Claim of the Security Bank & Trust Company, Lawton, Oklahoma

The Small Business Administration (SBA), as the prime contractor for food services at an Army base, subcontracted the work to a small business. The subcontractor was then granted a line of credit from a bank which was to be repaid directly by the SBA from the bimonthly contract payments. The contract was extended for a second year, and the bank was notified of the contract extension as well as a modification which provided that the contract could end pending an award under solicitation, and that the bank would be given 30 days notice of the termination. The bank then granted the subcontractor another loan without Government involvement which was not repaid. The bank claimed that SBA was liable for the amount since it had not been given the 30 days notice of termination which had been promised. SBA questioned the claim and also asked whether the Army was required to notify the bank of the termination and whether the Government's failure to notify the bank of the termination made it liable for the subcontractor's default. It was held that even though the bank was not given the 30 days notice, the modification indicating termination as well as the significantly different payment procedure should have alerted the bank to the possibility of sudden termination which would foreclose the 30 days notice despite the SBA promise to the contrary. Since the circumstances effectively placed the bank on actual or constructive notice that it was to rely on the subcontractor's ability and willingness to honor any future loans, and the bank knowingly elected to make the loan without any Government involvement, it was recommended that the SBA and the Army deny liability and disallow the claim.