B-230158.2, Mar 1, 1991, 91-1 CPD ***
B-230158.2: Mar 1, 1991
The offset will be governed by the procedures specified in section 10 of the Debt Collection Act of 1982. DRMS concluded that those two companies were so closely "affiliated" as to justify collection against one in order to recoup the debt of the other. Mid South argues that this action was improper and claims a refund of the withheld amount. Mid-South was unable to convince the Armed Services Board of Contract Appeals to rule on this issue. This Office was asked to consider the merits of Mid-South's claim and the propriety of the DRMS offset. We are unable to allow Mid-South's claim against DRMS. DRMS' actions were fully correct under the law. DRMS concluded that the two firms were sufficiently "affiliated" to justify administrative offset against the certified check which accompanied Mid-South's bid.
B-230158.2, Mar 1, 1991, 91-1 CPD ***
PROCUREMENT - Contract Disputes - Liquidated damages - Amount determination PROCUREMENT - Bid Protests - Administrative policies - Violation - GAO review 1. Where the contract between a government agency and its contractor authorizes the agency to take administrative offset against amounts owed under the contract in order to recoup debts owed by the contractor for other reasons (e.g., debts arising from other contracts or from overpayments), but the contract does not specify the procedures to be followed in such instances, the offset will be governed by the procedures specified in section 10 of the Debt Collection Act of 1982, 31 U.S.C. Sec.3716. PROCUREMENT - Payment/Discharge - Administrative settlement - Set-off 2. GAO declines to overturn an administrative offset taken by the Defense Reutilization and Marketing Service (DRMS) against one of its contractors (Mid-South Metals, Inc.) in order to recoup a debt allegedly owed by another contractor (Southmet Recycling Corp.) because the contractors failed to adequately rebut evidence compiled by DRMS to justify "piercing the corporate veil."
Claim of Mid-South Metals:
This matter concerns action taken by the Defense Reutilization and Marketing Service (DRMS) to recoup a debt owed to it by Southmet Recycling Corporation by means of offset (in the amount of $14,431.80) against a bid deposit filed by Mid-South Metals, Inc. DRMS concluded that those two companies were so closely "affiliated" as to justify collection against one in order to recoup the debt of the other. Mid South argues that this action was improper and claims a refund of the withheld amount. Because appeal of this matter to DRMS proved unsuccessful, and Mid-South was unable to convince the Armed Services Board of Contract Appeals to rule on this issue, this Office was asked to consider the merits of Mid-South's claim and the propriety of the DRMS offset.
For the reasons explained below, we are unable to allow Mid-South's claim against DRMS. Based on the record submitted to us, DRMS' actions were fully correct under the law.
The record before us indicates that in 1985 and 1986 DRMS asserted several claims against Southmet arising from seven sales contracts between the two. /1/ DRMS placed Southmet on its list of indebted and ineligible bidders, pending payment of the government's claim.
In April 1987, a DRMS sales contracting officer noticed certain coincidental facts in a bid submitted by another firm, Mid-South. accordance with agency procedures, DRMS sent a letter to Mid-South suggesting that the two firms appeared to be affiliated. That letter requested certain additional information in order to decide whether Mid South should be allowed to bid on the DRMS sales contracts. In June 1987, after receiving Mid-South's reply, DRMS concluded that the two firms were sufficiently "affiliated" to justify administrative offset against the certified check which accompanied Mid-South's bid. Since a balance still remained on Southmet's debt, DRMS continued to bar Southmet from bidding on its sales and similarly barred Mid-South.
Mid-South was offered the opportunity to appeal these actions to the Defense Logistics Agency, but chose instead to appeal to the Armed Services Board of Contract Appeals (ASBCA) in July 1987. /2/
In August 1987, DRMS received a bid from a firm identified as Weinstein Metals, headed by Harold Weinstein. Alterations in Weinstein's bidding documentation caused DRMS to again suspect an affiliation with Southmet. In subsequent correspondence and conversations with DRMS staff, Mr. Weinstein admitted that his unincorporated firm was affiliated to some degree with Mid-South. Shortly there-after, Mid-South agreed to send a check to DRMS in payment of the balance owed by Southmet. This payment effectively restored Southmet, Mid-South, and Weinstein Metals to eligibility for bidding on DRMS sales contracts. /3/
The submission asked us to consider the propriety of DRMS' collection of Southmet's debts from Mid-South by means of administrative offset. Essentially, DRMS concluded that Southmet and Mid-South were different names for the same entity and that the incorporation of Mid-South represented an improper attempt to avoid legal liability for Southmet's debt to DRMS. For this reason, DRMS "pierced the corporate veil" and took the offset about which Mid-South complains. Mid-South challenges the DRMS offset on two grounds: First, DRMS has not consistently identified the authority under which it acted. Sometimes, DRMS cited as its authority Condition 10 of the DRMS sales contract; /4/ other times it cited section 10 of the Debt Collection Act of 1982 (DCA) /5/ , Pub.L. No. 97-365, codified in 31 U.S.C. Sec.3716 (1988). Second, Mid-South maintains that DRMS cannot properly hold one corporation (Mid-South) liable for a debt owed by another corporation (Southmet).
