B-238004, B-242685, May 24, 1991, 70 Comp.Gen. 517

B-238004, B-242685, May 24, 1991, 70 Comp.Gen. 517

APPROPRIATIONS/FINANCIAL - Management - Claims By Government - Interest PROCUREMENT - Contract Disputes - Appeals - Interest 1. The Forest Service is not required to discontinue the assessment of interest, late payment penalties, or administrative costs pursuant to the Federal Claims Collection Act, as amended, 31 U.S.C. Sec. 3717, during the pendency of an appeal under the Contract Disputes Act. PROCUREMENT - Contract Disputes - Sureties - Liability - determination 2. Corporate sureties are liable, up to the penal sum of their bond, for the interest, late payment penalties, and administrative costs assessed against the contractor on whose behalf the surety provides its bond, plus any such assessments made against the surety for its own failure to pay in a timely fashion, even if the latter assessments exceed the penal sum of the bond. APPROPRIATIONS/FINANCIAL - Management - Claims By Government - Litigation expenses - General/administrative costs 3. The Forest Service may not include the costs of defending the agency's position in any appeals brought by a contractor or surety pursuant to the Contract Disputes Act as part of the administrative costs assessed under 31 U.S.C. Sec. 3717 against contractors and sureties.

Interest Under the Federal Claims Collection Act, as Amended, on Debts Appealed Under the Contract Disputes Act of 1978

This responds to separate requests from officials of the Department of Agriculture's Forest Service and its Office of Inspector General concerning the assessment of interest and other charges under the Federal Claims Collection Act of 1966 (FCCA), as amended by the Debt Collection Act of 1982, 31 U.S.C. Sec. 3717 (1988), on delinquent debts arising from national forest timber sales contracts. The questions posed in those requests concern (i) whether the Forest Service may assess interest, penalties, and administrative costs under the FCCA on such debts during the pendency of appeals taken pursuant to the Contract Disputes Act of 1978 (CDA), 41 U.S.C. ch. 9 (1988); (ii) the extent to which the corporate sureties who provide performance bonds for those timber sale contracts are subject to the assessment of those same charges in addition to the penal sums owed under their bonds; and (iii) whether the Forest Service may include its costs of defending appeals taken under the CDA in the administrative costs it assesses against either the contractors or their sureties under the FCCA.

As discussed below in greater detail, we find that: (i) the Forest Service, under the FCCA, should assess interest, late-payment penalties, and administrative costs on delinquent contract debts during the pendency of their appeal under the CDA; (ii) to the extent that it becomes necessary or appropriate to invoke the surety's bond, the surety is liable both for any charges assessed under section 3717 against the contractor, as well as any such charges assessed against the surety itself, after its obligation under the bond is invoked; and, (iii) in neither situation, however, may the Forest Service include its costs of defending or prosecuting an appeal pursuant to the CDA in the administrative costs assessable against the contractor or surety based solely upon the authority of section 3717. Only if such costs are awarded in the course of or by virtue of the CDA procedures or some other applicable statutory or contractual provision (i.e., independent of the FCCA), may they be collected from either the contractor or the surety.

BACKGROUND

As explained in the submissions, the Forest Service sells national forest timber to private purchasers through a program of competitive bidding which is subject to the CDA. In order to protect the government's interests, the Forest Service requires successful bidders (i.e., the contractors) to provide performance bonds, which they often obtain from corporate sureties. If the contractor defaults (e.g., by failing to remove the purchased timber in a timely fashion, or by damaging other government property or resources), the Forest Service assesses damages under the contract, and the Forest Service's Contracting Officer (CO) bills the contractor in accordance with the FCCA and the Federal Claims Collection Standards (FCCS), 4 C.F.R. ch. II (1991). The CO's bill explains the reasons for his determination, the contractor's appeal rights under the CDA, and the government's policies with respect to the assessment of interest, late-payment penalties, and administrative costs under the FCCA and FCCS. /1/ At that time, the CO also notifies the surety of the default and damages.

If the contractor does not pay the amount billed by the due date, the Forest Service bills the surety for the amount of the damages up to the amount of the penal sum of the bond. /2/ If the surety does not pay by the due date, the Forest Service assesses interest against the surety on the amount billed to it, accruing from the date of the billing notice sent to the surety. If the contractor or the surety appeal (either to the Board of Contract Appeals or the Claims Court), the Forest Service continues to accrue interest on the debt during the pendency of the appeal. The submissions indicate that many contractors and sureties have taken the position that the Forest Service cannot legally hold them liable for such charges before completion of the appellate process, and that, in any event, a surety's liability can never exceed the penal sum of its bond. According to the Forest Service, neither its contracts nor the sureties' performance bonds address these issues. The submissions also indicate that, while these issues do occasionally arise in connection with contracts entered into before amendment of the FCCA in 1982 to require interest and other charges, the Forest Service is primarily concerned about those claims which arise under contracts entered into after the amendments.

