B-147180, OCT. 3, 1961

B-147180, OCT. 3, 1961

TO CUMMINGS AND SELLERS:

REFERENCE IS MADE TO YOUR LETTER OF AUGUST 30, 1961, REQUESTING ON BEHALF OF THE HARTFORD ACCIDENT AND INDEMNITY COMPANY, SURETY FOR VAMAR CONSTRUCTION CORPORATION, RECONSIDERATION OF THE POSITION TAKEN BY THE CLAIMS DIVISION OF THIS OFFICE IN LETTER DATED MAY 11, 1961, THAT $4,136.44 OF THE $5,891.71 EARNED BY THE VAMAR CONSTRUCTION CORPORATION UNDER CONTRACT NO. DA-44-110-ENG-4261 PRIOR TO ITS DEFAULT IS SUBJECT TO SET-OFF AGAINST TAXES DUE BY IT.

THE REQUEST FOR RECONSIDERATION AND REVERSAL IS BASED ON THE AGREEMENT WITH THE GOVERNMENT UNDER WHICH THE SURETY FOR THE CONTRACTOR UNDERTOOK TO COMPLETE PERFORMANCE OF THE CONTRACT WORK. IT IS ALLEGED THAT IT WAS THE INTENTION OF BOTH THE GOVERNMENT AND THE SURETY THAT ALL MONIES EARNED UNDER THE CONTRACT BY THE CONTRACTOR PRIOR TO THE DEFAULT, AND THEN IN THE HANDS OF THE GOVERNMENT, WOULD BE MADE AVAILABLE AS NECESSARY TO REIMBURSE THE SURETY FOR ITS COST OF COMPLETING THE CONTRACT WORK.

THE CLAIMS DIVISION LETTER OF MAY 11, 1961, CITED UNITED STATES V. MUNSEY TRUST COMPANY, 332 U.S. 234, 239-240, AND GENERAL CASUALTY COMPANY OF AMERICA, ET AL. V. UNITED STATES, 130 CT.CL. 520, AS AUTHORITY FOR ITS POSITION THAT THE VAMAR TAX INDEBTEDNESS OF $4,136.44 WAS PROPER FOR COLLECTION BY SET-OFF. HOWEVER, IT IS ALLEGED THAT NEITHER OF THESE TWO CASES INCLUDES ANY REFERENCE TO A CONTRACTUAL AGREEMENT SUCH AS IS INVOLVED IN THE INSTANT CASE, UNDER WHICH THE FULL AMOUNT OF $5,891.71 IS PAYABLE TO THE SURETY IF ITS UNREIMBURSED COSTS, AS DETERMINED BY THIS OFFICE, EXCEED THAT AMOUNT AND THAT, THEREFORE, THE TWO CASES ARE DISTINGUISHABLE AND ARE NOT CONTROLLING. IT IS URGED THAT THE DISPOSITION OF THE MATTER SHOULD BE GOVERNED BY OUR DECISION OF SEPTEMBER 24, 1951, B- 100314, 31 COMP. GEN. 103, ABOUT WHICH YOU STATE "IN THAT CASE THE SURETY'S AGREEMENT WITH THE GOVERNMENT TO COMPLETE THE WORK WAS FOUND TO OVERRIDE THE SET OFF RULE THAT WOULD OTHERWISE HAVE APPLIED, AND IT WAS HELD THAT THE SURETY WAS ENTITLED TO BE PAID OUT OF THE FUNDS RETAINED BY THE GOVERNMENT PRIOR TO THE CONTRACTOR'S DEFAULT, TO THE EXTENT OF THE OTHERWISE UNREIMBURSED EXPENSES INCURRED BY THE SURETY IN COMPLETING THE WORK.'

YOUR APPLICATION OF THE DECISION REPORTED AT 31 COMP. GEN. 103 TO THE PRESENT CASE GOES BEYOND WHAT WAS ACTUALLY HELD THEREIN. THE DECISION HOLDS THAT THE RIGHT OF A SURETY WHO COMPLETES THE WORK OF A DEFAULTING CONTRACTOR TO MONIES EARNED BY THE CONTRACTOR PRIOR TO DEFAULT IS DERIVED PRIMARILY FROM THE SURETY'S SUBROGATION TO THE RIGHTS OF THE CONTRACTOR, AND IS INFERIOR TO THE GOVERNMENT'S RIGHT OF SET-OFF FOR AN INDEPENDENT DEBT OF THE CONTRACTOR, BUT THAT THE GOVERNMENT MAY BY SPECIFIC AGREEMENT UNDERTAKE TO REIMBURSE THE SURETY FOR COMPLETION COSTS OUT OF SUCH FUNDS.

