B-150726, MARCH 4, 1963, 42 COMP. GEN. 451

B-150726: Mar 4, 1963

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SET-OFF - AUTHORITY - EFFECT OF LIEN SUBORDINATION THE SUBORDINATION BY THE SMALL BUSINESS ADMINISTRATION OF ITS LIEN RIGHTS AS SENIOR MORTGAGEE TO PERMIT BORROWERS TO OBTAIN SURETY BONDS AND ADDITIONAL MORTGAGE FINANCING FROM PRIVATE SOURCES IS PROPER. WHERE THE ACTION IS CONSISTENT WITH THE PURPOSES OF THE ACT AND WILL IMPROVE THE PROSPECTS FOR REPAYMENT OF THE LOAN MADE PURSUANT TO SECTION 7 (A) (7) OF THE ACT. THE RIGHT IS RETAINED AGAINST CONTRACTS THAT ARE NOT UNDER BOND TO THE SURETY COMPANY AND AGAINST ANY OTHER CLAIMS WHICH THE BORROWER MAY BE ABLE TO ASSERT AGAINST THE GOVERNMENT. YOU HAVE REQUESTED OUR VIEWS ON THE PROPRIETY OF CERTAIN PROPOSED ACTIONS WITH RESPECT TO LOANS MADE TO SMALL BUSINESS FIRMS PURSUANT TO SECTION 7 OF THE SMALL BUSINESS ACT.

B-150726, MARCH 4, 1963, 42 COMP. GEN. 451

SMALL BUSINESS ADMINISTRATION - LOANS - MORTGAGES - SUBORDINATION OF LIEN. SET-OFF - AUTHORITY - EFFECT OF LIEN SUBORDINATION THE SUBORDINATION BY THE SMALL BUSINESS ADMINISTRATION OF ITS LIEN RIGHTS AS SENIOR MORTGAGEE TO PERMIT BORROWERS TO OBTAIN SURETY BONDS AND ADDITIONAL MORTGAGE FINANCING FROM PRIVATE SOURCES IS PROPER, THE LANGUAGE OF SECTION 5 (B) (7) OF THE SMALL BUSINESS ACT AUTHORIZING THE ADMINISTRATOR TO TAKE ALL ACTIONS RESPECTING THE "MAKING, SERVICING, COMPROMISING, MODIFYING, LIQUIDATING, OR OTHERWISE DEALING WITH OR REALIZING ON LOANS" BEING SUFFICIENTLY BROAD TO INCLUDE THE SUBORDINATION OF THE LOANS, WHERE THE ACTION IS CONSISTENT WITH THE PURPOSES OF THE ACT AND WILL IMPROVE THE PROSPECTS FOR REPAYMENT OF THE LOAN MADE PURSUANT TO SECTION 7 (A) (7) OF THE ACT, WHICH PRESCRIBES THAT LOANS SHALL BE "OF SUCH SOUND VALUE OR SO SECURED AS REASONABLY TO ASSURE REPAYMENT.' IN THE REPAYMENT OF SMALL BUSINESS LOANS MADE PURSUANT TO SECTION 7 OF THE SMALL BUSINESS ACT, AS AMENDED, 15 U.S.C. 636 (A), THE SMALL BUSINESS ADMINISTRATION MAY AGREE NOT TO ENFORCE THE GOVERNMENT'S COMMON LAW RIGHT OF SET-OFF IN CONNECTION WITH THE PERFORMANCE OF A SPECIFIC CONTRACT IN ORDER TO PERMIT THE BORROWER TO OBTAIN A SURETY BOND, SUCH AN AGREEMENT PROPERLY BEING WITHIN THE SCOPE OF THE BROAD AUTHORITY IN THE ACT WHERE CONSIDERATIONS OF POLICY AND THE ULTIMATE ADVANTAGE TO THE GOVERNMENT INDICATES THE DESIRABILITY OF WAIVING THE RIGHT OF SET-OFF, AND, ALTHOUGH THE GOVERNMENT HAS WAIVED ITS RIGHT OF SETOFF AGAINST A PARTICULAR CONTRACT, THE RIGHT IS RETAINED AGAINST CONTRACTS THAT ARE NOT UNDER BOND TO THE SURETY COMPANY AND AGAINST ANY OTHER CLAIMS WHICH THE BORROWER MAY BE ABLE TO ASSERT AGAINST THE GOVERNMENT.

