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«A 7 FILE: B-189183 DATE: January 12, 1979 MATTER OF: Robert L. Singleton; Capital City Construction, Inc., et al. rlo PL6 0° DIGEST: 1. GAO will not ...»

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WASH ING TON, 0. C. 20546

A 7

FILE: B-189183 DATE: January 12, 1979

MATTER OF: Robert L. Singleton; Capital City

Construction, Inc., et al.


PL6 0°


1. GAO will not question indebtedness owed by 8(a) subcontractor to Small Business Administration (SBA), notwithstanding allegations of fraudulent inducement to debt and alleged breach of collateral agreement by SBA, since allegations are unsupported and are contradicted by SBA.

2. Where surety has paid only fraction of outstanding claim under its payment bond, surety will not be permitted to share in retainage held by Government despite assertion that SBA advance payment to contractor was improper.

3. Clight of set-off as to debts owed is inherent Un--te-d-S-t-e-s and extends to debts owed as result of loan by SBA to 8(a) subcontractor7 SBA's capacity as Government agency could not be disregarded by courts.

4. SBA was not authorized to subordinate its interest to surety in view of dollar amount of contract.

5. Pearlman v. Reliance Insurance Company, 371 U.S.

132 (1962), does not affect Government's right to priority to contract retainage against surety which has completed payments under payment bond.

6. Attorney's liens are not recognizable against United States.

B-189183 2 The Singleton SubcontractOn August.23, 1972, the Small Business Administration (SBA) and the Federal Aviation entered into contract No. DOT-FA73.-SO-7071 for expansion and modernization of the Jacksonville Air Route Traffic Control Tower at Hilliard, Florida, in the amount of $2,455,366. On the same date, SBA entered into a subcontract--under so-called "8(a)" contracting authority--with Robert L. Singleton to do the work. FAA reports that "SBA delegated to FAA the responsibility of administering the [subcontract] * * * [and that] Reliance Insurance Company was the Miller Act payment and performance bond surety [for Robert Singleton]."

On May 29, 1974, SBA and Singleton entered into a modification of the subcontract which provided for the making of an advance payment by SBA to Singleton in the amount of $150,000. This agreement, in part,


"The final $150,000 due and payable by the U.S. Government (DOT/FAA) on this contract shall be withheld and used to liquidate this advance payment."

The advance and agreement were made without the knowledge or consent of Reliance.

Singleton completed the subcontract, but was unable to pay his laborers and materialmen. FAA reports that Reliance paid these creditors $9,000 and is being sued for another $142,946 under its payment bond. FAA reports that it is holding $150,000 under this contract to pay all claims relating to the contract.

Singleton contends that the $150,000 payment received from SBA was not a loan but an outright "grant or gift" and that for SBA to insist otherwise B-189183 3 means that the SBA fraudulently induced Singleton to sign the documents evidencing the purported loan. Moreover, Singleton alleges that SBA is indebted to the company because of its failure to deliver promised funds under other agreements for which failure Singleton is "presently preparing to file suit." Singleton therefore urges that the SBA cannot properly lay claim to the retainage.

Reliance argues that the prepayment by SBA to Singleton was improper as a "prepayment to a contractor by the Government without the consent or knowledge of the surety." Reliance urges that it has a right to the retained amount because of payments made to laborers and materialmen under its payment bond.

Consequently, Reliance argues that it is "entitled to the retained fund, not as a creditor and subject to set off, but as a subrogee having the same rights to the fund as the government."

The Capital Subcontract On August 17, 1972, SBA and FAA entered into contract No. DOT FA73-RM-0203 (price $2,925,478) for modernization and expansion at the Longmont, Colorado, air traffic control center. On the same date, SBA entered into subcontract No. SB830-8(a)-73-C-001 with Capital City Construction, Inc., to do the work.

FAA reports that Capital had difficulty securing appropriate bonding but that Aetna Tnstirance Company "eventually provided Miller Act performance and payment bonds." FAA further reports that "Aetna asserted that [bonding was provided] because SBA agreed to subordinate its interest in the contract to Aetna in return for Aetna's cooperation." Nevertheless, FAA reports that it "cannot ascertain the accuracy of [Aetna's] allegation."

