B-165016, FEB. 24, 1969

B-165016, FEB. 24, 1969

TO MR. SECRETARY:

REFERENCE IS MADE TO LETTER DATED JANUARY 29, 1969, AND ENCLOSURES, FROM THE ACTING GENERAL COUNSEL, OFFICE OF THE CHIEF OF ENGINEERS, ENGGC-C, CONCERNING THE CLAIM OF THE FIRST PENNSYLVANIA BANKING AND TRUST COMPANY FOR THE PAYMENT OF RETAINED PERCENTAGES AND FINAL PAYMENTS UNDER CERTAIN CONTRACTS THE PROCEEDS OF WHICH WERE ASSIGNED TO IT BY AMERICAN DREDGING COMPANY.

THE RECORD SHOWS THAT ON JUNE 6, 1968, THE SAVANNAH DISTRICT, CORPS OF ENGINEERS, TERMINATED AMERICAN DREDGING'S RIGHTS TO PROCEED UNDER A CONTRACT FOR UNCLASSIFIED DREDGING IN THE WILMINGTON (N.C.) HARBOR. AMERICAN DREDGING APPEALED THAT ACTION AND THAT CONTROVERSY IS STILL PENDING. SUBSEQUENT TO THE DEFAULT, SAVANNAH DISTRICT READVERTISED THE UNPERFORMED WORK AND MADE AN AWARD TO A COMPLETING CONTRACTOR ON AUGUST 30, 1968. THE GOVERNMENT HAS MADE DEMAND ON AMERICAN DREDGING FOR EXCESS COSTS AMOUNTING TO MORE THAN $2,000,000.

AT THE TIME OF THE LETTING OF THE COMPLETION CONTRACT, AUGUST 30, 1968, AMERICAN DREDGING HAD OTHER CONTRACTS WITH THE CORPS OF ENGINEERS AS FOLLOWS: CONTRACT NO. DISTRICT EST. PRICE EST. BAL. DUE ------------ --- ----- ---------- ------------ DACW56-69-C-0027 TULSA $2,065,000 $2,065,000 DACW03-69 C-0013 LITTLE ROCK 5,388,000 4,762,294 DACW51-68-C-0023 NEW YORK 729,880 210,174 DACW61-68-C-0251 PHILADELPHIA 224,720 69,171 DACW61-68-C- 0235 PHILADELPHIA 1,452,450 1,151,082

ON SEPTEMBER 9, 1968, AMERICAN DREDGING ASSIGNED THE PROCEEDS OF THE LITTLE ROCK, NEW YORK, AND PHILADELPHIA CONTRACTS TO THE FIRST PENNSYLVANIA COMPANY AND THE TULSA CONTRACT WAS SIMILARLY ASSIGNED ON SEPTEMBER 19, 1968. THE PHILADELPHIA DISTRICT RECEIVED NOTICES DATED SEPTEMBER 10, 1968, AND COPIES OF THE ASSIGNMENTS ON SEPTEMBER 13, 1968. WHILE THE FILE BEFORE US IS NOT CLEAR ON THIS POINT, WE ASSUME THAT OTHER DISTRICTS RECEIVED AND ACKNOWLEDGED SIMILAR NOTICES OF ASSIGNMENT. THE OFFICE, CHIEF OF ENGINEERS, BY TELEPHONE CALLS ON SEPTEMBER 27, 1968, CONFIRMED BY TELETYPE MESSAGES ON OCTOBER 15, 1968, INSTRUCTED THE ABOVE- MENTIONED DISTRICTS TO WITHHOLD RETAINED PERCENTAGES AND FINAL PAYMENTS ON ALL CONTRACTS WITH AMERICAN DREDGING.

ALTHOUGH COPIES OF THE CONTRACTS CONCERNED ARE NOT A PART OF THE FILE BEFORE US, WE ARE ADVISED THAT EACH OF THE PHILADELPHIA DISTRICT CONTRACTS CONTAINED A "NO SET-OFF" PROVISION RELATIVE TO ASSIGNED PROCEEDS OF THE CONTRACT AND WE WILL ASSUME FOR THE PURPOSES OF THIS DECISION THAT EACH OF THE OTHER CONTRACTS CONTAINED THE SAME STANDARD PROVISION.

IT IS REPORTED THAT THE FOLLOWING SUMS ARE CURRENTLY BEING WITHHELD:

AMOUNT

DISTRICT CURRENTLY CONTRACT NO. OFFICE BEING WITHHELD ------------ ------ -- -------------- DA-36-198-CIVENG-66-80

PHILADELPHIA $ 33,035 DACW61-68-C-0235 PHILADELPHIA 102,629 DACW61-68-C- 0251 PHILADELPHIA 23,850 DACW51-68 C-0023 NEW YORK 200,000 (APPROX.)

