B-183058, MAR 7, 1975

B-183058, MAR 7, 1975

WHERE CONTRACTOR, NOW BANKRUPT, HAD PROPERLY ASSIGNED CLAIM UNDER CONTRACT TO BANK, WHICH BANK, THEN ASSIGNED ALL SECURITY INTERESTS HELD ON CONTRACTOR TO ANOTHER FIRM, WHICH OBTAINED ORDER FROM BANKRUPTCY COURT THAT IT WAS OWNER OF ALL DEBT AND SECURITY INTERESTS OF CONTRACTOR, PAYMENT OF WITHHELD CONTRACT FUNDS MAY BE MADE TO FIRM WITHOUT SETOFF AS ASSIGNMENT FROM BANK WAS BY OPERATION OF LAW AND THEREFORE EXEMPT FROM ASSIGNMENT OF CLAIMS ACT.

INTERNATIONAL FASTENER RESEARCH CORP.:

THIS DECISION IS ISSUED PURSUANT TO A REQUEST FROM THE CHIEF, ACCOUNTING AND FINANCE DIVISION, OFFICE OF THE COMPTROLLER, DEFENSE SUPPLY AGENCY (DSA) REGARDING THE PROPRIETY OF DISBURSING $87,500 TO INTERNATIONAL FASTENER RESEARCH CORP. (IFR) AS SUCCESSOR IN INTEREST TO POLAN INDUSTRIES, DIVISION OF WOLLENSAK, INC. (WOLLENSAK).

DSA AWARDED CONTRACT NO. DAAA25-71-C0050 TO WOLLENSAK AND ON JANUARY 4, 1972, THE CONTRACTOR ASSIGNED ITS CLAIMS UNDER THE CONTRACT ALONG WITH OTHER FORMS OF SECURITY TO THE CHEMICAL BANK - DOMERICH DIVISION IN ACCORDANCE WITH THE ASSIGNMENT OF CLAIMS ACT (41 U.S.C. SEC. 15 (1970)). THE CONTRACT CONTAINED THE NO SETOFF PROVISIONS. ON OCTOBER 19, 1972, WOLLENSAK FILED A VOLUNTARY PETITION IN BANKRUPTCY IN THE UNITED STATES DISTRICT COURT, WESTERN DISTRICT OF NEW YORK. ON OCTOBER 26, 1972, THE CHEMICAL BANK ASSIGNED TO IFR ALL INDEBTNESS, SECURITY INTERESTS AND COLLATERAL HELD ON WOLLENSAK AND ON OCTOBER 30, 1972, IFR, AS A SECURED PARTY, PETITIONED THE COURT TO TAKE IMMEDIATE POSSESSION OF ALL ASSETS OF WOLLENSAK, WHICH REQUEST WAS GRANTED ON OCTOBER 31, 1972.

ON MAY 11, 1973, THE ADMINISTRATIVE CONTRACTING OFFICER FILED A PROOF OF CLAIM WITH THE COURT FOR $361,183.72 PLUS INTEREST WHICH CONSTITUTED UNLIQUIDATED PROGRESS PAYMENTS UNDER OTHER CONTRACTS HELD BY WOLLENSAK.

THE AFOREMENTIONED $87,500 WHICH THE GOVERNMENT WISHES TO SETOFF REPRESENTS A SETTLEMENT REACHED ON OCTOBER 3, 1974, UNDER CONTRACT DAAA25- 71-C0050 FOR INCREASED COSTS NOW DUE TO IFR AS SUCCESSOR IN INTEREST TO WOLLENSAK.

THE ISSUE NOW BEFORE OUR OFFICE IS WHETHER THE ASSIGNMENT AND SUBSEQUENT COURT ORDER OPERATED TO VALIDLY TRANSFER THE INTERESTS OF THE CHEMICAL BANK AS REGARDS THE SUBJECT CONTRACT TO IFR SO THAT DSA CANNOT SETOFF THE $87,500 AGAINST THE AMOUNT OWED BY WOLLENSAK FOR UNLIQUIDATED PROGRESS PAYMENTS UNDER OTHER CONTRACTS.

THE ASSIGNMENT OF CLAIMS ACT PROHIBITS ASSIGNMENTS OR TRANSFERS OF CLAIMS AGAINST THE UNITED STATES UNLESS CERTAIN PROCEDURES CONTAINED IN THE ACT ARE FOLLOWED AND THE PARTY TO WHOM THE ASSIGNMENT IS MADE IS A PROPER PARTY UNDER THE ACT. HOWEVER, THE COURTS HAVE RECOGNIZED AS AN EXCEPTION TO THE ACT THAT IT DOES NOT RESTRICT OR APPLY TO ASSIGNMENTS ARISING FROM OPERATION OF LAW. ERWIN V. UNITED STATES, 97 U.S. 392 (1878) AND UNITED STATES V. AETNA CASUALTY AND SURETY COMPANY, 338 U.S. 366 (1949).

WHILE OUR OFFICE HAS BEEN UNABLE TO FIND ANY PRECEDENT FOR THIS EXACT FACTUAL SITUATION, WE BELIEVE THE ABOVE TRANSFER WAS MADE BY OPERATION OF LAW AND IS THEREFORE EXEMPT FROM THE ACT. IT WAS THE COURT ORDERS WHICH EFFECTIVELY TRANSFERRED THE ASSIGNMENT. THIS IS SHOWN BY THE ORDER DATED OCTOBER 31 WHICH STATED:

"*** ALL OF THE ASSETS OF THE BANKRUPT ARE SUBJECT TO A FIRST AND SENIOR SECURITY INTEREST IN FAVOR OF INTERNATIONAL FASTENER RESEARCH CORPORATION

AND A SUBSEQUENT ORDER DATED DECEMBER 12, 1972, WHICH STATED:

"*** IFR IS NOW THE OWNER AND HOLDER OF THE DEBT INSTRUMENTS, SECURITY INTERESTS AND REAL ESTATE MORTGAGE HERETOFORE OWNED BY CHEMICAL BANK

THEREFORE, THE FUNDS CURRENTLY BEING WITHHELD SHOULD BE PAID TO IFR WITHOUT SETOFF.