MEMORANDUM OPINION
This matter comes before the Court on the motion of the United States, on behalf of the Small Business Administration (“SBA”), for summary judgment on its Complaint to Determine the Extent, Validity and Priority of Liens and Interest in Property of the Estate. The Court has core jurisdiction pursuant to 28 U.S.C. §§ 157(b)(2)(E) and 1334. Upon consideration of the pleadings, memorandum and other supporting documents submitted by the parties, the Court now issues Findings of Fact and Conclusions of Law.
BACKGROUND
The interests at issue in this proceeding arise out of a contract between the Debtor, Pyramid Industries, Inc. (“Pyramid”), and the United States Navy entered into on September 17, 1987, contract # N62472-84-C-0517 (“Prime Contract”). Pyramid wаs to perform work as the general contractor at the Glenview Naval Air Station in Glenview, Illinois. Upon completion of the project, a dispute arose between Pyramid and the Navy regarding the final balance due. Although Pyramid maintained that it was owed $55,000.00, its claim was eventually settled for $51,050.00. The Court approved this compromise in a February 27, 1990 order which stated that “all liens, claim [sic] and encumbrances asserted against the [Prime Contract] shall be transferred to and attach to the proceeds of the [Prime Contract] collected by Trustee, subject to further order of court.”
The Prime Contract required Pyramid to provide payment and performance surety bonds, which could be posted by individual sureties. Pyramid submitted A.G. Merklinger (“Merklinger”) and William Reeves (“Reeves”) as individual sureties. Merklinger and Reeves provided affidavits indicating their financial positions, but they did not post the requisite bonds. Merklinger filed for bankruptcy on June 1, 1990 claiming that he had no assets. The assets appearing on *977 Reeves’ affidavit were subsequently found to be non-existent at the time of execution and at all times thereafter.
Pyramid filed a voluntary petition for relief pursuant to chapter 11 of the Bankruptcy Code on Septеmber 14, 1989. The case was converted to chapter 7 on October 30, 1989. Andrew Maxwell (“Maxwell”) is the duly appointed chapter 7 trustee. The sum of $51,-050.00 in proceeds from the Prime Contract (“Proceeds”) is among the assets of Pyramid’s estate.
The SBA holds a lien claim against Pyramid for $590,574.88 arising out of loans extended to Pyramid to perform the Prime Contract. SBA’s interest is evidenced by three notes made by Pyramid (or one of its predecessors) in the amounts of $309,140.25, $47,171.33 and $240,316.30. The notes were made on July 2, 1984, August 22, 1988 and July 3, 1989, respectively. Each note is secured in part by a perfected security interest in Pyramid’s accounts, instruments, chattel рaper, general intangibles, and proceeds therefrom.
All American Corporation (“All American”) was the drywall, painting and decorating subcontractor for the Prime Contract pursuant to two separate agreements with Pyramid: a July 19, 1988 contract for $19,600.00 and an October 26,1988 contract for $25,000.00. After necessary additional work was performed, the balance due was $54,814.71. All .American has received no payments for its work. Thus All American holds an unsecured claim for $54,817.71 as one of Pyramid’s subcontractors under the Prime Contract.
The Lazzaro Companies, Inc. (“Lazzaro”) similarly asserts an unsecured claim as a subcontractor in the amount of $27,956.00. The claim is evidenced by an unsatisfied judgment in that amount entered against Pyramid, Merklinger and Reeves by the Circuit Court of Cook County, Illinois on April 20, 1990. Lazzaro has received no payments for its work, and therefore holds an unsecured claim against Pyramid for $27,956.00.
