UNITED STATES CLAIMS COURT
CHARLES M. TATELBAUM
ASSIGNEE FOR THE BENEFIT OF THE
CREDITORS OF A. HOEN & CO., INC.
v.
THE UNITED STATES
No. 29-85C
10 Cl. Ct. 207
Alan M. Grochal, Baltimore, Maryland, attorney of record for
plaintiff. Thomas C. Wheeler, of counsel.
David B. Stinson, Washington, D.C., with whom was Assistant
Attorney General Richard K. Willard, for defendant.
OPINION
YOCK, Judge.
This contract case involves an appeal from a decision of the
Government Printing Office ("GPO"), Board of Contract Appeals
(hereinafter the Board) 1 sustaining the Government Printing
Office's setoff of amounts owed by the insolvent contractor to
GPO on two defaulted contracts against amounts which GPO owed the
debtor on two unrelated contracts. On cross-motions for summary
judgment, the parties seek review of the Board's decision in
accordance with the standards of the Wunderlich Act, 41 U.S.C. ��
321, 322 (1982).
For reasons outlined herein, the Board's decision is affirmed.
Facts
Plaintiff Charles M. Tatelbaum is Assignee for the Benefit of the
Creditors of A. Hoen & Company, Inc. ("Hoen"), an insolvent
Maryland corporation. The GPO awarded Hoen five contracts during
1979 and 1980, four of which are relevant here. In all of these
contracts, GPO reserved the right to assess Hoen for any excess
costs of reprocurement in the event of Hoen's termination for
default.
Hoen had completed work on two of the contracts and had partially
completed work on the other two when it ceased its business
operations on April 10, 1981. Five days later, Hoen executed an
assignment for the benefit of its creditors, and on April 16,
1981, the Circuit Court of Baltimore City declared Hoen insolvent
and assumed jurisdiction over the Hoen estate, appointing
plaintiff Charles M. Tatelbaum and Edward F. Shea, Jr., as
assignees. 2
In accordance with the Default Clause of each contract, and upon
learning that Hoen had ceased business operations, GPO terminated
Hoen's contracts identified as Programs B 312-S, B 321-S, and B
365-M, for default, due to Hoen's inability to complete
performance. GPO notified Hoen of its termination for default by
letter dated April 15, 1981. The letter also informed Hoen that,
pursuant to contract provision, the company would be responsible
for any excess costs that arose due to reprocurement on these
contracts because of the default.
Of the four contracts at issue, two (B 315-S and B-365-M) had
been completed by the termination date and the GPO then owed Hoen
some $24,393.31 and $9,637.48, respectively, on the contracts.
Of the two partially completed contracts (B 312-S and B 321-S),
GPO then owed Hoen some $53,304.57 and $11,125.09 respectively.
On April 1, 1982, the GPO assessed against Hoen $122,702.38 in
excess reprocurement costs relating to contracts B 312-S and B
321-S. The GPO assessed $77,061.86 in reprocurement costs
against the B 312-S contract, and $45,640.52 against the B 321-S
contract. GPO did not assess any reprocurement costs against
contract B 365-M. Hoen was advised that GPO was setting off
these costs against $98,460.45 due and owing Hoen for performance
under all four contracts.
Plaintiff sought review of the setoff with the contracting
officer, which was denied on September 20, 1982. Subsequently,
the plaintiff appealed the contracting officer's decision to the
GPO Board of Contract Appeals, arguing that the GPO could not set
off against monies due and owing Hoen under Programs B 315-S and
B 365-M debts arising from Programs B 312-S and B 321-S.
Plaintiff conceded that GPO could recoup reprocurement costs of
each defaulted contract from amounts that the company was owed on
each defaulted contract, but argued that it was improper for GPO
to extend this setoff right to separate, completed contracts that
were not in default. Plaintiff claimed it was owed $34,030.79
under Programs B 315-S and B 365-M, the two contracts that had
been completed and that were not in default.
Plaintiff's complaint, filed February 14, 1985, seeks this
Court's review of the October 21, 1983, decision of the Board
which denied plaintiff's claim. Plaintiff initially sought to
obtain review of the Board's decision before the United States
Court of Appeals for the Federal Circuit. By decision dated
December 11, 1984, Tatelbaum v. United States, 749 F.2d 729 (Fed.
