B-131183, JULY 8, 1957, 37 COMP. GEN. 9

B-131183, JULY 8, 1957, 37 COMP. GEN. 9

CONTRACTS - PAYMENTS - SET-OFF - ASSIGNMENTS - TAX DEBTS THE PAYMENT OF A TAX DEBT OF A GOVERNMENT CONTRACTOR WHO ASSIGNED A CONTRACT CONTAINING A "NO SET-OFF CLAUSE" TO A BANK AS COLLATERAL SECURITY, FIRST FOR AN INDIVIDUAL LOAN AND LATER FOR A LOAN AS A MEMBER OF A JOINT VENTURE, WAS PROPERLY MADE FROM THE FINAL PROCEEDS DUE UNDER THE CONTRACT IN THE ABSENCE OF A SHOWING THAT THE CONTRACTOR AT THE TIME OF THE SET-OFF ACTION WAS INDEBTED TO THE BANK IN EITHER HIS OWN RIGHT OR IN HIS CAPACITY AS A MEMBER OF THE JOINT VENTURE.

TO THE SECRETARY OF THE TREASURY, JULY 8, 1957:

THIS REFERS TO LETTER OF MARCH 6, 1957, FROM THE COMMISSIONER OF INTERNAL REVENUE (HIS EFERENCE: O:C:OM-RVE) CONCERNING THE PAYMENT BY THE AIR FORCE TO THE INTERNAL REVENUE SERVICE OF $25,521 OF THE PROCEEDS OF FANDERLIK LOCKE COMPANY'S CONTRACT NO. AF 45 (602/-156, THE PAYMENTS UNDER WHICH WERE ASSIGNED TO THE SECURITY-FIRST NATIONAL BANK OF LOS ANGELES. THE SECURITY-FIRST NATIONAL BANK CLAIMS IT, RATHER THAN THE INTERNAL REVENUE SERVICE, IS ENTITLED TO THE MONEY.

THE RECORD SHOWS THAT THE FANDERLIK LOCKE COMPANY BORROWED $75,000 FROM THE SECURITY-FIRST NATIONAL BANK AND AS EVIDENCE OF THE LOAN IT EXECUTED A NOTE IN THAT AMOUNT ON JULY 3, 1956, AND DELIVERED IT TO THE BANK ON JULY 13, 1956; AND THAT AS COLLATERAL SECURITY FOR THAT NOTE AND FOR ANY OTHER AMOUNT IT MIGHT BE INDEBTED TO THE BANK, FANDERLIK ON JULY 11, 1956, ASSIGNED TO THE BANK ALL MONEYS DUE OR TO BECOME DUE UNDER AIR FORCE CONTRACT NO. AF 45 (602/-156, DATED NOVEMBER 22, 1955, WHICH CONTAINED THE USUAL "NO-SET-OFF" CLAUSE. THIS ASSIGNMENT WAS MADE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED 31 U.S.C. 203, 41 U.S.C. 15. THE INTERNAL REVENUE SERVICE ADVISES THAT THE NOTE WAS SATISFIED ON OR ABOUT JULY 26, 1956, BUT APPARENTLY THE ASSIGNMENT WAS NOT RELEASED BY THE BANK.

THE RECORD FURTHER SHOWS THAT BEFORE EXECUTING THE ABOVE REFERRED-TO ASSIGNMENT FANDERLIK ENTERED INTO A JOINT VENTURE WITH MEYER BROS. FOR THE PURPOSE OF BIDDING ON GOVERNMENT HOUSING CONTRACTS AND THE JOINT VENTURE WAS SUBSEQUENTLY AWARDED THREE SUCH CONTRACTS. THE JOINT VENTURE BORROWED FUNDS FROM THE SECURITY-FIRST NATIONAL BANK AND ASSIGNED PAYMENTS UNDER THE GOVERNMENT CONTRACTS TO THE BANK AS COLLATERAL SECURITY FOR THE LOANS. APPARENTLY THE ASSIGNMENT OF MONEYS DUE UNDER THE FANDERLIK AIR FORCE CONTRACT WAS INCLUDED AS "COLLATERAL SECURITY" FOR A $200,000 LOAN TO THE JOINT VENTURE, AND $150,000 OF THAT LOAN REMAINS UNPAID.

