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B-125183, JULY 22, 1969, 49 COMP. GEN. 44

B-125183 Jul 22, 1969
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TAX DEBTS THE RIGHT OF THE UNITED STATES AS A CREDITOR TO OFFSET THE AMOUNT OWED TO A CONTRACTOR IS NOT PRECLUDED BY ASSIGNEE AND ATTORNEY CLAIMS WHERE THE LOAN BY THE ASSIGNEE BANK PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940. HAD BEEN PAID AND THE ONLY OUTSTANDING LOAN IS NOT WITHIN THE ORBIT OF THE ACT. WHERE THE ATTORNEY'S FEE IS A MATTER BETWEEN ATTORNEY AND CLIENT. AN AWARD TO A CONTRACTOR ON THE BASIS THAT A CONTRACT TERMINATION SHOULD HAVE BEEN FOR CONVENIENCE AND NOT FOR DEFAULT. CONTENDS THAT HE IS ENTITLED TO $5. THE CONTRACT WAS TERMINATED FOR DEFAULT ON JULY 1. A MOTION TO THE BOARD FOR RECONSIDERATION WAS DENIED ON DECEMBER 20. SUIT WAS FILED IN THE COURT OF CLAIMS ON APRIL 9.

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B-125183, JULY 22, 1969, 49 COMP. GEN. 44

SET-OFF -- CONTRACT PAYMENTS -- TAX DEBTS THE RIGHT OF THE UNITED STATES AS A CREDITOR TO OFFSET THE AMOUNT OWED TO A CONTRACTOR IS NOT PRECLUDED BY ASSIGNEE AND ATTORNEY CLAIMS WHERE THE LOAN BY THE ASSIGNEE BANK PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED, HAD BEEN PAID AND THE ONLY OUTSTANDING LOAN IS NOT WITHIN THE ORBIT OF THE ACT, NOT HAVING BEEN MADE FOR THE PURPOSE OF PERFORMING GOVERNMENT CONTRACTS, AND WHERE THE ATTORNEY'S FEE IS A MATTER BETWEEN ATTORNEY AND CLIENT, ABSENT A STATUTORY PROVISION OR AN AGREEMENT BASED ON SUCH A PROVISION FOR PAYMENT TO THE ATTORNEY BY THE GOVERNMENT. THEREFORE, AN AWARD TO A CONTRACTOR ON THE BASIS THAT A CONTRACT TERMINATION SHOULD HAVE BEEN FOR CONVENIENCE AND NOT FOR DEFAULT, MAY BE SET OFF AGAINST THE CONTRACTOR'S TAX LIABILITY.

TO THE SECRETARY OF THE NAVY, JULY 22, 1969:

A LETTER DATED JUNE 10, 1969, WITH ENCLOSURES, FROM THE OFFICE OF GENERAL COUNSEL, REFERENCE OGC:ACK:SRR, REQUESTS OUR DECISION ON THE PROPER DISPOSITION OF THE SUM OF $25,500 DUE UNDER MODIFICATION NO. P001, DATED NOVEMBER 18, 1968, TO CONTRACT NO. N140-62236S-54294B, DATED APRIL 14, 1955. THE CONTRACTOR, SOL O. SCHLESINGER, D/B/A IDEAL UNIFORM CAP COMPANY, DEMANDS PAYMENT ON BEHALF OF AN ASSIGNEE BANK. THE CONTRACTOR'S ATTORNEY, HAROLD F. BLASKY, CONTENDS THAT HE IS ENTITLED TO $5,000 OF THE AMOUNT DUE FOR SERVICES RENDERED THE CONTRACTOR. THE INTERNAL REVENUE SERVICE CONTENDS THAT THE AMOUNT DUE SHOULD BE SET OFF AGAINST A DEFAULT JUDGMENT ENTERED IN 1965 AGAINST SOL O. SCHLESINGER IN THE AMOUNT OF $184,433.27.

