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73–211 PDF 2012

SECURITY IN BONDING ACT OF 2011 

HEARING 

BEFORE THE

SUBCOMMITTEE ON COURTS, COMMERCIAL 

AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

ON

H.R. 3534 

MARCH 5, 2012 

Serial No. 112–93 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 

(II) 

COMMITTEE ON THE JUDICIARY 

LAMAR SMITH, Texas, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

DENNIS ROSS, Florida 

SANDY ADAMS, Florida 

BEN QUAYLE, Arizona 

MARK AMODEI, Nevada 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

JARED POLIS, Colorado 

RICHARD HERTLING, Staff Director and Chief Counsel 

PERRY APELBAUM, Minority Staff Director and Chief Counsel 

SUBCOMMITTEE ON COURTS, COMMERCIAL AND ADMINISTRATIVE LAW

HOWARD COBLE, North Carolina, Chairman 

TREY GOWDY, South Carolina, Vice-Chairman 

ELTON GALLEGLY, California 

TRENT FRANKS, Arizona 

DENNIS ROSS, Florida 

BEN QUAYLE, Arizona 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

MELVIN L. WATT, North Carolina 

JARED POLIS, Colorado 

DANIEL FLORES, Chief Counsel 

JAMES PARK, Minority Counsel 

(III) 

C O N T E N T S 

MARCH 5, 2012 

Page 

THE BILL 

H.R. 3534, the ‘‘Security in Bonding Act of 2011’’ ................................................ 3 

OPENING STATEMENT 

The Honorable Howard Coble, a Representative in Congress from the State 

of North Carolina, and Chairman, Subcommittee on Courts, Commercial 

and Administrative Law ...................................................................................... 1 

WITNESSES 

Mark H. McCallum, CEO, National Association of Surety Bond Producers 

Oral Testimony ..................................................................................................... 6 

Prepared Statement ............................................................................................. 8 

Jeanette Wellers, President & CFO, JBlanco Enterprises, Inc. 

Oral Testimony ..................................................................................................... 21 

Prepared Statement ............................................................................................. 23 

Robert E. Little, Jr., Of Counsel, Cohen Seglias Pallas Greenhall & Furman 

PC 

Oral Testimony ..................................................................................................... 25 

Prepared Statement ............................................................................................. 26 

Karen Pecora-Barbour, President, The Barbour Group, LLC 

Oral Testimony ..................................................................................................... 32 

Prepared Statement ............................................................................................. 35 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Material submitted by the Honorable Howard Coble, a Representative in 

Congress from the State of North Carolina, and Chairman, Subcommittee 

on Courts, Commercial and Administrative Law .............................................. 58 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, and Ranking Member, Committee 

on the Judiciary ................................................................................................... 69 

Prepared Statement of the Honorable Steve Cohen, a Representative in Congress from the State of Tennessee, and Ranking Member, Subcommittee 

on Courts, Commercial and Administrative Law .............................................. 76 

Response to Post-Hearing Questions from Mark H. McCallum, CEO, National 

Association of Surety Bond Producers ................................................................ 82 

Response to Post-Hearing Questions from Karen Pecora-Barbour, President, 

The Barbour Group, LLC .................................................................................... 88 

Prepared Statement of the American Subcontractors Association, Inc. .............. 92 

(1) 

SECURITY IN BONDING ACT OF 2011 

MONDAY, MARCH 5, 2012 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COURTS, 

COMMERCIAL AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 4 p.m., in room 2141, 

Rayburn House Office Building, the Honorable Howard Coble 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Coble and Gowdy. 

Also Present: Representative Hanna. 

Staff Present: (Majority) Travis Norton, Counsel; Ashley Lewis, 

Clerk; and (Minority) James Park, Subcommittee Chief Counsel. 

Mr. COBLE. The witnesses will please take your places, if you 

will, and the Subcommittee will come to order. We have other people who are on their way, I am told, so we will move along initially. 

