The Court of Federal Claims in American Gov’t Props. & Houma SSA v. United States recently restated the general prohibition on assignment of federal government contracts and laid out the necessary steps contractors must follow in order to avoid an improper assignment of a lease agreement.
The case involved a contract to design, build and then lease to the Social Security Administration an office building in Houma, Louisiana. The General Services Administration (GSA) terminated the contract for default citing lack of progress. The plaintiffs brought suit alleging termination was improper and sought damages as a result of the alleged breach of contract. The defendant moved to dismiss on the grounds that plaintiff lacked standing to maintain suit against the government due to an improper assignment of the contract. The defendant alleged that the contract was assigned to Houma SSA, LLC (Houma) by American Government Properties (AGP), the original contracting party in violation of the Contracts Act.
41 U.S.C. §6305, otherwise known as the “Contracts Act” (“Anti-Assignment Act”) prohibits the transfer of federal contracts, or any interest in such a contract, to another party. “A purported transfer in violation of this subsection annuls the contract or order so far as the Federal Government is concerned, except that all rights of action for breach of contract are reserved to the government.” Under the act, contract payment may be assigned only to a financing institution, such as a bank or trust company, for the entire balance due to only one party, and the assignee must file a written notice of the assignment, along with a copy of the instrument of assignment with the contracting officer, the surety provider, and the disbursing officer designated in the contract to make payment. Furthermore, there are two judicially recognized exceptions to the requirements. First, the agency may waive the statutory prohibition by giving “clear assent to the assignment” through a novation agreement or by acting consistently with the assignment through the course of conduct. The second exception courts recognize is one by operation of law in cases of corporate succession through merger or consolidation and certain instances of corporate reorganization.
Plaintiffs attempted to argue that the “operation of law” exception should apply because the same individuals were in control of both entities and the transfer to Houma was akin to a corporate reorganization. The court rejected this argument distinguishing between “a voluntary transfer of contract rights like that between AGP and Houma and a transfer forced by law like corporate succession through purchase or merger.” In the alternative, the plaintiffs tried to argue the Contracts Act was never implicated due to the ex post dissolution of Houma and the transfer of its assets back to AGP. However, the court could not “simply ignore the assignment of the lease agreement between AGP and Houma.” There was a period of time where the “rights and duties of AGP under the contract with GSA were transferred and the government did not accede to the transfer.” In conclusion, the court held the assignment from AGP to Houma was in violation of the Contract Acts thus annulling the contract with GSA and therefore the plaintiffs lacked standing to maintain their suit.
Why does this matter?
Any contractor that attempts to assign their contractual rights of a contract with the federal government should be aware of and understand the prohibition as well as the specific ways to avoid an improper assignment to ensure contractual rights are not abrogated.
Historical and Revision Notes
R.S. § 3737; Oct. 9, 1940, ch. 779, § 1, 54 Stat. 1029; May 15, 1951, ch. 75, 65 Stat. 41; Pub. L. 103–355, title II, § 2451, Oct. 13, 1994, 108 Stat. 3324; Pub. L. 104–106, div. D, title XLIII, § 4321(i)(9), Feb. 10, 1996, 110 Stat. 676.
41:15(b) (words before par. (1) less words related to minimum amount).
41:15(b) (words before par. (1) related to minimum amount).
41:15(b)(2) (related to full balance due).
41:15(b)(2) (related to single assignment).
41:15(f) (less parenthetical phrase in par. (3)).
41:15(f) (parenthetical phrase in par. (3)), (g).
In subsection (a), the words “The party to whom the Federal Government gives a contract or order” are substituted for “the party to whom such contract or order is given” for clarity. The words “A purported transfer in violation of this subsection” are substituted for “any such transfer” because an actual transfer is precluded by this provision.
In subsection (b)(1), the words “amounts due from the Federal Government” are substituted for “moneys due or to become due from the United States or from any agency or department thereof” to eliminate unnecessary words. The words “may be assigned” are added to provide explicitly for authority that is necessarily implied by the source provision.
In subsection (b)(3), the words “in the case of any contract entered into after October 9, 1940” are omitted as obsolete.
In subsection (b)(5), the words “participating in such financing” are omitted as unnecessary.
In subsection (b)(8), the words “is not liable to make any refund to the Federal Government” are substituted for “no [liability] . . . shall create or impose any liability on the part of the assignee to make restitution, refund, or repayment to the United States of any amount heretofore since July 1, 1950, or hereafter received under the assignment” to eliminate unnecessary words. The words “an assignor’s liability to the Federal Government” are substituted for “liability of any nature of the assignor to the United States or any department or agency thereof ” for clarity and to eliminate unnecessary words.
In subsection (b)(9)(A), the words “except any such contract under which full payment has been made” are omitted as unnecessary because subsection (b)(8) precludes refund where full payment has already been made. The words “payments made to an assignee under the contract” are substituted for “payments to be made to the assignee of any moneys due or to become due under such contract” to eliminate unnecessary words.
In subsection (b)(9)(B), the words “When a ‘no reduction or setoff ’ provision as described in subparagraph (A) is included in a contract” are substituted for “If a provision described in subsection (e) of this section or a provision to the same general effect has been at any time heretofore or is hereafter included or inserted in any such contract”, the words “payments to the assignee” are substituted for “payments to be made thereafter to an assignee of any moneys due or to become due”, and the words “an assignor’s liability” are substituted for “any liability of any nature of the assignor to the United States or any department or agency thereof ”, for clarity and to eliminate unnecessary words.
In subsection (b)(9)(C), the text of 40:15(g), which provided that nothing in 40:15 affected rights and obligations accrued before subsection (g) was added by the Act of May 15, 1951 (ch. 75, 65 Stat. 41), is omitted as obsolete.
Memorandum of President of the United States, Oct. 3, 1995, 60 F.R. 52289, provided:
Memorandum for the Heads of Executive Departments and Agencies
Section 2451 of the Federal Acquisition Streamlining Act of 1994, Public Law 103–355 ([amending former] 41 U.S.C. 15 [see 41 U.S.C. 6305]) (“Act”), provides, in part, that “[a]ny contract of the Department of Defense, the General Services Administration, the Department of Energy or any other department or agency of the United States designated by the President, except [contracts where] . . . full payment has been made, may, upon a determination of need by the President, provide or be amended without consideration to provide that payments to be made to the assignee of any moneys due or to become due under [the] contract shall not be subject to reduction or set-off.”
By the authority vested in me as President by the Constitution and the laws of the United States of America, including section 301 of title 3, United States Code, I hereby designate all other departments and agencies of the United States as subject to this provision. Furthermore, I hereby delegate to the Secretaries of Defense and Energy, the Administrator of General Services, and the heads of all other departments and agencies, the authority under section 2451 of the Act to make determinations of need for their respective agency’s contracts, subject to such further guidance as issued by the Office of Federal Procurement Policy.
The authority delegated by this memorandum may be further delegated within the departments and agencies.
This memorandum shall be published in the Federal Register.