TO THE ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION, MARCH 4, 1963:

BY LETTER OF JANUARY 22, 1963, YOU HAVE REQUESTED OUR VIEWS ON THE PROPRIETY OF CERTAIN PROPOSED ACTIONS WITH RESPECT TO LOANS MADE TO SMALL BUSINESS FIRMS PURSUANT TO SECTION 7 OF THE SMALL BUSINESS ACT, PUBLIC LAW 85-536, AS AMENDED, 15 U.S.C. 636 (A).

IT IS EXPLAINED THAT YOUR AGENCY, IN CARRYING OUT PROGRAMS AUTHORIZED PURSUANT TO THE ABOVE-CITED SECTION, MAKES LOANS TO SMALL BUSINESS CONCERNS ENGAGED IN FEDERAL OR STATE CONSTRUCTION ACTIVITIES FOR WORKING CAPITAL, EXPANSION, EQUIPMENT PURCHASES, AND SIMILAR PURPOSES. THE SMALL BUSINESS ADMINISTRATION FREQUENTLY OBTAINS MORTGAGES ON THE BORROWERS' REAL AND PERSONAL PROPERTY AS SECURITY FOR THE LOANS. IN ADDITION TO THE SECURITY, THE GOVERNMENT'S INTEREST IS PROTECTED BY THE COMMON LAW RIGHT OF SET-OFF.

CONSTRUCTION CONTRACTORS, IN ORDER TO OBTAIN FEDERAL OR STATE CONSTRUCTION CONTRACTS, ARE REQUIRED TO POST BONDS TO INSURE PERFORMANCE OF THE WORK AND PAYMENT OF LABORERS AND MATERIALMEN. IT IS STATED IN THE LETTER THAT MANY SURETY COMPANIES HAVE REFUSED TO ISSUE SUCH BONDS BECAUSE OF THE PRIOR MORTGAGE ON THE BORROWER'S PROPERTY HELD BY SBA AND BECAUSE OF SBA'S RIGHT OF SET-OFF. IT IS EXPLAINED THAT THE FIRMS IN QUESTION MAY BE UNABLE TO OBTAIN CONSTRUCTION CONTRACTS WITHOUT THE SURETY BONDS AND THUS MAY FIND THEMSELVES UNABLE TO REPAY THE SBA LOANS. IN VIEW OF THIS SITUATION OUR VIEWS ARE REQUESTED AS TO WHETHER IT WOULD BE APPROPRIATE, FIRST TO SUBORDINATE SBA LIEN RIGHTS UNDER A SENIOR MORTGAGE IN FAVOR OF A SURETY COMPANY IN ORDER TO PERMIT THE BORROWER TO OBTAIN THE NECESSARY SURETY BONDS, AND SECONDLY TO AGREE NOT TO ENFORCE THE RIGHT OF SET OFF IN CONNECTION WITH THE PERFORMANCE OF A SPECIFIC CONTRACT.

IN CONNECTION WITH THE SUBORDINATION OF SBA'S LIEN RIGHTS AS SENIOR MORTGAGEE, IT IS NOTED THAT SBA HAS EFFECTED SUCH SUBORDINATION IN APPROPRIATE INSTANCES, AS DID ITS PREDECESSOR AGENCY, THE RECONSTRUCTION FINANCE CORPORATION, TO PERMIT THE BORROWER TO OBTAIN BOTH SURETY BONDS AND ADDITIONAL MORTGAGE FINANCING FROM PRIVATE SOURCES.

SECTION 7 (A) (7) OF THE SMALL BUSINESS ACT, 15 U.S.C. 636 (A) (7), PROVIDES THAT ALL LOANS MADE PURSUANT THERETO SHALL BE "OF SUCH SOUND VALUE OR SO SECURED AS REASONABLY TO ASSURE REPAYMENT.' IT HAS BEEN MADE ABUNDANTLY CLEAR BY THE CONGRESS THAT THE USE OF THE WORD "OR" WAS INTENDED TO PROVIDE AN ALTERNATIVE SO THAT A LOAN MAY BE GRANTED IF OF SOUND VALUE, WITH OR WITHOUT SECURITY. SEE H.REPT. NO. 555, 85TH CONG., PAGE 12. THEREFORE, UPON A DETERMINATION THAT THE LOAN IS OF SUCH SOUND VALUE AS REASONABLY TO ASSURE REPAYMENT IT MAY BE GRANTED WITHOUT THE NECESSITY OF OBTAINING A MORTGAGE ON THE BORROWER'S PROPERTY OR OTHER SECURITY.