Good to have you all with us, by the way. 

I will give my opening statement at this time. 

Surety bonds are financial instruments used to provide the national security for large construction contracts. For example, prime 

contractors typically post payment bonds to assure subcontractors 

that they will be paid for their work. Prime contractors may also 

bid, and post performance bonds to guarantee the owner that the 

work will be performed according to the contract. 

The Federal Government regularly contracts with privately 

owned businesses to complete construction projects. In doing so, the 

government requires contractors to obtain surety bonds, but the security provided to the government by a surety bond is only as good 

as the Capital R assets that stand behind the bond. 

There are currently three ways a contractor can satisfy the Federal Government’s requirement for adequate assurance of performance and payment. First, the contractor can obtain a bond from a 

corporate surety approved by the Treasury Department. These 

sureties are vetted by Treasury to ensure that they have adequate 

capital to make good on the bond, if necessary. 

Alternatively, the individual contractor can give the United 

States the possessory security interest in low-risk liquid assets 

such as T-bills, cash, or cash equivalents. If a contractor does not 

perform, the government seizes the assets with ease and finds another contractor to complete the work without suffering monetary 

loss. 

2 

A third option, a contractor may secure a bond from an individual surety. Under the Federal Acquisition Regulation, however, 

an individual with surety needs only to pledge assets to the government. It does not need to allow the government to hold the assets. 

In addition, an individual surety may pledge more volatile assets 

such as stocks and bonds traded on an exchange or rights in real 

property. 

In recent years, there have been a number of instances in which 

individual surety bonds have not provided the security that they 

purport to offer. In some cases this was because the value of the 

pledged assets had decreased significantly, like when the stock 

market suddenly dropped or real estate values plummeted. 

H.R. 3534, by Congressman Hanna of New York, is intended to 

give the Federal Government and subcontractors true security 

when they contract to perform construction work on a Federal 

project. The bill allows Federal contracting officials to require a 

bond from a Treasury-regulated surety. It does not foreclose individual sureties from the bonding market, but it does require them 

to pledge in the same manner the same kind of low-risk assets that 

an individual contractor would be required to pledge in lieu of a 

surety bond. 

It should also be noted that H.R. 3534 is supported by the American Subcontractors Association and the National Association of 

Minority Contractors. I hope to work with Ranking Member Cohen 

and Congressman Hanna to ensure that the Federal Government 

does not suffer monetary loss on construction projects at a time 

when it can least afford to do so. 

I look forward to hearing the testimony from our witnesses subsequently. 

[The bill, H.R. 3534, follows:] 

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Mr. COBLE. Mr. Richard Hanna of New York is recognized. Mr. 

Hanna, glad to have you sit on the podium. You won’t be able to 

speak, however, since you are not a Member of the select Committee, if you will. It is good to have you with us, nonetheless. 

Mr. HANNA. Thank you, sir. 

Mr. COBLE. And I am still a little reluctant to start. Let me introduce the witnesses, and by then we should be in a position to move 

forward. 

Where is my witnesses list here, Steve? Mr. Mark McCallum is 

the Chief Executive Officer of the National Association of Surety 

Bond Producers. NASBP is an international association of companies employing professional surety bond producers and brokers. 

Prior to his service there, Mr. McCallum held a seated position at 

the Association of General Contractors of America, and before that 

at the American Institute of Architects. Mr. McCallum earned his 

law degree from Tulane School of Law in New Orleans and his 

Bachelor’s Degree from Vanderbilt University in Nashville—one of 

May favorite towns, by the way, Mr. McCallum. I am a country 

music enthusiast. So when I think country music, I synonymously 

think Nashville, knowing that there is more to Nashville than that. 

Mr. MCCALLUM. It is a great town. 

Mr. COBLE. It is a great town. 

