Request Regarding Final Balance Due

The Army Corps of Engineers requested an advance decision as to the proper disbursement of the final balance due under a contract with the Small Business Administration (SBA). The work was entirely subcontracted, but the Army retained the right to administer the contract. When the subcontract was awarded, the surety executed the required performance and payment bonds. The subcontractor assigned the contract proceeds to a bank. SBA agreed to guarantee the surety 90 percent of any loss that might be sustained under the bonds and agreed to guarantee 90 percent of the assignment. After the contract was completed, the subcontractor requested assistance from the surety under the assistance bond. Subsequently, the bank assigned its interest in the contract proceeds to SBA. Thereafter, the surety moved to block any further payments by the Army to either the subcontractor or the bank, as assignee. The subcontractor submitted several claims against the Army related to the contract, and a settlement agreement was reached. However, the agency, bank, and surety disagreed as to who was entitled to the funds. The Internal Revenue Service (IRS) also filed a lien against the subcontractor for unpaid taxes. GAO held that SBA, by virtue of the assignment from the assignee bank, may under assignment declare all of the contractor's secured loans to be due and payable. Since SBA is thus the owner of the loan debts, it has priority for the Federal Government in the contract's proceeds. Since defaulted bank loans secured by assignment are then owed to the Government, SBA cannot concede any of the contract balance to the surety, even if the surety has paid all of the claims under the bond. Finally, SBA enjoys the benefit of the no set-off provision of the assignment of claims clause of the contract. Therefore, the debt owed SBA has priority over the IRS lien.