B-143655, AUG. 15, 1960

B-143655, AUG. 15, 1960

TO MR. LOUIS G. WALISCH, AUTHORIZED CERTIFYING OFFICER, COLUMBIA BASIN PROJECT, BUREAU OF RECLAMATION, UNITED STATES DEPARTMENT OF THE INTERIOR:

BY LETTER OF JULY 22, 1960, YOU REQUESTED A DECISION AS TO WHETHER YOU MIGHT PROPERLY CERTIFY FOR PAYMENT A VOUCHER PRESENTED BY THE FARMERS HOME ADMINISTRATION, UNITED STATES DEPARTMENT OF AGRICULTURE, REQUESTING PAYMENT OF $426 DUE FROM THE BUREAU OF RECLAMATION TO ONE CHESTER C. MARTINDALE. THE REQUEST FOR PAYMENT WAS TO EFFECT PARTIAL COLLECTION OF MR. MARTINDALE'S INDEBTEDNESS TO FHA BY WAY OF SETOFF.

WHILE THE RECORD IS NOT COMPLETE IN ALL RESPECTS, THE PERTINENT FACTS IN THE MATTER APPEAR TO BE ESSENTIALLY AS FOLLOWS:

UNDER DATE OF MARCH 22, 1954, THE UNITED STATES DEEDED CERTAIN REAL PROPERTY TO MR. MARTINDALE AND HIS WIFE, DOROTHY A. MARTINDALE. THE DEED WAS RECORDED ON APRIL 8, 1954, AND RESERVED TO THE UNITED STATES A RIGHT- OF-WAY FOR DITCHES OR CANALS CONSTRUCTED OR TO BE CONSTRUCTED BY THE AUTHORITY OF THE UNITED STATES AND A RIGHT-OF-WAY FOR PROPOSED PUBLIC ROADS. ALSO ON MARCH 22, 1954, MR. AND MRS. MARTINDALE EXECUTED A MORTGAGE, SUBJECT TO RESERVATIONS IN THE DEED, TO THE UNITED STATES, REPRESENTED BY THE FARMERS HOME ADMINISTRATION, AS SECURITY FOR A LOAN OF $14,505. ON APRIL 24, 1956, MR. AND MRS. MARTINDALE CONTRACTED WITH THE UNITED STATES, REPRESENTED BY THE PROJECT MANAGER OF THE COLUMBIA BASIN PROJECT, FOR SALE AT THE PRICE OF $426 OF ALL BUILDINGS, FENCES, DITCHES, SEEDINGS, GROWING CROPS, TREES AND SHRUBBERY, AND ANY AND ALL OTHER IMPROVEMENTS ON THE UNITED STATES RIGHT-OF-WAY. THE CONTRACT OF SALE PROVIDED THAT PRIOR TO PAYMENT, THE VENDOR WAS TO FURNISH SATISFACTORY EVIDENCE THAT HE WAS THE OWNER OF SAID IMPROVEMENTS FREE FROM ANY LIEN OR ENCUMBRANCE. ON THE BASIS THAT THE MORTGAGE HELD BY FHA, WHICH WAS RECORDED PRIOR TO THE DEED RESERVING A RIGHT-OF-WAY, DID NOT EXCEPT THE IMPROVEMENTS INVOLVED, THE BUREAU OF RECLAMATION REFUSED TO MAKE PAYMENT UNDER ITS CONTRACT PRIOR TO REMOVAL OF THE MORTGAGE ENCUMBRANCE. HOWEVER, YOUR LETTER STATES THAT VALUE TO THE BUREAU WAS RECEIVED AND THAT PAYMENT WOULD HAVE BEEN MADE BUT FOR THE REFUSAL OF FHA TO GRANT A PARTIAL RELEASE OF MARTINDALE'S MORTGAGE. IT IS ASSUMED, THEREFORE, THAT THE IMPROVEMENTS SOLD BY THE MARTINDALES WERE TAKEN OVER BY THE BUREAU.

