B-148092, FEBRUARY 28, 1962, 41 COMP. GEN. 569

B-148092: Feb 28, 1962

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THIS CONTRACT IS SUBJECT TO THE SAME PUBLIC POLICY OBJECTIONS AS TO ALLEGED FAVORITISM AND POSSIBLE FRAUD AS CONTRACTS BETWEEN THE GOVERNMENT AND INDIVIDUAL EMPLOYEES. 1962: REFERENCE IS MADE TO LETTER OF JANUARY 26. THE MAJORITY OF WHOSE STOCK IS OWNED BY GOVERNMENT EMPLOYEES. ARE ALSO EMPLOYEES OF THE AIR FORCE AT MCCLELLAN AIR FORCE BASE. IS ENGAGED IN THE MANUFACTURE OF METAL PARTS. THE AIR FORCE EMPLOYEES INVOLVED ARE WELDERS. THE DEPUTY ASSISTANT SECRETARY NOTES A NUMBER OF DECISIONS OF OUR OFFICE IN WHICH IT HAS BEEN STATED THAT IT IS UNDESIRABLE FOR THE GOVERNMENT TO CONTRACT WITH ITS EMPLOYEES. 4 COMP. CERTAIN EXCEPTIONS TO THE RULE HAVE BEEN ALLOWED AS IN 27 COMP. GEN. 735 WHERE AN ELECTRON MICROSCOPE OFFERED BY A GOVERNMENT EMPLOYEE WAS FOUND TO BE THE ONLY ONE MEETING THE NEEDS OF THE GOVERNMENT AND IN B-144482.

B-148092, FEBRUARY 28, 1962, 41 COMP. GEN. 569

OFFICERS AND EMPLOYEES - CONTRACTING WITH GOVERNMENT - PUBLIC POLICY OBJECTIONABILITY - CORPORATION A CONTRACT FOR THE MANUFACTURE OF METAL PARTS AND FITTINGS EXECUTED BY THE GOVERNMENT AND A CORPORATION OWNED, CONTROLLED AND DIRECTED BY A GROUP OF GOVERNMENT EMPLOYEES WHO PERFORM SUBSTANTIALLY SIMILAR METAL WORKING SERVICES FOR THE GOVERNMENT DOES NOT COME WITHIN THE EXCEPTION TO THE RULE THAT ONLY IN UNUSUAL CASES WHERE THE NEEDS OF THE GOVERNMENT CANNOT BE OTHERWISE SUPPLIED MAY CONTRACTS BETWEEN THE GOVERNMENT AND ITS EMPLOYEES BE SANCTIONED AND, THEREFORE, THIS CONTRACT IS SUBJECT TO THE SAME PUBLIC POLICY OBJECTIONS AS TO ALLEGED FAVORITISM AND POSSIBLE FRAUD AS CONTRACTS BETWEEN THE GOVERNMENT AND INDIVIDUAL EMPLOYEES.

TO THE SECRETARY OF THE ARMY, FEBRUARY 28, 1962:

REFERENCE IS MADE TO LETTER OF JANUARY 26, 1962, FROM THE DEPUTY ASSISTANT SECRETARY OF THE ARMY (I AND L) ( LOGISTICS) REQUESTING A DECISION CONCERNING THE PROPRIETY OF PERMITTING GOVERNMENT CONTRACTS WITH A CORPORATION, THE MAJORITY OF WHOSE STOCK IS OWNED BY GOVERNMENT EMPLOYEES. THE DEPUTY ASSISTANT SECRETARY STATES THAT ALL OF THE OFFICERS AND A MAJORITY OF THE DIRECTORS OF THE SA-MAC CORPORATION, NORTH SACRAMENTO, CALIFORNIA, ARE ALSO EMPLOYEES OF THE AIR FORCE AT MCCLELLAN AIR FORCE BASE, SACRAMENTO, CALIFORNIA, AND AIR FORCE EMPLOYEES OWN 897 SHARES OF THE 1,104 SHARES OF STOCK OUTSTANDING.

