Case Name: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Plaintiff/Cross-Appellant, v. The UNITED STATES, Defendant/Third Party Plaintiff-Appellee, v. Maurice L. BIANCHI, Third Party Defendant-Appellant
Court: United States Court of Appeals for the Federal Circuit
Jurisdiction: United States
Decision Date: 1994-04-29
Citations: 23 F.3d 380
Docket Number: Nos. 93-5059, 93-5060
Parties: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Plaintiff/Cross-Appellant, v. The UNITED STATES, Defendant/Third Party Plaintiff-Appellee, v. Maurice L. BIANCHI, Third Party Defendant-Appellant.
Judges: 
Reporter: Federal Claims Reporter
Volume: 31
Pages: 380–388

Head Matter:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Plaintiff/Cross-Appellant, v. The UNITED STATES, Defendant/Third Party Plaintiff-Appellee, v. Maurice L. BIANCHI, Third Party Defendant-Appellant.
Nos. 93-5059, 93-5060.
United States Court of Appeals, Federal Circuit.
April 29, 1994.
Rehearing Denied June 23, 1994.
Michael L. Burack, Wilmer, Cutler & Pickering, Washington, DC, argued for plaintiff/cross-appellant. With him on the brief were Eric R. Markus and Lydia R. Pulley.
Mark A. Melnick, Atty., Commercial Litigation Branch, Dept. of Justice, Washington, DC, argued for defendant/third party plaintiff-appellee. With him on the brief were Stuart E. Schiffer, Acting Asst. Atty. Gen. and David M. Cohen, Director. Also on the brief were Sandra Guydon, Office of Philadelphia, Pennsylvania and Joel K. Meese, Small Business Admin., of counsel.
Michael A. Hordell, Petrillo & Hordell, Washington, DC, argued for third party defendant-appellant. With him on the brief was Eric L. Lipman, of counsel. Mr. Hordell and the law firm of Petrillo & Hordell, withdrew as counsel of record with the courts permission before the matter was decided.
Before RICH, MAYER, and LOURIE, Circuit Judges.

Opinion:
PER CURIAM.
Maurice L. Bianchi appeals the judgment of the United States Court of Federal Claims, No. 90-3961C, entered pursuant to the grant of summary judgment in favor of the United States, and the denial of his cross-motion for summary judgment. Bank of America likewise appeals the court's grant of summary judgment in favor of the United States against it, and the denial of its motion for summary judgment. We reverse in part and vacate in part.
Background
The following facts are not disputed. In June 1979, Bianchi executed a security agreement in favor of Bank of America (bank), granting it a security interest in his property, including after-acquired accounts and contract rights. This interest secured Bianehi's existing obligations to the bank, as well as future loans and advances by the bank to Bianchi.
During 1979 and 1980, the Defense Logistics Agency (DLA) awarded three contracts for military clothing (numbers DLA100-79-C2894, DLA100-80-C2290, and DLA100-80-C2972) to M. Bianchi of California, a sole proprietorship of Maurice Bianchi. Shortly after the award of each contract, Bianchi assigned the proceeds and rights associated with each contract to the bank as security for loans to finance Bianchi's performance of the contracts. The bank notified the appropriate contracting and disbursing officers in accordance with the Assignment of Claims Act, 31 U.S.C. § 3727 (1988), 41 U.S.C. § 15 (1988); the government acknowledged and accepted each assignment. Thereafter, the bank received payments from the government of sums due Bianchi under the contracts.
Later in 1980, Bianchi and the bank sought to restructure their relationship, applying to the Small Business Administration (SBA) for a 90 percent guarantee on an additional $500,000 loan to Bianchi. The application disclosed the bank's preexisting lien position. The SBA approved the application, and the bank issued the loan; the collateral included a third lien on all receivables, including contract rights. Bianchi executed another security agreement, again granting the bank a security interest in all rights to payment of money owned or thereafter acquired by him. In July of 1981, the bank made another 90 percent SBA guaranteed loan to Bianchi of $50,000. The new loan was covered by the future advances clause of the December 1980 agreement.
