B-141070, NOV. 24, 1959

B-141070: Nov 24, 1959

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TO THE SECRETARY OF AGRICULTURE: FURTHER REFERENCE IS MADE TO OUR DECISIONS B-141070. WE STATED THE OPINION THAT IT WAS PROPER FOR THE COMMODITY CREDITY CORPORATION TO REQUIRE A PERFORMANCE BOND IN AN AMOUNT DEEMED ADEQUATE TO PROTECT THE INTERESTS OF THE UNITED STATES IN CONNECTION WITH THE OBLIGATIONS OF A WAREHOUSEMAN UNDER SUCH A COTTON STORAGE AGREEMENT. WE NOW HAVE BEEN REQUESTED TO CONSIDER THE QUESTION WHETHER THE NET WORTH REQUIREMENT AS SPECIFIED IN THE CURRENT REGULATIONS. A REVIEW OF THE PERTINENT REGULATIONS DISCLOSES THAT A PROSPECTIVE CONTRACTOR WHO IS NOT LICENSED UNDER THE U.S. WHAREHOUSE ACT IS REQUIRED TO SUBMIT FINANCIAL STATEMENTS SHOWING HIS NET WORTH BEFORE HE MAY BE GIVEN A STORAGE AGREEMENT.

B-141070, NOV. 24, 1959

TO THE SECRETARY OF AGRICULTURE:

FURTHER REFERENCE IS MADE TO OUR DECISIONS B-141070, DATED OCTOBER 26 AND NOVEMBER 6, 1959, REGARDING THE APPLICATION OF SAMJO, INC., FOR A COTTON STORAGE AGREEMENT WITH THE COMMODITY CREDIT CORPORATION.

IN OUR DECISION OF NOVEMBER 6, 1959, WE STATED THE OPINION THAT IT WAS PROPER FOR THE COMMODITY CREDITY CORPORATION TO REQUIRE A PERFORMANCE BOND IN AN AMOUNT DEEMED ADEQUATE TO PROTECT THE INTERESTS OF THE UNITED STATES IN CONNECTION WITH THE OBLIGATIONS OF A WAREHOUSEMAN UNDER SUCH A COTTON STORAGE AGREEMENT.

WE NOW HAVE BEEN REQUESTED TO CONSIDER THE QUESTION WHETHER THE NET WORTH REQUIREMENT AS SPECIFIED IN THE CURRENT REGULATIONS, CAN BE HELD TO BE AN ASSURANCE IN THE NATURE OF A PERFORMANCE BOND. A REVIEW OF THE PERTINENT REGULATIONS DISCLOSES THAT A PROSPECTIVE CONTRACTOR WHO IS NOT LICENSED UNDER THE U.S. WHAREHOUSE ACT IS REQUIRED TO SUBMIT FINANCIAL STATEMENTS SHOWING HIS NET WORTH BEFORE HE MAY BE GIVEN A STORAGE AGREEMENT. THE REGULATIONS FURTHER PROVIDE FOR AN ANNUAL REVIEW OF CONTRACTORS' FINANCIAL CONDITION AND BOND REQUIREMENTS. HOWEVER, WE FIND NOTHING IN THE REGULATIONS WHICH GIVES THE GOVERNMENT ANY ASSURANCE THAT A CONTRACTOR'S NET WORTH MAY NOT DECREASE OR DISAPPEAR COMPLETELY AFTER HE HAS BEEN AWARDED A COTTON STORAGE AGREEMENT OR EVEN BEFORE AWARD BUT AFTER HIS FINANCIAL STATEMENTS HAVE BEEN SUBMITTED. IN SUCH CIRCUMSTANCES, WE DO NOT BELIEVE THAT THE PRESENT REGULATIONS CONCERNING NET WORTH ADEQUATELY ASSURES PROTECTION TO THE COMMODITY CREDIT CORPORATION AGAINST DEFAULT IN PERFORMANCE BY A CONTRACTOR, ASSUMING THAT A PROTECTION EQUIVALENT TO $10 PER BALE IS DESIRED.

BECAUSE OF THIS, WE MUST CONCLUDE THAT THE NET WORTH REQUIREMENTS AS A SUBSTITUTE FOR A PART OF A PERFORMANCE BOND WHICH WOULD OTHERWISE BE REQUIRED ARE NOT IN THE NATURE OF A PERFORMANCE BOND. SINCE, AS WE CONCLUDE, NET WORTH REQUIREMENTS ARE INEFFECTIVE AS ASSURANCES OF PERFORMANCE, AND ARE NOT IN THE NATURE OF A PERFORMANCE BOND, THE ONLY ALTERNATIVE CONCLUSION IS THAT THEY PERTAIN TO A PROSPECTIVE CONTRACTOR'S GENERAL FINANCIAL RESPONSIBILITY. SO CONSIDERED, WE BELIEVE THE ISSUANCE BY THE SMALL BUSINESS ADMINISTRATION OF A CERTIFICATE THAT A PROSPECTIVE CONTRACTOR IS COMPETENT, AS TO CREDIT, TO PERFORM A PROPOSED COTTON STORAGE AGREEMENT MUST BE ACCEPTED AS SATISFYING THAT FINANCIAL RESPONSIBILITY REQUIREMENT. IN THE CIRCUMSTANCES, WE ARE OF THE OPINION THAT UNDER EXISTING REGULATIONS SAMJO, INC. SHOULD ONLY BE REQUIRED TO FURNISH A PERFORMANCE BOND FOR $60,000, ASSUMING A STORAGE CAPACITY OF 12,000 BALES. OUR DECISION OF NOVEMBER 6, 1959, IS MODIFIED ACCORDINGLY.

FROM AN OVER-ALL STANDPOINT, IT IS SUGGESTED THAT THE DEPARTMENT GIVE CONSIDERATION AS TO THE ADEQUACY OF THE PRESENT REGULATIONS OF THE DEPARTMENT IN THE LIGHT OF OUR COMMENTS AS EXPRESSED HEREIN. WE WOULD APPRECIATE BEING ADVISED OF YOUR VIEWS IN THE MATTER.

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