THE RECORD IN THIS CASE INDICATES THAT AFTER RECEIVING NOTICE OF AWARD IN APRIL 1955, THE CONTRACTOR UNDERTOOK PERFORMANCE. HOWEVER, BEFORE ANY OF THE SERVICE CAPS CALLED FOR HAD BEEN DELIVERED, THE CONTRACT WAS TERMINATED FOR DEFAULT ON JULY 1, 1955. THE CONTRACTOR APPEALED THE DEFAULT TERMINATION WITHOUT AVAIL TO THE SECRETARY OF THE NAVY. AN APPEAL TO THE ARMED SERVICES BOARD OF CONTRACT APPEALS RESULTED IN A DECISION, ASBCA NO. 2947, OCTOBER 31, 1955, ADVERSE TO THE CONTRACTOR. A MOTION TO THE BOARD FOR RECONSIDERATION WAS DENIED ON DECEMBER 20, 1955. SUIT WAS FILED IN THE COURT OF CLAIMS ON APRIL 9, 1956. THE COURT HELD, ON FEBRUARY 16, 1968, THAT THE DEFAULT TERMINATION WAS IMPROPER AND THE CONTRACTOR WAS "ENTITLED TO HAVE HIS ACCOUNT SETTLED AS IF HIS CONTRACT HAD BEEN FORMALLY TERMINATED FOR THE GOVERNMENT'S CONVENIENCE." SOL O. SCHLESINGER V UNITED STATES, 182 CT. C1. 571. THE COURT REMANDED THE CASE TO THE ASBCA FOR A DETERMINATION OF THE AMOUNT, IF ANY, TO WHICH THE CONTRACTOR WOULD HAVE BEEN ENTITLED IF HIS CONTRACT HAD BEEN TERMINATED FOR CONVENIENCE.

THEREAFTER, THE CONTRACTOR, THROUGH HIS ATTORNEY, NEGOTIATED A SETTLEMENT OF HIS CLAIM WITH THE NAVY PURCHASING OFFICE FOR $25,000, INCLUDING A $5,000 ATTORNEY'S FEE. THE SETTLEMENT AGREEMENT IS MODIFICATION NO. P001 REFERRED TO ABOVE. THE NAVY IS HOLDING A CHECK IN THE AMOUNT OF $25,500, PAYABLE TO SOL O. SCHLESINGER OR THE TREASURER OF THE UNITED STATES," PENDING OUR DECISION.

MR. SCHLESINGER CONTENDS THAT AFTER AWARD OF THE CONTRACT AND PRIOR TO ITS TERMINATION, HE EXECUTED AN ASSIGNMENT OF THE MONIES DUE OR TO BECOME DUE UNDER THE CONTRACT TO THE CHEMICAL CORN EXCHANGE BANK IN CONSIDERATION OF LOANS MADE TO HIM. HE CONTENDS THAT A PROPERLY ACKNOWLEDGED NOTICE OF THE ASSIGNMENT WAS RECEIVED BY THE BANK FROM THE GOVERNMENT. HOWEVER, HE HAS BEEN UNABLE TO LOCATE ANY DOCUMENTS PERTAINING TO THE ASSIGNMENT. SEARCH OF THE RECORDS OF BOTH THE NAVY AND THIS OFFICE PERTAINING TO THE CONTRACT HAS ALSO BEEN UNFRUITFUL. IT APPEARS FROM THE EVIDENCE SUBMITTED BY MR. SCHLESINGER TO ESTABLISH THE EXISTENCE OF THE ASSIGNMENT THAT THE LOAN FROM THE PURPORTED ASSIGNEE WAS PAID IN FULL ON AUGUST 24, 1956. MR. SCHLESINGER STATES THAT HE SECURED A LOAN OF $10,000 FROM THE SAME BANK IN 1966 AND THIS LOAN REMAINS UNPAID, ALTHOUGH THE BANK HAS INSTITUTED FORECLOSURE PROCEDURES AGAINST MR. SCHLESINGER'S PROPERTY. THE BANK HAS SUBMITTED NO CLAIM UNDER THE PURPORTED ASSIGNMENT.

