B-173331 August 19, 1971

B-173331: Aug 19, 1971

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Rooney: Further reference is made to your letter of June 17. The documentation required for processsing such a novation agreement in accordance with paragraph 26-402(b) of the Armed Services Procurement REgulations (ASPR) was forwarded to the office of counsel DCASR. The DCSAR counsel issued his opinion to the effect that the documentation furnished was legally sufficient. This part prescribes the policy and procedures for (1) recognition of a successor in interest to Government contracts when such interests are acquired incidental to a transfer of all the assets of a conttractor or such part of his assets as is involved in the performance of the contracts. *** * * * * * * "26-402 Agreement To Recognize a Successor in Interest "(a) The transfer of a Government contract is prohibited by law (41 U.S.C. 15).

B-173331 August 19, 1971

The Honorable Fred B. Rooney House of Representatives

Dear Mr. Rooney:

Further reference is made to your letter of June 17, 1971, relative to questions raised by Mack Trucks, Inc. (Mack), concerning the propriety of a novation agreement between the White Motor Corporation (White) and the AM General Corporation (AMG), a wholly owned subsidiary of Jeep Corporation (formally Kaiser Jeep Corporation), affecting two Production Engineering Contracts (PEC).

The documented report furnished our Office by the Defense Supply Agency (DSA) reveals that the United States Army Tank - Automotive Command, Warren, Michigan and White entered into contract No. DAAE07-71-C-0027 on September 1, 1970, for the period of September 1, 1970 through August 31, 1971, and entered into contract No. DAAE07-71-C-0138 on April 30, 1971, for the period of May 1, 1971 through April 30, 1972, for supplies and services necessary to accomplish the engineering and related functions for the 5 and 2-1/2-ton tactical vehicles under the respective contracts. By letter dated May 24, 1971, White requested that a novation agreement be executed recognizing AMG as a successor in interests to the aforementioned contracts. The documentation required for processsing such a novation agreement in accordance with paragraph 26-402(b) of the Armed Services Procurement REgulations (ASPR) was forwarded to the office of counsel DCASR, Detroit, Michigan, for review. On May 26, 1971, the DCSAR counsel issued his opinion to the effect that the documentation furnished was legally sufficient. Thereafter the Administrative Contracting Officer (ACO), having received the approvals required by ASPR 26-404 executed the novation agreement on behalf of the United States on June 23, 1971, the effective date of the novation agreement being June 1, 1971.

ASPR Section XXVI, Part 4, prescribes the policy and procedures to be followed for the recognition of the successor in interest to Government contracts. Those parts of Section XXVI pertinent here state:

"26-400 SCOPE OF PART. This part prescribes the policy and procedures for (1) recognition of a successor in interest to Government contracts when such interests are acquired incidental to a transfer of all the assets of a conttractor or such part of his assets as is involved in the performance of the contracts, ***

* * * * * *

"26-402 Agreement To Recognize a Successor in Interest "(a) The transfer of a Government contract is prohibited by law (41 U.S.C. 15). However, the Government may recognize a third party as the successor in interest to a Government contract where the third party's interest is incidental the transfer of all the assets of the contractor, or all that part of the contractor's assets involved in the performance of the contract.***"

Mack is of the belief that the intent of ASPR 26-400 is to protect the Government against companies which become financially troubled during performance of a Government contract and find it necessary to sell all or any part of their assets to the successor company. Undoubtly one of the reasons for the quoted provisions concerning novations is to provide procedures to protect the Government against companies which become financially troubled during contract performance, however, to so limit the regulations in question would soon bring to chaos the successful management and completion of innumerable Government contracts because of the sale and transfer of corporate assets pursuant to merger or consolidation; or, corporations and companies wishing to dispose of certain product linesor activities.

Mack is also of the belief that the instant novation agreement is not permissible since White is not transferring any of its capital assets to AMG, other than those assets which are currently the property of the Government. Contrary to Mack's assumption the "Bill of Sale, Assignment and Assumption of Obligations" from White to AMG, executed on May 24,1971, provided for the sale and transfer (will certain exceptions concerning cash and receivables) of all fixtures, tools, machinery, inventories, rights, titles, records, interests, and business, etc., of the PEC Division of the Diamond Reo Division of White to AMG. Outstanding unfilled contracts and orders, excluding contracts with the United States Government, were also transferred.

You are concerned with the correct interpretation of the word "acquired" as it appears in ASPR 26-400. Therefore, you ask "does this mean that the transferred assets must be purchased or can they be leased by the successor in interest?" We believe that "acquired" as used in the above regulation refers to such "interests" in Government contracts which are received by the transferee, rather than property, incidental to a transfer of all the assets of the contractor of such part of his assets as is involved in the performance of the contracts. The ASPR provision does not prohibit the leasing or subleasing of Facilities by the contractor to the transferes nor does it contain a requirement that there must be a transfer of any particular type of assets, or assets owned solely by the contractor. While the regulation contemplates the transfer of such part of the contractor's assets as is involved in the performance of the Government contract, it is apparent hat some of a contractor's machinery or facilities may be rented, or may be used only partially in performing the contract and not owned or readily severable so as to be sold as that part of his assets involved only in the performance of the Government contract. However, the documentation furnished our Office indicates that there was a complete transfer of the contractor's machinery, etc., and facilities, or contracts. The documents also indicate that the property at 111 West Mount Hope Avenue, Lansing, Michigan, to which you refer, was leased by White and that White's interests therein, including the right to renew the lease, were transferred to AMG. The premised at Sangamon Street in Chicago, Illinois, to which you likewise refer, were leased by White and a portion of the premises having been previously subleased by White to another subleasee.

The Government is generally not so much interested in what assets are transferred, or in what manner the transfer of property or interest therein is accomplished, the main concern of the agency concerned being whether the new contractor is in fact a successor in interest to the Government contract and whether the novation agreement is consistent with the Government's interest. While 41 U.S.C. 15 prohibits the asignment of Government contracts, this prohibition was intended for the protection of the Government, which may teat a contract as annulled by an assignment or recognize the assignment as the circumstances in a particular case may warrant. 32 Comp. Gen. 227 (1952). Thus, we believe the Defense Supply Agency was authorized to recognize the AMG as the new contractor since such recognition was determined to be in the interests of the United States.

Inasmuch as we are of the opinion that there is no question as to the legality of the novation agreement under discussion and, as indicated above, we do not believe there has been a violation of the applicable regulations, we are by separate letter advising DSA that we have no legal objection to removal of the suspension against the novation agreement.

If we can be of any further assistance in this matter, please advise us.

Sincerely yours,

R. F. Keller Acting Comptroller General of the United States