Aetna Insurance Company v. United States, 371-70.

Decision Date17 March 1972
Docket NumberNo. 371-70.,371-70.
Citation197 Ct. Cl. 713,456 F.2d 773
CourtU.S. Claims Court

Edward Gallagher, Washington, D. C., attorney of record, for plaintiff.

Ira Mark Bloom, Washington, D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant; Philip R. Miller and Joseph Kovner, Washington, D. C., of counsel.

Before COWEN, Chief Judge, LARAMORE, Senior Judge, and DAVIS, COLLINS, SKELTON, NICHOLS, and KASHIWA, Judges.


COWEN, Chief Judge:

By the parties' cross-motions for summary judgment, we are called upon to decide again whether the right of the United States to set off the unpaid contract balance against taxes owed it by a Government contractor is superior to a claim to the same contract retainage by a Miller Act1 surety under its payment bond.

The material facts are not in dispute. Allied Electrical Company, Inc., hereinafter Allied, entered into a contract dated February 11, 1965, with the General Services Administration to provide certain electrical work at Howard University, Washington, D. C. Plaintiff Aetna Insurance Company was the surety upon the performance and payment bonds provided by Allied pursuant to Miller Act provisions.

The date of substantial completion under the contract was established by the contracting officer as October 4, 1966, but this date was extended by extensions of time to January 16, 1967. On October 10, 1967, a major supplier left unpaid by Allied obtained a default judgment against the contractor in the amount of $18,525.39. On April 19, 1968, the Internal Revenue Service served a notice of levy upon the General Services Administration for taxes, penalties, and interest owed to the United States by Allied in an amount finally determined to be $14,130.07. Thereafter, plaintiff paid the default judgment, taking an assignment of the supplier's claim against Allied,2 and requested the General Services Administration to pay over the remaining balance under its contract with Allied.3 Plaintiff was advised, however, that the matter was being referred to the General Accounting Office for settlement because of the outstanding notice of levy. The General Accounting Office denied plaintiff's claim, setting off the remaining contract balance against the unpaid tax liability. Plaintiff requested reconsideration, and the Comptroller General affirmed the setoff by letter dated July 16, 1970.

It should be noted at the outset that plaintiff does not ask us to overrule our decision in Barrett v. United States, 367 F.2d 834, 177 Ct.Cl. 380 (1966). The dispute over contract retainages in Barrett was between a Miller Act payment bond surety, which had paid the claims of laborers and materialmen against their contractor, and the United States, which had set off against the retainages an amount for tax deficiencies assessed against the contractor. We held that the surety's claim was subordinate and inferior to the right of the United States to set off the amount of taxes owed to it by the contractor. The touchstone in Barrett was the Supreme Court's decision in United States v. Munsey Trust Co., 332 U.S. 234, 67 S.Ct. 1599, 91 L.Ed. 2022 (1947), which permitted the Government to set off an amount owed to it by its contractor against retainages claimed by the Miller Act surety under its payment bond. In the course of that opinion, however, the Court suggested a different outcome where the surety completed the Government's contract pursuant to a performance bond.

Later cases, relying on Munsey Trust, have held that a Miller Act surety who completes the contract on default of the contractor is entitled to the contract retainages in the hands of the Government, free from setoff for taxes owed by the contractor. However, each of these decisions reaffirmed the Munsey rule in situations where the Government's right of setoff is challenged by the surety under its payment bond. See Security Insurance Co. v. United States, 428 F.2d 838, 192 Ct.Cl. 754 (1970); Trinity Universal Insurance Co. v. United States, 382 F.2d 317 (5th Cir. 1967); cert. denied 390 U.S. 906, 88 S.Ct. 820, 19 L.Ed.2d 873 (1968); Aetna Casualty and Surety Co. v. United States, 435 F.2d 1082 (5th Cir. 1970).