ASSUMING, ARGUENDO, THAT THERE WAS A VALID ASSIGNMENT CONTAINING A "NO SET-OFF" PROVISION PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED, 31 U.S.C. 203 AND 41 U.S.C. 15, AS MR. SCHLESINGER CONTENDS, WE DO NOT BELIEVE THIS WOULD PRECLUDE THE GOVERNMENT FROM EXERCISING THE RIGHT OF SET-OFF IN PARTIAL SATISFACTION OF THE JUDGMENT AGAINST MR. SCHLESINGER. IT IS WELL ESTABLISHED THAT THE GOVERNMENT HAS THE SAME RIGHT OF SET-OFF "WHICH BELONGS TO EVERY CREDITOR, TO APPLY THE UNAPPROPRIATED MONEYS OF HIS DEBTOR, IN HIS HANDS, IN EXTINGUISHMENT OF THE DEBTS DUE TO HIM." UNITED STATES V MUNSEY TRUST CO., 332 U.S. 234; MCKNIGHT V UNITED STATES, 98 U.S. 179; GRATIOT V UNITED STATES, 40 U.S. 336. ALTHOUGH THE "NO SET-OFF" PROVISION OF THE ASSIGNMENT OF CLAIMS ACT ORDINARILY PROTECTS THE ASSIGNEE FROM ANY SET OFF UNTIL NOTICE OF THE REVOCATION OR RELEASE OF THE ASSIGNMENT HAS BEEN RECEIVED, WE HAVE TAKEN THE POSITION THAT IF THE AMOUNT PAYABLE UNDER AN ASSIGNED CONTRACT IS IN EXCESS OF THE AMOUNT OWED BY THE CONTRACTOR TO THE ASSIGNEE SUCH EXCESS MAY BE SET OFF TO SATISFY DEBTS OWED BY THE CONTRACTOR TO THE GOVERNMENT. 37 COMP. GEN. 9 (1957). SINCE THE AMOUNT LENT THE CONTRACTOR IN 1955 BY THE BANK WAS PAID IN 1956, THE "NO SET-OFF" PROVISION WOULD NOT BE FOR APPLICATION AND THE GOVERNMENT WOULD BE ENTITLED TO SET OFF THE ENTIRE AMOUNT DUE THE CONTRACTOR.

HOWEVER, MR. SCHLESINGER ARGUES THAT OUR HOLDING IN 37 COMP. GEN. 9, SUPRA, IS NOT FOR APPLICATION IN VIEW OF THE LOAN OF $10,000 MADE BY THE BANK IN 1966. IF THIS LOAN IS CONSIDERED SECURED BY THE ASSIGNMENT, THE BANK WOULD BE ENTITLED TO THE PAYMENT OF $10,000 AND THE BALANCE OF $15,500 COULD BE SET OFF. HOWEVER, WE DO NOT BELIEVE THAT THE ADDITIONAL LOAN IN 1966 MAY PROPERLY BE CONSIDERED AS BEING SECURED BY THE ASSIGNMENT. IN PETERMAN LUMBER COMPANY V ADAMS, 128 F. SUPP. 6, WHERE THE ASSIGNOR HAD REPAID THE ASSIGNEE BANK THE LOAN MADE IN CONSIDERATION OF THE PARTICULAR ASSIGNMENT, THE COURT FOUND THAT THE ASSIGNMENT VALIDLY COULD, AND IN FACT DID, COVER THE OTHER LOANS MADE FROM TIME TO TIME BY THE ASSIGNEE BANK TO THE ASSIGNOR TO PERMIT THE LATTER TO PERFORM OTHER CONTRACTS WITH THE FEDERAL GOVERNMENT. IN THIS CONNECTION THE COURT STATED:

THE COURT IS OF THE OPINION THAT THE ASSIGNMENT OF CLAIMS ACT DOES NOT LIMIT THE EFFECT OF THE ASSIGNMENT BETWEEN ASSIGNEE BANK AND OTHER PRIVATE PARTIES, OTHER THAN TO IMPLIEDLY LIMIT SUCH ASSIGNMENTS TO THOSE MADE FOR THE PURPOSE OF FINANCING GOVERNMENT CONTRACTS IN GENERAL.