FURTHER, SECTION 5 (B) (7), 15 U.S.C. 634 (B) (7), AUTHORIZES THE SMALL BUSINESS ADMINISTRATOR, IN CARRYING OUT HIS DUTIES, TO TAKE ALL ACTIONS DETERMINED BY HIM TO BE NECESSARY OR DESIRABLE IN ,MAKING, SERVICING, COMPROMISING, MODIFYING, LIQUIDATING, OR OTHERWISE DEALING WITH OR REALIZING ON LOANS.' WHILE THE PROVISION DOES NOT SPECIFICALLY ESTABLISH THE RIGHT OF THE ADMINISTRATOR IN APPROPRIATE INSTANCES TO SUBORDINATE SENIOR LIENS UNDER THE CIRCUMSTANCES DISCUSSED ABOVE, THE LANGUAGE APPEARS TO BE SUFFICIENTLY BROAD TO INCLUDE SUCH AUTHORITY AND HAS, AS INDICATED IN YOUR LETTER, BEEN CONSISTENTLY REGARDED AS THE STATUTORY BASIS FOR ACTIONS OF THIS TYPE TAKEN BY YOUR AGENCY IN THE PAST. THE LONGSTANDING STATUTORY CONSTRUCTION, WITHOUT CONGRESSIONAL OR OTHER OBJECTION, WOULD APPEAR STRONGLY TO SUPPORT ITS VALIDITY. SEE 2 SUTHERLAND, STATUTORY CONSTRUCTION, 3RD EDITION, SECTION 5107. THE LANGUAGE OF THE SECTION QUOTED ABOVE APPEARS TO HAVE BEEN INTENDED TO GIVE THE ADMINISTRATOR BROAD AUTHORITY IN DEALING WITH LOANS IN ORDER TO PROTECT THE INTEREST OF THE GOVERNMENT AND ALSO TO CARRY OUT THE PURPOSES OF THE ACT WHICH ARE STATED AT SECTION 2 (A), AS AMENDED BY PUBLIC LAW 87-305, 15 U.S.C. 631 (A), IN PART AS FOLLOWS:

* * * IT IS THE DECLARED POLICY OF THE CONGRESS THAT THE GOVERNMENT SHOULD AID, COUNSEL, ASSIST, AND PROTECT, INSOFAR AS IS POSSIBLE, THE INTERESTS OF SMALL-BUSINESS CONCERNS IN ORDER TO PRESERVE FREE COMPETITIVE ENTERPRISE, TO INSURE THAT A FAIR PROPORTION OF THE TOTAL PURCHASES AND CONTRACTS OR SUBCONTRACTS FOR PROPERTY AND SERVICES FOR THE GOVERNMENT (INCLUDING BUT NOT LIMITED TO CONTRACTS OR SUBCONTRACTS FOR MAINTENANCE, REPAIR, AND CONSTRUCTION) BE PLACED WITH SMALL BUSINESS ENTERPRISES, TO INSURE THAT A FAIR PROPORTION OF THE TOTAL SALES OF GOVERNMENT PROPERTY BE MADE TO SUCH ENTERPRISES, AND TO MAINTAIN AND STRENGTHEN THE OVERALL ECONOMY OF THE NATION.

IN VIEW OF THE FOREGOING, WE SEE NO OBJECTION TO SUBORDINATING SENIOR LIENS OF THE TYPE DESCRIBED ABOVE IN CIRCUMSTANCES WHERE IT IS DETERMINED THAT SUCH ACTION WILL BE CONSISTENT WITH THE PURPOSES OF THE ACT AND WILL IMPROVE THE PROSPECTS FOR REPAYMENT OF THE LOAN MADE PURSUANT TO SECTION 7 (A) (7).

WITH RESPECT TO WAIVING THE RIGHT OF SET-OFF, AS TO SPECIFIC CONTRACTS, WE ARE ASSURED THAT SBA WOULD RETAIN SUCH RIGHT AS AGAINST OTHER CONTRACTS NOT UNDER BOND TO THE SURETY COMPANY AND AS TO ANY OTHER CLAIMS WHICH THE BORROWER MAY BE ABLE TO ASSERT AGAINST THE GOVERNMENT. WE BELIEVE THAT SUCH ACTION AS YOU PROPOSE WITH RESPECT TO THE RIGHT OF SET-OFF IS PROPERLY WITHIN THE SCOPE OF THE BROAD AUTHORITY SET OUT ABOVE IN THE TYPE OF SITUATION DESCRIBED, WHERE CONSIDERATIONS OF POLICY AND THE ULTIMATE ADVANTAGE TO THE GOVERNMENT WOULD INDICATE THE DESIRABILITY OF SUCH A COURSE OF ACTION.