Cir. 1984), the United States Court of Appeals for the Federal
Circuit ruled that, since the GPO was not part of the Executive
Branch, the Contract Disputes Act of 1978, 41 U.S.C. � 601 et
seq. (1982), did not apply to decisions by the GPO Board of
Contract Appeals, and that the court of appeals, therefore,
lacked jurisdiction over Mr. Tatelbaum's attempted appeal. The
case was ordered transferred to this Court. Mr. Tatelbaum's
complaint invokes the jurisdiction of this Court pursuant to 28
U.S.C. � 1491 and the Wunderlich Act, 41 U.S.C. �� 321-22. Both
parties have filed motions for summary judgment.
Discussion
It is the duty of this Court, in reviewing a decision under the
standards of the Wunderlich Act, to determine whether the Board's
findings of fact and conclusions of law are supported by
substantial evidence and are correct as a matter of law. Dravo
Corp. v. United States, 219 Ct. Cl. 416, 423, 594 F.2d 842, 845
(1979); Entwistle Co. v. United States, 6 Cl. Ct. 281, 286
(1984).
Before responding to the plaintiff's contentions, it is important
to point out that judicial review of administrative factual
determinations under Wunderlich standards is narrow and limited.
Roflan Co. v. United States, 7 Cl. Ct. 242, 248 (1985); Iconco v.
United States, 6 Cl. Ct. 149, 151 (1984), aff'd mem., 770 F.2d
179 (Fed. Cir. 1985); Koppers Co. v. United States, 186 Ct. Cl.
142, 148, 405 F.2d 554, 557 (1968). The Board's findings of fact
are presumptively correct. Arundel Corp. v. United States, 207
Ct. Cl. 84, 99, 515 F.2d 1116, 1124 (1975). Plaintiff carries a
heavy burden in seeking to set aside factual determinations made
by a Board. Donald M. Drake Co. v. United States, 194 Ct. Cl.
549, 553, 439 F.2d 169, 171 (1971). Questions of law decided by
the Board, on the other hand, are not binding on this Court nor
entitled to finality. Astro-Space Laboratories, Inc. v. United
States, 200 Ct. Cl. 282, 293, 470 F.2d 1003, 1008-09 (1972).
The plaintiff argues that the decision of the GPO Board of
Contract Appeals is wrong as a matter of law. Specifically, the
plaintiff states the issue in the case to be whether the United
States may recover reprocurement costs for contracts terminated
for default from an insolvent contractor by offsetting those
reprocurement costs from amounts due the contractor under
unrelated contracts. The plaintiff does not contest the
Government's right to set off the reprocurement costs of each
defaulted contract from amounts that Hoen was owed on each
defaulted contract, but it argues strenuously that the GPO may
not extend its setoff rights to separate, completed contracts
that were not in default. In this connection, plaintiff argues
four subpoints: first, that state law and federal bankruptcy law
preclude the United States from setting off plaintiff's
obligations against those of the United States; second, that the
prospective reprocurement costs were not sufficiently liquidated
at the time of Hoen's assignment for the benefit of its creditors
to allow a setoff; third, that the requisite mutuality between
parties to a setoff is missing in this case; and fourth, that
equitable considerations require this setoff to be restricted or
eliminated altogether. Unfortunately for the plaintiff, however,
this Court does not agree with any of its legal arguments, and,
consequently, must affirm the Board's decision.
Generally, the Government has the right to set off any claim it
has against a contractor through the withholding of funds that
are otherwise payable to the contractor. This right is inherent
in the United States and grounded in the common law right of
every creditor to apply the monies of his debtor in his hands to
the extinguishment of the amounts due him from the debtor. Barry
v. United States, 229 U.S. 47 (1913); McKnight v. United States,
98 U.S. 179 (1878); Gratiot v. United States, 40 U.S. 336 (1841).
Furthermore, the Government's right to set off a contractor's
debts extends to monies owed as a result of separate and
independent contract transactions. United States v. Munsey Trust
Co., 332 U.S. 234, 239-40 (1947); Centron Corp. v. United States,
218 Ct. Cl. 1, 7, 585 F.2d 982, 985 (1978); Project Map, Inc. v.
United States, 203 Ct. Cl. 52, 54-55, 486 F.2d 1375, 1376 (1973);
59 Comp. Gen. 143 (1979); 2 Comp. Gen, 479 (1923).
A. State or Federal Statutory Exceptions To The General Right Of
Setoff
The plaintiff asserts that statutory exceptions preclude setoff
in this case. Hoen is an insolvent Maryland company and its
assets are under the jurisdiction of a state court that has
appointed an assignee for the benefit of the company's creditors.
