADE TO MORE THAN ONE PARTY, EXCEPT THAT ANY SUCH ASSIGNMENT OR REASSIGNMENT MAY BE MADE TO ONE PARTY AS AGENT OR TRUSTEE FOR TWO OR MORE PARTIES PARTICIPATING IN SUCH FINANCING. UNLESS OTHERWISE PROVIDED IN THIS CONTRACT, PAYMENTS TO AN ASSIGNEE OF ANY MONIES DUE OR TO BECOME DUE UNDER THIS CONTRACT SHALL NOT, TO THE EXTENT PROVIDED IN SAID ACT, AS AMENDED, BE SUBJECT TO REDUCTION OR SET-OFF.

ASPR 7-103.8 ALSO PROVIDES THAT:

*** PURSUANT TO THE PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED BY PUBLIC LAW 30, 82D CONGRESS, THE EFFECT OF THE LAST SENTENCE OF PARAGRAPH (A) OF THE FOREGOING CLAUSE IS THAT PAYMENTS TO BE MADE TO AN ASSIGNEE AFTER 15 MAY 1951 OF ANY MONIES DUE OR TO BECOME DUE UNDER THE CONTRACT SHALL NOT BE SUBJECT TO REDUCTION OR SET-OFF FOR ANY LIABILITY OF ANY NATURE OF THE CONTRACTOR TO THE GOVERNMENT WHICH ARISES INDEPENDENTLY OF THE CONTRACT, OR FOR ANY LIABILITY OF THE CONTRACTOR ON ACCOUNT OF (I) RENEGOTIATION UNDER ANY RENEOGTIATION STATUTE OR UNDER ANY STATUTORY RENEGOTIATION CLAUSE IN THE CONTRACT, (II) FINES, (III) PENALTIES (WHICH TERM DOES NOT INCLUDE AMOUNTS WHICH MAY BE COLLECTED OR WITHHELD FROM THE CONTRACTOR IN ACCORDANCE WITH OR FOR FAILURE TO COMPLY WITH THE TERMS OF THE CONTRACT), OR (IV) TAXES, SOCIAL SECURITY CONTRIBUTIONS, OR THE WITHHOLDING OR NONWITHHOLDING OF TAXES OR SOCIAL SECURITY CONTRIBUTIONS, WHETHER ARISING FROM OR INDEPENDENTLY OF THE CONTRACT. ***

THE PRIMARY ISSUES RAISED IN THE INSTANT CASE ARE, THEREFORE, WHETHER FIRST NATIONAL CITY BANK EITHER ENJOYS THE STATUS OF A BENEFICIARY OF AN ACCEPTABLE TRUST ARRANGEMENT OR HAS SOME OTHER RELATIONSHIP WITH THE ASSIGNEE WHICH WOULD UNDER THE REGULATION PRECLUDE THE GOVERNMENT FROM SETTING OFF A DEBT DUE IT FROM TRILON.

FIRST NATIONAL CITY ARGUES THAT IT IS THE BENEFICIARY OF A TRUST ARRANGEMENT WHEREBY FRANKLIN IS ACTING AS AGENT OR TRUSTEE BOTH FOR SBA AND FIRST NATIONAL CITY. INDEED, IT SHOULD BE NOTED THAT FIRST NATIONAL CITY ADMITS THAT FRANKLIN HAS NOT RELEASED THE ASSIGNMENT. THEREFORE, IN CONCERT WITH ASPR 7-103.8 THE SECOND ASSIGNMENT BY TRILON COULD NOT HAVE BEEN MADE ABSENT A RELEASE OF THE INITIAL ASSIGNMENT.

AS NOTED ABOVE, UNDER THE LOAN ARRANGEMENT WITH TRILON, FRANKLIN WAS THE PRINCIPAL OR CREDITOR ON THE FIRST $125,000 BUT WAS MERELY AN AGENT AND/OR TRUSTEE FOR SBA ON THE REMAINING $125,000. IT WAS IN THESE JOINT CAPACITIES THAT IT RECEIVED TRILON'S ASSIGNMENT.