Jean Blanco Wellers is the Executive Officer of JBlanco Enterprises, Inc., a construction and real estate management firm in 

Sheridan, Colorado. Ms. Wellers emigrated to the United States as 

a child to escape the civil war in El Salvador. Through hard work 

and education, she became corporate safety director for the largest 

residential roofing contractor in the Southwest before forming 

JBlanco Enterprises in 2004. 

JBlanco Enterprises participates in the Small Business Administration’s 8(a) development program. In 2008, Ms. Wellers’ firm was 

recognized by the SBA as 8(a) contractor of the year and was featured in 2010 as the second fastest growing minority-owned business in Colorado. 

Mr. Robert Little, Jr. is an attorney with more than 37 years in 

public service and private practice. Currently he is of counsel in 

the law firm of Cohen Seglias Pallas Greenhall & Furman, PC. 

Prior to that he served as a senior associate counsel to the headquarters of the Naval Facilities Engineering Command for service, 

supply, and construction contracts worldwide. In that capacity, he 

had a substantial experience with reviewing surety bond applications. Mr. Little holds a law degree from the College of William & 

Mary, and a Bachelor’s Degree in philosophy from the Virginia 

Polytechnic Institute. 

Finally, Miss Karen Barbour is the owner and founder of the 

Barbour Group, a Maryland-based independent insurance agency 

with a focus on construction bonding and commercial insurance. 

Prior to starting the Barbour Group, Ms. Barbour was a partner 

of Barbour Construction Corp for 10 years. The Governor of Maryland has appointed Ms. Barbour to his Commission on Small Business. She also serves as vice chair on the advisory board for the 

Small Business Development Center for the State of Maryland. Ms. 

Barbour attended Loyola University in Maryland where she earned 

6 

her Bachelor’s Degree in political science and history. She earned 

her business degree from the University of Baltimore. 

It is good to have each of you with us, and I am still in a reluctant hold right now. I hate to start before a member of the Democrat Party shows up, but we may do that because I don’t want to 

penalize you all for having been here in a timely way. 

James, I have your assurance that I won’t be keel-hauled. But 

for the moment, folks, if you all would just hang loose, I need to 

get another Member here if we can. And if not, we will go ahead 

and proceed. So be at ease for the time being, and pardon my gravelly voice, folks. I am trying to come down with my annual early 

March cold, but sounds irritable, I know. 

[Brief recess.] 

Mr. COBLE. I appreciate the presence of the witnesses here, and 

hopefully we will get some action momentarily. Let’s roll. Folks, we 

are going to go ahead and proceed according to plan. Again, thank 

you for your patience, and I apologize for the delay. 

Mr. McCallum, we will start with you, and folks, we try to comply with the 5-minute rule. There is a timer on your desk, and 

when the green light turns amber, that is your wake-up call that 

you have a minute at that point, and then when the red light appears, that is the 5-minute termination. You will not be physically 

punished if you violate that, but if you can wrap it up as soon as 

possible. Mr. McCallum, we will start with you. You are recognized 

for 5 minutes. Get your mike on, please, Mr. McCallum. 

TESTIMONY OF MARK H. McCALLUM, CEO, NATIONAL 

ASSOCIATION OF SURETY BOND PRODUCERS 

Mr. MCCALLUM. Mr. Chairman, thank you for the opportunity to 

speak to you this afternoon. 

NASBP members are companies employing licensed bond producers who assist businesses of all sizes to obtain surety credit and 

to grow as competitive businesses. Bond producers often are asked 

by construction firms to help them assess the strength and reputation of a surety furnishing a bond to which the firm is a beneficiary. A surety that is not sound financially cannot add to the 

credit standing of the firm to which it is bonded. Moreover, such 

a surety will not supply the protection promised by the bond. As 

a result, bond producers advocate for well-regulated and stable surety markets. 

The Security and Bonding Act of 2011, House Resolution 3534, 

is a critical and commonsense measure that will assure the integrity of surety bonds on Federal construction contracts when issued 

by individuals using a pledge of assets. Bonds furnished by unlicensed individual sureties have an unfortunate track record of 

problems on Federal construction projects. 

