B-155504, NOV. 16, 1965

B-155504, NOV. 16, 1965

TO THE SECRETARY OF THE INTERIOR:

REFERENCE IS MADE TO LETTER DATED SEPTEMBER 8, 1965, WITH ENCLOSURES, FROM THE ASSISTANT SECRETARY OF THE INTERIOR, REQUESTING OUR DETERMINATION AS TO THE PROPRIETY OF MAKING PAYMENTS TO THE SURETIES AND AN ASSIGNEE OF THE H AND M CONSTRUCTION COMPANY, A COPARTNERSHIP OF EL CAJON, CALIFORNIA, AND A DEFAULTING CONTRACTOR.

IT IS STATED THAT FROM 1962 TO 1964 THE NATIONAL PARK SERVICE AWARDED THE PARTNERSHIP SIX CONTRACTS FOR VARIOUS CONSTRUCTION AND RECONSTRUCTION WORK IN SEQUOIA AND KINGS CANYON NATIONAL PARKS. PROCEEDS OF ONE CONTRACT WERE PROPERLY ASSIGNED PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT, 31 U.S.C. 203. IN SEPTEMBER 1964, THE CONTRACTING OFFICER RECEIVED NOTIFICATION THAT THE PROJECTS UNDERTAKEN BY THE PARTNERSHIP WERE BEING CLOSED DOWN FOR LACK OF FUNDS. AS A CONSEQUENCE, THE SIX CONTRACTS WERE TERMINATED FOR DEFAULT. IT IS FURTHER STATED THAT AN ATTEMPT WAS MADE TO STOP PAYMENT ON A CHECK WHICH THE GOVERNMENT HAD MISDELIVERED TO, AND WHICH WAS CONVERTED BY, THE PARTNERSHIP. THIS CHECK, WHICH INCLUDED AMOUNTS DUE FOR WORK PERFORMED UNDER THE ASSIGNED CONTRACT, SHOULD HAVE BEEN ISSUED AS SEVERAL CHECKS, WITH ONE IN AN APPROPRIATE AMOUNT DELIVERED TO THE SAN DIEGO TRUST AND SAVINGS BANK, AS ASSIGNEE.

IT APPEARS FROM THE RECORD THAT FIVE OF THE CONTRACTS WERE TAKEN OVER BY THE SURETIES AND COMPLETED BY THEM. THE SIXTH CONTRACT IS NOT COMPLETED, WHICH IS THE CONTRACT INVOLVING THE ASSIGNMENT OF FUNDS TO THE SAN DIEGO BANK AND THE MISDELIVERED CHECK.

INFORMATION PREVIOUSLY FURNISHED INDICATES THAT IN FOUR OF THE FIVE CONTRACTS COMPLETED BY THE SURETIES, THE COSTS OF COMPLETION FROM THE DATE OF TAKE-OVER BY THE SURETIES EXCEED THE NET AMOUNT HELD BY THE GOVERNMENT AS THE UNEXPENDED BALANCE DUE UNDER THE CONTRACTS BUT UNEARNED BY THE DEFAULTING CONTRACTOR, LESS LIQUIDATED DAMAGES FOR LATE COMPLETION. THE FIFTH CONTRACT, THE SURETY'S COMPLETION COSTS ARE EXCEEDED BY THE UNEXPENDED BALANCE DUE UNDER THE CONTRACT FROM THE DATE OF THE SURETY'S TAKE-OVER LESS LIQUIDATED DAMAGES. THE SIXTH CONTRACT INVOLVING THE ASSIGNMENT TO THE SAN DIEGO BANK AND THE ERRONEOUS PAYMENT, IS CONSIDERED SEPARATELY.