AS WAS INDICATED IN BEACON WEAR CLOTHING COMPANY V. UNITED STATES, 355 F.2D 583; 174 CT. CL. 40 (1966), ONCE THE OUTSTANDING INDEBTEDNESS HAS BEEN REPAID IN FULL FROM THE PROCEEDS DUE ON THE CONTRACT (AND WHERE APPLICABLE, OTHER RECEIVABLES OF THE CONTRACTOR WHICH IT HAD ALSO PLEDGED AS SECURITY FOR THE LOAN), THE PRINCIPAL MAKING THE LOAN HAS NO FURTHER RIGHTS OR FINANCIAL INTEREST. THE COURT STATED AT PAGE 590 THAT:

*** GENERALLY, AN ASSIGNMENT MADE AS COLLATERAL SECURITY FOR A DEBT GIVES THE ASSIGNEE ONLY A QUALIFIED INTEREST IN THE ASSIGNED CHOSE, COMMENSURATE WITH THE DEBT OR LIABILITIES SECURED, EVEN THOUGH THE ASSIGNMENT APPEARS TO BE ABSOLUTE ON ITS FACE. ***

SEE PETERMAN LUMBER CO. V. ADAMS, 128 F. SUPP. 6 (W.D. ARK. 1955), 49 COMP. GEN. 44, 45 (1969), 37 ID. 9 (1957). THEREFORE, SINCE FRANKLIN, IN ITS CAPACITY AS PRINCIPAL, HAD NOT BEEN FULLY PAID FROM THE PROCEEDS OF THE CONTRACT AND/OR THE RECEIVABLES OF TRILON (AS NOTED ABOVE FRANKLIN WAS SHORT OF FULL PAYMENT BY $7,812), WE FEEL THAT FUNDS ARISING OUT OF THE CONTRACT SHOULD CONTINUE TO BE PAID IT AS ORIGINAL ASSIGNEE, WITHOUT SETOFF, UNTIL FRANKLIN'S ORIGINAL LOAN OF $125,000 IS FULLY PAID.

IN THIS REGARD, THE FACT THAT FRANKLIN HAD ALREADY BEEN PAID OUT BY A THIRD PARTY, FIRST NATIONAL CITY, IS NOT DETERMINATIVE OF FRANKLIN'S RIGHTS OR THE GOVERNMENT'S OBLIGATION UNDER THE ASSIGNMENT FOR THE GOVERNMENT IS A STRANGER TO ANY CONTRACTUAL AGREEMENTS BETWEEN THE ASSIGNEE-PRINCIPAL (FRANKLIN) AND ANY THIRD PARTY. WE DO NOTE, HOWEVER, THAT SINCE FRANKLIN WAS PAID $7,812 BY FIRST NATIONAL CITY, IT MIGHT BE CONTRACTUALLY BOUND TO TURN OVER THIS SAME SUM TO FIRST NATIONAL CITY UPON PAYMENT BY THE GOVERNMENT. FIRST NATIONAL CITY MAY, IN ESSENCE, HAVE OBTAINED FOR ITS $7,812 THE SAME BUT NO GREATER RIGHTS THAN FRANKLIN ITSELF POSSESSED UNDER THE TRILON ASSIGNMENT - ESSENTIALLY THE RIGHT TO PAYMENT OF NEARLY $8,000, WITHOUT ANY SETOFF. SEE BERKELEY V. UNITED STATES, 276 F.2D 9; 149 CT. CL. 549 (1960), AND UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234 (1949); SEE, ALSO, B 171552, APRIL 27, 1971.

ACCORDINGLY, THE SUM OF $7,812 SHOULD BE PAID DIRECTLY TO FRANKLIN NATIONAL BANK AS ASSIGNEE-PRINCIPAL.

IN SUPPORT OF THE CONTENTION THAT FIRST NATIONAL CITY IS ENTITLED TO THE BALANCE OF THE $62,181.37 IN QUESTION (OR $54,369.37), COUNSEL FOR THE BANK CITES THE CASES OF CONTINENTAL BANK AND TRUST COMPANY V. UNITED STATES, 416 F.2D 1296; 189 CT. CL. 99 (1970) AND CHELSEA FACTORS, INC. V. UNITED STATES, 181 F. SUPP. 685; 149 CT. CL. 202 (1960). IN CONTINENTAL, A GOVERNMENT CONTRACTOR ASSIGNED CONTINENTAL BANK AND TRUST COMPANY (CONTINENTAL) ALL PROCEEDS ON A CONTRACT WITH THE ARMY. CONTINENTAL, IN TURN, ADVANCED CERTAIN MONIES TO THE CONTRACTOR FOR THE PERFORMANCE OF THE CONTRACT. THIS INITIAL SUM WAS REPAID. HOWEVER, ADDITIONAL LOANS WERE MADE BY CONTINENTAL TO THE CONTRACTOR AND CONTINENTAL CLAIMED THAT A BALANCE OF $43,848.41 WAS STILL OWED IT ON THESE LOANS SECURED BY THE ASSIGNMENT.