IT IS FURTHER REPORTED THAT AMERICAN DREDGING HAD AN UNSECURED "LINE OF CREDIT" WITH THE BANK OF BETWEEN EIGHT AND TEN MILLION DOLLARS; THAT IN MARCH 1967 AMERICAN DREDGING HAD NO LOANS XTANT; THAT AT THE TIME OF THE EXECUTION OF THE ASSIGNMENTS THE AMERICAN DREDGING COMPANY WAS INDEBTED TO THE FIRST PENNSYLVANIA COMPANY IN EXCESS OF $9,000,000 FOR MONEY ADVANCED ON THE "LINE OF CREDIT"; THAT NO NEW LOAN WAS MADE AS A RESULT OF THE ASSIGNMENT; AND THAT AMERICAN DREDGING'S LOAN BALANCE NEITHER INCREASED NOR DECREASED AS A RESULT OF THE ASSIGNMENT. THE REPORT CONTINUES THAT FOLLOWING THE ASSIGNMENTS, CERTAIN PRIOR LOANS WERE RENEWED AND CONTRACT PROGRESS PAYMENTS RECEIVED ON THE ASSIGNMENTS WERE APPLIED TO REDUCE AN EARLIER LOAN.

IN THE FIRST PENNSYLVANIA LETTER OF NOVEMBER 7, 1968, IT IS ASSERTED THAT THE CONTRACTS (PROCEEDS OF THE CONTRACTS) WERE ASSIGNED TO SECURE LOANS TO THE CONTRACTOR THEN AGGREGATING $8,650,000. ALSO, CLAIM WAS MADE FOR THE RETAINED PERCENTAGES AND FINAL PAYMENTS WITHHELD, AND FURTHER REQUEST WAS MADE THAT THE APPROPRIATE CONTRACTING OFFICERS BE INSTRUCTED TO MAKE PAYMENTS UNDER THE CONTRACTS AS THEY BECOME DUE.

THE ASSIGNMENT OF CLAIMS ACT, AS AMENDED, 31 U.S.C. 203, PROVIDES IN PART AS FOLLOWS:

"ALL TRANSFERS AND ASSIGNMENTS MADE OF ANY CLAIM UPON THE UNITED STATES, OR OF ANY PART OR SHARE THEREOF, OR INTEREST THEREIN, WHETHER ABSOLUTE OR CONDITIONAL, AND WHATEVER MAY BE THE CONSIDERATION THEREFOR, * * * SHALL BE ABSOLUTELY NULL AND VOID, UNLESS THEY ARE FREELY MADE AND EXECUTED IN THE PRESENCE OF AT LEAST TWO ATTESTING WITNESSES, AFTER THE ALLOWANCE OF SUCH A CLAIM, THE ASCERTAINMENT OF THE AMOUNT DUE, AND THE ISSUING OF A WARRANT FOR THE PAYMENT THEREOF. * * *

"THE PROVISIONS OF THE PRECEDING PARAGRAPH SHALL NOT APPLY IN ANY CASE IN WHICH THE MONEYS DUE OR TO BECOME DUE FROM THE UNITED STATES OR FROM ANY AGENCY OR DEPARTMENT THEREOF, UNDER A CONTRACT PROVIDING FOR PAYMENTS AGGREGATING $1,000 OR MORE, ARE ASSIGNED TO A BANK, TRUST COMPANY, OR OTHER FINANCING INSTITUTION, INCLUDING ANY FEDERAL LENDING AGENCY: * * *

"ANY CONTRACT OF THE DEPARTMENT OF DEFENSE, THE GENERAL SERVICES ADMINISTRATION, THE ATOMIC ENERGY COMMISSION * * * MAY * * * PROVIDE * * * THAT PAYMENTS TO BE MADE TO THE ASSIGNEE OF ANY MONEYS DUE OR TO BECOME DUE UNDER SUCH CONTRACT SHALL NOT BE SUBJECT TO REDUCTION OR SET-OFF, AND IF SUCH PROVISION OR ONE TO THE SAME GENERAL EFFECT * * * IS HEREAFTER INCLUDED OR INSERTED IN ANY SUCH CONTRACT, PAYMENTS TO BE MADE THEREAFTER TO AN ASSIGNEE OF ANY MONEYS DUE OR TO BECOME DUE UNDER SUCH CONTRACT, * * * SHALL NOT BE SUBJECT TO REDUCTION OR SET OFF FOR ANY LIABILITY OF ANY NATURE OF THE ASSIGNOR TO THE UNITED STATES OR ANY DEPARTMENT OR AGENCY THEREOF WHICH ARISES INDEPENDENTLY OF SUCH CONTRACT.'

