B-178674, AUG 1, 1974, 54 COMP GEN 80

B-178674: Aug 1, 1974

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INCORPORATED SEEKS OUR OPINION AS TO WHETHER IT IS A "FINANCING INSTITUTION" WITHIN THE MEANING OF THE ASSIGNMENT OF CLAIMS ACT. WHETHER A PROPOSED ASSIGNMENT OF PAYMENTS UNDER GOVERNMENT EQUIPMENT LEASES TO ALANTHUS PERIPHERALS IS PERMISSIBLE UNDER THE STATUTE. AGENCIES OF THE GOVERNMENT HAVE TAKEN CONFLICTING POSITIONS REGARDING THE VALIDITY OF SUCH ASSIGNMENTS. THE PURPOSE OF THE 1940 ENACTMENT WAS TO MAKE IT EASIER FOR GOVERNMENT CONTRACTORS. THIS IS LARGELY BECAUSE OF A PATTERN SET BY INTERNATIONAL BUSINESS MACHINES CORPORATION (IBM). HAVE DEVELOPED PRODUCTS WHICH COMPETE WITH OLDER METHODS OF DATA ENTRY AND WITH IBM-MANUFACTURED MEMORY. MANY OF THESE MANUFACTURERS ARE UNDERCAPITALIZED AND MUST SELL THEIR EQUIPMENT IN ORDER TO RECOVER MANUFACTURING COSTS AND PRODUCE A POSITIVE CASH FLOW.

B-178674, AUG 1, 1974, 54 COMP GEN 80

CLAIMS - ASSIGNMENTS - VALIDITY - LEASE PAYMENTS - COMPUTER EQUIPMENT ASSIGNMENT OF LEASE PAYMENTS UNDER GOVERNMENT LEASES FOR COMPUTER EQUIPMENT TO LEASE FINANCING COMPANY WHICH PURCHASES TITLE TO EQUIPMENT SHOULD BE RECOGNIZED SINCE PURCHASER OF EQUIPMENT MAY BE REGARDED AS FINANCING INSTITUTION UNDER ASSIGNMENT OF CLAIMS ACT.

IN THE MATTER OF ALANTHUS PERIPHERALS, INC., AUGUST 1, 1974:

ALANTHUS PERIPHERALS, INCORPORATED SEEKS OUR OPINION AS TO WHETHER IT IS A "FINANCING INSTITUTION" WITHIN THE MEANING OF THE ASSIGNMENT OF CLAIMS ACT, 31 U.S.C. 203, 41 U.S.C. 15, AND WHETHER A PROPOSED ASSIGNMENT OF PAYMENTS UNDER GOVERNMENT EQUIPMENT LEASES TO ALANTHUS PERIPHERALS IS PERMISSIBLE UNDER THE STATUTE. AS EXPLAINED BELOW, AGENCIES OF THE GOVERNMENT HAVE TAKEN CONFLICTING POSITIONS REGARDING THE VALIDITY OF SUCH ASSIGNMENTS.

THE ASSIGNMENT OF CLAIMS ACT OF 1940, 54 STAT. 1029, 31 U.S.C. 203, AS AMENDED, PERMITS ASSIGNMENTS OF GOVERNMENT CONTRACT PROCEEDS TO FINANCING INSTITUTIONS IN DEROGATION OF THE GENERAL PROHIBITION AGAINST ASSIGNMENTS. THE PURPOSE OF THE 1940 ENACTMENT WAS TO MAKE IT EASIER FOR GOVERNMENT CONTRACTORS, PARTICULARLY SMALL BUSINESSES, TO SECURE FINANCING FOR CARRYING OUT OBLIGATIONS TO THE GOVERNMENT TO THE END THAT GOVERNMENT CONTRACTS MIGHT BE SPEEDILY AND EFFECTIVELY PERFORMED. ADDITIONALLY, THE ACT IMPLEMENTED THE CONGRESSIONAL PREFERENCE THAT FEDERAL CONTRACTS BE FINANCED BY PRIVATE RATHER THAN PUBLIC CAPITAL. SEE PRODUCE FACTORS CORPORATION V. UNITED STATES, 467 F.2D 1343, 199 CT. CL. 572 (1972) AND CONTINENTAL BANK AND TRUST COMPANY V. UNITED STATES, 416 F.2D 1296, 189 CT. CL. 99 (1969).