IN UNITED STATES V. MUNSEY TRUST CO., RECEIVER, 332 U.S. 234, IT WAS HELD, QUOTING FROM THE SYLLABUS, THAT:

"1. NOTWITHSTANDING CLAIMS OF A SURETY ON A STATUTORY PAYMENT BOND (GIVEN UNDER 40 U.S.C. SEC. 270A) FOR REIMBURSEMENT FOR SUMS PAID TO LABORERS AND MATERIALMEN, THE GOVERNMENT MAY SET OFF, AGAINST UNAPPROPRIATED PERCENTAGES OF PROGRESS PAYMENTS WITHHELD BY IT AND DUE TO THE CONTRACTOR ON THE CONSTRUCTION CONTRACT, A DEBT OWED TO IT BY THE CONTRACTOR AS A RESULT OF A SEPARATE AND INDEPENDENT TRANSACTION. PP. 236-244.

"4. WITH REFERENCE TO WITHHELD AND UNAPPROPRIATED PERCENTAGES OF PROGRESS PAYMENTS ON A CONSTRUCTION CONTRACT, PERFORMANCE OF WHICH HAS BEEN COMPLETED AND ACCEPTED, THE GOVERNMENT IS NOT A MERE GENERAL CREDITOR BUT A SECURED CREDITOR ENTITLED TO WITHHOLD WHAT IT OWES THE CONTRACTOR UNTIL IT IS PAID WHATEVER THE CONTRACTOR OWES THE GOVERNMENT. P. 240.

"6. THE RIGHT OF THE GOVERNMENT TO RETAINED PERCENTAGES OF PROGRESS PAYMENTS ON A CONSTRUCTION CONTRACT DOES NOT DEVOLVE ON A SURETY WHO HAS PAID LABORERS AND MATERIALMEN, SO AS TO PREVENT THE GOVERNMENT FROM APPLYING THE UNAPPROPRIATED SUM TO THE SATISFACTION OF ITS OWN CLAIM GROWING OUT OF A SEPARATE AND INDEPENDENT TRANSACTION. PP. 242-243.'

IN OUR DECISION OF AUGUST 10, 1960, 40 COMP. GEN. 85, WE STATED:

"IN 31 COMP. GEN. 103 WE CONSIDERED THE VALIDITY AND EFFECT OF AN AGREEMENT ENTERED INTO BETWEEN THE GOVERNMENT AND A SURETY FOR COMPLETION OF A CONTRACT ON WHICH THE PRINCIPAL WAS IN DEFAULT, AND CONCLUDED THAT THE UNDERTAKING OF THE SURETY TO COMPLETE THE WORK WAS ADEQUATE CONSIDERATION FOR THE GOVERNMENT'S AGREEMENT TO PAY THE CONTRACT BALANCE IN ITS HANDS TO THE SURETY, TO THE EXTENT OF ITS ACTUAL COST OF COMPLETION OF THE CONTRACT, EXCLUSIVE OF ANY EXPENDITURES UNDER THE PAYMENT BOND.

"WHILE IN THAT CASE THE AGREEMENT, AS WE CONSTRUED IT DID NOT PURPORT TO OBLIGATE THE GOVERNMENT TO PAY THE SURETY ANY PART OF THE RETURNED PERCENTAGES OF PAYMENTS EARNED BY THE CONTRACTOR, WE TOOK THE POSITION THAT THE GOVERNMENT COULD NOT, WITHOUT THE CONSENT OF THE PRINCIPAL, AGREE TO PAY TO THE SURETY ANY PART OF THE EARNED BUT UNPAID PROGRESS ESTIMATES OR RETAINED PERCENTAGES WHICH MIGHT BE IN EXCESS OF THE SURETY'S COST OF COMPLETION. FURTHERMORE, WE POINTED OUT THAT THE PRINCIPAL'S CONSENT IN THAT SITUATION WOULD CONSTITUTE AN ASSIGNMENT OF HIS RIGHTS AGAINST THE GOVERNMENT WHICH WOULD NOT BE ENFORCEABLE AGAINST THE GOVERNMENT, AND WOULD NOT AFFECT THE GOVERNMENT'S RIGHT OF SET-OFF FOR ANY DEBT OWING TO IT BY THE CONTRACTOR.