DISCUSSION

Debts pending appeal

The FCCA and the FCCS impose a general requirement on agencies to assess interest, penalties, and administrative costs on delinquent claims owed to the United States. 31 U.S.C. Sec. 3717(a)(1), (e) ("shall" assess these charges); 4 C.F.R. Sec. 102.13(a) ("shall assess"). Section 104.2(c) of the FCCS provides for the suspension of collection activities where the debtor properly requests waiver or reconsideration of the debt. Whether the agency may or must suspend collection activities under the FCCS depends upon whether the statute under which waiver or reconsideration is sought is "mandatory" or "permissive." 4 C.F.R. Sec. 104.2(c). A statute is said to be "mandatory" where it imposes a "duty to decide" before collection may proceed; it is "permissive" if it does not prohibit collection action pending consideration of the request, and thus allows the agency to decide whether to proceed without awaiting the outcome of the waiver or reconsideration request. E.g., 63 Comp.Gen. 10, 12 n.3 (1983), quoting Califano v. Yamasaki, 442 U.S. 682, 693 n.9 (1979). Under a "mandatory" statute, the agency must suspend collection, including the assessment of interest, until either the agency has decided the issue subject to waiver or reconsideration, or the time within which such a request could be made has passed without one having been made. 4 C.F.R. Sec. 104.2(c)(1). See also 4 C.F.R. Sec. 102.13(h). As we have observed previously:

"While interest serves to compensate a creditor for loss of the use of money, in the specific context of the FCCA as amended by the DCA, it serves perhaps a more important purpose-- to encourage the prompt payment of debts owed to the United States. The authority to charge interest is essentially another weapon in the Government's debt collection arsenal. ... Where a mandatory waiver or reconsideration statute applies, there is no debt upon which collection action may be pursued-- stated differently, the overpayment does not ripen' into a debt-- until the mandatory waiver or reconsideration process has run its course."

63 Comp.Gen. at 12.

Thus, whether the Forest Service must discontinue the accrual of interest and related charges pending completion of the CDA appellate process depends upon whether the CDA is "mandatory" or "permissive," as those terms are used in the FCCS regulations that implement the FCCA. /3/

Our review of the CDA convinces us that it is "permissive" in nature. Nothing in the CDA requires suspending collection action pending appeal. Indeed, the act seems to contemplate otherwise. The CDA provides that: "Nothing in this Act shall prohibit executive agencies from including a clause in government contracts requiring that pending final decision of an appeal, action, or final settlement, a contractor shall proceed diligently with the performance of the contract in accordance with the contracting officer's decisions." 41 U.S.C. Sec. 605(b). The legislative history of this provision notes that it was inserted in order to address "the concerns of the Defense Department that by not including such a statement in the statute, agencies might be precluded from inserting and enforcing sections in their contracts requiring that contractors continue performance on their contracts pending final determination of their claims. ... This will give the executive agencies the flexibility they currently have to include such clauses in their contracts."

124 Cong. Rec. 36267 (Remarks of Sen. Byrd).

The fact that Congress specifically intended agencies to have the discretion to require contractors to perform despite the pendency of claims under the CDA suggests that Congress also intended that agencies may require contractors to comply with other aspects of their contractual obligations-- including the obligation to pay money. The investment in the agency of this discretion under the CDA, in combination with the mandatory interest provisions of the FCCA and FCCS, leads us to conclude that Forest Service generally should continue these assessments during the pendency of CDA appeals unless, in the exercise of sound discretion, it finds, on a case-by-case basis, that the suspension is consistent with the criteria in 4 C.F.R. Sec. 104.2(c)(2). /4/ Of course, this is not to say that agencies are free to ignore the jurisdiction and authority of the Boards of Contract Appeals or the Claims Court when taking collection action on claims which have been submitted to those bodies, but rather, that the dual status of interest assessments as both compensation for late payment and inducement to prompt payment makes it appropriate to continue to accrue interest and related charges even after an appeal has been filed. The continued accrual of interest and related charges does not interfere with the appellate tribunal's authority. Accord, Summit Contractors v. United States, 21 Cl.Ct. 767, 781 (1990) (prejudgment interest assessment not tolled by virtue of surety's appeal of administrative decision against contractor).