WE BELIEVE THE PETERMAN CASE IS AMPLE PRECEDENT, AT LEAST BY WAY OF DICTA, FOR REFUSING TO PAY THE ASSIGNEE WHERE, AS HERE, IT APPEARS THAT THE LOAN MADE TO THE ASSIGNOR WAS NOT MADE FOR THE PURPOSE OF PERFORMING GOVERNMENT CONTRACTS. ALSO, SEE BEACON WEAR CLOTHING COMPANY V UNITED STATES, 174 CT. CL. 40, 355 F. 2D 583, 590, WHERE THE COURT STATED, "ALTHOUGH THE BANK HELD A VALID ASSIGNMENT, ITS ONLY INTEREST IN THE PROCEEDS DUE ON THE CONTRACT WAS TO SECURE THE LOANS MADE TO FINANCE PERFORMANCE." SEE THE UNREPORTED OPINION OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TENNESSEE, SOUTHERN DIVISION, IN CHATTANOOGA WHEELBARROW CO. V UNITED STATES, CIVIL ACTION NO. 4755, JANUARY 26, 1967, HOLDING THE ASSIGNMENT THEREIN HAS NO VALIDITY AGAINST THE UNITED STATES WHERE THERE WAS NO LOAN TO BE USED IN PERFORMANCE OF THE CONTRACT.

IN SUMMARY, IT IS OUR OPINION THAT MR. SCHLESINGER'S CLAIM ON BEHALF OF THE PURPORTED ASSIGNEE IS NOT PROPERLY FOR RECOGNITION UNLESS THE OUTSTANDING INDEBTEDNESS REPRESENTS LOANS MADE TO THE ASSIGNOR FOR THE PURPOSE OF CARRYING OUT CONTRACTS WITH THE GOVERNMENT. THIS, OF COURSE, ASSUMES THE PROOF OF EXISTENCE OF A VALID ASSIGNMENT AND APPROPRIATE NOTICE AS REQUIRED BY THE ASSIGNMENT OF CLAIMS ACT.

REMAINING FOR CONSIDERATION IS MR. BLASKY'S CLAIM THAT HE IS ENTITLED TO $5,000 OF THE SUM PAYABLE UNDER THE MODIFICATION. MR. BLASKY ENTERED THE CASE ON BEHALF OF MR. SCHLESINGER IN 1963 AFTER THE DEATH OF THE CONTRACTOR'S FIRST ATTORNEY. IN ADDITION TO HANDLING MR. SCHLESINGER'S CASE IN THE COURT OF CLAIMS, MR. BLASKY PREPARED THE SETTLEMENT PROPOSAL AND HANDLED NEGOTIATION OF THE MODIFICATION. ACCORDING TO MR. BLASKY (AND THIS IS NOT DENIED BY THE NAVY) THE SETTLEMENT PROPOSAL ACCEPTED BY THE NAVY INCLUDED $5,000 FOR LEGAL FEES. HOWEVER, THE MODIFICATION AS SIGNED BY THE CONTRACTOR AND THE GOVERNMENT DOES NOT MENTION THIS SUM. MR. BLASKY BASES HIS CLAIM ON THE THEORY THAT HIS EFFORTS CREATED THE FUND OF WHICH THE GOVERNMENT IS ATTEMPTING TO AVAIL ITSELF AND HE IS EQUITABLY ENTITLED TO BE COMPENSATED FOR HIS SERVICES IN SO DOING. IN SUPPORT OF HIS POSITION HE CITES TWO CASES, UNITED STATES V HUBBELL, 323 F. 2D 197, AND UNITED STATES V KAMIENIECKI, 261 F. SUPP. 683. IN CONNECTION WITH HIS RELIANCE ON THESE CASES, HE STATES:

ADMITTEDLY, THESE CASES DO RELY ON THE ESTABLISHMENT OF A FUND, AND DO NOT TREAT THE MATTER OF OFFSET. NEVERTHELESS, THE EQUITABLE PRINCIPLE THAT CONTROLS THESE CASES IS EQUALLY APPLICABLE TO THE SCHLESINGER SITUATION. CONCISELY STATED, AS A RESULT OF LEGAL EFFORTS OF OUR FIRM A WRONGFUL CONTRACT ACTION WAS RECTIFIED, AND TO THE EXTENT OF THE AMOUNT OF THE NEGOTIATED SETTLEMENT A TAX LIABILITY DUE THE FEDERAL GOVERNMENT WAS REDUCED.