SBA made several advances to Capital, the unliquidatedbalance of which is $268,515.B-189183 4

FAA terminated Capital, partly for default and partly for convenience. Aetna declined to complete the job on its performance bond, but paid laborers and materialmen $691,358 on its payment bond. FAA also reports that the "In ffi alXeegA A yi~e AYES), meanwhile, asserted a $38, ax len r Wlt olding taxes not paid by Capital, and Capital's law firm asserted an attorney's lien for $22,461 in attorney's fees." FAA retains $333,532 to pay all claims relating to the contract.

SBA's position in these matters is as follows:

"SBA made substantial advance payments to both subcontractors which have not been fully repaid. SBA has made demand upon FAA for payment to SBA of the unliquidated balance of such advance payments from monies in FAA's possession which it is withholding from payments due the subcontractors. FAA has declined to make payment to SBA and has, indeed, even suggested the possibility of filing an interpleader suit to determine who is entitled to payment.

"It is our unequivocal opinion that SBA, having made advance payments of U.S.

Government funds to the subcontractors, is entitled to repayment of the unpaid balances thereof from any monies due the subcontractors in the possession of FAA and that SBA's claim takes priority over the claims of other Government agencies, sureties, and any and all other claimants.

* * * * *

–  –  –

* * * * * "With respect to SBA's claim for unliquidated advance payments made to Robert L. Singleton, it is submitted that it is wholly immaterial that such advance payments were made pursuant to modification to the subcontract between SBA and Singleton without the consent of the surety since both the payment bond (Standard Form 25-A) and the performance bond (Standard Form 25) expressly provide that the surety undertakes obligations under the contract and '* * * any and all modifications of said contract that may hereafter be made, notice of which to the Surety(ies) being hereby waived * * *' (Emphasis supplied)" "[FAA] stated * * * that the surety (Aetna) provided payment and performance bonds to the Capital City Construction Co., Inc. (an 8(a) subcontractor) 1* * * because SBA agreed to subordinate its interest in the contract to Aetna in return for Aetna's cooperation * * *' and that if Aetna could demonstrate the existence of such an agreement, it would defeat SBA's claim.

"Pursuant to Section 411 of the Small Business Investment Act of 1958, as amended, 15 U.S.C. 694b., SBA may '* * * guarantee and enter into commitments to guarantee any surety against loss, as hereinafter provided, as the result of the breach of the terms of a bid bond, payment bond, or performance bond by a principal on any contract up to $1,000,000 in amount * * *1 (Emphasis supplied). Since the contract between SBA and FAA which was subcontracted to Capital City was over twice that amount, SBA had no authority to, and could not and did not, guarantee or enter into any commitment to guarantee Aetna against loss as the result of breach of the term of any bonds upon which Aetna was the surety in connection with the contract.

B-189183 6 * * * * * "[Moreover,] it does not appear that the surety under the performance bond in this case is a 'completing surety' and acquired any rights * *

FAA's analysis is as follows:

"The [relevant] legal rules * * * derive from a quartet of Supreme Court decisions. Prairie State Bank v. United States, 164 U.S. 227 (1896), concerned a dispute between a bank which had advanced money to a contractor and the surety who completed the job under a performance bond after the contractor defaulted. The Court found that the surety's subrogation arose at the time the bond was issued, and was therefore prior to the bank's equitable lien, which arose at the time it made its advance. The Court held that the surety was entitled to the percentage of the contract price which had been retained by the Government pending the completion of the contract. Hennigensen v. U.S. Fidelity and Guaranty Co., 208 U.S. 405 (1908), expanded the Prairie. State Bank holding.

* * * * * "Read together, Prairie State Bank and Hennigensen gave sureties on either performance or payment bonds a clear preference to contract funds retained by the Government over the claims of private lenders or assignees. They did not deal with the question of whether sureties held a like preference over claims of the United States to retained funds. United States v. Munsey Trust Co., 322 U.S. 234 (1947), resolved this question in the Government's favor.