THE CONTRACT BETWEEN THE ARMY AND THE CONTRACTOR WAS TERMINATED ON OR ABOUT NOVEMBER 15, 1965, AT WHICH TIME THE SUM OF $100,141.05 WAS DUE THE CONTRACTOR UNDER THE TERMS OF THE CONVENIENCE TERMINATION. CONTINENTAL ASSERTED A CLAIM FOR $43,848.41 (THE AMOUNT STILL OWED IT) OF THIS TOTAL SUM. HOWEVER, AT THE TIME THE CONTRACTOR WAS ADJUDICATED BANKRUPT (OCTOBER 6, 1966), THE CONTRACTOR WAS INDEBTED TO THE GOVERNMENT IN THE SUM OF APPROXIMATELY $332,602.26 UNDER OTHER CONTRACTS BETWEEN THE CONTRACTOR AND THE GOVERNMENT.

THE GOVERNMENT CONCEDED THAT FUNDS WERE ADVANCED BY CONTINENTAL "FOR PERFORMANCE OF SAID GOVERNMENT CONTRACT." HOWEVER, THE GOVERNMENT ARGUED THAT SINCE THE ORIGINAL LOAN BETWEEN THE CONTRACTOR AND CONTINENTAL SECURED BY THE ASSIGNMENT HAD BEEN REPAID, THE GOVERNMENT MAY SET OFF THE $43,848.41 CLAIMED BY CONTINENTAL, AS THE NO SETOFF PROVISION WAS APPLICABLE ONLY TO THAT PORTION OF THE ORIGINAL LOAN STILL OUTSTANDING. SINCE NO SUCH PORTION EXISTED, CONTINENTAL COULD NOT INVOKE THE PROTECTION OF THE NO SETOFF CLAUSE.

THE COURT OF CLAIMS, IN HOLDING THAT THE NO SETOFF PROVISION WAS APPLICABLE TO THE AMOUNT CLAIMED, STATED AT PAGE 1302 THAT:

IN APPARENT RECOGNITION OF THE LACK OF SUPPORT FOR ITS POSITION IN THE DECISIONAL LAW, DEFENDANT RESORTS TO THE CONTENTION THAT THE SET OFF IS PERMISSIBLE IN THIS INSTANCE, SINCE UNDER THE COMMON LAW OF ASSIGNMENTS, PLAINTIFF'S INTEREST IN THE ASSIGNED COLLATERAL CEASED WHEN THE LOAN MADE FOR THE PERFORMANCE OF THE CONTRACT WAS REPAID. 6 C.J.S. ASSIGNMENTS SEC. 93. THIS ARGUMENT IGNORES THE MODERN TREND AWAY FROM TYING PARTICULAR LOANS TO PARTICULAR SECURITY. FURTHERMORE, THE ADOPTION OF SUCH A RULE FOR THE STATUTORY ASSIGNMENT INVOLVED HERE WOULD IMPAIR THE FAMILIAR REVOLVING CREDIT FINANCING DEVICE TO WHICH CONGRESS REFERRED WHEN DELETING THE PREVIOUSLY DISCUSSED SET-OFF AND REDUCTION LIMITATION PROVISION FROM THE 1951 AMENDMENTS TO THE ACT. AS THIS COURT NOTED IN CHELSEA FACTORS, INC., SUPRA, 181 F. SUPP. 690, 149 CT. CL. AT 210: "THE 1940 AMENDMENT TO THE ASSIGNMENT OF CLAIMS ACT WAS INTENDED TO FACILITATE THE FINANCING OF GOVERNMENT CONTRACTS BY PRIVATE CAPITAL IN THE WAY IN WHICH PRIVATE CAPITAL NORMALLY OPERATES IN FINANCING THE COUNTRY'S ECONOMY. ***" CHELSEA FACTORS INVOLVED THE CLAIM OF A PARTY (CHELSEA) WHICH LOANED MONEY TO THE GOVERNMENT CONTRACTOR WHICH IN TURN ASSIGNED THE PROCEEDS OF ITS CONTRACT TO A BANK WITH WHICH CHELSEA HAD ESTABLISHED A FINANCIAL RELATIONSHIP REGARDING THIS MATTER. THE BANK, THE ASSIGNEE OF RECORD, WAS TO RECEIVE ALL MONIES DUE UNDER THE ASSIGNMENT AND, AFTER APPLICATION OF CHELSEA'S INDEBTEDNESS TO THE BANK, PAY OVER THE REMAINING FUNDS TO CHELSEA.

