B-159132, FEB. 28, 1968

B-159132, FEB. 28, 1968

CONTRACTS - PAYMENTS - CONFLICTING CLAIMS DECISION DENYING COMPLETING SURETY COMPANY'S CLAIM FOR AMOUNTS DUE UNDER DEFAULTED CONTRACT WITH ARMY CORPS OF ENGINEERS. ALTHOUGH U.S. COURT OF APPEALS FOR FIFTH CIRCUIT IN TRINITY UNIVERSAL INSURANCE CO. V U.S., 382F2D 317 (1967) HAS ALLOWED A SURETY WHO COMPLETES CONTRACT AFTER DEFAULT AMOUNT OF A TAX SETOFF ON BASIS THAT COMPLETING CONTRACTOR IS PERFORMING FOR BENEFIT OF GOVT. AND THAT SETOFF FOR TAXES OF DEFAULTED CONTRACTOR WOULD NOT BE EQUITABLE SUCH DECISION CONFLICTS WITH STANDARD ACCIDENT INSURANCE CO. V U.S., 119 CT. CL. 749 (1951) WHICH HAS BEEN FOLLOWED BY COMP. GEN. TO PERMIT SET OFF FOR TAXES AGAINST AMOUNTS DUE COMPLETING SURETY IN ABSENCE OF PROHIBITION IN TAKE OVER AGREEMENT. COMP. GEN. WOULD NOT BE JUSTIFIED IN FOLLOWING TRINITY CASE -- RULE ADVERSE TO GOVERNMENT'S INTEREST.

TO MR. JOHN D. GRIGGS:

REFERENCE IS MADE TO YOUR LETTER OF FEBRUARY 12, 1968, ON BEHALF OF NATIONAL SURETY CORPORATION, REQUESTING PAYMENT OF $2,898.86, WHICH REPRESENTS THE FINAL PROGRESS PAYMENT AND RETAINED PERCENTAGES EARNED BY JERRY PITMAN, CONTRACTOR, UNDER CONTRACT NO. DA 29-005-ENG-4858 WITH THE DEPARTMENT OF THE ARMY, CORPS OF ENGINEERS.

THE CONTRACTOR DEFAULTED IN PERFORMANCE OF THE CONTRACT AND HIS RIGHT TO PROCEED THEREUNDER WAS TERMINATED ON JUNE 24, 1965. THEREAFTER, YOUR CLIENT COMPLETED THE CONTRACT UNDER AN AGREEMENT WITH THE GOVERNMENT WHICH PROVIDED FOR PAYMENT DIRECTLY TO THE COMPLETION CONTRACTOR OF EARNED ESTIMATES FOR WORK PERFORMED BY IT FROM THE UNEARNED CONTRACT BALANCE AND FURTHER PROVIDED THAT THE GOVERNMENT AND THE COMPLETION CONTRACTOR RESERVED THEIR RESPECTIVE RIGHTS IN AND TO RETAINED PERCENTAGES AND BALANCES EARNED BUT UNPAID AT THE TIME OF PITMAN'S DEFAULT.

SEVERAL CONFLICTING CLAIMS WERE MADE FOR THE $2,898.86 CONTRACT BALANCE DUE PITMAN. HOWEVER, THE INTERNAL REVENUE SERVICE HAD FILED A NOTICE OF LEVY AGAINST THE CONTRACTOR FOR TAXES AND STATUTORY ADDITIONS IN THE AMOUNT OF $6,303.14. IN VIEW THEREOF, OUR OFFICE CONCLUDED THAT THE GOVERNMENT HAD THE RIGHT TO SET OFF AMOUNTS DUE THE CONTRACTOR UNDER THE CONTRACT IN PARTIAL LIQUIDATION OF THE TAX LEVY. THIS DECISION IS BASED ON THE HOLDINGS IN UNITED STATES V MUNSEY TRUST CO., 332 U.S. 234 (1947), AND STANDARD ACCIDENT INSURANCE COMPANY V UNITED STATES, 119 CT. CL. 749 (1951). WITH RESPECT TO THE GOVERNMENT'S RIGHT OF SETOFF AGAINST A SURETY, WE STATED OUR POSITION IN 31 COMP. GEN. 103, 105, AS FOLLOWS:

"* * * THIS PRECISE POINT WAS CONSIDERED IN THE CASE OF STANDARD ACCIDENT INSURANCE COMPANY V UNITED STATES, DECIDED BY THE COURT OF CLAIMS JUNE 5, 1951, C.CLS. NO. 46116 (119 CT. CL. 749, 1951). THERE, AS HERE, CLAIM WAS MADE BY A COMPLETING SURETY TO RETAINED PERCENTAGES IN THE HANDS OF THE GOVERNMENT. THE COURT RULED THAT THE GOVERNMENT HAD A RIGHT TO SET OFF THE CONTRACTOR'S TAX LIABILITY AGAINST SUCH RETAINED PERCENTAGES DESPITE THE SURETY'S CLAIM, STATING IN ITS OPINION AS FOLLOWS:

