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The Navy requested a decision as to whether a payment bond and surety should be paid to an insurance firm which filed a claim under performance and payment bonds provided by a prime contractor. Both the insurance firm and the contractor had advised the Navy to make all progress payments to the insurance firm. However, the Navy erroneously sent the final payment to the contractor which attempted to send the money to the firm. A Federal tax lien was attached to the contractor's account, consequently, the contractor was able to pay the insurance firm only a portion of the amount owed. The firm claimed that the Navy was liable for the amount owed because, if the Navy had not made its erroneous payment, it would have received the full amount. The Navy contended that, since the insurance firm's claim arose due to the Government's assertion of its tax claim, the Navy's liability should depend upon the order of priority between the surety and the tax claim, and a tax claim has priority over the claim of a payment bond surety. GAO agreed that, because of this priority, the insurance firm was not entitled to the amount that it claimed. Accordingly, the claim need not be paid.

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