B-128375, JULY 9, 1956, 36 COMP. GEN. 19

B-128375, JULY 9, 1956, 36 COMP. GEN. 19

CLAIMS - ASSIGNMENTS - CONTRACTS - SET-OFF AMOUNTS DUE UNDER A GOVERNMENT CONTRACT WHICH CONTAINED A "NO SET OFF" CLAUSE, AND WHICH WAS ASSIGNED TO SECURE LOANS TO ENABLE THE CONTRACTOR TO PERFORM WORK UNDER THE PARTICULAR CONTRACT AS WELL AS OTHER GOVERNMENT CONTRACTS, MAY NOT BE WITHHELD BY THE GOVERNMENT TO SATISFY DEBTS OF THE CONTRACTOR WHICH AROSE INDEPENDENTLY OF THE CONTRACT SO LONG AS THE CONTRACTOR IS INDEBTED TO THE ASSIGNEE ON ACCOUNT OF LOANS MADE TO CARRY OUT ANY OF THE CONTRACTS.

TO THE SECRETARY OF THE ARMY, JULY 9, 1956:

REFERENCE IS MADE TO LETTER OF JUNE 21, 1956, FROM THE ASSISTANT SECRETARY OF THE ARMY ( LOGISTICS), REQUESTING OUR ADVICE AS TO THE PROPRIETY OF MAKING PAYMENTS TO THE ASSIGNEE UNDER CONTRACT NO. DA 36 030- QM-5093 IN THE FOLLOWING CIRCUMSTANCES.

THE CONTRACT WAS ENTERED INTO WITH THE DOUGLAS CORPORATION, DOUGLAS, GEORGIA, ON FEBRUARY 1, 1955, AND CALLED FOR THE FABRICATION OF SOME 196,000 PAIRS OF COTTON UTILITY TROUSERS FROM GOVERNMENT FURNISHED MATERIAL AT AN AGGREGATE PRICE OF ABOUT $186,000. THE CONTRACTOR MADE AN ASSIGNMENT OF ALL MONEYS DUE OR TO BECOME DUE UNDER THE CONTRACT TO NATIONAL FACTORS, INC., NOTICE OF WHICH IS RECEIVED FROM THE ASSIGNEE ON JUNE 16, 1955. BY SEPTEMBER 6, 1955, THE CONTRACTOR HAD DELIVERED SOME 36,000 PAIRS OF TROUSERS, AND ON SEPTEMBER 13, 1955, THE BALANCE OF THE CONTRACT WAS TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT, PURSUANT TO THE STANDARD " TERMINATION FOR CONVENIENCE" ARTICLE INCLUDED IN THE CONTRACT. THE PARTIES WERE UNABLE TO AGREE ON A TERMINATION SETTLEMENT, AND ON JANUARY 4, 1956, THE CONTRACTING OFFICER MADE A UNILATERAL FINDING THAT THE CONTRACTOR WAS ENTITLED TO SOME $94,000 ON ITS TERMINATION CLAIM. AN APPEAL BY THE CONTRACTOR FROM THIS FINDING IS NOW PENDING BEFORE THE ARMED SERVICES BOARD OF CONTRACT APPEALS.

THE CONTRACTOR WAS DECLARED IN DEFAULT ON ANOTHER CONTRACT ON OCTOBER 21, 1955, ON ACCOUNT OF WHICH IT IS ALLEGEDLY INDEBTED TO THE UNITED STATES IN THE APPROXIMATE AMOUNT OF $100,000. THE DEFAULT, AND THE CONTRACTOR'S LIABILITY THEREFOR, ARE ALSO PENDING ON APPEAL BEFORE THE ARMED SERVICES BOARD OF CONTRACT APPEALS. IN ADDITION, THE CONTRACTOR REPORTEDLY OWES SOME $8,300 ON ACCOUNT OF UNPAID FEDERAL TAXES. THE CONTRACTOR INDICATED A WILLINGNESS TO WITHDRAW ITS APPEAL FROM THE $94,000 TERMINATION FINDING IF THAT AMOUNT WOULD BE PAID TO ITS ASSIGNEE.