"IN THE ABSENCE OF ANY CLEAR JUDICIAL AUTHORITY TO THE CONTRARY, WE BELIEVE, THAT WE SHOULD ADHERE TO THE VIEWS EXPRESSED IN 31 COMP. GEN. 103, AND REGARD AS UNAUTHORIZED AND CONTRARY TO THE INTEREST OF THE GOVERNMENT ANY PURPORTED UNDERTAKING BY THE GOVERNMENT TO APPLY UNPAID PROGRESS ESTIMATES OR RETAINED PERCENTAGES OF A DEFAULTING CONTRACTOR TO REIMBURSEMENT OF A COMPLETING SURETY FOR PAYMENT BOND DISBURSEMENTS, FREE OF ANY RIGHT OF SET-OFF FOR ANY CLAIM OF THE GOVERNMENT AGAINST THE CONTRACTOR.'

THE CONTRACTS WITH THE SURETIES FOR COMPLETION OF THE PROJECTS HERE ARE SUBSTANTIALLY THE SAME AS THE CONTRACT CONCERNED IN 31 COMP. GEN. 103.

IN APPLYING THE RATIONALE OF 31 COMP. GEN. 103 TO THE FIVE COMPLETED CONTRACTS, IT IS OUR VIEW THAT THE UNEXPENDED CONTRACT BALANCE IN EACH INSTANCE MUST BE REDUCED BY THE LIQUIDATED DAMAGES ASSESSED UNDER THE CONTRACT CONCERNED AND THE REMAINDER OF THE UNEXPENDED CONTRACT BALANCES MAY BE PAID TO THE COMPLETING SURETY IN AMOUNTS NOT TO EXCEED ITS EXPENSES INCURRED IN COMPLETING THE CONTRACTS FROM THE DATE OF ITS TAKEOVER. WHERE THE UNEXPENDED CONTRACT BALANCE EXCEEDS SUCH COMPLETION COSTS, THE REMAINDER IS CONSIDERED AS DUE THE SURETY'S PRINCIPAL AS ARE OTHER WITHHELD EARNED SUMS, AND AS SUCH IT IS AVAILABLE TO THE GOVERNMENT FOR OFFSET AGAINST AMOUNTS DUE THE GOVERNMENT BY REASON OF OTHER TRANSACTIONS. IN THE EVENT THAT THE GOVERNMENT HAS NO CLAIM AGAINST THE PRINCIPAL, OR IF THERE IS A REMAINDER AFTER ACCOMPLISHING THE OFFSET, THE TOTAL OF THE SUMS DUE THE PRINCIPAL, INCLUDING WITHHELD PERCENTAGES AND UNPAID EARNED BALANCES, SHOULD BE PAID TO THE PRINCIPAL, OR AS IN THE PRESENT CASES, WHERE THE PRINCIPAL IS BANKRUPT, TO THE TRUSTEE IN BANKRUPTCY, ON HIS DEMAND. IN THIS CONNECTION, IT MAY BE OBSERVED THAT INSOFAR AS THE SURETIES ARE CONCERNED, WE HAVE CONSISTENTLY TAKEN THE POSITION THAT A PAYMENT BOND SURETY'S RIGHT TO PRIORITY OVER OTHER CLAIMANTS CANNOT OTHERWISE BE RECOGNIZED UNTIL THE SURETY HAS SATISFIED ALL CLAIMS FOR LABOR AND MATERIALS FURNISHED IN CONNECTION WITH THE PERFORMANCE OF THE CONTRACT WORK. SEE UNITED STATES V. NATIONAL SURETY COMPANY, 254 U.S. 73, AND AMERICAN SURETY COMPANY V. WESTINGHOUSE ELECTRIC MANUFACTURING COMPANY, ET AL., 296 U.S. 133. SEE ALSO B-157563, OCTOBER 26, 1965. THE SURETIES MAY THEN PRESENT THEIR CLAIMS FOR PRIORITY TO THE TRUSTEE IN BANKRUPTCY, AND A JUDICIAL DETERMINATION OF THEIR RIGHTS OBTAINED. IN ANY EVENT THE GOVERNMENT WOULD SUCCEED IN OBTAINING A GOOD AND VALID ACQUITTANCE FOR THE SUMS BEING HELD AS STAKEHOLDER.

