B-119376, JUNE 28, 1954, 33 COMP. GEN. 608

B-119376, JUNE 28, 1954, 33 COMP. GEN. 608

CONTRACTS - DEFAULT - COMPLETING SURETY'S RIGHTS V. ASSIGNEE'S RIGHTS IN VIEW OF THE CONFLICTING COURT DECISIONS AS TO WHETHER THE RIGHTS OF A BANK AS A CONTRACTOR'S ASSIGNEE UNDER ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED, ARE SUPERIOR TO THOSE OF THE CONTRACTOR'S SURETY, NEITHER THE SURETY WHO PAID LABORERS AND MATERIALMEN AMOUNTS DUE AT TIME OF CONTRACTOR'S DEFAULT AND WHO COMPLETED THE WORK UNDER THE CONTRACT NOR AN ASSIGNEE BANK MAY BE PAID THE FINAL PAYMENT DUE UNDER THE CONTRACT UNTIL THEIR DIFFERENCES ARE SETTLED BY MUTUAL PAYMENT DUE UNDER THE CONTRACT UNTIL THEIR DIFFERENCES ARE SETTLED BY MUTUAL AGREEMENT OR THEIR RIGHTS HAVE BEEN DECIDED BY A COURT OF COMPETENT JURISDICTION.

ACTING COMPTROLLER GENERAL WEITZEL TO COLONEL S. E. BIGNELL, DEPARTMENT OF THE ARMY, JUNE 28, 1954:

THERE HAS BEEN RECEIVED BY REFERENCE FROM THE CHIEF OF FINANCE (FILE: FINEY 167/87259 INDUSTRIAL CONSTRUCTORS) YOUR REQUEST FOR A DECISION AS TO THE PROPRIETY OF MAKING PAYMENT ON A VOUCHER IN THE AMOUNT OF $133,100.18, STATED IN FAVOR OF THE UNION PACIFIC INSURANCE COMPANY ( SURETY), TACOMA, WASHINGTON, AND/OR CENTRAL BANK AND TRUST COMPANY, AND COVERING A PROPOSED 14TH AND FINAL PAYMENT UNDER CONTRACT NO. DA-25-066-ENG-1447, DATED JANUARY 30, 1952, WITH ROY YATES, TRADING AS INDUSTRIAL CONSTRUCTORS, FOR THE CONSTRUCTION OF CERTAIN BUILDINGS AND APPURTENANT FACILITIES AT LOWRY AIR FORCE BASE, DENVER, COLORADO.

THE FIRST SIX PAYMENTS UNDER THE CONTRACT WERE MADE TO THE CONTRACTOR AND PAYMENTS NOS. 7 TO 13, INCLUSIVE, WERE MADE TO THE CENTRAL BANK AND TRUST COMPANY, DENVER, COLORADO, UNDER AN ASSIGNMENT EXECUTED PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, 54 STAT. 1029, AS AMENDED. THE 13TH PROGRESS PAYMENT COVERED THE PERIOD JANUARY 11 TO FEBRUARY 10, 1953, AT WHICH TIME THE ORIGINAL CONTRACT PRICE OF $1,968,000 HAD BEEN INCREASED BY VARIOUS CHANGE ORDERS TO $1,990,856.91, AND IT WAS ESTIMATED THAT THE CONTRACTOR HAD EARNED THE AMOUNT OF $1,961,520.91. IN MAKING THE 13TH CONTRACT PAYMENT, THERE WAS DEDUCTED FROM THAT AMOUNT THE SUM OF $1,946,002.90, CONSISTING OF PREVIOUS PAYMENTS AGGREGATING THE AMOUNT OF $1,843,960.06, A LIQUIDATED DAMAGE ASSESSMENT OF $2,500 AND THE SUM OF $99,542.84 AS A RETAINED PERCENTAGE OF THE CONTRACT PRICE.