IN DESCRIBING THE BACKGROUND OF THE PRESENT CASE, ALANTHUS PERIPHERALS STATES:

HISTORICALLY DATA PROCESSING EQUIPMENT HAS BEEN OBTAINED BY END USERS THROUGH THE VEHICLE OF LEASING RATHER THAN PURCHASE. THIS IS LARGELY BECAUSE OF A PATTERN SET BY INTERNATIONAL BUSINESS MACHINES CORPORATION (IBM), THE DOMINANT FACTOR IN THE DATA PROCESSING INDUSTRY. IBM HAS ALWAYS ENCOURAGED THE LEASING OF ITS EQUIPMENT RATHER THAN THE PURCHASE OF THAT EQUIPMENT BY END USERS. IN RECENT YEARS, SMALLER MANUFACTURERS OF DATA PROCESSING EQUIPMENT, PRINCIPALLY DATA ENTRY EQUIPMENT AND MEMORY, HAVE DEVELOPED PRODUCTS WHICH COMPETE WITH OLDER METHODS OF DATA ENTRY AND WITH IBM-MANUFACTURED MEMORY. MANY OF THESE MANUFACTURERS ARE UNDERCAPITALIZED AND MUST SELL THEIR EQUIPMENT IN ORDER TO RECOVER MANUFACTURING COSTS AND PRODUCE A POSITIVE CASH FLOW. TRADITION IN THE INDUSTRY HOWEVER DICTATES THAT THEY LEASE THEIR EQUIPMENT RATHER THAN SELL IT TO END USERS. AS A RESULT, THE MANUFACTURER MUST WAIT SEVERAL YEARS TO RECOVER ITS COSTS AND TO SHOW A PROFIT, DURING WHICH PERIOD A NEGATIVE CASH FLOW RESULTS.

ALANTHUS PERIPHERALS IS SAID TO BE A SEPARATE CORPORATE ENTITY FROM, AND A WHOLLY OWNED SUBSIDIARY OF, ALANTHUS CORPORATION. ALTHOUGH ALANTHUS CORPORATION IS ENGAGED IN THE BUSINESS OF PURCHASING DATA PROCESSING EQUIPMENT FROM THE LARGER MANUFACTURERS AND OBTAINING LEASE AGREEMENTS WITH USERS, AS LESSOR, IT IS RESPONSIBLE FOR THE MAINTENANCE AND SERVICE OF THE EQUIPMENT.

ON THE OTHER HAND, ALANTHUS PERIPHERALS ENTERS INTO AGREEMENTS WITH INDEPENDENT MANUFACTURERS WHICH PROVIDE FOR THE PURCHASE OF A LARGE PORTION OF THE MANUFACTURER'S LEASE PORTFOLIO. THE COMPANY ACQUIRES TITLE TO SPECIFIC EQUIPMENT FROM THE MANUFACTURER ON THE DATE A LEASE BETWEEN THE MANUFACTURER AND THE END USER GOES INTO EFFECT, AT WHICH TIME WE UNDERSTAND THE COMPANY MAKES PAYMENT TO THE MANUFACTURER. THE LEASE PAYMENTS ARE ASSIGNED TO ALANTHUS PERIPHERALS BUT THE MANUFACTURER REMAINS RESPONSIBLE FOR THE MAINTENANCE AND SERVICE OF THE EQUIPMENT. ALANTHUS PERIPHERALS ASSUMES NO OBLIGATION TO THE GOVERNMENT AS A RESULT OF THE TRANSACTION BETWEEN IT AND THE MANUFACTURER. FURTHERMORE, UPON EXPIRATION OF THE LEASE THE MANUFACTURER IS RESPONSIBLE FOR REMARKETING THE EQUIPMENT AS THE EXCLUSIVE AGENT OF THE OWNER. COUNSEL FOR ALANTHUS PERIPHERALS STATES THAT WHILE A SALE TRANSACTION IS UTILIZED RATHER THAN A NORMAL FACTORING OF ACCOUNTS RECEIVABLE, THE SALE IS A NECESSARY DEVICE TO SUPPORT THE TWO "LAYERS" OF FINANCING. WHEN THE MANUFACTURER AGREES TO SELL A PORTION OF ITS LEASE PORTFOLIO TO ALANTHUS PERIPHERALS IT RECEIVES AN ADVANCE FROM ITS BANK BASED ON SUCH SALE AND COUNSEL CONTENDS THAT THE BANK'S FINANCING IS, IN EFFECT, REPLACED BY ALANTHUS PERIPHERALS WHEN IT MAKES PAYMENT FOR THE EQUIPMENT PURCHASED AT THE COMMENCEMENT OF THE LEASE.