THE BANK ADVISES THAT THE JOINT VENTURE WAS FORMED ON AUGUST 12, 1955, AND THAT IT MADE ITS FIRST LOAN TO THE JOINT VENTURE ON MARCH 6, 1956. THE BANK FURTHER ADVISES THAT ITS LINE OF CREDIT WAS SET UP TO BE SECURED BY THE ASSIGNMENT OF MONEYS DUE FROM THE FOUR GOVERNMENT HOUSING PROJECT CONTRACTS, THE THREE JOINT VENTURE CONTRACTS, AND THE FANDERLIK CONTRACT INVOLVED HERE, AF 45 (602/-156. THE BANK, HOWEVER, INDICATES THAT THIS LATTER CONTRACT IS A JOINT VENTURE CONTRACT, BUT THE CONTRACT ITSELF DISCLOSES THAT IT IS BETWEEN THE GOVERNMENT AND THE FANDERLIK LOCKE COMPANY. ALSO, IT IS CLEAR THAT AT LEAST ONE LOAN WAS MADE TO THE JOINT VENTURE PRIOR TO THE ASSIGNMENT OF MONEYS DUE UNDER CONTRACT NO. AF 45 (602/-156.

AFTER THE ASSIGNMENT OF THE PROCEEDS OF THE AIR FORCE CONTRACT NO. AF 45 (602/-156 AND REPAYMENT OF THE $75,000 FANDERLIK LOAN TO THE BANK AND BEFORE THE EXECUTION OF A $200,000 NOTE BY THE JOINT VENTURE IN FAVOR OF THE BANK, THE INTERNAL REVENUE SERVICE ACQUIRED ON AUGUST 23, 1956, A STATUTORY FEDERAL TAX LIEN IN THE SUM OF $25,119.57 AGAINST FANDERLIK. NOTICE OF THAT LIEN WAS FILED WITH THE COUNTY RECORDER FOR THE COUNTY OF LOS ANGELES ON NOVEMBER 1, 1956. BEFORE THE DATE OF THE $200,000 NOTE ( DECEMBER 28, 1956) AND AT A TIME WHEN NEITHER FANDERLIK NOR THE JOINT VENTURE WAS INDEBTED TO THE BANK, $25,521.48 BECAME PAYABLE UNDER THE ASSIGNED AIR FORCE CONTRACT NO. AF 45 (602/ 156. PURSUANT TO THE ABOVE- REFERRED-TO NOTICE OF LEVY, ON NOVEMBER 30, 1956, THE AIR FORCE TRANSMITTED TO THE INTERNAL REVENUE SERVICE TREASURY CHECK NO. 415,059, DATED NOVEMBER 21, 1956, FOR $25,521.48 DRAWN TO THE ORDER OF THE TREASURER OF THE UNITED STATES OR FANDERLIK LOCKE COMPANY. THE AIR FORCE NOW CONTENDS THAT THE CHECK WAS FORWARDED TO THE INTERNAL REVENUE SERVICE IN ERROR BECAUSE THE SECURITY FIRST NATIONAL BANK HOLDS A VALID ASSIGNMENT IN ACCORDANCE WITH THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED. HOWEVER, THE CHIEF, COLLECTION DIVISION, INTERNAL REVENUE SERVICE, LOS ANGELES, CONTENDS, IN EFFECT, THAT WHILE THE TERMS OF THE ASSIGNMENT ARE BROAD AND DO CONTAIN A CLAUSE STATING THAT IT SHALL BE COLLATERAL SECURITY TO THE BANK FOR ANY AND ALL INDEBTEDNESS OF THE ASSIGNOR "THEN EXISTING OR HEREAFTER ARISING," SUCH ASSIGNMENT SHOULD NOT BE HELD EFFECTIVE FOR A NOTE GIVEN BY THE JOINT VENTURE FOR AN ENTIRELY SEPARATE OBLIGATION, PARTICULARLY SINCE THE NOTE EVIDENCING THE EXISTING DEBT OF THE JOINT VENTURE TO THE BANK WAS GIVEN ON JANUARY 2, 1957, WHEREAS THE NOTICE OF TAX LEVY WAS FILED ON NOVEMBER 1, 1956.

