B-160740 February 13, 1969
B-160740: Feb 13, 1969
We are responding to the request therein for comments on the legal theory advanced by the plaintiff surety company. Plaintiff is suing as the completing surety on the performance bonds of George Bennett Construction Company under two contracts with the Corps of Engineers. When George Bennett was doing business as a sole proprietor. He and his wife accrued a personal Federal tax liability which was assumed in 1959 by the corporation which bore his name. 339.39 was due to plaintiff surety. We also determined that this amount was subject to offset of $127. The judgment was satisfied in full without offset in the letter part of march 1967. Our opinion is requested as to the plaintiff's "theory that.
B-160740 February 13, 1969
The Honorable William D. Ruckelshaus Assistant Attorney General Civil Division Department of Justice
Dear Mr. Ruckelshaus:
SUBJECT: The Fidelity & Casualty Co. of New York v. United States, CT. Cl. No. 196-68
We refer again to a letter dated January 7, 1969 (reference ELW, Jr. JAP:vn, 154-196-68), concerning the above-captioned litigation. We are responding to the request therein for comments on the legal theory advanced by the plaintiff surety company.
Plaintiff is suing as the completing surety on the performance bonds of George Bennett Construction Company under two contracts with the Corps of Engineers. The construction company defaulted on these contracts in late 1963 when it became bankrupt. Plaintiff took over these contracts in January 1964.
It appears that in 1951, when George Bennett was doing business as a sole proprietor, he contracted with the Corps of Engineers for certain services. In 1956, he and his wife accrued a personal Federal tax liability which was assumed in 1959 by the corporation which bore his name. Mr. Bennett thereafter instituted suit in the Court of Claims (before the bankruptcy of his corporation and the surety takeover agreements) on the 1951 contract between himself and the Corps of Engineers. In August of 1965, after taking extensive testimony in 1962 and 1963 and after a number of procedural motions, the Commissioner filed findings as to which both parties took exception. In May of 1966, our Office found that $202,339.39 was due to plaintiff surety, and we also determined that this amount was subject to offset of $127,845.61 for unpaid Federal taxes. Of the amount set off, $31,332.59 represented the personal tax liability of Mr. Bennett and his wife which the corporation had assumed in 1959. On January 20, 1967, Mr. Bennett recovered a personal judgment for $52,436.63 on the 1951 contract. The judgment was satisfied in full without offset in the letter part of march 1967.
Our opinion is requested as to the plaintiff's "theory that, at least in the circumstances here involved, the Government may be under a duty to wait to collect a debt due it from the debtor (here George Bennett) even though it is possible to collect the debt immediately from another person (here the corporation) who has assumed the debt."
We would observe at the outset that a duty of the kind asserted by plaintiff would be equitable in nature, inasmuch as the Government has a legal right to payment from a debtor and this legal right is subject to legal qualifications only to the extent that such qualification may be embodied in the statute or contract creating the debt. We are not informed of any legal conditions or limits which might restrict the Government's right to payment by the corporation of the assumed tax liability. The completing surety is in no better position than its principal as against the United States.
An obligation on the part of the United States to refrain from collecting a tax debt out of con tract proceeds owed to a completing surety may arise, in equity, from some sort of "fiduciary relation," which would arise when one party reposes a special trust and confidence in another. See the definition of "Fiduciary Relation" in Black's Law Dictionary (4th edition), pages 753-54. However, we think it is clear that the relationship of the Government and the plaintiff cannot be considered as constituting a fiduciary relation. Their positions vis-a-vis one another can be most accurately described as a debtor-creditor relationship which is generally agreed not to be fiduciary in character. See Restatement of Trusts 2nd, Section 12, Comment "b".
Moreover, while it appears that relations of confidence other than those of the standard variety may receive judicial enforcement, there must be a factual demonstration that one party has reposed a special trust and confidence in the other. We do not think that such a showing has been made in this case. The critical fact in this case is that the corporation had assumed, as of 1959, the personal tax liability of Mr. Bennett and his wife. The tow contracts from which this suit arises were executed in 1963. At the time the plaintiff became surety on the corporation's payment and performance bonds, the information concerning the corporate assumption of indebtedness was at least as available to plaintiff as well as to the Government had such a liability which it could assert against the corporation (or its surety) when plaintiff voluntarily undertook to become surety, we see no elements of unfairness in the Government's setting off the tax liability.
However, even assuming that a court should find some equities running in plaintiff's favor, we think that the court in good conscience should refusal would be that, on balance, imposition of a duty to defer collection to wait the possibility that another source of payment may become available would render the Government's motives suspect and would result in administrative inconvenience out of proportion to the magnitude of the interests to be protected. "In other words, the consequences of granting relief should be balanced against the need for it." 27 Am. Jur. 2d, "Equity," Section 107, page 628.
If the court should hold that the Government was duty bound to waive its right to set off the #31,000 against the amount owed plaintiff, there are two major foreseeable effects:
(1) In any given case the anticipated alternate source of payment may not materialized.
(2) In all cases, responsible accounting officials will be required to expend some considerable time and effort in searching for alternative source of payment in order to maximize the amounts payable to completing sureties.
It is not at all clear how frequent would be the occurrence of either or both of these results. However, it may be inferred that the risk of the Government in never collecting a debt once it has passed up an opportunity to collect it from the surety, plus the administrative burden, would more than counterbalance the very few instances where such a rule would benefit a surety.
It is therefore our opinion that no legal or equitable duty devolved upon the Government to postpone collection of the debt in order to set it off against a possible future personal recovery by Mr. Bennett.
R. F. KELLER General Counsel