WE HAVE EXAMINED THE CASES CITED BY MR. BLASKY AND BELIEVE THEY ARE INAPPLICABLE TO THE INSTANT CASE BECAUSE, AS MR. BLASKY ADMITS, THEY DO NOT INVOLVE THE GOVERNMENT'S RIGHT OF SET-OFF.

GENERALLY, THE EMPLOYMENT AND PAYMENT OF AN ATTORNEY IS A MATTER BETWEEN THE CLAIMANT AND THE ATTORNEY AND, IN THE ABSENCE OF A STATUTORY PROVISION OR A VALID AGREEMENT BASED ON A STATUTORY PROVISION, THERE IS NO AUTHORITY FOR THE PAYMENT OF AN ATTORNEY'S FEE BY THE GOVERNMENT. EDELMAN V UNITED STATES, 117 CT. CL. 400, 413; PIGGLY WIGGLY V UNITED STATES, 112 CT. CL. 391, 432. ALTHOUGH THE ASPR PROVISIONS CONCERNING THE SETTLEMENT OF CONVENIENCE TERMINATION CLAIMS AUTHORIZE THE ALLOWANCE OF THE COST OF LEGAL FEES TO THE CONTRACTOR, THEY DO NOT PROVIDE AUTHORITY FOR THE PAYMENT OF SUCH FEES TO OTHER THAN THE CONTRACTOR. IN PITTMAN V UNITED STATES, 127 CT. CL. 173, CERTIORARI DENIED, 348 U.S. 815, PLAINTIFF, AN ATTORNEY, SOUGHT RECOVERY ON THE BASIS THAT HE HAD A LIEN ON AN AWARD MADE TO HIS CLIENT BY THE MARITIME ADMINISTRATION. IN DISMISSING THE PLAINTIFF'S PETITION THE COURT HELD THAT WHETHER IT WAS AN ATTORNEY'S LIEN, AN EQUITABLE INTEREST OR SOMETHING ELSE, THE CONTRACT BETWEEN THE PLAINTIFF AND HIS CLIENT GAVE OVER TO THE PLAINTIFF AN INTEREST IN HIS CLIENT'S CLAIM AGAINST THE GOVERNMENT, WHICH IS FORBIDDEN BY THE ANTI- ASSIGNMENT STATUTE, R.S. 3477 (31 U.S.C. 203). SEE ALSO EMPIRE ORDNANCE CORPORATION, ET AL. V UNITED STATES, 130 CT. CL. 719, AND MICHAEL M. KEARNEY, ET AL. V UNITED STATES, 152 CT. CL. 202, 285 F. 2D 797.

IN A CASE SQUARELY ON POINT, MADDEN V UNITED STATES, 178 CT. CL. 121, 371 F. 2D 469, THE COURT OF CLAIMS HELD THAT THE RIGHT OF THE UNITED STATES TO OFFSET THE AMOUNT OWED TO A CONTRACTOR AGAINST AMOUNTS OWED TO THE SMALL BUSINESS ADMINISTRATION AND INTERNAL REVENUE SERVICE WAS SUPERIOR TO AN ATTORNEY'S LIEN. IN UNITED STATES V COHEN, 389 F. 2D 689, THE UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT, HELD THAT THE RIGHT OF A FEDERAL PRISONER'S ATTORNEYS TO RECOVER FEES AWARDED BY THE DISTRICT COURT OUT OF A TORT RECOVERY, WAS DERIVED FROM THE PRISONER'S RIGHT IN THE RECOVERY AND, THEREFORE, SUBJECT TO THE GOVERNMENT'S RIGHT OF SET-OFF AGAINST THE PRISONER'S PRIOR TAX ASSESSMENTS, WHICH HAD BEEN REDUCED TO JUDGMENTS.

ACCORDINGLY, THE AMOUNT OF $25,500 SHOULD BE SET OFF AGAINST SOL O. SCHLESINGER'S TAX LIABILITY.

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