B-226918(2)-O.M. April 8, 1988

B-226918(2)-O.M. April 8, 1988

DIGEST

To: Associate Director, Claims Group - Oliver W. Krueger

From: Associate General Counsel - Rollee H. Efros

Subject: Acceleration of Installment Debt Repayment Agreements--B-226918.2-O.M.

In a memorandum of April 30, 1987, your office requested our advice on three questions regarding the processing of debt accounts referred by executive agencies to GAO for further collection activities. The first of those questions (concerning GAO's authority to return those accounts to the agencies which sent them) has already been answered in our memorandum B-226918-O.M., Jan. 29, 1988. The present memorandum completes our response.

The basic question is whether GAO can unilaterally "accelerate" installment debt repayment agreements which GAO has entered into with its debtors. Generally speaking, creditors may not accelerate installment debt repayment agreements--regardless of whether those agreements have been breached or not--unless the agreements expressly establish that right for the creditor. The agreements which Claims Group entered into do not give that right to GAO. [1]

BACKGROUND

Although GAO no longer performs this function, [2] other agencies have for many years referred to GAO debt accounts which the agencies had been unable to collect or otherwise dispose of. Upon receipt of those accounts, GAO often initiated its own collection efforts. Until relatively recently, in those cases where GAO did initiate further collection activity, GAO typically sent demand letters to the debtors responsible for those accounts. Those letters asked the debtors to complete "Financial Statement" forms which asked: "How do you propose to pay your debt to United States?" In addition, those forms provided fill-in-the blank response options of: "I will pay $_____ per month beginning, 19__ and "I will pay a lump sum of $_____ on 19__." GAO accepted payments made in accordance with the proposed payment schedules. There were also instances where, rather than completing and returning the Financial Statement, the debtors simply sent partial payments to the Claims Group. In either case, GAO responded to a debtor's payment with a computer-generated billing notice which (a) acknowledged receipt of the payment, (b) recited the remaining balances of principal, interest, and other charges still outstanding on the account, and (c) advised the debtor of the "scheduled payment [amount]" and the "scheduled payment due [date]." The amount of the "scheduled payment" matched the amount which the debtor had just paid; while the "scheduled payment due [date]" reflected a date one month from the date of receipt of the payment just made by the debtor.

The problem which the Claims Group is now trying to resolve is that for some accounts, the above procedure was followed even though the scheduled payment amount was insufficient to cover interest accruals on the debt, or was for a very small amount, such as $5 or less. While some of those debtors have failed to consist-entry meet even those modest installment plan requirements, others are completely current in their payments. The Claims Group is concerned that, in following the above procedures, it may have entered into legally binding contractual agreements which may not be consistent with the government's best interests. The Claims Group would like to abrogate those agreements and either enter into new and more favorable (to the government) repayment agreements, or pursue other methods of disposing of those debts. Specifically, your office wishes to know whether GAO can unilaterally "accelerate" (that is, demand immediate repayment of) all installment payments--both those already past due and those scheduled to become due in the future--which remain to be repaid under those agreements.

DISCUSSION

We think that GAO did enter into binding, implied-in-fact, contractual agreements with its debtors. E.g., 17 Am. Jur. 2d Contracts Secs. 3, 4 (1964); 11 Am. Jur. 2d Bills & Notes Secs. 227, 229, 255 (1963). Those agreements did not expressly provide GAO with the power of acceleration. Although the right of acceleration originally arose as a common law remedy, most commercial installment debt repayment contracts today do include explicit acceleration clauses. E.g., Johnson v. McCrackin-Sturman Ford, Inc., 527 F.2d 257, 264 (3rd Cir. 1975). This is because the courts have long refused to authorize common law acceleration in simple debt repayment situations. E.g., New York Life Insurance Co. v. Viglas, 297 U.S. 672, 679-81 (1936); City of Hampton, Va. v. United States, 218 F.2d 401, 405 (4th Clr. 19553; Local 1574, International Association of Machinists and Aerospace Workers v. Gulf and Western Manufacturing Co., 417 F. Supp. 191, 201 (D. Me. 1976). Creditors who want to be able to accelerate payments under simple installment debt repayment contracts must include acceleration clauses in the contracts themselves. E.g., Llewellyn Iron Works v. Littlefield, 74 Wash. 86, 132 P. 867, 868 (1913); Holcomb v. Webley, 185 Va. 150, 37 S.E.2d 762, 765 (1946).

Consequently, GAO may not accelerate payments owed under the installment repayment agreements with its debtors, even where the debtor is delinquent in his payments. However, there is an alternative which GAO might elect to pursue for at least some of those agreements where the debtor is delinquent. As was observed in 64 Comp.Gen. 493, 499 (1985), unless expressly agreed to by the parties, the acceptance of a work-out agreement does not discharge a delinquent debt until the work-out agreement is completely paid. If the agreement is breached, the creditor may proceed on the original debt as if the work-out agreement did not exist.

Unfortunately, many of the debts which the Claims Group is attempting to collect are not otherwise collectable for a variety of reasons. For those debts for which this alternative would not be feasible (excluding, of course, those on which offset and litigation are barred by operation of an applicable statute of limitations), GAO might still be able to use this alternative as the basis for urging those debtors to negotiate new and better repayment agreements. Otherwise, the Claims Group may wish to reconsider whether compromise, suspension, or termination of collection pursuant to the Federal Claims Collection Standards, 4 C.F.R. ch. II (1987), should be undertaken on these accounts.

Should you have any further questions regarding this matter, please feel free to contact Mr. Neill Martin-Rolsky of my staff at 275-5544.

1. The April 1987 memo also sought our interpretation of 26 U.S.C. Sec. 61(a)(12) (1982) regarding payments owed under "acceleratable" installment repayment agreements. In view of our answer on the question of acceleration, our staffs informally agreed that this item need not be further considered.

2. B-226918-0.M., Jan. 29, 1988 (citing Federal Claims Collection Standards (FCCS), 49 Fed. Reg. 8889, 8895 (supplementary information statement)).