IN REPLY TO INQUIRY BY THE ARMY, THE ASSIGNEE STATED AS FOLLOWS IN A LETTER DATED FEBRUARY 23, 1956:

FOR YOUR INFORMATION, OUR CHICAGO OFFICE HANDLES ONLY THE ACTUALLY RECEIVABLES EMANATING FROM GOVERNMENT CONTRACTS THAT WE FACTOR FOR OUR CLIENTS. ANY ADVANCES MADE TO A CLIENT FOR INVENTORY, MACHINERY, PAYROLL, OR FOR ANY OTHER REASON ARE MADE TO THE CLIENT FROM OUR CINCINNATI OFFICE.

IN THE CASE OF OUR CLIENT, DOUGLAS CORPORATION OF DOUGLAS, GEORGIA, THE CHICAGO OFFICE ADVANCED ONLY AGAINST THE RECEIVABLES ON THIS CONTRACT TO THE EXTENT OF APPROXIMATELY $32,000.00, AND WAS REIMBURSED BY THE GOVERNMENT TO THE EXTENT OF APPROXIMATELY $31,000.00, LEAVING A BALANCE ON THEIR BOOKS OF APPROXIMATELY $1,000.00.

HOWEVER, OUR CINCINNATI OFFICE HAS ADVANCED TO THE DOUGLAS CORPORATION ON THIS CONTRACT AND FOR THE CARRYING OUT OF OTHER CONTRACTS HELD BY THEM, AN AMOUNT IN EXCESS OF $120,000.00.

UPON BEING AGAIN REQUESTED TO VERIFY EXACTLY HOW MUCH MONEY WAS ADVANCED BY IT UNDER CONTRACT NO. DA 36-030-QM-5093, THE ASSIGNEE STATED BY LETTER DATED MARCH 9, 1956, AS FOLLOWS:

WE REITERATE OUR STATEMENTS IN OUR LETTER OF FEBRUARY 23, 1956, WHEREIN WE NOTIFIED YOU THAT OUR COMPANY HAS OWING TO IT BY THE DOUGLAS CORPORATION AN AMOUNT IN EXCESS OF $152,000 AND HAS BEEN REIMBURSED BY THE GOVERNMENT TO AN AMOUNT OF APPROXIMATELY $31,000.00, LEAVING THE INDEBTEDNESS OWING US IN EXCESS OF $120,000.00.

THEREFORE IT IS OBVIOUS THAT WE CANNOT RELEASE OUR ASSIGNMENT ON THE ABOVE CONTRACT UPON ANY TOKEN PAYMENT OF A MERE $1,000.00.

ON 7 MARCH, 1956, THE UNDERSIGNED MET WITH REPRESENTATIVES OF PHILADELPHIA QUARTERMASTER TOGETHER WITH OUR CLIENT, TO DISCUSS OUR CLIENT'S CLAIM ON ABOVE SUBJECT CONTRACT. IT IS OUR UNDERSTANDING THAT IF OUR CLIENT AGREED TO SETTLE SUCH CLAIM IMMEDIATELY, THERE WOULD BE DUE THEM ON SUCH CLAIM AN AMOUNT IN EXCESS OF $94,000.00. WE WERE INFORMED, HOWEVER, BY LEGAL COUNSEL OF PHILADELPHIA QM THAT DUE TO A DECISION OF THE COMPTROLLER GENERAL (B 124 314; 35 CG 104) ISSUED AUGUST 25, 1955, THE ABOVE AMOUNT WOULD NOT BE PAID UNTIL PHILADELPHIA QM WAS FURNISHED WITH DOCUMENTARY PROOF THAT THE INDEBTEDNESS OWED US BY OUR CLIENT WAS ADVANCED FOR THE SPECIFIC PERFORMANCE OF ABOVE SUBJECT CONTRACT.