IN VIEW OF THE REPORTED FACTS AND CIRCUMSTANCES THE COMMISSIONER SAYS THAT HIS OFFICE IS UNABLE TO DETERMINE WHETHER THE CLAIM OF THE BANK FOR THE FUNDS IN QUESTION IS SUPERIOR TO THE CLAIM OF THE INTERNAL REVENUE SERVICE AND HE REQUESTS THAT WE RESOLVE THE QUESTION.

THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED 31 U.S.C. 203, PERMITS CONTRACTORS TO ASSIGN TO A BANK OR OTHER FINANCING INSTITUTION "THE MONEYS DUE OR TO BECOME DUE" UNDER A GOVERNMENT CONTRACT AND IN THE CASE OF DEPARTMENT OF DEFENSE CONTRACTS (AND CERTAIN OTHER GOVERNMENT AGENCIES) THE ACT PERMITS THE INCLUSION OF A CLAUSE PROHIBIT REDUCTION OR SET-OFF FROM PAYMENTS TO BE MADE TO THE ASSIGNEE BECAUSE OF TAXES OWED BY THE CONTRACTOR TO THE GOVERNMENT. AS INDICATED ABOVE A "NO SET-OFF" CLAUSE WAS INCLUDED IN CONTRACT NO. AF 45 (602/-156.

UNDER THE ASSIGNMENT EXECUTED BY FANDERLIK TO THE BANK ALL MONEYS DUE OR TO BECOME DUE UNDER THE CONTRACT WERE ASSIGNED TO THE BANK AS COLLATERAL SECURITY FOR "ANY AND ALL INDEBTEDNESS OF ASSIGNOR TO SAID BANK NOW EXISTING OR HEREAFTER ARISING, NO MATTER HOW EVIDENCED.' AS A GENERAL RULE THE LAW APPLICABLE TO PARTNERSHIPS APPLIES TO THE RELATION BETWEEN MEMBERS OF A JOINT VENTURE AND THIRD PERSONS AND AN INDIVIDUAL LIABILITY IS IMPOSED ON A PERSON LIABLE AS A JOINT VENTURER. SEE 48 C.J.S. JOINT ADVENTURES 13 AND 14B. SEE ALSO LOCKE V. DUCHESNAY, ET AL., 258 P. 418. THUS, IT APPEARS THAT THE FANDERLIK LOCKE COMPANY WOULD BE LIABLE INDIVIDUALLY FOR THE DEBTS OF THE JOINT VENTURER.

ORDINARILY WHERE THE PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED, HAVE BEEN MET, ALL PAYMENTS DUE IN ACCORDANCE THEREWITH ARE MADE TO THE ASSIGNEE UNTIL NOTICE OF THE REVOCATION OR RELEASE OF THE ASSIGNMENT HAS BEEN RECEIVED. HOWEVER, 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 AN ASSIGNEE SUCH EXCESS MAY BE USED BY THE GOVERNMENT TO SATISFY INDEPENDENT DEBTS OWED BY THE CONTRACTOR TO THE UNITED STATES. 35 COMP. GEN. 104. IN THAT DECISION WE STATED THAT ,THERE IS NO DOUBT THAT AN ASSIGNEE WHO TAKES AN ASSIGNMENT AS SECURITY FOR LOANS TO THE ASSIGNOR MUST ACCOUNT TO THE ASSIGNOR AS A CONSTRUCTIVE TRUSTEE FOR ALL PROCEEDS COLLECTED IN EXCESS OF THE ASSIGNOR'S INDEBTEDNESS. * * * BUT, IF THE BENEFICIARY OF A TRUST IS INDEBTED IN A GREATER AMOUNT TO THE SAME PERSON FROM WHOM MONEY IS DUE TO THE TRUSTEE, THE TRUSTEE MAY NOT COLLECT MORE THAN THE DIFFERENCE BETWEEN THE TWO DEBTS.'