"-* * * THE RATIONALE OF THE MUNSEY CASE (332 U.S. 234) APPLIES AND WOULD POSTPONE PLAINTIFF'S RIGHT TO THE RETAINED PERCENTAGES TO THAT OF THE UNITED STATES EVEN IF THE CONTRACTOR HAD NOT BEEN FORMALLY DECLARED INSOLVENT AND EVEN IF THE CONTRACTOR'S DEBT TO THE UNITED STATES BORE NO RELATION TO THE CONTRACT FROM WHICH THE RETAINED PERCENTAGES DERIVED. * *

"THE COURT STATED, IN EFFECT, THAT THE SURETY'S RIGHTS DERIVED PRIMARILY FROM ITS SUBROGATION TO THE CONTRACTOR, AND THAT IT COULD NOT CLAIM RIGHTS UNDER THE CONTRACT BY SUBROGATION TO THE GOVERNMENT WITHOUT ASSUMING THE CONTRACTOR'S LIABILITIES AS WELL. UNDER THE RULE ESTABLISHED BY THE STANDARD ACCIDENT CASE, IT IS EVIDENT THAT ANY RIGHTS THE SURETIES MAY HAVE TO PAYMENT OF ANY PART OF THE RETAINED PERCENTAGES DEPEND ENTIRELY UPON THE COMPLETION AGREEMENT BETWEEN THE SURETIES AND THE GOVERNMENT. THIS IS EQUALLY TRUE AS FAR AS THE UNPAID PROGRESS ESTIMATES ARE CONCERNED. * * *.' IN THE INSTANT CASE THE "TAKEOVER AGREEMENT" DOES NOT PROVIDE FOR DISPOSITION OF THE UNPAID FUNDS EARNED BY THE CONTRACTOR PRIOR TO DEFAULT.

IN SUPPORT OF YOUR POSITION THAT THE NATIONAL SURETY CORPORATION IS ENTITLED TO THE CONTRACT BALANCE OF $2,898.86, YOU CITE THE CASE OF TRINITY UNIVERSAL INSURANCE COMPANY V UNITED STATES, 382 F.2D 317, DECIDED SEPTEMBER 12, 1967, BY THE UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT. THE DECISION REVERSED A JUDGMENT OF THE DISTRICT COURT WHICH REJECTED A CLAIM OF THE TRINITY UNIVERSAL INSURANCE COMPANY, AS COMPLETING SURETY ON AN AIR FORCE CONSTRUCTION CONTRACT, FOR RECOVERY OF THE AMOUNT OF A TAX SETOFF AGAINST THE SUM RETAINED ON PROGRESS PAYMENTS MADE TO THE CONTRACTOR BEFORE THE CONTRACTOR DEFAULTED AND ITS RIGHT TO PROCEED FURTHER WAS TERMINATED BY THE GOVERNMENT. THE JUDGMENT OF THE DISTRICT COURT WAS REVERSED BY THE COURT OF APPEALS ON THE BASIS OF ITS CONCLUSION THAT A SURETY WHO UNDERTAKES TO COMPLETE A CONTRACT AFTER THE CONTRACTOR DEFAULTS IS PERFORMING A BENEFIT FOR THE GOVERNMENT "AND HAS A RIGHT TO THE RETAINED FUNDS AND REMAINING PROGRESS MONEY TO DEFRAY ITS COSTS.' THE COURT OF APPEALS HAS TAKEN THE POSITION THAT A SETOFF FOR TAXES WOULD NOT BE EQUITABLE SINCE, IF THE COMPLETING SURETY HAD NOT ELECTED TO PERFORM AFTER THE CONTRACTOR DEFAULTED, THE GOVERNMENT COULD HAVE COLLECTED FROM THE SURETY ONLY THE DAMAGES ATTRIBUTABLE TO THE CONTRACTOR'S DEFAULT.

THE COURT OF APPEALS RECOGNIZES THAT ITS HOLDING IS IN CONFLICT WITH THAT OF THE COURT OF CLAIMS IN THE STANDARD ACCIDENT INSURANCE COMPANY CASE, SUPRA, WHICH OUR OFFICE HAS CONSISTENTLY APPLIED UNLESS THE TAKEOVER AGREEMENT BETWEEN THE GOVERNMENT AND THE PERFORMANCE BOND SURETY SPECIFICALLY PROHIBITS A SETOFF FOR TAXES OF THE DEFAULTING CONTRACTOR. ALTHOUGH THERE NOW EXISTS A CONFLICT BETWEEN THE COURTS ON THE GOVERNMENT'S RIGHT OF SETOFF IN THE CIRCUMSTANCES HERE PRESENTED, WE DO NOT FEEL JUSTIFIED IN FOLLOWING THE RULE ADVERSE TO THE GOVERNMENT'S INTEREST WITHOUT A JUDICIAL RESOLUTION OF THE CONFLICT.