ON OCTOBER 2, 1972, THE UNITED STATES GEOLOGICAL SURVEY, DEPARTMENT OF THE INTERIOR, APPROVED SUCH AN ASSIGNMENT TO ALANTHUS PERIPHERALS OF MONIES DUE UNDER A LEASE BETWEEN THE DEPARTMENT AND SCAN-DATA CORPORATION (SCAN), A SMALL INDEPENDENT MANUFACTURER OF DATA PROCESSING EQUIPMENT. DECEMBER 1972 A NOTICE OF ASSIGNMENT WAS SUBMITTED TO THE VETERANS ADMINISTRATION (VA) RELATING TO THE ASSIGNMENT TO ALANTHUS PERIPHERALS OF MONIES DUE UNDER CONTRACT NO. GS-00S-4291 AND LETTER ORDER NO. 2-204-13, DATED MARCH 15, 1972, AS AMENDED, ENTERED INTO BETWEEN SCAN AND THE VA, COVERING SCAN DATA PROCESSING EQUIPMENT.

BOTH ASSIGNMENTS TO ALANTHUS PERIPHERALS WERE IDENTICAL IN FORM, BUT THE VA REFUSED TO ACKNOWLEDGE THE ASSIGNMENT ON THE GROUND THAT ALANTHUS PERIPHERALS IS NOT A "FINANCING INSTITUTION" WITHIN THE MEANING OF THE ASSIGNMENT OF CLAIMS ACT.

AN ASSIGNMENT IS A MANIFESTATION OF INTENTION BY THE OWNER OF A RIGHT TO ANOTHER PERSON, PRESENTLY TO TRANSFER SUCH RIGHT TO THAT OTHER PERSON OR TO A THIRD PERSON. (SEE RESTATEMENT OF CONTRACTS, SECTION 149(1).) THE PRESENT CASE, WE HAVE A PAYMENT OF MONEY FROM ALANTHUS PERIPHERALS TO SCAN IN RETURN FOR TITLE TO THE COMPUTER EQUIPMENT, LEASED TO THE GOVERNMENT, AND THE ASSIGNMENT TO ALANTHUS PERIPHERALS OF THE RIGHT TO LEASE PAYMENTS FROM THE GOVERNMENT. EVEN THOUGH THE TRANSFER OF THE RIGHT TO RECEIVE MONEY UNDER THE LEASE IS INCORPORATED WITHIN A SALE OF LEGAL TITLE OF TANGIBLE PROPERTY, IT CONSTITUTES AN ASSIGNMENT OF A RIGHT.

A PURPOSE OF THE ASSIGNMENT OF CLAIMS ACT, AS AMENDED, "*** IS TO ASSIST GOVERNMENT CONTRACTORS IN FINANCING THEIR OPERATIONS." PETERMAN LUMBER COMPANY V. ADAMS, 128 F. SUPP. 6, 13 (W.D. ARK. 1955). THE COURT IN PETERMAN CONTINUED:

*** THAT UNDER THE ACT A CONTRACTOR MAY ASSIGN HIS PAYMENTS UNDER A PARTICULAR CONTRACT TO THE BANK AS SECURITY FOR THE ADVANCES MADE IN CONNECTION WITH SAID CONTRACT; OR THE CONTRACTOR (WHEN HE IS PERFORMING A NUMBER OF GOVERNMENT CONTRACTS) MAY ASSIGN HIS PAYMENTS UNDER A PARTICULAR CONTRACT AS SECURITY FOR MONEY ADVANCED BY THE BANK IN CONNECTION WITH HIS WHOLE OPERATION OF PERFORMING OTHER GOVERNMENT CONTRACTS AS WELL AS THAT PARTICULAR CONTRACT.

THUS, IN ORDER FOR AN ASSIGNMENT TO BE INCLUDED WITHIN THE ASSIGNMENT OF CLAIMS ACT, THE ASSIGNEE MUST FINANCE A GOVERNMENT CONTRACTOR IN HIS PERFORMANCE OF A GOVERNMENT CONTRACT OR CONTRACTS. MOREOVER, WE HAVE HELD, IN THE WAKE OF THE UNREPORTED OPINION OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TENNESSEE, SOUTHERN DIVISION, IN CHATTANOOGA WHEELBARROW CO. V. UNITED STATES, CIVIL ACTION NO. 4755, JANUARY 26, 1967, THAT "*** AN ASSIGNMENT HAD NO VALIDITY AGAINST THE UNITED STATES WHERE THERE WAS NO LOAN BY THE ASSIGNEE TO THE ASSIGNOR TO BE USED IN PERFORMANCE OF THE CONTRACT WITH THE ***" GOVERNMENT, B-175670, MAY 25, 1972. ALSO SEE 49 COMP. GEN. 44, 46 (1969).