THE TAKEOVER AGREEMENT HERE INVOLVED, SUPPLEMENTAL AGREEMENT NO. 1, DATED JUNE 20, 1958, PROVIDES, IN PERTINENT PART, AS FOLLOWS:

"2. THE GOVERNMENT AGREES TO PAY SURETY FOR ALL WORK PERFORMED BY IT IN ACCORDANCE WITH THE TERMS OF THE AFORESAID CONTRACT, INCLUDING RETAINED PERCENTAGES ON EARNINGS FOR SUCH WORK, WITHOUT SET OFF FROM SUCH MONEYS BECAUSE OF ANY INDEBTEDNESS OF THE DEFAULTING CONTRACTOR TO THE UNITED STATES. WITH RESPECT TO RETAINED PERCENTAGES AND OTHER MONEYS EARNED BY THE DEFAULTING CONTRACTOR PRIOR TO DEFAULT, AND NOW IN THE HANDS OF THE GOVERNMENT, IT IS AGREED THAT TO THE EXTENT OF SUCH FUNDS AS MAY BE NECESSARY TO REIMBURSE THE SURETY FOR ITS COST OF COMPLETING THE CONTRACT WORK THE MATTER OF PAYMENT WILL BE PRESENTED TO THE COMPTROLLER GENERAL.'

IT WILL BE NOTED THAT THE PARAGRAPH CONTAINS TWO SENTENCES. THE FIRST SENTENCE CLEARLY APPLIES ONLY TO WORK PERFORMED BY THE COMPLETING SURETY, AND ONLY THE SECOND SENTENCE APPLIES TO THE MONIES EARNED BY THE DEFAULTING CONTRACTOR PRIOR TO DEFAULT WHICH ARE THE SUBJECT OF YOUR CLAIM. WITH RESPECT TO THE DISPOSITION OF THE MONIES EARNED BY THE DEFAULTING CONTRACTOR THE SECOND SENTENCE MERELY PROVIDES "TO THE EXTENT SUCH FUNDS MAY BE NECESSARY TO REIMBURSE THE SURETY FOR ITS COST OF COMPLETING THE CONTRACT WORK THE MATTER OF PAYMENT WILL BE PRESENTED TO THE COMPTROLLER GENERAL.' THERE IS NOTHING CONTAINED IN THE SECOND SENTENCE WHICH CAN REASONABLY BE INTERPRETED AS WAIVING THE GOVERNMENT'S PRIOR RIGHT OF SET-OFF, OR AS INDICATING ANY INTENTION TO DO SO.

THE RECORD SHOWS THAT BY LETTER DATED APRIL 11, 1958, THE CONTRACTOR NOTIFIED THE GOVERNMENT THAT IT WOULD BE UNABLE TO COMPLETE THE CONTRACT. SHORTLY THEREAFTER, ON APRIL 18, 1958, THE FINANCE OFFICER WAS SERVED BY THE U.S. TREASURY DEPARTMENT WITH A NOTICE OF LEVY GIVING NOTICE OF CERTAIN TAX LIENS AGAINST VAMAR CONSTRUCTION CORPORATION AND MAKING DEMAND FOR PAYMENT THEREOF. IT IS REPORTED BY THE CONTRACTING OFFICER THAT "THE ENTIRE HISTORY OF THE NEGOTIATION OF THE SUPPLEMENTAL AGREEMENT OVER A PERIOD LASTING FROM 17 APRIL 1958 TO 20 JUNE 1958 WAS ONE OF INTENSE CONFLICT BETWEEN REPRESENTATIVES OF THE SURETY AND REPRESENTATIVES OF THE CORPS OF ENGINEERS AT ALL LEVELS AS TO THE PROPER DISPOSITION OF THE MONEY EARNED BY VAMAR PRIOR TO DEFAULT AND REMAINING UNPAID. AT NO TIME WAS THERE ANY CAPITULATION TO THE SURETY WITH RESPECT TO THE PRIOR RIGHT OF THE UNITED STATES TO SET OFF THIS MONEY IN SATISFACTION OF DELINQUENT TAXES.'

IN VIEW OF THE FOREGOING AND ASIDE FROM THE FACT THAT THE SUPPLEMENTAL AGREEMENT DOES NOT SO PROVIDE, THE RECORD SHOWS THAT IT WAS NOT THE INTENTION OF THE GOVERNMENT THAT ALL MONIES EARNED UNDER THE CONTRACT BY THE CONTRACTOR PRIOR TO DEFAULT AND UNPAID WOULD BE MADE AVAILABLE AS NECESSARY TO REIMBURSE THE SURETY FOR THE COST OF COMPLETING THE CONTRACT WORK, AS ALLEGED.

ACCORDINGLY THERE IS NO SIMILARITY IN THIS CASE TO THE SITUATION INVOLVED IN 31 COMP. GEN. 103 AND, THEREFORE, THE ACTION TAKEN BY THE CLAIMS DIVISION IN THE LETTER OF MAY 11, 1961, MUST BE AND IS SUSTAINED.

UPON THE SUBMISSION OF A PROPER INDEMNITY AGREEMENT TO THE CLAIMS DIVISION, AS REQUESTED IN THE LETTER OF MAY 11, 1961, YOUR CLAIM FOR THE BALANCE OF THE AMOUNT EARNED BY VAMAR PRIOR TO DEFAULT AND AFTER SET-OFF OF THE TAX INDEBTEDNESS WILL BE CONSIDERED BY THE CLAIMS DIVISION OF THIS OFFICE.