In fact, financial loss to subcontractors and to contracting agencies from individual surety bond fraud was the catalyst for changes 

in the Federal Acquisition Regulation in 1990. Recent events involving individual sureties, however, have made clear that these 

changes have not proven sufficient to ameliorate the problem. It is 

time to do so, and NASBP, along with 10 other national construction and surety organizations view the proposed statutory changes 

in H.R. 3534 as the solution. 

7 

Mr. Chairman, as you mentioned earlier today, construction 

firms may use one of three methods to furnish security on a Federal construction project. They may secure a bond written by a corporate surety listed on Treasury Circular 570; they may use their 

own assets to purchase and pledge an eligible obligation in lieu of 

a surety bond or they may obtain a bond from an individual if the 

bond is secured by an acceptable asset, which includes stock, 

bonds, and real property. 

Corporate sureties writing on Federal projects must possess a 

certificate of authority from the Department of the Treasury, which 

conducts a financial review of the surety and sets a single bond 

size limit for the surety. Corporate sureties are licensed in the 

States in which they conduct surety business and they must obtain 

certificates of authority from State insurance departments. They 

are regularly audited and file financial reports with State regulators. They must file the rates they intend to charge for their 

bonds and are subject to market conduct investigations. They are 

also rated by private rating organizations, such as A.M. Best, 

which publicize their financial strength and size. 

Individual sureties are not subject to the same level of scrutiny 

and oversight as corporate sureties and are vetted solely by Federal 

contracting officers who often are overburdened and under 

resourced for the complex tasked required of them. Federal regulations do not require individual sureties to possess a certificate of 

authority as an insurer in any State. 

They are not required to furnish character information such as 

information about criminal convictions, State or Federal tax liens, 

prior bankruptcies, or State cease and desist orders. No third-party 

rating information is available on individual sureties. If a contracting officer fails to performed adequately, the necessary investigation of the individual surety and the assets backing the individual surety bond proves insufficient or nonexistent, unpaid subs 

and suppliers are denied their statutory payment remedy and contracting agencies are denied their guarantee of contract performance. 

H.R. 3534 solves this problem. It requires individual sureties to 

pledge solely those assets defined as eligible obligations by the Secretary of the Treasury. Eligible obligations are public debt obligations of the U.S. Government and obligations whose principal and 

interest is unconditionally guaranteed by the U.S. Government. 

These assets then are given to the Federal contracting authority, 

which in turn deposits them in a Federal depository, such as the 

Federal Reserve Bank, St. Louis, ensuring that pledged assets are 

real, sufficient, convertible to cash, and in the physical custody and 

control of the Federal Government. This is nothing more than what 

now is statutorily required of construction firms that wish to 

pledge assets as security on a Federal contract in lieu of a surety 

bond. 

Firms working on Federal construction projects, either as subs or 

suppliers, have no control over the prime contractor’s choice of security provided to the Federal Government, but they suffer the 

most harm financially if the provided security proves illusory. H.R. 

3534 will give them the confidence that on all Federal projects adeVerDate Aug 31 2005 15:20 Apr 27, 2012 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 H:\WORK\COURTS\030512\73211.000 HJUD1 PsN: DOUGA
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quate and reliable security is in place to guarantee that they will 

be paid. 

Thank you for your time and attention today. I am happy to answer questions that you may have. 

[The prepared statement of Mr. McCallum follows:] 


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ATTACHMENTS 


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Mr. COBLE. Thank you, Mr. McCallum, and you beat the red 

light. It illuminated. You get a gold star for that. 

Ms. Wellers, I am not trying to put pressure on you, but you are 

recognized as well. 

TESTIMONY OF JEANETTE WELLERS, PRESIDENT & CFO, 

JBLANCO ENTERPRISES, INC. 