IN A SUBMISSION TO THIS OFFICE, COUNSEL FOR ALANTHUS PERIPHERALS CONTENDS THAT PETERMAN; CHATTANOOGA WHEELBARROW; BEACON WEAR CLOTHING CO. V. UNITED STATES, 174 CT. CL. 40, 355 F.2D 583 (1966) AND 49 COMP. GEN. 44 (1969) DO NOT STAND "*** FOR THE PROPOSITION THAT A GOVERNMENT AGENCY MUST OR SHOULD REFUSE TO HONOR AN ASSIGNMENT OF CONTRACT PROCEEDS WHEN THERE IS NO SHOWING OF AN EXISTING UNDERLYING 'LOAN'." ALANTHUS PERIPHERALS FURTHER CONTENDS THAT:

THE ONLY POSSIBLE REQUISITE TO THE VALIDITY OF AN ASSIGNMENT PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT IS THAT THE ASSIGNMENT BE MADE FOR THE GENERAL PURPOSE OF FINANCING GOVERNMENT CONTRACTS AND THE INSTANT TRANSACTION MEETS THAT STANDARD.

IN EACH OF THE CITED CASES THERE WAS AN ADVANCE OF MONEY FOR THE PURPOSE OF FINANCING THE PARTICULAR CONTRACT AND THE GOVERNMENT WAS NOT REQUIRED TO RECOGNIZE THE COLLATERAL ASSIGNMENT ONCE THE UNDERLYING DEBT WAS SATISFIED. WE AGREE WITH COUNSEL THAT THE ABOVE CASES DO NOT REQUIRE THE EXISTENCE OF A LOAN AS A PREREQUISITE TO A VALID ASSIGNMENT. RATHER, THEY DEAL WITH THE QUESTION OF THE EXTENT TO WHICH THE GOVERNMENT MUST RECOGNIZE THE VALIDITY OF AN ASSIGNMENT WHERE THE CONTRACT HAS BEEN FINANCED WITH A LOAN. TO THE EXTENT THAT FINANCING IS EFFECTED THROUGH THE PURCHASE AND ASSIGNMENT OF ACCOUNTS RECEIVABLE, THE SITUATION DISCUSSED IN THESE CASES DOES NOT ARISE.

A FACTORING COMPANY HAS BEEN CONSIDERED TO BE A FINANCING INSTITUTION TO WHOM ASSIGNMENTS COULD BE MADE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940. THIS IS ONE WHO PURCHASES MERELY THE ACCOUNTS RECEIVABLE. 20 COMP. GEN. 415 (1941). GENERALLY ASSIGNMENTS ARE RECOGNIZED WHERE THE ASSIGNEE DEALS IN MONEY AS DISTINGUISHED FROM OTHER COMMODITIES AS A PRIMARY FUNCTION OF ITS BUSINESS ACTIVITY (22 COMP. GEN. 44, 46 (1942)) AND AN ORDINARY BUSINESS CORPORATION WHICH INCIDENTALLY PROVIDES FINANCING TO ITS SUPPLIERS IS NOT A PROPER ASSIGNEE UNDER THE ACT. 31 COMP. GEN. 90 (1950).

THE QUESTION HERE STEMS FROM THE FACT THAT ALANTHUS PERIPHERALS PURCHASES NOT ONLY THE ACCOUNTS RECEIVABLE BUT ALSO THE PARTICULAR EQUIPMENT INVOLVED AND THEREFORE IT MAY BE VIEWED AS FUNCTIONING, AT LEAST IN PART, AS A LEASING COMPANY. HOWEVER, WE BELIEVE AN ANALOGY MAY BE DRAWN HERE TO THE SITUATION CONSIDERED IN FREEDMAN'S SAVINGS AND TRUST CO. V. SHEPHERD, 127 U.S. 494 (1888) WHEREIN THE COURT HELD THAT A CONTRACT FOR THE LEASE OF REAL PROPERTY WAS PROPERLY TRANSFERRED UPON THE SALE OF THE REALTY WHERE THE LESSOR PERFORMED NO FUNCTION OTHER THAN TO COLLECT THE RENT. WHILE IN THE INSTANT CASE THERE IS NO ATTEMPT TO TRANSFER THE LEASE CONTRACT ITSELF, THERE IS A SALE OF THE UNDERLYING SUBJECT MATTER OF THE LEASE CONCERNING WHICH THE PURCHASER, AS IN FREEDMAN'S, PERFORMS AN ENTIRELY PASSIVE ROLE INSOFAR AS CONCERNS THE GOVERNMENT'S USE OF THE LEASED EQUIPMENT.