WE WILL ASSUME FOR PURPOSES OF THIS DECISION, BUT WITHOUT SO DECIDING, THAT THE ASSIGNMENT OF CLAIMS ACT, AS AMENDED, PROTECTS THE ASSIGNEE WHEN THE ASSIGNMENT OF CLAIMS UNDER A CONTRACT OF A CONTRACTOR IS COLLATERAL SECURITY FOR A LOAN TO A JOINT VENTURE IN WHICH THE CONTRACTOR IS PARTICIPANT, RATHER THAN FOR A LOAN TO THE CONTRACTOR. APPARENTLY, IN THE INSTANT CASE THE PAYMENT DUE UNDER AIR FORCE CONTRACT NO. AF 45 (602/-156, AGAINST WHICH THE $25,521.48 TAX DEBT WAS SET OFF, WAS THE FINAL PAYMENT DUE UNDER THE CONTRACT, ALTHOUGH THE RECORD BEFORE US IS NOT CLEAR ON THAT POINT. WE FIND NOTHING IN THE RECORD TO INDICATE THAT THE FANDERLIK LOCKE COMPANY WAS INDEBTED TO THE SECURITY-FIRST NATIONAL BANK, EITHER IN ITS OWN RIGHT OR IN ITS CAPACITY AS A MEMBER OF THE JOINT VENTURE, BETWEEN THE TIME THIS FINAL PAYMENT BECAME DUE THE BANK AND THE TIME THE NOTICE OF TAX LEVY WAS FILED OR THE DATE THE CHECK IN QUESTION WAS ISSUED AND FORWARDED TO THE INTERNAL REVENUE SERVICE. HENCE, WE THINK THAT IF THE PAYMENT HAD BEEN MADE TO THE ASSIGNEE BANK BETWEEN SUCH PERIODS THE BANK WOULD HAVE HAD TO TURN THE PAYMENT OVER TO THE ASSIGNOR, IF REQUESTED TO DO SO BY THE ASSIGNOR. THUS, OUR ABOVE-REFERRED-TO HOLDING IN 35 COMP. GEN. 104, CONCERNING AMOUNTS DUE AN ASSIGNEE IN EXCESS OF THE AMOUNT OWED THE ASSIGNEE BY AN ASSIGNOR INDEBTED TO THE GOVERNMENT, WOULD APPLY HERE.

IN VIEW OF WHAT HAS BEEN STATED ABOVE, AND IN THE ABSENCE OF A SHOWING THAT THE FANDERLIK LOCKE COMPANY WAS INDEBTED TO THE BANK, EITHER IN ITS OWN RIGHT OR IN ITS CAPACITY AS A MEMBER OF THE JOINT VENTURE, BETWEEN THE TIME THE PAYMENT IN QUESTION BECAME DUE UNDER CONTRACT NO. AF 45 (602/-156 AND THE DATE THE CHECK INVOLVED WAS ISSUED AND FORWARDED TO THE INTERNAL REVENUE SERVICE, WE ARE OF THE VIEW THAT THE CLAIM OF THE INTERNAL REVENUE SERVICE IS SUPERIOR TO THAT OF THE BANK. ACCORDINGLY, THE PROCEEDS OF THE CHECK SHOULD BE RETAINED BY THE INTERNAL REVENUE SERVICE FOR APPLICATION TO THE TAX INDEBTEDNESS OF THE FANDERLIK LOCKE COMPANY.