Soon thereafter, DLA terminated two of the contracts for default. Bianchi defaulted on the loans, including both the SBA guaranteed loans and the bank's prior non-guaranteed loans. In December 1981, the bank applied to the SBA for payment on the guarantees, in return for which it assigned its interest in the guaranteed loans to the SBA
In 1981, Bianchi instituted a series of claims under the contracts before the Armed Services Board of Contract Appeals (board). In September 1988, DLA and Bianchi agreed to settle the claims. Under the settlement agreement, DLA agreed to pay $617,500 plus interest directly to Bianchi. The government paid Bianchi a total of $1,141,220.83.
In June 1990, the bank requested that the government pay it the settlement amount under the Assignment of Claims Act. On October 23, 1990, DLA wrote to Bianchi, demanding repayment of the money, acknowledging that payment should have gone to the bank under the assignment. Bianchi made no repayment, and the government took no further action until the bank filed this suit.
On November 21, 1990, the bank filed its complaint against the government in the United States Court of Federal Claims seeking payment of the $1,141,220.83 as assignee under the Assignment of Claims Act. The government asserted as an affirmative defense the SBA's superior right to the money paid to Bianchi. On April 16, 1992, the government filed a third-party complaint against Bianchi seeking return of the money paid under the settlement.
All parties moved for summary judgment. The court granted summary judgment in favor of the government against the bank, holding that the bank had assigned its rights to the SBA and had no further claim on money due Bianchi under the contracts. The court also granted summary judgment in favor of the government against Bianchi in the amount of $1,141,220.83, concluding that the government had erroneously paid Bianchi and was therefore entitled to repayment.
Discussion
I.
Bianchi raises constitutional and procedural objections to the judgment against him in the Court of Federal Claims. We decline to reach Bianchi's constitutional arguments because we conclude that the government was not entitled to assert its claims against Bian-chi in the first instance.
The funds the government seeks to recover through its third-party complaint stem from an agreement reached between the government and Bianchi in 1988 settling a contractual dispute. Pursuant to the agreement, the government agreed to pay Bianchi $617,-500 plus interest in satisfaction of Bianchi's claims. This agreement was incorporated into a decision of the Armed Services Board of Contract Appeals, in which it was stipulated that the parties waived their rights to appeal or seek reconsideration of the board's decision.
In support of its claim against Bianchi, the government now contends that the settlement award was paid to Bianchi in contravention of the various assignments of rights associated with Bianehi's contracts and that it has a right to recover any funds erroneously paid from the public treasury. The government does not have that right in this case.
The government's right to recoup erroneously paid funds cannot be invoked by the government as a means to circumvent a legal obligation. In return for Bianchi's agreement to discontinue his action against the government, the government agreed to settle his claims and voluntarily relinquished its right to disturb the settlement. Bianchi accordingly ceased pursuing his contract claims and the government must likewise be held to its end of the bargain. "The law strongly favors settlement of litigation, and there is a compelling public interest and policy in upholding and enforcing settlement agreements voluntarily entered into." Hemstreet v. Spiegel, Inc., 851 F.2d 348, 350 (Fed.Cir.1988) (citing Bergh v. Department of Transp., 794 F.2d 1575, 1577 (Fed.Cir.), cert. denied, 479 U.S. 950, 107 S.Ct. 437, 93 L.Ed.2d 386 (1986)).
The government does not challenge the validity or the enforceability of the settlement. Indeed, there is no indication that the parties failed to deal with each other at arm's length or that Bianchi withheld material information. The government certainly had adequate knowledge of the various financial arrangements associated with the contracts in view of the fact that the assignments from Bianchi to the bank were made pursuant to the Assignment of Claims Act, which was designed to protect the government from secret assignments. See McKenzie v. Irving Trust Co., 323 U.S. 365, 369, 65 S.Ct. 405, 407, 89 L.Ed. 305 (1945); Pittman v. United States, 116 F.Supp. 576, 580 (1953), cert. denied, 348 U.S. 815, 75 S.Ct. 23, 99 L.Ed. 642 (1954). In the absence of any fraud, misdirection, or concealment, the government may not recover funds paid in good faith and to the satisfaction of the interested parties. See McKnight v. United States, 13 Ct.Cl. 292, 313, 1800 WL 946 (1877), aff'd, 98 U.S. 179, 25 L.Ed. 115 (1878). Here, "[t]here was nothing contrary to good morals or conscience in the payment or receipt of the money. The facts were all known." 98 U.S. at 185-86.