THE GOVERNMENT, WHILE NOTING THAT THE STATUTE PERMITS AN ASSIGNMENT TO ONE AND ONLY ONE FINANCING INSTITUTION BUT DOES PERMIT THE ASSIGNMENT TO ONE FINANCING INSTITUTION AS AGENT OR TRUSTEE FOR TWO OR MORE PARTIES, ARGUES THAT ANY NOTICE GIVEN BY THE SINGLE ASSIGNEE-AGENT TO THE GOVERNMENT MUST ADVISE OF ANY ARRANGEMENT WHICH THE BANK HAS WITH OTHER PARTIES TO THE TRANSACTION. THE COURT OF CLAIMS, HOWEVER, REJECTED THIS REASONING, STATING INSTEAD THAT IRRESPECTIVE OF ANY FAILURE TO INDICATE ANY AGENCY-PRINCIPAL RELATIONSHIP, THE RIGHTS OF CHELSEA, A PARTY CLEARLY PARTICIPATING IN THE FINANCING OF THIS GOVERNMENT CONTRACT, WERE PRESERVED. (FN1)

FN1 IN FINE FASHIONS INC. V. UNITED STATES, 328 F.2D 419 (2ND CIR., 1964) THE COURT IN COMMENTING ON CHELSEA STATED AT PAGE 423:

IN THAT CASE A BANK, WHICH HAD RECEIVED AN ASSIGNMENT OF THE PROCEEDS OF A GOVERNMENT CONTRACT, WAS FOUND TO BE A TRUSTEE FOR A FACTORING CORPORATION, WHICH HAD ALSO PARTICIPATED IN FINANCING THE GOVERNMENT CONTRACT.

THE FACTS OF THE INSTANT CASE ARE, HOWEVER, DISTINGUISHABLE IN THAT HERE THE BENEFICIARY-PRINCIPAL DID NOT PARTICIPATE IN THE FINANCING OF THIS GOVERNMENT CONTRACT.

THE CASE OF COLEMAN, ET AL. V. UNITED STATES, 158 CT. CL. 490 (1962), CITED IN CHATTANOOGA, INDICATES THAT WHERE A LENDING INSTITUTE ADVANCED MONEY TO A GOVERNMENT CONTRACTOR AND IN TURN RECEIVES AN ASSIGNMENT, WITHOUT KNOWLEDGE THAT THE FUNDS WOULD NOT BE USED TO FINANCE THE PERFORMANCE OF THE CONTRACT, THE USE TO WHICH FUNDS ARE PUT SHOULD NOT DEFEAT THE ASSIGNMENT. HOWEVER, WE FEEL THAT A LOAN MADE AFTER THE CONTRACT HAS BEEN PERFORMED CAN AND DOES IN AND OF ITSELF CONSTITUTE IRREFUTABLE CONSTRUCTIVE KNOWLEDGE TO THE LENDER THAT THE MONEY LENT WILL NOT BE APPLIED TO PERFORMANCE OF THE CONTRACT. SEE 49 COMP. GEN., SUPRA. SPECIFICALLY, FIRST NATIONAL CITY DID NOT MAKE ANY LOANS TO TRILON UNTIL SEPTEMBER OR OCTOBER OF 1969, WHILE PERFORMANCE ON TRILON'S CONTRACT WITH DSA HAD BEEN COMPLETED ON OCTOBER 7, 1968. IT SEEMS IMPROBABLE, THEREFORE, THAT UNLIKE THE SITUATION IN CHELSEA AND CONTINENTAL ANY OF THE FUNDS ADVANCED BY FIRST NATIONAL CITY WERE UTILIZED FOR THE PERFORMANCE OF THE INSTANT CONTRACT.

IN 49 COMP. GEN., SUPRA, OUR OFFICE HELD THAT THE NO SETOFF PROVISION DID NOT PRECLUDE SETOFF AGAINST AN ASSIGNEE WHO HAD LOANED THE CONTRACTOR MONIES WHICH IN VIEW OF THE TIME RELATIONSHIP TO CONTRACT PERFORMANCE DID NOT APPEAR TO PROVIDE FINANCING FOR THE CONTRACT THE PROCEEDS OF WHICH HAD BEEN ASSIGNED.