THE RECORD SHOWS THAT MR. AND MRS. MARTINDALE BECAME DELINQUENT IN THEIR LOAN ACCOUNTS AND FHA FORECLOSED ITS REAL ESTATE AND CHATTEL MORTGAGES AND THAT A JUDGMENT WAS ENTERED FEBRUARY 26, 1957, IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF WASHINGTON, SOUTHERN DIVISION. THE SECURITY WAS SOLD LEAVING A DEFICIENCY OWING TO FHA ON THE JUDGMENT ACCOUNT OF $6,645.94 PRINCIPAL. THE DEFICIENCY CANNOT BE COLLECTED FROM MR. MARTINDALE BECAUSE OF HIS DISCHARGE IN BANKRUPTCY. MRS. MARTINDALE, HOWEVER, DID NOT RECEIVE A DISCHARGE AND IS STILL LIABLE FOR THE DEFICIENCY.

THE RECORD DOES NOT SHOW EXACTLY WHEN MR. MARTINDALE WAS ADJUDICATED BANKRUPT, BUT IT IS APPARENT FROM THE DATES OF VARIOUS CORRESPONDENCE IN THE FILE THAT THE BANKRUPTCY PROCEEDINGS OCCURRED AFTER HIS INTEREST IN THE $426 AND HIS DEBT TO FHA ACCRUED. SECTION 68 (A) OF THE BANKRUPTCY ACT, 52 STAT. 878, 11 U.S.C. 108 (A), PROVIDES THAT "IN ALL CASES OF MUTUAL DEBTS OR MUTUAL CREDITS BETWEEN THE ESTATE OF BANKRUPT AND A CREDITOR THE ACCOUNT SHALL BE STATED AND ONE DEBT SHALL BE SET OFF AGAINST THE OTHER, AND THE BALANCE ONLY SHALL BE ALLOWED OR PAID.' AND IN 6 AM.JUR. (REV.ED.), BANKRUPTCY, SECS. 516, IT IS STATED THAT "GENERALLY SPEAKING, TO ESTABLISH MUTUALITY WARRANTING A SETOFF UNDER THE BANKRUPTCY ACT, THE DEBTS OR CREDITS MUST EXIST AT THE TIME OF THE FILING OF THE PETITION IN BANKRUPTCY.' IT WOULD APPEAR, THEREFORE, THAT MR. MARTINDALE'S RIGHT TO THE FUNDS HELD BY THE BUREAU IS DEFEATED UNDER THE PROVISIONS OF SECTION 68 (A) AND THAT THOSE FUNDS SHOULD BE APPLIED AGAINST HIS INDEBTEDNESS TO FHA. MOREOVER, ANY INTEREST MRS. MARTINDALE MAY HAVE IN THE FUNDS WOULD BE FOR APPLICATION AGAINST HER INDEBTEDNESS TO FHA.

ACCORDINGLY, IN ANSWER TO THE SPECIFIC QUESTION PRESENTED, PAYMENT OF THE $426 IN QUESTION MAY BE MADE DIRECTLY TO THE FARMERS HOME ADMINISTRATION WITHOUT EXPRESS APPROVAL FROM MR. MARTINDALE.

A SECOND QUESTION RAISED IN YOUR LETTER, AS TO WHETHER YOU MAY ASSUME THE RIGHT OF DIRECT SETOFF PAYMENT APPLIES TO ALL CASES WHERE A DEFICIENCY COURT JUDGMENT HAS BEEN AWARDED IN FAVOR OF THE GOVERNMENT, CANNOT BE ANSWERED CATEGORICALLY. EACH CASE MUST NECESSARILY BE CONSIDERED IN LIGHT OF THE PREVAILING FACTS AND CIRCUMSTANCES.

AS A THIRD QUESTION PRESENTED IS MADE CONTINGENT UPON THE CONCLUSION THE PAYMENT TO THE FARMERS HOME ADMINISTRATION IN THE INSTANT CASE IS NOT AUTHORIZED, ANSWER THERETO IS NOT REQUIRED.