The plaintiff argues that GPO, by withholding payments owed to
Hoen for work completed on all four contracts in question, will
receive a larger payment than other similarly situated creditors.
This larger payment, plaintiff asserts, will result in a
preferential transfer to the United States which should be set
aside or avoided by the assignee under Maryland law. The
plaintiff's argument fails, however, because state law is
superseded by the rights of the Federal Government specifically
established by federal law and federal court decisions. Sola
Electric Co. v. Jefferson Electric Co., 317 U.S. 173, 176 (1942);
Keydata Corp. v. United States, 205 Ct. Cl. 467, 482-83, 504 F.2d
1115, 1123-24 (1974); United States v. Somerville, 324 F.2d 712,
714-15 (3d Cir. 1943), cert. denied, 376 U.S. 909 (1944).
The right of the United States to set off its debts against those
of a creditor is firmly established in both case law and
statutory authorization. See United States v. Munsey Trust Co.,
332 U.S. 234 (1947); Project Map, Inc. v. United States, 203 Ct.
Cl. 52, 486 F.2d 1375 (1973); United States v. Brunner, 282 F.2d
535 (10th Cir. 1960); 7 Comp. Gen. 576 (1928). See also 31 U.S.C.
� 71 (1976) (current version at 31 U.S.C. � 3702 (1982)); 31
U.S.C. � 227 (1976) (current version at 31 U.S.C. � 3728 (1982));
31 U.S.C. � 951-53 (1976) (current version at 31 U.S.C. �� 3701,
3711, 3717, 3718 (1982)); and 28 U.S.C. � 1503 (1982). Hoen was
declared insolvent and its assets were assigned for the benefit
of creditors under Maryland law. Federal bankruptcy law thus has
no direct application here. Since the United States' authority
to set off supersedes any state law that would impinge upon this
right, GPO could set off reprocurement expenses due to Hoen's
default upon two partially completed contracts as if the
insolvency and assignment for the benefit for creditors had never
taken place.
Under federal bankruptcy law, the United States' broad rights of
setoff are not limited by insolvency. When a debtor is adjudged
a bankrupt and a trustee is appointed to administer his estate,
the estate assets pass to the trustee subject to the equitable
right of setoff then existing. A debtor of the bankrupt may set
off debts of the insolvent company rather than pay off what he
owes and attempt to collect from the estate as a general
creditor. 7 Comp. Gen. 576, 578 (1928). While Hoen did not file
for bankruptcy, he did execute an assignment for the benefit of
its creditors pursuant to applicable Maryland law. The plaintiff
has noted the the United States bankruptcy code has been largely
incorporated into Maryland insolvency law. Thus, the analogy to
federal bankruptcy law is appropriate and calls for the same
result. Plaintiff has cited this Court to no state or federal
law that would preclude the Government's general right to setoff
under the factual circumstances herein present.
B. Liquidation of the United States' Claim For Reprocurement
Costs
Next, the plaintiff argues that the Government's claim was not
liquidated as of April 16, 1981, the date that the Maryland court
asserted jurisdiction over the Hoen estate, because the excess
costs for reprocurement were not ascertained until approximately
one year later. Plaintiff asserts that since GPO's claims were
unliquidated by April 16, 1985, GPO lost its ability to set them
off against amounts owing at that time to Hoen for completed work
on unrelated contracts.
The power of the United States to exercise its right to setoff,
as noted earlier, supersedes any state insolvency procedure. GPO
therefore did not have to liquidate its claim for procurement
costs strictly by April 16, 1981 or lose its right to set them
off.
It is an established rule that the United States has a provable
claim against a bankrupt for the excess cost of reprocurement at
the time the bankrupt files its petition for bankruptcy. United
States v. Brunner, 282 F.2d 535 (10th Cir. 1960). In Brunner, the
United States terminated a manufacturing contract for "inability
to perform" in view of the commencement of bankruptcy procedures
by the contractor. Here, the United States terminated Hoen's
contract for "inability to perform" by letter dated April 15,
1981. Hoen had ceased business operations on April 10, 1981, and
executed its assignment for the benefit of its creditors some
five days later.
In Brunner, the Court held that bankruptcy was an anticipatory
breach of an executory contract and that liability for the
resulting excess costs of reprocurement came into existence at
the time of the breach. This liability accrued in spite of the
fact that actual reprocurement did not take place until later and
only then were the actual reprocurement amounts known. The
bankruptcy in Brunner parallels the cessation of business
operations and assignment for benefit of creditors in this case.