AS TO THE SIXTH CONTRACT, CONTRACT NO. 14-10-1436-407, IT APPEARS THAT AN ASSIGNMENT WAS MADE TO SAN DIEGO TRUST AND SAVINGS BANK OF ALL MONIES DUE OR TO BECOME DUE UNDER THE ABOVE CONTRACT, WHICH ASSIGNMENT WAS MADE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED. PROGRESS PAYMENTS WERE MADE UNDER THIS CONTRACT TO THE SAN DIEGO BANK UP TO THE TIME OF DEFAULT, WITH THE EXCEPTION OF THE LAST PAYMENT OF $28,929.62 WHICH WAS ERRONEOUSLY INCLUDED IN A CHECK PAYABLE TO H AND M AS PROGRESS PAYMENTS ON THREE OTHER CONTRACTS. H AND M DID NOT FORWARD TO THE SAN DIEGO BANK THAT PART OF THE CHECK REPRESENTING THE PROGRESS PAYMENT ON THE ASSIGNED CONTRACT. FOLLOWING DEFAULT ON THIS ASSIGNED CONTRACT AND THE BANKRUPTCY OF H AND M, THE GOVERNMENT AND THE SURETY ENGAGED A CONTRACTOR TO COMPLETE THE CONTRACT FOR THE UNEXPENDED CONTRACT BALANCE. AT THIS TIME, AND AFTER DEFAULT OF H AND M, THE ORIGINAL CONTRACTOR, THE SURETY HAD INCURRED CONSIDERABLE EXPENSE UNDERITS BOND TO THE GOVERNMENT, AND THE GOVERNMENT HAD IN ITS POSSESSION RETAINED PERCENTAGES OF PROGRESS PAYMENTS, EARNED BY H AND M PRIOR TO DEFAULT. LIQUIDATED DAMAGES FOR DELAY IN COMPLETION HAVE NOT BEEN ASSESSED, AND, IN ADDITION, THE GOVERNMENT HAS A CLAIM AGAINST H AND M IN THE AMOUNT OF THE ERRONEOUS PAYMENT TO THEM DESCRIBED ABOVE. THE SAN DIEGO TRUST AND SAVINGS BANK HAS PRESENTED ITS CLAIM FOR THE AMOUNT ERRONEOUSLY PAID TO H AND M WHICH SHOULD HAVE BEEN PAID TO THE BANK, AS ASSIGNEE. THE SURETY CLAIMS THE AMOUNT OF RETAINED EARNINGS AS REIMBURSEMENT FOR ITS BOND EXPENSES.

AS TO THE CLAIM OF THE SAN DIEGO BANK WE PERCEIVE NO BASIS FOR THE GOVERNMENT'S FURTHER FAILURE TO PAY THE AMOUNT WHICH SHOULD HAVE BEEN PAID PURSUANT TO THE ASSIGNMENT.

HOWEVER, THE GOVERNMENT HAS THE RIGHT OF SET-OFF AGAINST AMOUNTS DUE H AND M FOR CLAIMS OF THE GOVERNMENT, THAT IS, LIQUIDATED DAMAGES AND THE AMOUNT OF THE ERRONEOUS PAYMENT TO H AND M. IN THIS REGARD, WITHHELD BALANCES UNDER ALL THE CONTRACTS ARE AVAILABLE FOR THE SET OFF OF THE ERRONEOUS PAYMENT. SEE UNITED STATES V. MUNSEY TRUST CO., SUPRA.

WE HAVE AVOIDED, IN THIS DECISION, DISCUSSION OF EXACT AMOUNTS CONCERNED UNDER EACH CONTRACT, SINCE WE BELIEVE THE COMPUTATIONS OF AMOUNTS DUE TO AND FROM THE GOVERNMENT SHOULD BE CAREFULLY REVIEWED PRIOR TO EXECUTION OF THE NECESSARY VOUCHERS AND PAYMENT THEREOF.