THE RECORD INDICATES THAT IT WAS THE VIEW OF THE CONTRACTING OFFICER THAT:

"26. THERE IS NO ROOM FOR DOUBT THAT THE ASSIGNMENT WAS MADE SOLELY TO BAR SET-OFF BY THE GOVERNMENT IN RECOVERING ITS LOSS CAUSED BY AMERICAN DREDGING COMPANY'S DEFAULT. THE BANK MADE NO LOANS IN CONSIDERATION OF THE ASSIGNMENTS, NOR DID THE BANK REDUCE ANY PRE EXISTING DEBT. THE COMPANY OBTAINED A BENEFIT, IN THAT THE UNSECURED LOANS WERE CONVERTED INTO GILTEDGED OBLIGATIONS SECURED BY THE U.S. TREASURY. * * * ALTHO AWARE OF THE GOVERNMENT'S CLAIM, THE BANK WAS TO BECOME A COLLECTION AGENT FOR THE COMPANY, AND A MERE CONDUIT, AS IT WERE, THROUGH WHICH THE PROCEEDS OF THE SEVERAL CONTRACTS WERE TO FLOW TO THE COMPANY'S COFFERS, SHIELDED FROM DIMINUTION THROUGH SET-OFF UNTIL SAFELY CREDITED TO THE FIRM'S ACCOUNT.'

WE WOULD AGREE THAT IF, AS CONTENDED BY THE CONTRACTING OFFICER, THE FIRST PENNSYLVANIA IS MERELY A COLLECTION AGENT FOR AMERICAN DREDGING, THE RIGHT OF SET-OFF WOULD NOT BE BARRED TO THE UNITED STATES. SEE B-137321, OCTOBER 13, 1958; 37 COMP. GEN. 318.

IN THE PRESENT CASE, HOWEVER, IT APPEARS THAT DURING THE PERIOD MARCH 1967 TO AUGUST 31, 1968, THE BANK ADVANCED TO AMERICAN DREDGING SUMS IN EXCESS OF SIX MILLION DOLLARS IN UNSECURED SHORT-TERM LOANS, IN ADDITION TO EXISTING UNSECURED LONG-TERM LOANS IN THE AMOUNT OF $2,700,000. IT IS NOTED THAT IT WAS DURING THE MENTIONED SEVENTEEN MONTH PERIOD THAT AMERICAN DREDGING WAS AWARDED AND WAS PERFORMING, IN ADDITION TO THE BASIC CONTRACT HERE CONCERNED, FIVE ADDITIONAL CONTRACTS WITH A TOTAL ESTIMATED PRICE OF $9,860,050, OF WHICH OVER EIGHT MILLION DOLLARS WAS STILL DUE ON AUGUST 31, 1968. IT WOULD BE UNREALISTIC TO CONCLUDE THAT THE LOAN MONEY DID NOT, EITHER DIRECTLY OR INDIRECTLY, ENTER INTO THE FINANCING OF THE SIX CONTRACTS. FURTHERMORE, THE ADMINISTRATIVE REPORT SPECIFICALLY RECITES THAT PROGRESS PAYMENTS RECEIVED ON THE CONTRACTS WERE USED TO REDUCE ONE OF THE LOAN BALANCES. IT IS DIFFICULT FOR US TO UNDERSTAND THE LOGIC OF THE ARGUMENT THAT THE BANK WAS NO MORE THAN AN "AGENT FOR" OR "CONDUIT TO" THE CONTRACTOR-ASSIGNOR, WHEN IT IS EVIDENT FROM THE RECORD THAT PAYMENTS TO THE BANK UNDER THE ASSIGNMENTS WILL BE APPLIED AGAINST THE ASSIGNOR'S OUTSTANDING INDEBTEDNESS TO THE BANK.

IN VIEW OF THE ABOVE, WE CONCLUDE THAT SUMS DUE THE CONTRACTOR UNDER THE UNDEFAULTED "NO SET-OFF" CONTRACTS MAY NOT BE WITHHELD FOR SET OFF AGAINST THE INDEBTEDNESS OF THE CONTRACTOR UNDER THE DEFAULTED CONTRACT FOR UNCLASSIFIED DREDGING IN THE WILMINGTON (N.C.) HARBOR. 35 COMP. GEN. 104; 37 COMP. GEN. 318. SEE ALSO COLEMAN V UNITED STATES, 158 CT.CL. 490, 496. HOWEVER, ANY RETAINED SUMS UNDER THE WILMINGTON HARBOR CONTRACT MAY BE USED IN SET-OFF TO REDUCE THE CONTRACTOR'S INDEBTEDNESS ARISING OUT OF THAT CONTRACT.