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B-176216, NOV 7, 1972, 52 COMP GEN 262

B-176216 Nov 07, 1972
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IS UNDER THE PAYMENT BOND AND NOT UNDER THE PERFORMANCE BOND OR AS COMPLETING SURETY AND. 332 U.S. 234(1947) IS FOR APPLICATION. A RULE REAFFIRMED IN SUBSEQUENT CASES IN SITUATIONS WHERE THE GOVERNMENT'S RIGHT OF SETOFF IS CHALLENGED BY THE SURETY UNDER ITS PAYMENT BOND. 1972: REFERENCE IS MADE TO YOUR LETTER DATED JUNE 1. IS ASSERTED ON THE BASIS THAT THE SURETY IS ENTITLED TO PAYMENT BY REASON OF EQUITABLE SUBROGATION UNDER A MILLER ACT PAYMENT BOND. AS THEY ARE RECITED IN YOUR LETTER AND ENCLOSURES. ARE AS FOLLOWS: THE CONTRACTOR FAILED TO COMPLETE THE JOB. THE TOTAL CONTRACT EARNINGS OF THE DEFAULTED CONTRACTOR WAS $14. 340.92 WAS PAID TO THE BANK OF VERNAL. 995.80 AND ACTUAL DAMAGES ACCRUED AGAINST SWAUGER BY BLM WAS $2.

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B-176216, NOV 7, 1972, 52 COMP GEN 262

CONTRACTS - DEFAULT - MONIES OWING CONTRACTOR - DISPOSITION THE CLAIM OF THE SURETY FOR THE AMOUNT OWING A DEFAULTING CONTRACTOR WHICH HAD BEEN PAID TO THE INTERNAL REVENUE SERVICE FOR TAXES DUE UNDER CONTRACTS OTHER THAN THE DEFAULTED CONTRACT MAY NOT BE CERTIFIED FOR PAYMENT. A THIRD PARTY AND NOT THE SURETY COMPLETED THE DEFAULTED CONTRACT AND HENCE THE SURETY'S CLAIM, WHICH REPRESENTS WITHHOLDING TAXES FROM THE WAGES OF LABORERS, IS UNDER THE PAYMENT BOND AND NOT UNDER THE PERFORMANCE BOND OR AS COMPLETING SURETY AND, THEREFORE, THE RULE OF UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234(1947) IS FOR APPLICATION, A RULE REAFFIRMED IN SUBSEQUENT CASES IN SITUATIONS WHERE THE GOVERNMENT'S RIGHT OF SETOFF IS CHALLENGED BY THE SURETY UNDER ITS PAYMENT BOND.

TO PAULINE R. BARLOW, UNITED STATES DEPARTMENT OF THE INTERIOR, NOVEMBER 7, 1972:

REFERENCE IS MADE TO YOUR LETTER DATED JUNE 1, 1972, WITH ENCLOSURES, REQUESTING A DECISION AS TO THE PROPRIETY OF PAYMENT OF A VOUCHER COVERING A CLAIM FOR REIMBURSEMENT IN THE AMOUNT OF $808.61, REPRESENTING PAYMENT OF AN INTERNAL REVENUE SERVICE CLAIM FOR WITHHOLDING TAXES BY UNITED STATES FIDELITY & GUARANTY COMPANY LEVIED AGAINST ITS PRINCIPAL, SWAUGER CONTRACTORS.

THE TAXES INVOLVED IN THE LEVY AGAINST THE PRINCIPAL, SWAUGER CONTRACTORS, AROSE FROM CONTRACT NO. 53500-CTO-48 DATED SEPTEMBER 11, 1969, WITH THE BUREAU OF LAND MANAGEMENT (BLM) FOR CONSTRUCTION OF A FOUR- WIRE BARBED WIRE FENCE AND GATES. THE CLAIM FILED IN BEHALF OF THE SURETY, UNITED STATES FIDELITY AND GUARANTY, IS ASSERTED ON THE BASIS THAT THE SURETY IS ENTITLED TO PAYMENT BY REASON OF EQUITABLE SUBROGATION UNDER A MILLER ACT PAYMENT BOND.