Both constitute anticipatory breaches of contracts and in both
cases the Government terminated for default due to the
contractors obvious inability to finish performance. In both
situations, breaches of contracts with the United States created
liability for reprocurement costs at the time of the breach.
Thus, the fact that the United States could not ascertain the
exact amount of its claim for reprocurement costs from Hoen until
later is and was irrevelant. Therefore, the plaintiff's
liquidity argument fails.
C. Mutuality Of Parties
The plaintiff also argues that Government setoff is inappropriate
under the circumstances present in this case because there is no
mutuality of parties. Plaintiff asserts that GPO owed Hoen some
$34,000 under the two unrelated contracts at the time of the
insolvency. However, by the time GPO defaulted Hoen on the two
partially completed contracts, Hoen had executed an assignment
for the benefit of its creditors and had been declared insolvent
by the Circuit Court for Baltimore City, which had named Mr.
Tatelbaum as assignee of Hoen. Thus, according to the plaintiff,
Mr. Tatelbaum is not the same party as Hoen, and, therefore, the
requisite mutuality of parties is not present which might
otherwise allow setoff on these various contract debts.
Unfortunately for the plaintiff, however, its argument is flawed.
Maryland case law holds that an assignee takes an insolvent's
property in the same condition and with the same burdens under
which it was held by the insolvent. See Dowler v. Cushwa, 27 Md.
354, 367 (1867). Furthermore, applying federal bankruptcy
standards, a trustee in bankruptcy takes property of the bankrupt
subject to the identical equities and liens as the person or
corporation out of whose possession it is taken. 7 Comp. Gen.
576, 578 (1928). Thus, the plaintiff's argument on mutuality
fails. Mutuality of parties is present in this case.
D. Equity Considerations
Finally, the plaintiff has asserted two equitable arguments that,
in its view, should preclude the Government from its general
right of setoff in this case.
The plaintiff first argues that GPO has unclean hands because it
waited for some twelve months to pay the Government's debt that
was due on the completed contracts in order to create the
possibility of an offset. The simple answer to this argument,
however, is that the GPO has the legal right to set off debts.
There is nothing unclean about delaying a reasonable time until
the extent of the mutual debts are known and fixed, in order to
effect the legal right to setoff that it had. For the Government
not to do so would have been legally impermissible, under the
statutes of the United States.
Next, the plaintiff contends that the Government should be
estopped from its setoff here, because the GPO contract
specialist handling the contracts at issue wrote the plaintiff a
letter dated June 9, 1981, indicating that he would detain
$75,000 of the funds due Hoen to cover any offset and that the
balance would be paid shortly to the assignee. Since the
contract specialist never paid the "balance" to Hoen in this
case, the plaintiff believes that the Government should be
estopped to now assert its right to setoff because the plaintiff
relied on these assurances of payment.
Estoppel, however, would be inappropriate under these
circumstances because no Government employee has the authority to
act contrary to the law and the Government's best interests. See
Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380 (1947).
Furthermore, under the circumstances here present, the plaintiff
could not have reasonably relied on the assurances given in the
letter. Thus, plaintiff's equitable arguments also fail to
persuade this Court.
In summary, there is no factual dispute here between the parties;
the plaintiff concedes it is liable for the reprocurement costs
on Contracts B 312-S and B 321-S in the amount of $122,782.38 and
the defendant concedes it owes Hoen $98,460.45 for work
completed. The only issue is the propriety of setting off
against these reprocurement costs that portion of the money owed
to Hoen applicable to work performed on contracts unrelated to
those on which the company defaulted. The determination of this
issue is a question of law. The GPO Board of Contract Appeals
correctly determined that the United States could recover
reprocurement costs for contracts terminated for default from an
insolvent contractor by deducting these costs from amounts due
the contractor under those unrelated contracts. The Board's
decision is not arbitrary, capricious, is supported by
substantial evidence, and is correct as a matter of law.
Consequently, this Court determines that the Board's decision
should be affirmed.
CONCLUSION
For the foregoing reasons, the defendant's motion for summary
judgment is granted, the plaintiff's cross-motion for summary
judgment is denied, and the Court will dismiss the petition.
Each party will bear its own costs.
July 10, 1986
_______________
1 Panel 9-82 (October 21, 1983).
2 Edward F. Shea, Jr., subsequently resigned leaving Charles M.
Tatelbaum as the remaining assignee.