ON APRIL 14, 1953, BY SUPPLEMENTAL AGREEMENT BETWEEN THE CONTRACTING PARTIES AND THE CO-SURETIES ON THE CONTRACT PERFORMANCE AND PAYMENT BONDS, IT WAS AGREED THAT THE SURETIES WOULD TAKE OVER AND COMPLETE THE CONTRACT WORK AND BE PAID ALL MONEYS DUE OR TO BECOME DUE UNDER THE CONTRACT AFTER ALL CLAIMS OF THE GOVERNMENT AGAINST THE CONTRACTOR HAD BEEN SATISFIED.

IT APPEARS THAT THE UNITED PACIFIC INSURANCE COMPANY, TACOMA, WASHINGTON, (NAME AS SHOWN ON VOUCHER SHOULD BE " UNITED" INSTEAD OF " UNION"), ACTING ON ITS OWN BEHALF AND AS AGENT OF THE OTHER CO SURETIES, PAID THE A. A. AND E. B. JONES COMPANY THE SUM OF $46,784.37 FOR THE COMPLETION OF THE CONTRACT WORK AND MADE PAYMENTS TO LABORERS AND MATERIALMEN AGGREGATING THE SUM OF $318,442.90. ALSO, THE RECORD SHOWS THAT THE TOTAL CONTRACT PRICE WAS INCREASED IN THE NET AMOUNT OF $1,721.34 BY CHANGE ORDERS ISSUED DURING THE PERIOD OF THE 14TH AND FINAL CONTRACT PAYMENT ESTIMATE, FEBRUARY 10 TO JUNE 5, 1953.

THE ATTORNEY FOR THE SURETY COMPANIES SIGNED THE FINAL PAYMENT ESTIMATE BUT UNDER PROTEST WITH RESPECT TO THE STATEMENT THEREON CONCERNING THE ASSIGNMENT TO THE BANK. PREVIOUSLY, THE ATTORNEY INDICATED THAT THE SURETIES WERE NOT NOTIFIED OF THE BANK'S ASSIGNMENT UNTIL APRIL 10, 1953, AND CONTENDED, IN EFFECT, THAT THE DELAY IN FURNISHING NOTICE OPERATED TO MAKE THE RIGHTS OF THE SURETIES SUPERIOR TO THOSE OF THE ASSIGNEE BANK IN THE MATTER. HOWEVER, NOTICE OF THE ASSIGNMENT HAVING BEEN RECEIVED BEFORE THE EXECUTION OF THE AGREEMENT OF APRIL 14, 1953, IT IS QUESTIONABLE WHETHER THE DELAY IN FURNISHING NOTICE OF THE BANK'S ASSIGNMENT OPERATED TO THE DISADVANTAGE OF THE SURETIES.

THE BANK MADE NO CLAIM FOR THE SUM OF $133,100.18 BUT APPEARS TO HAVE ASSUMED THAT ITS ASSIGNMENT WOULD BE RECOGNIZED WHEN PAYMENT OF THAT AMOUNT WAS MADE BY THE GOVERNMENT. BY LETTER DATED MARCH 22, 1954, FROM THE HONORABLE EDWIN C. JOHNSON AND THE HONORABLE EUGENE D. MILLIKIN, UNITED STATES SENATE, THERE WAS FORWARDED HERE FOR CONSIDERATION A BRIEF PREPARED BY THE LAW FIRM OF IRELAND, IRELAND, STAPLETON AND PRIOR, WHEREIN IT IS ALLEGED THAT THERE IS APPROXIMATELY $149,000 DUE THE CENTRAL BANK AND TRUST COMPANY ON THE NOTE SECURED BY THE LOWRY FIELD CONTRACT; AND CONTENDED THAT, IN VIEW OF THE DECISIONS RENDERED IN THE CASES OF COCONUT GROVE EXCHANGE BANK V. AMSTERDAM CASUALTY CO., 149 F.2D 73, AND GENERAL CASUALTY CO. OF AMERICA V. SECOND NATIONAL BANK OF HOUSTON, 178 F.2D 679, THE AMOUNT NOW DUE FROM THE GOVERNMENT UNDER THE CONTRACT MUST BE PAID OVER TO THE CENTRAL BANK AND TRUST COMPANY "IN RECOGNITION OF ITS SUPERIOR RIGHT TO THE SAME UNDER THE " ASSIGNMENT OF CLAIMS" ACT.'