THE FACTS, AS THEY ARE RECITED IN YOUR LETTER AND ENCLOSURES, ARE AS FOLLOWS:

THE CONTRACTOR FAILED TO COMPLETE THE JOB, AND THE BUREAU OF LAND MANAGEMENT HAD THE WORK COMPLETED BY ANOTHER CONTRACTOR. THE TOTAL CONTRACT EARNINGS OF THE DEFAULTED CONTRACTOR WAS $14,929.42, OF WHICH $8,340.92 WAS PAID TO THE BANK OF VERNAL, VERNAL, UTAH, ASSIGNEE OF SWAUGER CONTRACTORS. EXCESS COMPLETION COSTS TOTALED $1,995.80 AND ACTUAL DAMAGES ACCRUED AGAINST SWAUGER BY BLM WAS $2,514.97, LEAVING A NET BALANCE IN THE CONTRACT ACCOUNT AS OF OCTOBER 21, 1971, OF $2,077.73. OCTOBER 21, 1971, THE CONTRACTING OFFICER ADVISED THE CONTRACTOR THAT THE BALANCE REMAINING DUE ($2,077.73) WOULD BE REMITTED TO THE INTERNAL REVENUE SERVICE (IRS) IN PARTIAL SATISFACTION OF ITS "REQUEST FOR OFFSET- GOVERNMENT CONTRACTS" IN THE AMOUNT OF $14,104.82, TRANSMITTED TO THE BUREAU OF LAND MANAGEMENT ON JULY 22, 1971. THE BALANCE DUE UNDER THE CONTRACT WAS TRANSFERED TO IRS ON JANUARY 13, 1972. IT IS STATED THAT THE TAXES REPRESENTED BY THIS AMOUNT PRESUMABLY AROSE FROM CONTRACTS OTHER THAN THE CONTRACT WITH BLM.

IT IS REPORTED THAT THE ASSIGNEE-BANK ASSUMED AN UNUSUAL POSTURE IN THIS CASE IN THAT IT PAID, WITH THE CONSENT OF THE SURETY, LABOR AND MATERIAL CLAIMS DIRECTLY TO THE CLAIMANTS. IN A LETTER DATED APRIL 12, 1972, FROM THE BANK TO THE CONTRACTING OFFICER, IT APPEARS THAT THE BANK FILED A CLAIM FOR THE BALANCE UNDER THE CONTRACT AT THE TIME PAYMENT WAS MADE OF THE AMOUNT TO IRS. THE AMOUNT OF THE BANK'S CLAIM IS NOT INDICATED.

IN A LETTER DATED NOVEMBER 16, 1971, FROM SURETY'S COUNSEL, FOLLOWING BLM'S ADVICE TO THE CONTRACTOR THAT THE CONTRACT BALANCE WAS BEING SET OFF AGAINST THE IRS CLAIM, COUNSEL REITERATED ITS CLAIM FOR REIMBURSEMENT (ON BEHALF OF THE CONTRACTOR) FOR THE PAYMENT TO IRS OF $808.61 FOR WITHHOLDING TAXES OF THE CONTRACTOR DUE IRS BY REASON OF EQUITABLE SUBROGATION TO THE RIGHTS OF THE IRS TO THE EXTENT OF THE PAYMENT. ADDITION, THE SURETY ADVISED THAT IT HAD PAID A MATERIALMAN'S CLAIM IN THE AMOUNT OF $259.65. THE CLAIM FOR REIMBURSEMENT WAS DENIED ON THE BASIS THAT THE GOVERNMENT'S RIGHT TO SETOFF WAS ESTABLISHED IN UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234(1947) AND FOLLOWED IN STANDARD ACCIDENT INS. CO. V. UNITED STATES, 119 CT. CL. 749(1951). THEREAFTER SURETY'S COUNSEL RESPONDED CITING A NUMBER OF COURT OF CLAIMS CASES IN SUPPORT OF ITS CLAIM OF PRIORITY OVER THE IRS CLAIM.

ON THE BASIS OF THE FACTS AND CIRCUMSTANCES, OUR DECISION IS REQUESTED ON THE FOLLOWING QUESTIONS:

1. MAY THE ENCLOSED VOUCHER BE CERTIFIED FOR PAYMENT?

2.IF THE ANSWER TO THE FIRST QUESTION IS IN THE AFFIRMATIVE, IS THE SURETY ALSO ENTITLED TO REIMBURSEMENT FOR THE PAYMENT TO IDAHO BIT & STEEL, INC., IN THE AMOUNT OF $259.65?

3. IF YOU CONCLUDE THAT THE SURETY IS ENTITLED TO PAYMENT OF EITHER OR BOTH OF ITS CLAIMS, THEN IS THE BANK ENTITLED TO PAYMENT OF THE BALANCE OF THE $2,077.73 TO THE EXTENT THAT THE BANK IS ABLE TO ESTABLISH THAT IT STOOD IN THE SHOES OF THE SURETY BY PAYING LABORER'S AND MATERIALMAN'S CLAIMS AND COMPLETION COSTS UNDER THE FINANCING ARRANGEMENT WITH THE CONTRACTOR?

4. ASSUMING THAT THE ANSWER TO QUESTION NO. 1 IS IN THE AFFIRMATIVE, WHAT STEPS ARE AVAILABLE TO BLM TO OBTAIN A REFUND FROM IRS OF ALL OR A SUFFICIENT PART OF THE PAYMENT OF $2,077.73 IN ORDER TO SATISFY CLAIMS OF THE SURETY AND THE BANK OF VERNAL?