On November 13, 1987, Gerson Electric Construction Company (“Gerson”) entered into a contract with Pyramid to provide electrical construction labor and materials at the Naval Station for a base contract price of $181,200.00. Gerson has fully performed its work under the subcontract, and it has received $85,991.50 in payments frоm Pyramid. Gerson has not yet received the $95,208.50 balance. When Pyramid filed for bankruptcy, Gerson made an unsuccessful claim against the sureties for payment. Gerson asserts a secured claim against Pyramid for $95,208.56 as a subcontractor under the Prime Contract. 1
On or around August 13, 1993, the United States (on behalf of the SBA) filed a complaint to determine the extent, validity and priority of liens and interests in Pyramid’s estate. The following parties were named as defendants: Maxwell, as trustee of the Debt- or’s estate; Affiliated Bank; All American; Art Drapery Studios Corp.; Butler Street Foundry & Iron; Chicago Builders & Erectors, Inc.; Columbia Pipe & Supply Co.; Construction Specialties, Inc.; Contractors Acoustical Supply; Diversified Insulation; Douglass & Co.; Gerson; Gilead-Angelo Construction; Harold A. Sehweig Co., Inc.; Lazzaro; Martin Cement Co.; Municipal Funding, Inc.; Southwest Financial Bank; Vesta Distributors, Inc.; WLW & Assocs.; and nonrecord claimants. The complaint alleged that the interests of these defendants are junior, inferior and subordinate to those of the SBA. Therefore, the SBA sought declaratory judgment that its interest in the Proceeds is superior to those of the defendants. Maxwell, All American, Gerson and Lazzaro filed answers to the complaint. 2 All American, Gerson and Lazzaro (collectively, the “Defendants”) deny that their equitable interest in the Proceeds are junior, inferior or subordinate to those of the federal government and the SBA. Maxwell admits the amounts due under the Prime Contract for each of the defendants named in the complaint, admits that each of the defendants has some interest in the Proceeds, and denies *978 that his interest is subordinate to that of the SBA.
The United States on behalf of the SBA now moves for summary judgment on its declaratory judgment complaint with respect to the Defendants. 3
STANDARDS FOR SUMMARY JUDGMENT
Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, admissions and affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56, incorporated by reference by Fed.R.Bankr.P. 7056;
Wainwright Bank & Trust Co. v. Railroadmens Fed. Sav. & Loan Ass’n of Indianapolis,
CONCLUSIONS OF LAW
The SBA maintains, and the Defendants do not contest, that it has a perfеcted security interest in the Proceeds. The SBA also argues that the Defendants do not have a perfected interest in the Proceeds; rather, they are general unsecured creditors of Pyramid. Therefore, the SBA reasons that if the Defendants have an equitable interest in the Proceeds, those interests are subordinate to those of the SBA. Finally, the SBA claims that it may step into the shoes of the Navy because they are both government entities and that it has the right to setoff against the proceeds pursuant to § 553 of the Bankruptcy Code.
All American and Gerson filed separate answers to thе motion for summary judgment as well as memoranda in support of their positions. All American’s brief expressly adopted the arguments set forth in Gerson’s memorandum and presented additional arguments. Although Lazzaro did not file a separate memorandum in response to the SBA’s summary judgment motion, the Court will assume that it adopts the arguments articulated in All American’s and Ger-son’s memoranda. 4 The Defendants essentially assert that their interests in the Proceeds are superior to those of the SBA pursuant to the Miller Act, third party beneficiary principles, and equitable liens.
A. Priority of Claimants to Contract Proceeds
In order to determine the relative priorities of the SBA and the Defendants to the Proceeds, the Court must attempt to navigate a thicket of public construction cases dating back almost a century. The exercise begins with
Prairie State Nat’l Bank of Chicago v. United States,
Henningsen v. United States Fidelity & Guar. Co.,
Next, the Supreme Court held that the federal government’s right to setoff is superi- or to that of a surety who pays subcontractors pursuant to a payment bond.
United States v. Munsey Trust Co. of Wash., D.C.,
Munsey Trust also articulated the following priority rules in cases involving government contracts:
1) A surety may not enforce its right of indemnification against the government but may prevail over the general contractor.
2) When the government withholds a portion of the contract price, it is a secured creditor. The government’s right to offset is superior to the rights of the general contractor, therefore, monies setoff by the government are not funds due and owing to the general contractor.
3) Subcontractors cannot assert a right to payment against the federal government, cannot take liens on public works, and cannot have hens on amounts setoff by the government (because they are not funds due and owing to the general contractor).
4) The rationale for the government’s withholding of a percentage of the contract price is primarily to guarantee completion of the work and secondarily to ensure that subcontractors get paid. Therefore, the government’s right to setoff takes precedence over subcontractors’ claims. The government has no obligation to pay subcontractors.
5) Subcontractors have no rights to funds retained by the government. Therefore, sureties stepping into the shoes of the subcontractors (paid by the surety) similarly have no rights to the retained funds. If the subcontractors are not paid, the government *980 is not to release the funds, and the surety is not entitled to subrogation.