It is plaintiff's principal contention here that the distinction made in these cases between the priority rights of a performance bond surety and those of a payment bond surety is no longer valid in light of the enactment into law of the Federal Tax Lien Act of 1966.4 Plaintiff says that the language of section 6323 of the Internal Revenue Code of 1954,5 as amended by the Federal Tax Lien Act of 1966, gives sureties upon both payment and performance bonds, without distinction, priority over a federal tax lien.6 Section 6323(a) gives a holder of a security interest priority over the tax lien, while section 6323(h)(1) broadly defines a security interest to mean "any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability." More specifically, section 6323(c) (1) provides that security interests in qualified property arising from obligatory disbursement agreements, entered into before the tax lien is filed, are protected against the lien even though funds are advanced under the agreement after the filing of the tax lien. Where the obligatory disbursement agreement is a surety contract ensuring the performance of a contract between the taxpayer and another person, section 6323(c) (4) (C) (i) provides that the term qualified property includes "the proceeds of the contract the performance of which was ensured."

Relying heavily on the above-cited provisions of the statute, plaintiff argues that the Munsey Trust rule has been rendered inoperative by the enactment of the Federal Tax Lien Act of 1966 and that the application of the Munsey rule in this case would defeat the broad remedial purpose Congress had in mind when the law was passed.

Defendant agrees that the Federal Tax Lien Act of 1966 did indeed change the prior law with respect to the priority of the federal tax lien over other specified security interests. However, defendant maintains that the Act was concerned only with the priority to be accorded the federal tax lien and was not intended to and did not affect the ruling in the Munsey Trust case with respect to the Government's right of setoff.

We agree with defendant. The fundamental difficulty with plaintiff's argument is that the plain words of amended section 6323 grant priority only in terms of the lien imposed by section 6321. The statute does not purport to cover the situation at hand where the United States seeks to set off against taxes owed to it by its contractor funds remaining unpaid under the contract.

Plaintiff asserts that a resort to the legislative history of the Federal Tax Lien Act of 1966 is neither necessary nor proper to a decision in this case, and that the plain terms of the Act should persuade us to render judgment in its favor. As an alternative argument, however, plaintiff maintains that, while the statute may speak only of tax liens, it was the congressional policy, as shown by the legislative history surrounding the passage of the law, to grant a payment bond surety priority over the Government's right of setoff in the factual circumstances involved in this case. We have examined the legislative history relied on by plaintiff, and can find no support therein for its position. Rather than revealing the policy asserted by plaintiff, the historical discussion is restricted to situations involving the tax lien in competition with the interests of other creditors. Hearings before the House Committee on Ways and Means on H.R. 11256 and H.R. 11290, 89th Cong., 2d Sess. 37 and 38 (1966); H. Rep.No.1884, 89th Cong., 2d Sess. 9 (1966); S.Rep.No.1708, 89th Cong., 2d Sess. 9 (1966), U.S.Code Cong. & Admin.News, p. 3722.

Also damaging to plaintiff's position is the following statement contained in the Treasury Department's technical explanation of that part of the proposed act dealing with the protection of surety companies making payments under a bond entered into before notice of a lien is filed:

Finally, nothing in this bill is intended to reverse U. S. v. Munsey Trust Co. (1947) 332 U.S. 234 67 S.Ct. 1599, 91 L.Ed. 2022 which held that the United States may set off amounts due it for taxes against amounts owned sic by the United States to the taxpayer under a contract. Hearings before the House Committee on Ways and Means, supra, at 48.

This written expression of the views of the Treasury Department was made a part of and attached to a written statement submitted by the Assistant Secretary of the Treasury at the hearing held by the House Committee on Ways and Means on March 2, 1966. The statement was made a part of the record and ordered to be printed. When the bill was favorably reported out by the House Ways and Means Committee and by the Senate Finance Committee, respectively, it was noted that the Treasury Department had urged the adoption of the bill. H.Rep.No.1884 at 3; S.Rep.No.1708 at 3. It would certainly be extraordinary for both committees to represent to Congress that the Treasury urged the adoption of the bill if, contrary to the views expressed by the Assistant Secretary of the Treasury, there was any intent on the part of either committee to reverse the holding in Munsey Trust.

There is yet another aspect of the legislative history which militates strongly against plaintiff's argument as to the congressional intent. It is clear from the same committee report that Congress intended that several of the provisions of the bill would change the existing law as set forth in certain decisions of the Supreme Court. Where this was the congressional purpose, the report stated that designated sections changed the results reached in such decisions,...

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