The government could easily have taken appropriate steps to avoid incurring any liability to the bank. For example, the government could have insisted that any settlement award be paid to the bank in view of the bank's asserted security interest. The government did not do so, perhaps because Bianchi would not have agreed to that arrangement or because the government presumed that the bank retained an inferior interest. Whatever the reason for its failure to protect itself, the government cannot now renege on its commitment to honor its settlement with Bianchi, into which it entered voluntarily and with full knowledge of the facts. "To permit [the government] to escape its obligation under the settlement would seriously decrease the willingness of parties to settle litigation on mutually agreeable terms and thus weaken the efficacy of settlements generally." Hemstreet, 851 F.2d at 350.
Although the government waived its right to challenge the board's decision awarding payment to Bianchi, it attempts to do just that by means of a third-party complaint filed in another forum. The government should not be allowed to do indirectly what it is prohibited from doing directly. We therefore hold that the government, having waived its right to challenge the settlement, is precluded from seeking to recover the settlement award through a third-party complaint filed in the Court of Federal Claims.
II.
In its cross-appeal, Bank of America challenges the trial court's conclusion that the bank retained no right to receive payments under the Bianchi contracts after it assigned its interest in the guaranteed loans to the SBA in return for payment on the loan guarantees. Specifically, the bank argues that it is entitled to judgment because of its superi- or right to contract payments as Bianchi's assignee under the Assignment of Claims Act.
Both the bank and the SBA claim a security interest in Bianchi's contract receivables. The bank obtained its interest, the assignment, in return for its original loans to finance Bianchi's contract performance. When it later extended the guaranteed loans, Bianchi again granted it a security interest in the receivables, an interest the bank eventually transferred to the SBA in return for payment on the loan guarantees. The Court of Federal Claims agreed with the government that this transfer assigned all of the bank's interest in the contract payments, not merely those associated with the guaranteed loans.
The loan documents refute this position, for they show that the bank assigned away only its rights "in th[ose] certain Note[s]" relating to the guaranteed loans. Since the rights under the guaranteed loans attached after the interest under the earlier loans secured by the same collateral, the SBA took its interest subject to the preexisting interest retained by the bank. Cf. United States v. McDermott, -U.S. -, -, 113 S.Ct. 1526, 1531, 123 L.Ed.2d 128 (1993) ("When two private lenders both exact from the same debtor security agreements with after-acquired-property clauses, the second lender knows . that that category of property will be subject to another claim"). Indeed, the record shows that the SBA clearly knew of the bank's senior interest in the contract payments.
As an assignee under the Assignment of Claims Act, the bank's security interest included the right to bring a suit against the government to recover any contract payment made to another. Produce Factors Corp. v. United States, 467 F.2d 1343, 1349 (Ct.Cl.1972). As we said, the bank never relinquished this right. "The Government having received timely notice of plaintiffs assignment paid [Bianchi] at its peril. And where an erroneous payment is made by the Government it is no bar to the rightful claimant." Central Nat'l Bank v. United States, 91 F.Supp. 738, 741 (Ct.Cl.1950) (citation omitted). The government's payment to Bianchi in settlement of the contract dispute was a payment under the contract that should have gone to the bank under the assignment. Thus, the bank has a right to the payment under the Act.
The government asserts a right to set off the amount that Bianchi owed to the SBA against any money owed to the bank by virtue of the settlement. Of course, like any creditor, the government has the right to set off a contractor's debts against payments due the contractor. United States v. Munsey Trust Co., 332 U.S. 234, 239, 67 S.Ct. 1599, 1601-02, 91 L.Ed. 2022 (1947). The government argues that as an assignee, the bank had no greater claim to the payment than did Bianchi, its assignor. If true, the government could set off Bianchi's liability to the SBA against money due the bank. Cf. id. at 239-40, 67 S.Ct. at 1601-02 ("Insofar as the suitor in the Court of Claims asserted the contractor's title to the sum in dispute, that court was under statutory duty to recognize the undisputed claim for damages of the United States").