6) The surety assumes the risk of the general contractor’s insolvency, not the federal government. Thus the government’s right to setoff is superior to the surety’s right to indemnification.
Pearlman v. Reliance Ins. Co.,
Read in unison, Prairie State, Henningsen, Munsey Trust and Pearlman yield the following priority ranking for entitlement to proceeds of government construction contracts:
1. the federal government exercising a right of offset;
2. unpaid subcontractors and sureties who have either paid subcontractors pursuant to a payment bond or eom-pleted the contract pursuant to a performance bond;
3. assignees of the general contractor, including secured creditors; and
4. the general contractor or the bankruptcy trustee.
Paid subcontractors and sureties who have not performed the contract or paid the laborers and material suppliers are not entitled to receive any of the withheld contract proceeds.
Recent cases illustrate that this analysis is correct. In
United States v. TAC Constr. Co.,
B. Setoff 7
The Defendants argue that the SBA should not be afforded the special priority rights of the sovereign (as is the Internal Revenue Service) because the SBA is a quasi-commercial lender.
United States v. Kimbell Foods, Inc.,
In its complaint, the SBA alleged:
9. The SBA is the holder of a secured claim against Pyramid in an amount of 490,574.88. The SBA’s claim is secured by a perfected security interest and by the federal government’s right of offset against PYRAMID’S claim against it under the Prime Contract.
Lazzaro admitted the allegations in this paragraph. Admissions contained in the pleadings are binding and may support a motion for summary judgment against a party even if contrary evidence is later produced.
Missouri Hous. & Dev. Comm’n v. Brice,
All American and Gerson answered that they lacked sufficient knowledge or information to form a belief as to the truth of the averments in that paragraph, which has the effect of a denial. Fed.R.Civ.P. 8(b). Since All American’s and Gerson’s responses merely controvert the SBA’s allegations, a denial is sufficient to shift the evidentiary burden to the SBA to show that it may exercise the federal government’s right of offset.
In re Ionosphere Clubs, Inc.,
The SBA asserts that it is entitled to offset its debt against the Proceeds pursuant to § 553 of the Code.
8
Setoff is grounded on the absurdity of making A pay B when B owes A.
Studley v. Boylston Nat’l Bank,
To offset a debt pursuant to § 553(a), the creditor must show that 1) the debtor owes a debt to the creditor which arose prior to the commencement of the bankruptcy case; 2) the debtor holds a claim against the creditor which arose prior to the commencement of the case; and 3) the debt and the claim are mutual.
Lakeside,
Mutuality exists only when the debts are in the same right and between the same parties, standing in the same сapacity.
Bevill, Bresler,
There is a split in the authorities as to whether separate departments and agencies of the same government are a single entity for mutuality purposes under § 553.
10
The seminal case for the proposition that mutuality exists when a party owes a debt to one governmental department or agency and is owed an obligation by a different governmental department or agency is
Cherry Cotton Mills, Inc. v. United States,
“[e]very reason that could have promptеd Congress to authorize the Government to plead counterclaims for debts owed to any of its other agencies applies with equal force to debts owed to the R.F.C. ... That the Congress chose to call it a corporation does not alter its characteristics so as to make it something other than what it actually is, an agency selected by Government to accomplish purely Governmental purposes.”
Id.
at 539,
Increasingly, courts have extended
Cherry
to apply to setoffs in the bankruptcy context.
See, e.g., Thomas,
However, some courts have concluded that setoff in bankruptcy cases should be treated differently than setoff in other contexts. “[T]he federal law of bankruptcy presents different and unique considerations, as payments made by one government agency to another during a bankruptcy proceeding may operate to the detriment of other creditors.”
Bosarge v. United States Dept. of Educ.,
5 F.Bd 1414, 1419 n. 7 (11th Cir.1998) (noting the split in authority). Bankruptcy is generally oriented toward the prevention of preferential treatment of creditors.
