Central Bank v. United States/Opinion of the Court

This grant of certiorari requires us to construe the provision of the Assignment of Claims Act of 1940, 54 Stat. 1029, 31 U.S.C. § 203, 31 U.S.C.A. § 203, which provides:

'Any contract entered into by the War Department or the Navy     Department may provide that payments to an assignee of any      claim arising under such contract shall not be subject to      reduction or set-off, and if it is so provided in such      contract, such payments shall not be subject to reduction or      set-off for any indebtedness of the assignor to the United      States arising independently of such contract.'

The facts of the case are not in dispute. The Graham Ship Repair Company, a California partnership, entered into a contract for ship repair work with the Navy Department on December 30, 1944. As permitted by the Assignment of Claims Act of 1940, the contract authorized the Graham Company to assign the proceeds of the contract to a bank and payments to the assignee bank were not to be 'subject to reduction or set off for any indebtedness of the Contractor to the Government arising independently of this contract.'

After the contract had been made, the Graham Company arranged with petitioner, a California banking corporation, for the financing of the ship repair work. As security for the funds to be advanced, Graham assigned the proceeds payable under the contract to petitioner. This assignment was made on January 31, 1945. The Contracting Officer, Bureau of Ships, Navy Department, the Disbursing Officer and the General Accounting Office were duly notified of the assignment as required by the Act.

Pursuant to the assignment, the Graham Company received substantial sums of money from petitioner for use in performing the contract. During the course of performance Graham failed to remit to the Collector of Internal Revenue $453,469.55 in withholding taxes, and $11,462.91 in federal unemployment taxes, which it had withheld, pursuant to §§ 1401 and 1622 of the Internal Revenue Code, 26 U.S.C.A. §§ 1401, 1622, from the salaries and wages of its employees who were engaged in work called for by the Navy contract. Instead of remitting these sums to the Collector, Graham had converted them to its own use. Because of this dereliction the contract was terminated by the Navy on March 31, 1946, and the individuals of the Graham partnership pleaded guilty to an indictment for willful attempt to evade the payment of the withheld taxes.

At the time the contract was terminated, Graham's obligation to the Government for the unpaid withholding taxes, with interest and penalties, aggregated $616,750.95. At that time the sum of $110,966.08 was due Graham from the Government for work performed under the contract. Also at that time Graham was indebted to petitioner in an amount in excess of $110,966.08 for advances made by petitioner pursuant to the assignment.

Petitioner, as assignee, filed a claim for the balance due from the Government under the contract. The Commissioner of Internal Revenue also claimed that amount. The Comptroller General ruled that the $110,966.08 was a proper set-off against Graham's tax indebtedness and accordingly reduced such indebtedness to $415,018.17.

Thereafter petitioner brought this suit in the Court of Claims. That court held that the set-off made by the Comptroller General was proper because the tax deductions withheld were 'not entirely independent of such contract', Central Bank v. United States, Ct.Cl., 105 F.Supp. 992, 994, and that petitioner was therefore not entitled to recover under the assignment.

Prior to 1940, an assignment such as Graham made to petitioner would have been of no effect as against the United States. Under the Anti-Assignment Statutes, R.S. §§ 3477 and 3737, while the assignment might in some circumstances have been good as between the assignor and assignee, Martin v. National Surety Co., 300 U.S. 588, 57 S.Ct. 531, 81 L.Ed. 822, it could not operate to the detriment of rights of the United States. Any set-off which the United States had against an assignor would have been effective against the assignee.

The Assignment of Claims Act of 1940, amending the Anti-Assignment Statutes, validated the assignment of moneys due or to become due under any government contract if the assignment were made to a financing institution. The Act authorized the War and Navy Departments to limit the Government's previous rights of set-off. See R.S. §§ 3477, 3737, as amended 31 U.S.C.A. § 203, 41 U.S.C.A. § 15. It provided, see 31 U.S.C. § 203, 31 U.S.C.A. § 203, supra, p. 1, 'that payments to an assignee of any claim arising under such contract shall not be subject to reduction or set-off'.

The Assignment of Claims Act of 1940 was evidently designed to assist in the national defense program through facilitating the financing of defense contracts by limiting the Government's power to reduce properly assigned payments. Borrowers were not to be penalized in security because one contracting party was the Government. Contractors might well have obligations to the United States not imposed by the contract from which the payments flowed, as for example the contractor's income tax for prior earnings under the contract. The taxes here involved are another good illustration of the dangers to lenders.

The clause in question which prohibits set-offs for 'any indebtedness of the assignor to the United States arising independently of such contract,' was embodied in an amendment introduced by Senator Barkley during debate on the Act. In proposing the amendment, the Senator stated:

'Mr. President, the amendment merely provides that when a     contractor, in order to obtain money so that he may perform      his contract with the Government under the defense program,      assigns his contract to a bank or trust company in order to      get money with which to proceed with the work, it shall not      be permissible to offset against the claim or contract later      an indebtedness which the contractor may owe the Government      on account of some other contract or some other situation. *     *  * '

Otherwise,

' * *  * the Government could come in and assert a claim      against the contractor on account of something else which had      no relationship whatever to the contract and the defense      program.'

'The assignee knew that the contractor would be required to     withhold and pay taxes to the defendant. The obligation of     the contractor for the taxes in question arose before the      partners converted such taxes to their own use and such      obligation was therefore directly associated with the      contract.

'In order to be independent, as we think that term was used     and intended by the Assignment of Claims Act, the      indebtedness must arise irrespective of, exclusive of, and      separate from the contract, and must have no direct relation      with such contract.'

To support its position, the words of United States v. Munsey Trust Co. were relied upon:

'(One) is not compelled to lessen his own chance of     recovering what is due him by setting up a fund undiminished      by his claim, so that others may share it with him.' 332 U.S.      234, 240, 67 S.Ct. 1599, 1602, 91 L.Ed. 2022.

The Munsey case is inapplicable. It turns on the ability of the Government to reimburse itself ahead of a surety for sums expended to pay laborers out of funds withheld by the United States from the surety's principal. No problem of assignment was involved and we held the Government could set off its independent claim against the surety.

The requirement that Graham withhold taxes from the 'payment of wages' to its employees and pay the same over to the United States did not arise from the contract. The requirement is squarely imposed by §§ 1401 and 1622 of the Internal Revenue Code. Without a government contract Graham would owe the statutory duty to pay over the taxes due, just as it would to pay its income tax on profits earned. Graham's embezzlement lay neither in execution nor in breach of the contract. It arose from the conversion of the withheld taxes which Graham held as trustee for the United States pursuant to § 3661 of the code. Assignor Graham's indebtedness to the United States arose, we think, 'independently' of the contract.

Finally it is urged that the Act should be construed so as to protect the United States. The short answer to this is that the Act should be construed so as to carry out the purpose of Congress to encourage the private financing of government contracts. To grant the Government its sought-for rights of set-off under the circumstances of this case, would be to defeat the purpose of Congress. It would require the assignee to police the assignor's accounting and payment system. It would increase the risk to the assignee, the difficulty of the assignor in financing the performance, and the ultimate cost to the Government.

Reversed.

The CHIEF JUSTICE, Mr. Justice BURTON and Mr. Justice CLARK dissent.

Mr. Justice BLACK and Mr. Justice JACKSON took no part in the consideration or decision of this case.