FURTHERMORE, WE BELIEVE THAT THE ARRANGEMENT HERE MAY BE VIEWED, IN A LARGER SENSE, AS PROVIDING LEASE FINANCING TO THE MANUFACTURER AND AS CONTRIBUTING TO THE PERFORMANCE OF GOVERNMENT CONTRACTS. MANY FACTORS WHICH ARE UNIQUE TO THE PERIPHERAL EQUIPMENT INDUSTRY EXPLAIN THE EXISTENCE OF THIS TYPE OF ARRANGEMENT. THERE EXISTS INTENSE COMPETITION AMONG MANUFACTURERS OF PERIPHERAL EQUIPMENT WHICH HAS PRODUCED A RAPID RATE OF TECHNICAL INNOVATION AND OBSOLESCENCE. UNDER SUCH CONDITIONS EQUIPMENT USERS NORMALLY DO NOT PURCHASE EQUIPMENT BUT RATHER PREFER TO ENTER INTO RELATIVELY SHORT TERM LEASES. NEWLY DEVELOPING MANUFACTURERS CANNOT AFFORD TO PROVIDE SUCH SHORT TERM LEASES TO COVER THEIR ENTIRE OUTPUT BECAUSE OF THE EXPENSES OF MANUFACTURING AND THEY FIND THAT THE ACCOUNTING RAMIFICATIONS OF SUCH A LEASING OPERATION ARE UNDESIRABLE. THIS SITUATION THE LEASING COMPANY, WHICH MAY BE VIEWED AS "AKIN TO A VENTURE CAPITALIST," IS PRIMARILY A "FINANCIAL INTERMEDIARY" WITHOUT ITS OWN MARKETING OR SERVICE CAPABILITIES. SEE BIRNBAUM, LEASE FINANCING FOR FLEDGLING MANUFACTURERS OF COMPUTER PERIPHERAL EQUIPMENT, 29 BUS. LAW'R 477 (1974). CONSIDERING THE PECULIAR CIRCUMSTANCES OF THE PERIPHERAL EQUIPMENT INDUSTRY, THE ROLE OF ALANTHUS PERIPHERALS AS A FINANCING INTERMEDIARY APPEARS TO BE SIGNIFICANT AND IS AN ACCEPTABLE ALTERNATIVE TO BORROWING FROM CONVENTIONAL LENDERS AGAINST THE SECURITY OF THE LEASED EQUIPMENT AND CONTRACTUAL RIGHTS TO RECEIVE RENT. ALTHOUGH IT MAY BE DEBATABLE WHETHER SUCH LEASE FINANCING COMPANIES PRIMARILY DEAL IN MONEY AS OPPOSED TO OTHER COMMODITIES, WE DO NOT THINK THAT THIS SHOULD BE THE PIVOTAL CRITERION FOR APPLYING THE FINANCING INSTITUTION EXCEPTION OF THE ASSIGNMENT OF CLAIMS ACT. IN VIEW OF THE UNIQUE CIRCUMSTANCES OF THE PERIPHERAL EQUIPMENT INDUSTRY, WE HAVE CONCLUDED THAT THE INSTANT ARRANGEMENT SHOULD BE RECOGNIZED AS PROVIDING LEASE FINANCING WHICH SIGNIFICANTLY CONTRIBUTES TO THE PERFORMANCE OF GOVERNMENT CONTRACTS AND THAT THIS TYPE OF LEASE FINANCING OPERATION IS MORE THAN AN INCIDENTAL FUNCTION OF SUCH LEASE FINANCING COMPANIES. FURTHER, WE BELIEVE ASSIGNMENTS INCIDENT TO SUCH LEASE FINANCING ARRANGEMENTS FURTHER THE OBJECTIVES OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, AND THAT SUCH LEASE FINANCING COMPANIES SHOULD BE REGARDED AS FINANCING INSTITUTIONS UNDER THE ACT.