Surety's liability

A surety's liability with respect to assessments made against the contractor for the contractor's delay in making payment is limited to the penal sum of its performance bond. This follows from the fact that the surety has contractually pledged to make all payments owed by the contractor to the government, subject to the limits of the penal sum of its bond. However, once the surety's obligation under the bond has been properly invoked, its contractual duty is to make timely payment to the government, in place of the contractor. From that point on, any failure to make timely payment would represent not a derivative liability of the contractor's breach, but, rather, the direct liability of the surety for its own breach, with respect to which the penal sum of the bond is irrelevant. See, for example, United States v. United States Fidelity & Guaranty Co., 236 U.S. 512, 530-31 (1915) (quoting United States v. Hills, 4 Cliff. 618, Fed. Cas. No. 15,369), holding that:

"Sureties, if answerable at all for interest beyond the amount of the penalty of the bond given by their principal, can only be held for such an amount as accrued from their own default in unjustly with holding payment after being notified of the default of the principal."

See also, e.g., Royal Indemnity Co. v. United States, 313 U.S. 289, 295 (1941); Summit Contractors v. United States, 21 Cl.Ct. at 781.

Costs of defending appeals

According to the FCCS, agencies are required to "assess ... charges to cover administrative costs incurred as a result of a delinquent debt, that is, the additional costs incurred in processing and handling the debt because it became delinquent." 4 C.F.R. Sec. 102.13(d). In explaining this provision, the Supplementary Information statement which accompanied the most recent revision of the FCCS stated that an exhaustive and detailed list of the charges included under this rubric would not be "feasible." Instead, the following test was offered: "Whether the particular cost was incurred by virtue of the delinquency or whether it would have been incurred in any event." 49 Fed. Reg. 8889, 8893 (1984).

We do not believe that the costs of defending the government's position in CDA hearings qualify under this test. Indeed, the Supplementary Information statement suggested that "administrative costs" do not include the cost of administrative hearings and appeals. See 65 Comp.Gen. 893, 898 n.13 (1986), interpreting 49 Fed. Reg. at 8895. To allow the government to routinely and unilaterally charge contractors with the costs of the government's defense of appeals would effectively punish, discourage, and defeat pursuit of the procedural rights granted by the CDA. It would also be inconsistent with the authority of the Boards of Contract Appeals and the Claims Court to award costs and attorney fees based upon their United States Claims Court").

In discussing the government's right to assess interest on these debts, the submissions of the Forest Service and the Inspector General stressed that contractors and sureties often (if not usually) delay filing their appeals under the CDA until the last day of the statutory periods established for such actions. Certainly, given the lengthy periods involved (as much as a year, for example, see 41 U.S.C. Sec. 609(a)(3) (appeals to Claims Court)), the practice of delaying the filing of an appeal until the last day possible will often mean that the debt is delinquent at the time that the government incurs the costs of defending the appeal. However, this does not mean that the cost of defending the appeal was incurred by virtue of the delinquency. As the submissions suggest, appeals filed before the onset of delinquency would still have to be defended at a cost to the agency. Thus, there is more of "coincidence" than "cause" to this relationship.

/1/ The FCCA and FCCS generally require agencies to assess interest at the "Treasury tax and loan accounts" rate (also known as the "current value of funds" rate), accruing from the date of the initial notice of delinquency, plus (b) a late-payment penalty of 6 percent per annum on those portions of the debt which are more than 90 days past due, plus (c) a charge to cover the additional administrative costs incurred by the agency in consequence of the debt's delinquency. 31 U.S.C. Sec. 3717; 4 C.F.R. Sec. 102.13. See B-222845, Dec. 9, 1987.

/2/ The Forest Services states that frequently, when claims arise against a timber contractor, the contractor lacks sufficient resources to cover the damages and that those damages usually exceed the penal sum of the bond.

/3/ Contract debts within the scope of the CDA are subject to the assessment of interest and other charges under the FCCA. See 31 U.S.C. Sec. 3701(b), 4 C.F.R. Sec. 101.2(a) (the definition of "claims"). Cf. 31 U.S.C. Sec. 3701(c)(d); 4 C.F.R. Sec. 102.3(b)(4), 102.13(i), 102.19 (identifying kinds of debts and debtors exempt from the DCA). See also, e.g., IBM Corp., ASBCA Nos. 28821, 29106, 84-3 B.C.A. Sec. 17,689; Pat's Janitorial Service, Inc., ASBCA No. 29129, 84-3 B.C.A. Sec. 17,549 (application of the FCCA to contract debts subject to the CDA).

/4/ This result seems equitable given the government's obligation, under 41 U.S.C. Sec. 611, to pay interest to contractors in similar situations.