Propriety of Payment to the North Carolina National Bank

B-195629: Sep 7, 1979

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An Accounting Officer of the Department of the Army requested an advance decision concerning the propriety of paying the balance due under an Army contract to a bank as the creditor of a bankrupt firm. In January 1973 the firm had given a Security Agreement to the bank in which the firm agreed to assign to the bank its current and future accounts receivable of any type arising out of its professional endeavors. The firm filed a Petition in Bankruptcy in October 1978 stating that the bank was its creditor and had a valid lien against certain accounts receivable, including the balance due on a completed Army contract awarded in November 1976 and completed in December 1978. GAO found that a blanket assignment to the bank of accounts receivable predating by more than 3 years a Government contract under which proceeds became available for payment may not be recognized as a valid assignment. GAO held that the Government may not recognize the assignment as valid and payment may not be made by the Government to the bank. However, if the assignee is able to provide evidence substantiating the assignment's validity, the assignee may be paid as long as the Government is indemnified.