Sampsell v. Imperial Paper & Color Corp.,
An analysis of the definitions in the Code supports this conclusion. § 553(a) provides that setoff is a right of a “creditor.” A “creditor” is an “entity” that has a claim against the debtor or the estate, or an “entity” that has a community claim. 11 U.S.C. § 101(10). An “entity” includes person, estate, trust,
governmental unit,
and United States trustee. 11 U.S.C. § 101(15) (emphasis added). Finally, ‘“governmental unit’ means United States; State; ...; department, agency, or instrumentality of the United States ...” 11 U.S.C. § 101(27). Some сourts have therefore interpreted the differentiation between the United States and a department (or agency) of the United States as evidence of congressional intent to treat each governmental department or agency as a separate creditor.
See Ionosphere Clubs,
*984
Inc.,
If resort to the statute is unsatisfactory in seeking to determine whether various agencies of the federal government are to be considered as if one for mutuality purposes, perhaps the issue should be decided by resort to policy: given the pervasive nature of government involvement in business (as a debtor and creditor), and given the violence done to the equality principle by permitting a right of setoff, bankruptcy courts should not find sufficient identity between different agencies of the government so as to permit setoff absent clearer statutory dirеction to do so. Stated differently, § 553 should be read restrictively.
The Court concludes that the better reasoned approach is to treat each department, agency, or instrumentality of the United States as a separate entity for purposes of setoff. Here, the Navy and the SBA must be considered to be two distinct entities. They each have separate budgets and staffs, serve different functions and possess distinct claims, privileges and relationships with respect to Pyramid. The SBA owes Pyramid nothing, and Pyramid owes the Navy nothing. This distinction serves to differentiate
Munsey Trust,
where the department of the government that contracted with the debtor was the same agency that withheld the proceeds for breach of the contract. While it may be appropriate for the Navy and the SBA to be considered in other contexts as separate parts of one entity, they are separate entities under the strict mutuality requirements imposed in bankruptcy cases.
Cf. Hancock,
CONCLUSION
In summary, the Court concludes that the rights of unpaid subcontractors to contract proceeds are superior to those of creditors secured by an assignment by the general contractor, and that the SBA is not entitled to exercise the Navy’s right to offset its debt against the Prime Contract Proceeds. Because Lazzaro is bound by its admission that the SBA is secured by a right to setoff its debt, the rights of the SBA are superior to those of Lazzaro in this case. However, All American and Gerson preserved this argument, and their rights in the Proceeds are superior to those of the SBA.
ORDER
For the reasons set forth in the Court’s Memorandum Opinion issued on this date, IT IS HEREBY ORDERED that the motion of the United States, on behalf of the Small Business Administration, for summary judgment is GRANTED with respect to The Laz-zaro Companies, Inc. and DENIED with respect to All-American Corporation and Ger-son Electric Construction Company.
Notes
. Whether Gerson's claim is, in fact, secured is not at issue in this proceeding.
. A default judgment was entered against the remaining defendants on October 15, 1993 for failure to appear in this adversary proceeding.
. The motion for summary judgment does not apply to Maxwell as trustee.
. For convenience, the Court will treat the arguments advanced by a single Defendant as if it were made by each of the Defendants.
. In a concurring opinion, Justice Clark, joined by Justices Douglas and Brennan, concluded that the surety could not recover by standing in the shoes of the subcontractors since subcontractors cannot have a lien on public property. However, the surety could prevail by subrogation to the rights of the federal government since it fulfilled its obligation under a payment bond.
. In light of this holding, it is unnecessary for the Court to determine whether the Defendants have priority status under either the Miller Act or pursuant to third party beneficiary or equitable lien theories.
. The terms "setoff” and “offset” are commonly used interchangeably as synonyms. However, section 553 of the Code uses "setoff” as a noun and "offset” as a verb. Thеrefore, the Court will adhere to the usage in the Code regardless of the terminology found in the cases.
.Section 553 provides:
(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case
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11 U.S.C. § 553(a).
. There is no requirement that the debts arise out of the same transaction in order for setoff to be available under § 553.
Davidovich,
.
Compare, e.g., Matter of Butz,
. This argument illustrates a flaw in the logic of cases like
Thomas
when applied to a chapter 7 proceeding. Except in rare instances, the government’s
loss is
a benefit to the other similarly situated creditors. The debtor receives nothing, so there is no reason for the debtor to care which creditors receive the largest shares of a limited pool of assets.
See IML Freight,
. Because the Court concludes that the SBA cannot offset its debt against the Proceeds, the SBA’s argument that it did not waive its right to offset is irrelevant.