THE CORPORATION, APPARENTLY A SMALL BUSINESS UNDER THE DEFINITION IN PARAGRAPH 1-701, ARMED SERVICES PROCUREMENT REGULATION, IS ENGAGED IN THE MANUFACTURE OF METAL PARTS, FITTINGS, ETC., FROM SHEET METAL AND BAR STOCK. IT DESIRES TO DO BUSINESS WITH THE SACRAMENTO SIGNAL DEPOT, AN ARMY INSTALLATION, AND IF PERMITTED TO DO SO, MOST OF THE ORDERS WOULD BE PLACED UNDER THE SMALL PURCHASE PROCEDURES OUTLINED IN ASPR SECTION III, PART 6, WITH AN OCCASIONAL AWARD OF A RELATIVELY LOW DOLLAR VALUE, FORMALLY ADVERTISED CONTRACT. THE AIR FORCE EMPLOYEES INVOLVED ARE WELDERS, SHEET METAL WORKERS, ETC., PERFORMING SUBSTANTIALLY THE SAME SERVICES FOR THE CORPORATION WHICH THEY PERFORM FOR THE GOVERNMENT.

THE DEPUTY ASSISTANT SECRETARY NOTES A NUMBER OF DECISIONS OF OUR OFFICE IN WHICH IT HAS BEEN STATED THAT IT IS UNDESIRABLE FOR THE GOVERNMENT TO CONTRACT WITH ITS EMPLOYEES. 4 COMP. GEN. 116; 5 ID 93; 14 ID. 404. CERTAIN EXCEPTIONS TO THE RULE HAVE BEEN ALLOWED AS IN 27 COMP. GEN. 735 WHERE AN ELECTRON MICROSCOPE OFFERED BY A GOVERNMENT EMPLOYEE WAS FOUND TO BE THE ONLY ONE MEETING THE NEEDS OF THE GOVERNMENT AND IN B-144482, FEBRUARY 20, 1961, WHERE WE INTERPOSED NO OBJECTION TO GOVERNMENT EMPLOYEE ACTING AS A SUBCONTRACTOR TO A GOVERNMENT CONTRACTOR. IN B-136095, MAY 23, 1958, WE APPROVED AWARD TO A CORPORATION CONTROLLED BY A GOVERNMENT EMPLOYEE WHO HAD AGREED TO RESIGN UPON RECEIPT OF AWARD. THE DEPUTY ASSISTANT SECRETARY REQUESTS ADVICE AS TO THE APPLICABILITY OF OUR PRIOR DECISIONS TO A SEPARATE LEGAL ENTITY SUCH AS THE SA-MAC CORPORATION.

THE CASE INVOLVING A GOVERNMENT EMPLOYEE ACTING AS A SUBCONTRACTOR, B- 144482, SUPRA, AROSE IN THE DEPARTMENT OF LABOR. THAT DEPARTMENT HAS SINCE CHANGED ITS REGULATIONS TO PRECLUDE SUCH ACTIVITY ON THE PART OF ITS EMPLOYEES. IN THIS CONNECTION, SEE 40 OP. ATTY. GEN. 187 WHEREIN IT IS STATED AT PAGE 190:

HOWEVER, IN CONTROLLING THE PRIVATE BUSINESS ACTIVITIES OF THEIR OFFICERS, THE EXECUTIVE DEPARTMENTS AND AGENCIES OF THE UNITED STATES ARE NOT LIMITED BY THE PROHIBITORY STATUTES AND ELEMENTARY LEGAL PRINCIPLES OF FIDUCIARY CONDUCT OUTLINED ABOVE. THE HEAD OF ANY EXECUTIVE DEPARTMENT OR AGENCY WITHIN THE GOVERNMENT HAS THE POWER TO PRESCRIBE SUCH RULES AND REGULATIONS GOVERNING THE CONDUCT OF PRIVATE BUSINESS AFFAIRS BY HIS SUBORDINATES AS HE MAY DETERMINE. SEE TITLE 5, U.S.C., SECTION 22. * *

THE CONCLUSIONS REACHED IN B-144482 HAVE NO APPLICABILITY TO THE PRESENT CASE SINCE THE QUESTION PRESENTED HERE DOES NOT DEAL WITH SUBCONTRACTING BUT RATHER WITH DIRECT CONTRACTING BETWEEN THE GOVERNMENT AND A CORPORATION OWNED AND CONTROLLED BY ITS EMPLOYEES. THE EXCEPTION TO THE GENERAL RULE AGAINST THE GOVERNMENT CONTRACTING WITH ITS EMPLOYEES WHICH WAS APPROVED IN B-136095 ALSO APPEARS TO HAVE NO RELEVANCE IN THE PRESENT CASE SINCE THERE IS NO INDICATION THAT THE AIR FORCE EMPLOYEES INTEND TO RESIGN FROM THEIR GOVERNMENT EMPLOYMENT UPON RECEIVING AWARD OF A GOVERNMENT CONTRACT.