IN THE FIRST CASE CITED WHICH WAS DECIDED BY THE UNITED STATES CIRCUIT COURT OF APPEALS, FIFTH CIRCUIT, IT WAS HELD THAT THE ASSIGNMENT OF CLAIMS ACT OF 1940 "WHILE BEING PRIMARILY FOR THE PROTECTION OF THE UNITED STATES AND NOT FOR THE REGULATION OF THE EQUITIES OF THE CLAIMANTS, AS BETWEEN THEMSELVES, NEVERTHELESS, DID INCIDENTALLY AFFECT THE RIGHTS BETWEEN THE ASSIGNEE OF CONTRACTOR AND THE SURETY SO AS TO MAKE ASSIGNMENTS TO A BANK FROM A CONTRACTOR FOR THE PURPOSES OF THE CONTRACT VALID AND THE POSSESSION BY THE ASSIGNEE BANK OF PROCEEDS OF THE CONTRACT LAWFUL.'

SIMILARLY, IN THE GENERAL CASUALTY CO. CASE, ALSO DECIDED BY THE UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT, IT WAS HELD THAT AN ASSIGNEE BANK, RATHER THAN THE SURETY, WAS ENTITLED TO MONEY WHICH REPRESENTED WHAT WAS OWING BY THE GOVERNMENT AS FINAL SETTLEMENT OF THE CONTRACT THERE INVOLVED. HOWEVER, IT WAS INDICATED IN THAT DECISION THAT, IF THE SURETY HAD ADVANCED FUNDS NECESSARY TO COMPLETE THE CONTRACT, IT WOULD HAVE BEEN ENTITLED TO REIMBURSEMENT OF SUCH AMOUNTS.

DIRECTLY IN CONFLICT WITH THE REASONING IN BOTH OF THESE DECISIONS IS A DECISION RENDERED BY THE COURT OF CLAIMS IN THE CASE OF ROYAL INDEMNITY COMPANY V. UNITED STATES, 117 C.1CLS. 736. IN THAT CASE NO QUESTION OF COMPLETION COST WAS INVOLVED, THERE HAVING BEEN ONLY THE QUESTION AS TO WHETHER, NOTWITHSTANDING AN ASSIGNMENT OF CONTRACT PAYMENTS PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, THE SURETY WAS ENTITLED TO A SUM REMAINING IN THE HANDS OF THE GOVERNMENT BY REASON OF HAVING PAID OUT A LARGER SUM TO LABORERS AND SUPPLIERS LEFT UNPAID AT THE TIME OF THE CONTRACTOR'S DEFAULT. JUDGMENT WAS RENDERED IN FAVOR OF THE SURETY COMPANY ON THE BASIS OF THE CONCLUSION THAT ITS CLAIM WAS SUPERIOR TO THAT OF THE CONTRACTOR WHO HAD CAUSED THE LOSS AND THAT THE POSITION OF THE ASSIGNEE BANK WAS NO BETTER THAN THAT OF THE CONTRACTOR (ITS ASSIGNOR).

IN VIEW OF THIS CONFLICT, THIS OFFICE WOULD NOT BE WARRANTED IN AUTHORIZING PAYMENT ON THE INSTANT VOUCHER TO EITHER THE BANK OR THE SURETY COMPANIES. ACCORDINGLY, UNLESS THE BANK AND THE SURETY COMPANIES SETTLE THEIR DIFFERENCES BY MUTUAL AGREEMENT THEY MUST PRESENT THE ISSUES TO A COURT OF COMPETENT JURISDICTION. COPIES OF THIS DECISION ARE BEING FORWARDED TO THE ATTORNEYS REPRESENTING THE BANK AND THE CO-SURETIES, AND IT IS SUGGESTED THAT YOU ADVISE THEM OR THEIR PRINCIPALS WITH RESPECT TO ANY KNOWN INDEBTEDNESS OF THE CONTRACTOR TO THE UNITED STATES, INCLUDING ANY TAX LIABILITY REPORTED BY THE INTERNAL REVENUE SERVICE. MEANWHILE, THE VOUCHER AND SUPPORTING PAPERS WILL BE RETAINED IN THIS OFFICE.