* * * * * "As Pearlman v. Reliance Insurance Co., 371 U.S. 132 (1962), makes clear, the Munsey rule is limited to cases where the Government B-189183

–  –  –

"The Comptroller General has held that when it is not possible administratively to determine conclusively the rights of all parties to retainages held by an agency, the agency holding the funds should not make payment to any of the contending parties until these rights are determined by agreement or court order (B-158142, Feb. 14, 1966).

"We believe that the Comptroller General should rely on this rule and decline to decide the cases in question. There is considerable legal uncertainty in both cases concerning the relative rights of SBA and the surety. SBA argues that as a government agency, it is entitled to set off its claim against the contractor against the retainage held by FAA, per the Munsey rule. If this argument prevails, the equitable claim of the surety to the retainage based on its payment to laborers and materialmen is unavailing.

On the other hand, SBA's functional role B-189183 8

in the transaction is that of an assignee:

SBA made a 'loan' to the contractor and the contractor 'assigned' to SBA the right to receive from FAA a certain part of the contract price. * * * Moreover, relying on the statement in Pearlman * * * that the Government has the right (if not the obligation) to pay laborers and materialmen from the retained fund, the surety could argue that equity favors doing so with respect to their subrogee in these cases. The cases would appear to turn on the question of whether the court viewed the SBA's status as a government agency or its functional role as an assignee as more significant. In a type of case in which equitable considerations are important, it is not a foregone conclusion that SBA's status would control.

"There are additional uncertainties. In the Denver case, the relative priority of SBA and IRS is problematical. Munsey and its progeny held that the Government, as an entity, may set off claims against retainages. Tax liens are among the items subject to set off.* * * Should there be insufficient money to pay the claims of both [SBA and IRS] this question would have to be resolved. Second, Aetna has asserted that SBA agreed to subordinate its interest in the contract to Aetna in return for Aetna's agreement to bond what it viewed (correctly, as it turned out) as a poor risk. If Aetna could demonstrate the existence of such an agreement, it could defeat SBA's Munsey claim, even if that claim would otherwise prevail. In the Florida case, the effect upon the parties' rights of the failure of SBA and Singleton to obtain Reliance's consent to the advance is a potential problem.

B-189183 9 "Because of these uncertainties, a decision by the Comptroller General directing FAA to pay SBA could involve this Department in double liability. Therefore, we request that you do not decide the merits of the conflicting claims for payment, but rather direct SBA to negotiate with FAA and the other parties concerning the disposition of the funds and, failing agreement, to cooperate in an interpleader action to resolve the issues."

–  –  –

In the absence of a judgment against the United States, the right of set-off as to debts owed is inherent in the United States and extends to debts owed as a result of separate and independent transactions.

As we said in Bonneville Power Administration, B-188473,

August 3, 1977, 77-2 CPD 74:

"* * * Where a person is both creditor and debtor to the Government, the accounting officers are required by law to consider both the debts and credits and set off one indebtedness against the other, and certify only the balance. * * * "This Office has held that the Government may setoff the estimated amount of claims due the United States by withholding amounts due under Government contracts. Metro Machine Corporation, B-187178, October 7, 1976, 76-2 CPD 323; Nabisco Inc., B-184506, October 29, 1975, 76-1 CPD 189. Set-off of the amount of estimated debts is authorized notwithstanding the absence of final resolution of a contract dispute underlying the debt. * * *" Although Singleton contests the validity of the $150,000 indebtedness owed to SBA, based on the record before us we do not question that indebtedness for the following reasons: (1) the record evidences the signed B-189183 10 document of Singleton's indebtedness to SBA; (2) the unsupported allegations of fraudulent inducement are contradicted by SBA's apparent position that the debt was not fraudulently induced; and (3) because Singleton insists that it will be filing suit in court over the alleged failure of SBA to honor other supposed financial commitments, it would be inappropriate for our Office to consider that the alleged SBA failure now affects the $150,000 indebtedness owed here.

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