THE SPECIFIC QUESTIONS PRESENTED BY THE CASE, AS SUMMARIZED IN THE REPORT AND RECOMMENDATION OF THE SUCCESSOR CONTRACTING OFFICER, ARE AS FOLLOWS:

1. DOES THE GOVERNMENT HAVE THE RIGHT TO OFFSET MONEYS, IN EXCESS OF THE ASSIGNEE'S EQUITY THEREIN, OWING UNDER AN ASSIGNED CONTRACT, AGAINST AN INDEBTEDNESS OF THE CONTRACTOR ARISING INDEPENDENTLY OF SAID CONTRACT?

2. IF SO, DOES THE ASSIGNEE HAVE AN ABSOLUTE RIGHT TO RECEIVE PAYMENTS DESPITE INDEPENDENT GOVERNMENT CLAIMS WHEN NEITHER THE CONTRACTOR NOR THE ASSIGNEE HAS PRESENTED SUBSTANTIAL EVIDENCE THAT MONEYS WERE ADVANCED BY THE ASSIGNEE FOR PERFORMANCE OF SUBJECT GOVERNMENT CONTRACT OR OTHER GOVERNMENT CONTRACTS?

3. DOES THE GOVERNMENT HAVE THE RIGHT TO DETERMINE THE EXTENT OF THE ASSIGNEE'S EQUITY UNDER AN ASSIGNED CONTRACT?

THE GENERAL ACCOUNTING OFFICE HAS 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 USED BY THE GOVERNMENT TO SATISFY INDEPENDENT DEBTS OWED BY THE CONTRACTOR TO THE UNITED STATES. COMP. GEN. 104, 108. IN THAT OPINION, WE STATED OUR BELIEF THAT THE "NO SET-OFF" PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT, 41 U.S.C. 15, ARE FOR THE PROTECTION OF THE ASSIGNEE, AND CANNOT BE USED BY THE CONTRACTOR TO IMMUNIZE CONTRACT PROCEEDS AGAINST COLLECTION OF THE CONTRACTOR'S JUST DEBTS TO THE GOVERNMENT THROUGH THE DEVICE OF AN ASSIGNMENT MERELY FOR COLLECTION. WHILE THE PRECISE QUESTION HAS NOT, SO FAR AS WE KNOW, BEEN JUDICIALLY DETERMINED, WE BELIEVE THAT OUR HOLDING IN 35 COMP. GEN. 104 IS SOUND AS APPLIED TO AMOUNTS WHICH, IF COLLECTED, AN ASSIGNEE WOULD BE REQUIRED TO TURN OVER TO ITS ASSIGNOR.

HOWEVER, THAT CASE DID NOT INVOLVE THE QUESTION WHETHER LOANS SECURED BY THE ASSIGNMENT WERE MADE TO ASSIST THE CONTRACTOR IN PERFORMING THE ASSIGNED CONTRACT OR OTHER GOVERNMENT CONTRACTS. IN OUR OPINION, THE LEGISLATIVE HISTORY OF THE 1951 AMENDMENT TO THE ASSIGNMENT OF CLAIMS ACT, 41 U.S.C. 15, SUPPORTS THE CONCLUSION THAT THE VALIDITY OF AN ASSIGNMENT IS NOT DEPENDENT UPON THE PURPOSE FOR WHICH LOANS SECURED BY THE ASSIGNMENT ARE MADE. DURING THE LEGISLATIVE PROCESS SEVERAL DIFFERENT BILLS WERE CONSIDERED BY THE SENATE AND HOUSE COMMITTEES. AS FINALLY ENACTED, THE AMENDMENT IS IN THE FORM OF H.R. 3692, 82D CONGRESS, WHICH WAS REPORTED OUT ON APRIL 24, 1951. HOUSE REPORT NO. 376, 82D CONGRESS. A SOMEWHAT SIMILAR BILL, S. 998, HAD BEEN REPORTED OUT IN THE SENATE ON APRIL 11, 1951. SENATE REPORT NO. 217, 82D CONGRESS. ON APRIL 25, 1951, MR. ROBERTSON, SPEAKING FOR THE SENATE COMMITTEE WHICH HAD REPORTED OUT S. 998, OFFERED AN AMENDMENT TO S. 998 WHICH SUBSTITUTED THE LANGUAGE OF H.R. 3692 FOR THAT OF THE SENATE BILL. THE AMENDMENT WAS ADOPTED AND THE BILL PASSED AS THUS AMENDED. CONG. RECORD, APRIL 25, 1951, PAGE 4464. ON MAY 1, 1951, THE HOUSE PASSED THE SENATE BILL. CONG. RECORD, MAY 1, 1951, PP. 4733 4734.