A SITUATION MORE CLOSELY ANALOGOUS TO THIS CASE WAS PRESENTED IN B 124557, OCTOBER 10, 1955, WHEREIN WE HELD THAT THE AIR FORCE ACTED PROPERLY IN REJECTING A BID FROM A CORPORATION OWNED OR CONTROLLED BY AN EMPLOYEE OF ARMY ORDNANCE. THE ACTION WAS TAKEN UNDER AIR FORCE PROCUREMENT INSTRUCTION 1-2003.3 (B) WHICH STATES "IT IS A GENERAL RULE OF PUBLIC POLICY THAT THE GOVERNMENT SHOULD NOT CONTRACT WITH ITS OWN PERSONNEL UNLESS THE NEEDS OF THE GOVERNMENT CANNOT REASONABLY BE MET OTHERWISE.' ALTHOUGH "PUBLIC POLICY" IS A PHRASE WHICH HAS NO EASILY ASCERTAINABLE MEANING, AN INDICATION OF THAT POLICY MAY BE OBTAINED FROM LONG GOVERNMENTAL PRACTICE, STATUTORY ENACTMENTS, AND OBVIOUS ETHICAL OR MORAL STANDARDS. SEE MUSCHANY V. UNITED STATES (1945), 324 U.S.C 49, 66. IN UNITED STATES V. MISSISSIPPI VALLEY GENERATING COMPANY (1961), 364 U.S. 520, THE COURT STATED IN A DISCUSSION OF A CONFLICT OF INTEREST STATUTE AT PAGE 549," THE MORAL PRINCIPLE UPON WHICH THE STATUTE IS BASED HAS ITS FOUNDATION IN THE BIBLICAL ADMONITION THAT NO MAN MAY SERVE TWO MASTERS, MATT. 6:24, A MAXIM WHICH IS ESPECIALLY PERTINENT IF ONE OF THE MASTERS HAPPENS TO BE ECONOMIC SELF-INTEREST.' REGARDLESS OF STATUTE, HOWEVER, CONTRACTS BETWEEN THE GOVERNMENT AND ITS EMPLOYEES HAVE BEEN CONSIDERED SUBJECT TO CRITICISM FROM A PUBLIC POLICY STANDPOINT ON THE GROUNDS OF POSSIBLE FAVORITISM AND PREFERENTIAL TREATMENT. OUR OFFICE HAS OFTEN EXPRESSED THE VIEW THAT SUCH CONTRACTS SHOULD NOT BE MADE EXCEPT FOR THE MOST COGENT REASONS. SEE 4 COMP. GEN. 116; 5 ID. 93; 14 ID. 403; 21 ID 705; 25 ID. 690; 27 ID. 735. THIS SAME PUBLIC POLICY HAS BEEN APPLIED WITH FAR-REACHING EFFECT IN THE FIELD OF MUNICIPAL CORPORATIONS. MUNICIPAL CONTRACT IN WHICH AN OFFICER OR EMPLOYEE OF THE MUNICIPAL CORPORATION HAS A PERSONAL PECUNIARY INTEREST IS VOID AND UNENFORCEABLE BOTH AT COMMON LAW AND UNDER STATUTORY PROVISIONS. 63 C.J.S. MUNICIPAL CORPORATIONS, SECTION 988; TRAINER V. CITY OF COVINGTON ( GA. 1933), 189 S.E. 842; CLARK V. TOWN OF RUSSIA ( NY 1940), 28 N.E.2D 650; CITY OF EDINBURG V. ELLIS ( TEX. 1933), 59 S.W.2D 99.