But the bank is not simply an ordinary assignee. The Assignment of Claims Act expressly limits the government's right to set off Bianchi's debts against payments to the bank. 31 U.S.C. § 3727; 41 U.S.C. § 15. Under the Act, government contracts may provide that an assignee's right to contract payments "shall not be subject to reduction or set-off for any liability of any nature of the assignor to the United States or any department or agency thereof which arises independently of such contract____" 41 U.S.C. § 15. Bianchi's contracts contained such a clause.
The goal of the Assignment of Claims Act is to make it easier for contractors to finance performance of their obligations to the government. Produce Factors Corp. v. United States, 467 F.2d at 1348. The inclusion of "no set-off" clauses alleviates some of the uncertainty that would otherwise hinder financing by ensuring assignees a stream of payments unaffected by the contractor's potentially numerous "obligations to the United States not imposed by the contract from which the payments flowed." Central Bank v. United States, 345 U.S. 639, 643, 73 S.Ct. 917, 919, 97 L.Ed. 1312 (1953). See Produce Factors, 467 F.2d at 1348 (assignee's right to receive payment of contract proceeds dependent only on "performance by the contractor of his contractual obligations").
While the government could assert against the bank any defenses arising against Bianchi under the contracts, Produce Factors Corp., 467 F.2d at 1349 (non-performance or failure of consideration), Bianchi's indebtedness to the government arose not from the contracts, but from the notes. The government argues that the notes are not independent of the contracts, for they were intended to finance the performance of the contracts, and, indeed, the security agreements expressly listed rights to contract payments as collateral. Even accepting that Bianehi's liability on the notes was "related to" the contracts, however, we agree with the bank that the liability on the notes arose "independently of such contract."
The Supreme Court addressed this language in Central Bank v. United States, 345 U.S. at 646, 73 S.Ct. at 920, ruling that the United States could not set off a contractor's tax indebtedness against sums due an assign-ee on the contract. The tax liability arose from the contractor's failure to pay withholding and unemployment taxes for work done on the contract. The Court reasoned, however, that the government could not set off the tax because it did not arise from the contract; the tax was imposed by statute, and would have been due even absent a contract with the government. Id. at 645^6.
Like a contractor's tax liability, Bianchi's liability on the notes did not arise from his defense contracts, it was imposed by the loan documents. He could owe on the notes even if he had no contract. Moreover, the government has conceded any defense to payment based on inadequate performance of the contracts by settling Bianchi's contract claims. Because his liability on the notes "lay neither in execution nor in breach of the contracts]," Central Bank, 345 U.S. at 646, 73 S.Ct. at 920, Bianchi's liability to the SBA on the notes is independent of the contracts, barring set-off by the government. Therefore, the bank should recover the amount due under the government's settlement with Bianchi.
Conclusion
Accordingly, we reverse the judgment of the Court of Federal Claims in the government's favor against the bank, and vacate the judgment in favor of the government against Bianchi.
COSTS
The bank and Bianchi shall have their costs.
REVERSE IN PART, VACATE IN PART.
. The United States Claims Court was renamed the United States Court of Federal Claims on October 29, 1992. Federal Courts Administration Act of 1992, Pub.L. No. 102-572, § 902(a), 106 Stat. 4506, 4516.
. Although the concurrence would resolve this case on constitutional grounds, we adhere to the doctrine that we should avoid deciding constitutional questions where an alternative basis exists upon which our decision may rest. See Hagans v. Lavine, 415 U.S. 528, 565, 94 S.Ct. 1372, 1393, 39 L.Ed.2d 577 (1974) (Rehnquist, J., dissenting); SRI Int'l v. Matsushita Elec. Corp. of Am., 775 F.2d 1107, 1126 (Fed.Cir.1985) (Markey, C.J., additional views).