Centron Corp. v. United States

• Citation: 585 F.2d 982
• Decision Date: 18 October 1978
• Docket Number: No. 266-76.,266-76.
• Parties: CENTRON CORPORATION v. The UNITED STATES.
• Court: Court of Federal Claims

585 F.2d 982

CENTRON CORPORATION v. The UNITED STATES.

No. 266-76.

United States Court of Claims.

October 18, 1978.

Oscar Spitz, Corpus Christi, Tex., for plaintiff. Spitz & Grossman, Corpus Christi, Tex., of counsel.

Frances L. Nunn, Washington, D. C., with whom was Asst. Atty. Gen. Barbara Allen Babcock, Washington D. C., for defendant.

Before FRIEDMAN, Chief Judge, SKELTON, Senior Judge, and KASHIWA, Judge.

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

FRIEDMAN, Chief Judge:

The question in this case is whether the Small Business Administration (SBA) validly offset, against an indebtedness to it from a contractor, Elegant Garments, Inc. (Elegant), amounts that SBA otherwise was obligated to pay to Elegant. The plaintiff, Centron Corporation (Centron), contends that it was entitled to 85 percent of the amount due from SBA to Elegant and that SBA, therefore, had no right to offset that 85 percent against Elegant's indebtedness to SBA.

The case is before us on cross-motions for summary judgment. After hearing oral argument, we conclude that the plaintiff is not entitled to recover. We therefore deny the plaintiff's motion for summary judgment and grant that of the defendant.

I.

The United States has a program under which certain portions of government procurement contracts are set aside for minority contractors. See generally SBA, 8(a) Business Development Program (1976); SBA, Section 8(a) Program Standard Operating Procedure (1976). Such procurement is accomplished by the contracting agency hiring the SBA as the prime contractor; the latter then subcontracts with the minority contractor to perform the contract. The SBA frequently lends money and provides other assistance to the subcontractor to help it in performing the contract; sometimes it pays the subcontractor a higher price than that under its prime contract with the procuring agency. See 15 U.S.C. §§ 636(b), 636(a), 637(a) (1976). The procuring agency makes payments under the contract to SBA, which remits the payments to the subcontractor after deducting any amounts SBA has advanced to it.

That procedure was followed in this case. In September 1968, the United States Army Procurement Supply Agency (Supply Agency) entered into a contract with SBA under which, pursuant to SBA's Minority Set-Aside Program, SBA was to supply bandoleers for 40 mm. cartridges. Shortly before, SBA had entered into a subcontract with Elegant, an ethnic minority-owned corporation, to perform the prime contract.¹

Armed Services Procurement Regulations (ASPR) 1-1701, 1702 (1969) provide that all contracts for $100,000 or more shall include a Value Engineering Incentive Clause, under which a contractor shares in any cost reductions that result from his suggestion. The contractor receives payments covering all contracts for which the suggestion produces savings, including those with other contractors.

In August 1969 the Supply Agency solicited bids for another contract to supply 40 mm. bandoleers. Centron submitted a bid and, believing that it would be the successful bidder, also submitted a Value Engineering Change Proposal (Change Proposal) as the procurement regulation contemplated. It suggested that uncapped snap fasteners be used instead of the capped fasteners that the Supply Agency had specified for the additional bandoleers, and it stated that this change would produce substantial savings in the cost of the bandoleers.

The contract for the additional bandoleers, however, was awarded to Elegant (again through the SBA) which, under ASPR 1-1701, was the only person who could submit a Change Proposal. On September 24, 1969, following the award of the contract to Elegant, Centron and Elegant entered into a contract under which:

(1) Elegant agreed to submit to the Supply Agency a Change Proposal "using all of the technical data and specifications furnished to it by CENTRON ...", and Centron agreed to furnish to Elegant "all necessary documents, drawings, specifications and other necessary instruments required to submit" the Change Proposal to the Supply Agency.

(2) In consideration of the "assignment" of the Change Proposal, Elegant agreed "to pay to CENTRON Eighty-five Per Cent (85%) of all funds realized therefrom immediately upon receipt of such funds from the United States of America."

(3) Centron and Elegant agreed that "some form of joint escrow arrangement will be set up to the end that moneys to be received from the United States of America on the Value Engineering Change Proposal" would be paid 85 percent to Centron and 15 percent to Elegant. Centron agreed to pay "all expenses incurred in the processing" of the Change Proposal.