With respect to the first point, although DRMS' communications did not clearly and consistently identify the source of authority under which it acted, DRMS' lack of clarity did not prejudice Mid-South's rights. noted in our decision in 64 Comp.Gen. 142 (1984), the DCA was intended to give the government the tools to collect debts owed the United States, yet simultaneously assure fair treatment for the government's debtors. Comp.Gen. at 143. Section 10 of that act concerns the use of "administrative offset." Essentially, it requires agencies to give their debtors reasonable notice of the agency's intention to use offset, and a meaningful opportunity to be heard with respect to the amount and validity of the alleged debt and whether and in what amount offset should be taken. /6/ Our decision held, based upon both the broad definition of "administrative offset" contained in section 10, and the due process requirements imposed upon the government by the United States Constitution, that agencies generally are required to follow the procedures prescribed by section 10 whenever they take offsets under other statutes, the common law, or even government contracts, unless different procedures are specified in applicable statutes, regulations, cases, or contractual provisions. /7/
In Mid-South's case, although condition 10 and the DRMS regulations explicitly provided for offset, they did not specify the procedures to be used. DRMS was therefore required to apply the section 10 procedures. other words, both condition 10 and section 10 of the DCA applied to the taking of offset against Mid-South. Cf. 64 Comp.Gen. at 147-48. This means that DRMS was required to accord Mid-South with a reasonable notice and opportunity to be heard on the issues of whether there was a debt owed by Southmet, whether it was proper to hold Mid-South (or Weinstein Metals) liable for that debt, and in what amount collection by offset, if otherwise appropriate, should be taken, and to afford Mid-South the opportunity to work out some alternative method of payment. Cf. 31 U.S.C. Sec.3716; 4 C.F.R. Sec. TT2.3. Our review of the record indicates that these rights were accorded Mid South by DRMS, and were not compromised by DRMS' failure to clearly and consistently identify both the contract clause and the DCA as the relevant sources of authority. Mid-South's first point is answered accordingly.
The second point concerns the propriety of collecting Southmet's debt from Mid-South, based on allegations of common ownership and operations. This tactic, referred to as "piercing the corporate veil," is well established in the law. As the Supreme Court explained in Bangor Punta Operations, Inc. v. Bangor and Aroostook Railroad Co., 417 U.S. 703, 713 (1974) (citations omitted):
"Although a corporation and its shareholders are deemed separate entities for most purposes, the corporate form may be disregarded in the interests of justice where it is used to defeat an overriding public policy... . In such cases, courts of equity, piercing all fictions and disguises, will deal with the substance of the action and not blindly adhere to the corporate form."
In our decision, B-229258, Apr. 14, 1988, we observed that in order for the doctrine to apply, "two dominant requirements must be met -- there must be such unity of interest and ownership that the separate personalities of the parent and subsidiary no longer exist, and circumstances must indicate that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice." The factors most commonly considered in this regard include several relevant to this case: failure to observe the formalities of the corporate form, use of the corporation as a facade for the operations of dominant stockholders, and use of separate corporate identities in promoting injustice or fraud. Cf. B-299258, supra.
Although more frequently applied to the corporate parent-subsidiary relationship, the doctrine may also be applied to corporations affiliated by means of common ownership. E.g., In re Bowen Transports, Inc., 551 F.2d 171, 179 (7th Cir. 1977). Cf. 61 Comp.Gen. 121, 124-25 (1981). There is no requirement that the governing contract, regulation, or statute refer to this principle, which is not surprising, given the rule's origins as an equitable doctrine. Normally, the burden of showing the impropriety of piercing the veil falls upon the company that would be adversely affected. E.g., B-212991, Nov. 28, 1983.
In this case, DRMS amassed and submitted to us considerable evidence to support the conclusion that Southmet and Mid-South were commonly owned, had virtually the same officers, used the same telephone lines, buildings and facilities, equipment, and staff, used each others' names, stationery, uniforms, and corporate "logos" interchangeably, and maintained no apparent separation between the operations of the two firms. Moreover, there were clear indications in the record that would support the inference that the separate corporate entities of Southmet, Mid-South, and Weinstein Metals were used as facades to disguise the singular activities of the common principal stockholders, with the intent to improperly avoid the payment of valid debts owed to the United States.
This record afforded DRMS a solid basis upon which to pierce the veil and enforce collection of Southmet's debt from Mid-South. As noted above, the burden of rebutting this record fell squarely upon Mid South. However, Mid-South has not adequately done so.
We find that Mid-South and Southmet were entitled to and, in fact, did receive appropriate administrative due process consistent with the terms of their contracts and 31 U.S.C. Sec.3716, in conjunction with DRMS' offset actions. We also find that DRMS had ample bases upon which to "pierce the corporate veil" separating Mid-South and Southmet, and that Mid-South has not adequately rebutted the evidence DRMS relied upon in so doing. For these reasons, we cannot authorize payment of Mid-South's claim in this matter.
/1/ Southmet unsuccessfully appealed the agency's determination on one of these to the ASBCA. ASBCA No. 34417, Nov. 19, 1987.
/2/ The ASBCA subsequently declined to take jurisdiction in the matter because the claim did not arise under a contract within the purview of the Contract Disputes Act. ASBCA No. 35731, Dec. 11, 1987.
/3/ We agree with Mid-South that under these circumstances, Mid South's payment of the amount owed by Southmet does not preclude Mid South from continuing to challenge DRMS' collection from Mid-South, rather than Southmet.
/4/ Condition 10 provides that "The Bidder or Purchaser agrees that the selling agency DRMS may use all or a portion of any bid deposit or refund due it to satisfy, in whole or in part, any debts arising out of prior transactions with the selling agency."
/5/ Section 10 of the DCA states, in pertinent part, that subject to certain procedural requirements, agencies may use "administrative offset" to collect debts owed to the United States.
/6/ Section 10 is implemented by section 102.3 of the joint GAO Justice Department regulations known as the Federal Claims Collection Standards, 4 C.F.R. ch. II.
/7/ See 64 Comp.Gen. at 147-49. See also 64 Comp.Gen. 493, 496 (1985); DMJM/Norman Engineering Co., Armed Services Board of Contract Appeals No. 28154, Mar. 2, 1984, reprinted in 84-1 B.C.A. Para. 17,226 (1984).