IT IS SIGNIFICANT TO NOTE THAT S. 998, PRIOR TO MR. ROBERTSON'S AMENDMENT, PROVIDED THAT PAYMENTS ONCE MADE TO AN ASSIGNEE UNDER ASSIGNED CONTRACTS OF THE DEPARTMENT OF DEFENSE, GENERAL SERVICES ADMINISTRATION, AND THE ATOMIC ENERGY COMMISSION,

* * * EXCEPT THOSE CONTRACTS UNDER WHICH ALL WORK REQUIRED BY THE CONTRACT HAS BEEN COMPLETED PRIOR TO DATE OF THE ENACTMENT OF THIS AMENDMENT, * * *

SHOULD NOT BE RECOVERABLE FROM THE ASSIGNEE

* * * EXCEPT PAYMENTS IN EXCESS OF AMOUNTS PAID OR LOANED TO THE ASSIGNEE (ASSIGNOR) UNDER ANY FACTORING ARRANGEMENT, LOAN, DISCOUNT, OR ADVANCE MADE IN CONNECTION WITH OR SECURED BY THE ASSIGNMENT * * *.

THE DIFFERENCE BETWEEN THIS LANGUAGE AND THAT IN H.R. 3692 WAS EXPLAINED BY MR. ROBERTSON AS FOLLOWS, CONG. REC., APRIL 25, 1951, P. 4464:

(1) THE PROTECTION AFFORDED THE ASSIGNEE AGAINST CLAIMS, INCLUDING THOSE INVOLVING THE SO-CALLED "NO SET-OFF" CLAUSE, WOULD BE LIMITED UNDER S. 998 TO AMOUNTS LOANED OR ADVANCED BY THE ASSIGNEE, WHEREAS H.R. 3692 WOULD NOT IMPOSE SUCI LIMITATIONS. THE REASON FOR THIS DIFFERENCE IS THAT AS A PRACTICAL MATTER IT WOULD BE DIFFICULT TO DETERMINE THE EXACT AMOUNTS LOANED OR ADVANCED WHERE SEVERAL CONTRACTS ARE ASSIGNED TO AN ASSIGNEE AND PROVISION IS MADE FOR REVOLVING CREDITS.

IN THE BILL WHICH WAS FINALLY ENACTED, THE PROTECTION AGAINST RECOVERY BACK OF PAYMENTS ALREADY MADE TO AN ASSIGNEE WAS NOT LIMITED TO AMOUNTS ADVANCED BY THE ASSIGNEE TO THE CONTRACTOR, BUT APPLIED TO ALL PAYMENTS RECEIVED BY THE ASSIGNEE AFTER JULY 1, 1950. FURTHERMORE, THE BILL AS ENACTED PERMITS THE INCLUSION OF A "NO SET-OFF" CLAUSE IN ANY CONTRACT OF THE AGENCIES NTIONED,"EXCEPT ANY SUCH CONTRACT UNDER WHICH FULL PAYMENT HAS BEEN MADE.'