AT THE OUTSET IT MUST BE OBSERVED THAT THE SURETY HERE DID NOT COMPLETE THE CONTRACT. THE GOVERNMENT HAD TO OBTAIN A THIRD PARTY CONTRACTOR TO COMPLETE THE WORK AND PAID THIS COMPLETING CONTRACTOR FROM UNPAID CONTRACT BALANCES. HENCE THE SURETY'S CLAIM HERE IS UNDER THE PAYMENT BOND AND NOT UNDER THE PERFORMANCE BOND OR AS COMPLETING SURETY. THE SUM CLAIMED, $808.61, AS STATED ABOVE, REPRESENTS WITHHOLDING TAXES ON WAGES FROM LABORERS UNDER THE CONTRACT CONCERNED HERE.

IN THE RECENT CASE, AETNA INSURANCE COMPANY V. THE UNITED STATES, 197 CT. CL. 713, THE COURT OF CLAIMS STATED:

*** THAT PLAINTIFF DOES NOT ASK US TO OVERRULE OUR DECISION IN BARRETT V. UNITED STATES, 177 CT. CL. 380, 367 F.2D 834(1966). THE DISPUTE OVER CONTRACT RETAINAGES IN BARRETT WAS BETWEEN A MILLER ACT PAYMENT BOND SURETY, WHICH HAD PAID THE CLAIMS OF LABORERS AND MATERIALMEN AGAINST THEIR CONTRACTOR, AND THE UNITED STATES, WHICH HAD SET OFF AGAINST THE RETAINAGES AN AMOUNT FOR TAX DEFICIENCIES ASSESSED AGAINST THE CONTRACTOR. WE HELD THAT THE SURETY'S CLAIM WAS SUBORDINATE AND INFERIOR TO THE RIGHT OF THE UNITED STATES TO SET OFF THE AMOUNT OF TAXES OWED TO IT BY THE CONTRACTOR. THE TOUCHSTONE IN BARRETT WAS THE SUPREME COURT'S DECISION IN UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234(1947), WHICH PERMITTED THE GOVERNMENT TO SET OFF AN AMOUNT OWED TO IT BY ITS CONTRACTOR AGAINST RETAINAGES CLAIMED BY THE MILLER ACT SURETY UNDER ITS PAYMENT BOND. IN THE COURSE OF THAT OPINION, HOWEVER, THE COURT SUGGESTED A DIFFERENT OUTCOME WHERE THE SURETY COMPLETED THE GOVERNMENT'S CONTRACT PURSUANT TO A PERFORMANCE BOND.

LATER CASES, RELYING ON MUNSEY TRUST, HAVE HELD THAT A MILLER ACT SURETY WHO COMPLETES THE CONTRACT ON DEFAULT OF THE CONTRACTOR IS ENTITLED TO THE CONTRACT RETAINAGES IN THE HANDS OF THE GOVERNMENT, FREE FROM SETOFF FOR TAXES OWED BY THE CONTRACTOR. HOWEVER, EACH OF THESE DECISIONS REAFFIRMED THE MUNSEY RULE IN SITUATIONS WHERE THE GOVERNMENT'S RIGHT OF SETOFF IS CHALLENGED BY THE SURETY UNDER ITS PAYMENT BOND. SEE SECURITY INSURANCE CO. V. UNITED STATES, 192 CT. CL. 754, 428 F.2D 838(1970); TRINITY UNIVERSAL INSURANCE CO. V. UNITED STATES, 382 F.2D 317(5TH CIR. 1967); CERT. DENIED, 390 U.S. 906(1968); AETNA CASUALTY AND SURETY CO. V. UNITED STATES, 435 F.2D 1082(5TH CIR. 1970).

THE COURT THEN CONSIDERED THE PRIME QUESTION IN THAT CASE WHICH CONCERNED THE APPLICATION OF THE FEDERAL TAX LIEN ACT OF 1966, 80 STAT. 1125, 26 U.S.C. 6323 NOTE, AND CONCLUDED THAT THE STATUTE DOES NOT AFFECT THE GOVERNMENT'S RIGHT OF SETOFF IN PAYMENT BOND CASES.

SINCE WE ARE HERE DEALING WITH A PAYMENT BOND MATTER, WE MUST CONCLUDE THAT THE RULE OF MUNSEY TRUST IS APPLICABLE AND CONCLUDE THAT YOUR FIRST QUESTION MUST BE ANSWERED IN THE NEGATIVE. THE VOUCHER WILL BE RETAINED HERE.

THE FOREGOING CONCLUSION RENDERS UNNECESSARY CONSIDERATION OF YOUR THREE REMAINING QUESTIONS.

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