Centron assigned the Change Proposal to Elegant, and Elegant submitted it to the Supply Agency. The latter accepted the proposal and agreed to pay Elegant a stipulated percentage of the savings. Centron sent copies of all pertinent documents relating to the agreement between itself and Elegant to SBA "as a Notice of Assignment from Elegant Garments Incorporated to Centron Corporation of 85% of all funds to be received from the United States of America" on the Change Proposal and as "a formal request that 85% of the monies paid by the United States on account of" the Change Proposal "be paid directly to" Centron. SBA replied that it would not do so, since it was not a party to the contract between Centron and Elegant, and "the matter is a private dispute between the parties and SBA presently has no authority to escrow funds or suspend payment of funds to Elegant Garments."

Elegant failed to pay Centron 85 percent of the amounts it received from SBA under the Change Proposal or to establish the escrow agreement under the contract. Centron then brought suit in the United States District Court for the Northern District of Illinois against Elegant, various individuals, and SBA. Centron Corp. v. Elegant Garments, Inc., No. 70C 1919. The suit was settled in August 1970 on the basis of a stipulation entered into by all of the parties "except the SMALL BUSINESS ADMINISTRATION," which the court adopted as its findings and judgment.

The stipulation stated that Centron was entitled to receive 85 percent and Elegant 15 percent "of all moneys realized or to be received by ELEGANT GARMENTS, INC., from the UNITED STATES OF AMERICA and from SMALL BUSINESS ADMINISTRATION" relating to the Change Proposal. It provided for the establishment of an escrow agreement under which Elegant was to instruct SBA to make all payments arising out of the Change Proposal to the escrowee, and the latter was to pay 85 percent of those amounts to Centron and 15 percent to Elegant. The escrow was established, and copies of the court judgment providing for the escrow and various papers relating thereto were furnished to SBA. In 1970 and 1971 SBA paid the escrowee $69,045.51, which it had received from the Supply Agency under the Change Proposal, and the escrowee in turn remitted 85 percent of that amount to Centron and 15 percent to Elegant.

In 1972 the Supply Agency paid additional amounts to SBA under the Change Proposal that covered other contracts for the procurement of bandoleers. SBA, however, did not remit these moneys either to the escrowee or to Elegant. Instead, it offset them against an indebtedness to it of $40,000, reflected in an overdue promissory note, that Elegant had incurred in connection with another procurement contract, for which SBA had provided financial assistance. The Supply Agency, SBA, and Elegant also settled another claim for moneys under the Change Proposal for $4,000, which SBA paid to Elegant.

Centron contends that SBA was entitled to offset only 15 percent of the amounts it received from the Supply Agency under the Change Proposal and that it could not offset the remaining 85 percent against Elegant's indebtedness to it that arose out of a different transaction because Centron rather than Elegant had the right to receive those moneys.

II.

"The government has the same right `which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him.'" United States v. Munsey Trust Co., 332 U.S. 234, 239, 67 S.Ct. 1599, 1602, 91 L.Ed. 2022 (1947); Project Map, Inc. v. United States, 486 F.2d 1375, 203 Ct.Cl. 52 (1973); Trinity Universal Ins. Co. v. United States, 382 F.2d 317, 320 (5th Cir.1967), cert. denied, 390 U.S. 906, 88 S.Ct. 820, 19 L.Ed.2d 873 (1968); 28 U.S.C. §§ 1503, 2508, 31 U.S.C. § 227 (1970). The "established right of set-off" permits the government "to set-off against progress payments ... a federal claim on another contract (with the same contractor) which is believed in good faith, but mistakenly, to be valid." William Green Constr. Co. v. United States, 477 F.2d 930, 936, 201 Ct.Cl. 616, 625 (1973), cert. denied, 417 U.S. 909, 94 S.Ct. 2606, 41 L.Ed.2d 213 (1974).

Under this principle, if Elegant without participation by Centron had developed and submitted the Change Proposal, SBA unquestionably could have offset against Elegant's indebtedness to it under another contract any amounts it owed Elegant under the Change Proposal. Indeed, Centron recognizes this by its concession that SBA properly offset against Elegant's indebtedness to SBA 15 percent of the amounts SBA received under the Change Proposal. The question is whether the fact that Elegant agreed to pay Centron 85 percent of the amounts it received from the United States under the Change Proposal barred SBA from offsetting these amounts against Elegant's indebtedness to it. We answer that question negatively.

A. Centron was not a party to any contract with the United States or its agencies. The agreement covering the Change Proposal was solely between Elegant and the government and was a part of, and dependent upon, the subcontract between those two parties. Indeed, under the Armed Services Procurement Regulation only a party to an existing...