IT SEEMS TO US THAT THE PERMISSION GIVEN BY THE STATUTE TO INSERT A "NO SET-OFF" CLAUSE IN CONTRACTS UNDER WHICH FULL PAYMENT HAS NOT BEEN MADE, EVEN THOUGH ALL WORK REQUIRED BY THE CONTRACT MAY HAVE BEEN COMPLETED, NEGATIVES ANY INFERENCE THAT THE "NO SET-OFF" PROTECTION IS RESTRICTED TO ADVANCES MADE FOR PERFORMANCE OF THE PARTICULAR CONTRACT CONTAINING SUCH CLAUSE. THIS CONCLUSION WAS REACHED BY THE COURT IN THE CASE OF PETERMAN LUMBER COMPANY V. ADAMS, 128 F.1SUPP. 6. WE REALIZE THAT THE COURT IN THAT CASE ALSO STATED ITS OPINION THAT THE ASSIGNMENT OF CLAIMS ACT ,IMPLIEDLY" LIMITED ASSIGNMENTS TO THOSE MADE FOR THE PURPOSE OF FINANCING GOVERNMENT CONTRACTS IN GENERAL. HOWEVER, THAT QUESTION WAS NOT BEFORE THE COURT AND ITS STATEMENT AS TO THE EFFECT OF THE ACT IS NOT A SQUARE HOLDING ON THE POINT.

IN THE PRESENT CASE, THE DOUGLAS CORPORATION WAS ENGAGED IN CARRYING OUT AT LEAST ONE OTHER GOVERNMENT CONTRACT BEFORE AND AFTER THE DATE THE INSTANT CONTRACT WAS ASSIGNED. THE ASSIGNEE HAS STATED THAT IT ADVANCED OVER $152,000 TO THE CONTRACTOR "ON THIS CONTRACT AND FOR THE CARRYING OUT OF OTHER CONTRACTS HELD BY THEM," OF WHICH OVER $120,000 REMAINS UNPAID. WHILE, AS STATED ABOVE, WE HAVE TAKEN THE POSITION THAT THE "NO SET-OFF" CLAUSE DOES NOT PROTECT THE CONTRACTOR AGAINST SET-OFF OF AMOUNTS WHICH HE IS ENTITLED TO RECEIVE FROM AN ASSIGNEE, WE ARE NOT PREPARED TO EXTEND THAT HOLDING TO SITUATIONS WHERE THE ASSIGNEE'S RIGHTS WILL BE PREJUDICED. WHILE WE BELIEVE AN ASSIGNEE PROPERLY MAY BE REQUESTED TO ADVISE THE GOVERNMENT AS TO THE STATUS OF ITS ACCOUNT WITH AN ASSIGNOR, WE DO NOT BELIEVE THE ASSIGNMENT OF CLAIMS ACT REQUIRES IT TO PROVE THAT ADVANCES MADE BY IT WERE USED FOR THE PERFORMANCE OF GOVERNMENT CONTRACTS. THE ACT, AS AMENDED, WAS FOR THE PURPOSE OF AFFORDING PROTECTION TO FINANCIAL INSTITUTIONS WHICH LOANED MONEY ON THE SECURITY OF GOVERNMENT CONTRACTS. WHILE THE USE MADE OF FUNDS SO LOANED MAY AFFECT THE EQUITIES BETWEEN AN ASSIGNEE AND OTHER CLAIMANTS OF THE CONTRACT PROCEEDS, WE DO NOT SEE THAT IT AFFECTS THE GOVERNMENT'S LIABILITY TO COMPLY WITH THE ASSIGNMENT SO LONG AS THE ASSIGNOR REMAINS INDEBTED TO THE ASSIGNEE.

ACCORDINGLY, SINCE THE DOUGLAS CORPORATION AND THE ASSIGNEE HAVE BOTH STATED THAT THE FORMER OWES THE LATTER AN AMOUNT IN EXCESS OF THE BALANCE PAYABLE UNDER CONTRACT NO. DA 36-030-QM-5093, WE BELIEVE THAT THE "NO SET- OFF" CLAUSE OF THAT CONTRACT PRECLUDES WITHHOLDING OF ANY PART OF SUCH BALANCE TO SATISFY DEBTS OF THE CONTRACTOR ARISING INDEPENDENTLY OF THAT CONTRACT.