SIMILAR PRECEDENT CAN BE FOUND IN THE UNREPORTED OPINION OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TENNESSEE, CHATTANOOGA WHEELBARROW CO. V. UNITED STATES, CIVIL ACTION NO. 4755, JANUARY 26, 1967; AND IN B-175670, MAY 25, 1972.

THE COURT IN CHATTANOOGA STATED AT PAGE 4 THAT:

*** THERE IS NO SHOWING OF ANY FINANCIAL ASSISTANCE RENDERED BY THE BANK WHICH FACILITATED THE PERFORMANCE BY TRADERS DISTRIBUTING COMPANY OF THIS PARTICULAR CONTRACT WITH THE GOVERNMENT. ***

THE COURT OF CLAIMS IN CONTINENTAL PRESENTED A FAIRLY CONCISE PORTRAIT OF THE LEGISLATIVE HISTORY OF THE ASSIGNMENT OF CLAIMS ACT WHERE IT CITED THE COMMENTS OF SENATOR BARKLEY, AS FOLLOWS:

"THE AMENDMENT MERELY PROVIDES THAT WHEN A CONTRACTOR, IN ORDER TO OBTAIN MONEY SO THAT HE MAY PERFORM HIS CONTRACT WITH THE GOVERNMENT UNDER THE DEFENSE PROGRAM, ASSIGNS HIS CONTRACT TO A BANK OR TRUST COMPANY IN ORDER TO GET MONEY WITH WHICH TO PROCEED WITH THE WORK, IT SHALL NOT BE PERMISSIBLE TO OFFSET AGAINST THE CLAIM OR CONTRACT LATER AN INDEBTEDNESS WHICH THE CONTRACTOR MAY OWE THE GOVERNMENT ON ACCOUNT OF SOME OTHER CONTRACT OR SOME OTHER SITUATION. *** 86 CONG. REC. 12303 (1940) ***

WE TAKE THESE CASES, THEREFORE, TO AFFIRM A POLICY OF ENCOURAGING THE FINANCING OF GOVERNMENT CONTRACTS BY NOT LIMITING TO THE INITIAL AMOUNT LOANED THE NO SETOFF PROTECTION OF PARTIES WHICH LEND A CONTRACTOR SEVERAL SUMS FOR THE PERFORMANCE OF A CONTRACT. HOWEVER, NEITHER CONTINENTAL, CHELSEA NOR COLEMAN STAND FOR THE PROPOSITION THAT PARTIES WHICH LEND MONEY TO A FIRM HAVING BOTH COMPLETED (FROM THE CONTRACTOR'S POINT OF VIEW) AND ON-GOING CONTRACTS ARE PROTECTED AGAINST SETOFF UNDER THE COMPLETED CONTRACT.

FIRST NATIONAL CITY LOANED TRILON $250,000 BELIEVING THAT THE SUBJECT CONTRACT WAS FULLY PERFORMED. IT THEREFORE QUITE REASONABLY ANTICIPATED THAT NO FURTHER FUNDS WOULD FLOW TO TRILON FROM THIS CONTRACT. YET, WHEN FUNDS DID BECOME AVAILABLE THE BANK ASSERTED A CLAIM AGAINST THEM.

WHILE IT IS TRUE THAT DUE TO THE PRIORITIES ESTABLISHED BY THE UNIFORM COMMERCIAL CODE OF NEW YORK, FIRST NATIONAL CITY HAS FIRST PRIORITY TO THESE FUNDS, THE BANK'S ENTITLEMENT IS SECONDARY TO THE SETOFF RIGHTS OF THE FEDERAL GOVERNMENT. AND, SINCE WE CONCLUDE THAT THE ASSIGNMENT OF CLAIMS ACT DOES NOT EXTEND NO SETOFF PROTECTION TO FIRST NATIONAL CITY BANK IN THIS INSTANCE, THE GOVERNMENT MAY PROPERLY EXERCISE ITS RIGHT OF SETOFF TO THE $54,369.37 IN QUESTION.

AS NOTED ABOVE, HOWEVER, THE SUM OF $7,812 IS NOT SUBJECT TO SETOFF AND SHOULD THEREFORE BE PAID IN ACCORDANCE WITH THE PROVISIONS OF THE ASSIGNMENT.