THE GENERAL RULE AS TO THE INVALIDITY OF A MUNICIPAL CONTRACT IN WHICH AN OFFICER OR EMPLOYEE IS INTERESTED APPLIES WHERE THE OFFICER IS A MEMBER, STOCKHOLDER OR EMPLOYEE OF A COMPANY CONTRACTING WITH THE MUNICIPALITY. 63 C.J.S. MUNICIPAL CORPORATIONS, SECTION 991 (B). IN APPLYING THIS RULE IN GANNTT V. ARKANSAS POWER AND LIGHT CO. ( ARK 1934), 74 S.W.2D 232, THE COURT STATED "JUST HOW OR WHY A STOCKHOLDER IN A CORPORATION SHOULD NOT BE CONSIDERED AS INTERESTED IN THE BUSINESS AND AFFAIRS OF SUCH CORPORATION IS NOT POINTED OUT IN THE BRIEFS, AND WE CANNOT CONCEIVE OF SUCH BEING THE LAW. ALTHOUGH A STOCKHOLDER MAY OWN ONLY ONE SHARE OF THE CAPITAL STOCK OF A CORPORATION, HE IS DIRECTLY INTERESTED IN ITS AFFAIRS.' IN FOSTER V. CAPE MAY ( N.J. 1897), 36 A. 1089, THE COURT HELD THAT A COUNCILMAN HOLDING ONE SHARE OF STOCK FOR COLLATERAL ON A LOAN HAD SUFFICIENT INTEREST TO INVALIDATE A CONTRACT BETWEEN THE CITY AND THE CORPORATION WHOSE STOCK HE HELD.

IN THE PRESENT CASE, WE ARE NOT CALLED UPON TO DETERMINE WHETHER THE HOLDING OF A SMALL AMOUNT OF STOCK BY GOVERNMENT EMPLOYEES IS SUFFICIENT TO BRING THE CORPORATION WITHIN THE GENERAL RULE THAT IT IS UNDESIRABLE FOR THE GOVERNMENT TO CONTRACT WITH ITS EMPLOYEES. THE OWNERSHIP OF EIGHTY PERCENT OF THE STOCK OF SA-MAC BY EMPLOYEES OF MCCLELLAN AIR FORCE BASE AND THE FACT THAT SUCH EMPLOYEES CONSTITUTE A MAJORITY OF THE DIRECTORS AND ALL OF THE OFFICERS, IN OUR OPINION, PLACES THE CORPORATION IN THE SAME RELATIONSHIP THAT THE INDIVIDUAL EMPLOYEES HAVE WITH THE GOVERNMENT FOR THE PURPOSE OF ENTERING INTO CONTRACTS. DESPITE THE FACT THAT THE CORPORATION IS A SEPARATE LEGAL ENTITY, A CONTRACT BETWEEN A CORPORATION OWNED AND CONTROLLED AS THIS ONE, AND THE GOVERNMENT, WOULD AFFORD THE SAME GROUNDS FOR COMPLAINT AS TO ALLEGED FAVORITISM AND POSSIBLE FRAUD IN THE CONDUCT OF PUBLIC BUSINESS THAT WOULD BE AFFORDED THE SAME GROUNDS FOR COMPLAINT AS TO ALLEGED FAVORITISM AND POSSIBLE FRAUD IN THE CONDUCT OF PUBLIC BUSINESS THAT WOULD BE AFFORDED BY A CONTRACT BETWEEN THE GOVERNMENT AND ITS INDIVIDUAL EMPLOYEES.

ALTHOUGH NOT EXPRESSLY PROHIBITED BY STATUTE OR REGULATION IN THIS INSTANCE, WE BELIEVE THAT CONTRACTS BETWEEN THE GOVERNMENT AND ITS EMPLOYEES OR, AS HERE, A CORPORATION CONTROLLED BY THEM, SHOULD BE AUTHORIZED ONLY IN THOSE EXCEPTIONAL CASES WHERE THE NEEDS OF THE GOVERNMENT CANNOT REASONABLY BE OTHERWISE SUPPLIED. WE HAVE NO INFORMATION IN THIS CASE THAT THE SA-MAC CORPORATION MANUFACTURES METAL PARTS AND FITTINGS WHICH ARE UNOBTAINABLE ELSEWHERE. WE MUST CONCLUDE, THEREFORE, THAT CONTRACTING WITH SA-MAC DOES NOT FALL WITHIN THE ABOVE EXCEPTION.