Ms. WELLERS. Thank you for having me here. My name is Jeanette Wellers, and I own a roofing, waterproofing, and photovoltaic 

company located in Sheridan, Colorado. I incorporated my company 


NASBP-14.eps
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in 2004 with an SBA loan. I will make this really short, because 

I only have 5 minutes and I can talk about the subject for hours. 

In 2006, we were located in Bloomfield, Colorado, which is now 

Mr. Jared Polis’ district. In 2006, 2 years after I started my business, my company entered into a contract with a general contractor 

who had contracted to the Federal Government. This was our first 

Federal job ever. I heard through the grapevine that this general 

contractor had some financial problems, but after consulting with 

my staff, we decided that there was minimal risks, and this was 

a Federal contract and bonding was in place. 

After the general contractor failed to pay our progress payment 

and after we found out that we had no privity with the Federal 

Government, we consulted an attorney, who after various requests 

for production of documents found out that the general contractor 

had obtained and the Federal Government had accepted a fraudulent bond from an individual surety. 

We expended thousands of dollars only to learn that the individual surety did nothing to secure the bond principal other than 

its ability to pay premiums. More detrimental to us was the fact 

that the assets pledged to back the bond did not exist. So there 

were no securities pledged and when we went back to talk to the 

bonding company, they didn’t have a claim department. They had 

pledged all of the assets to different projects, private and Federal. 

The fact is that the individual surety could not pay any money 

due to us, and we ended up getting a second mortgage from our 

house in $240,000 worth of credit that we owed to credit cards. At 

this time we owe our attorney a lot of money, and we talked to an 

attorney, and he ended up telling us that it is okay not to pay what 

we owed to them. I ended up going to the bank and getting a loan 

to pay my credit cards, and that is how we ended up getting back 

on track. 

So I am here to support Bill 3534, and I am requesting that you 

guys hold individual surety and government entities to the same 

due diligence as contractors are held, and dispel all of us the 

stresses this has caused to my employees, my family, and my company. 

That is it. 

[The prepared statement of Ms. Wellers follows:] 

23 

Prepared Statement of Jeanette Wellers 


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Mr. COBLE. Thank you, Ms. Wellers. By the way, folks, for your 

information, your entire statements will be made part of the 

record. Thank you, Ms. Wellers. You too beat the illuminated red 

light. 

Mr. Little, the pressure is on you now. Good to have you, Mr. Little. 


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TESTIMONY OF ROBERT E. LITTLE, JR., OF COUNSEL, 

COHEN SEGLIAS PALLAS GREENHALL & FURMAN PC 

Mr. LITTLE. Thank you for the opportunity to testify today on 

H.R. 3534, Security Bonding Act of 2011. These views are my own 

and do not necessarily represent the views of Cohen Seglias or the 

Naval Facilities Engineering Command, my former employer, and 

my remarks will be brief. 

The bill will provide much needed certainty to a very contentious 

area of Federal construction contracts, acceptability of bid, performance and payment bonds issued by individual sureties. A little bit 

of background. To address rampant fraud problems encountered 

with individual sureties in the late 1980’s, the regulations, that is 

the Federal Acquisition Regulation, was modified in 1990 to require individual sureties to pledge certain highly liquid assets. The 

intent was to make the wealth or solvency of the surety largely irrelevant. 

The result was that for about 12 years individual sureties all but 

disappeared. Their disappearance, by the way, had no apparent ill 

effects on the small or small disadvantaged business community. 

When they reappeared, they were convincing to a few people because the people that saw individual sureties initially had never 

seen them before. As it turns out, most individual surety bonds 

were rejected. 

As I began to look at them in 2004, I noticed that as they were 

rejected they seemed to be modified to account for each prior rejection. It was as if there were some central clearinghouse that was 

learning based on the rejections, then issuing the learned information to the individual surety community. And the one thing that 

they all had and, in my experience at least still have in common, 

was that all of the assets were unacceptable. All of them. 

One of my favorite assets was shares of penny stock based on already mined gold abiding in the tailings of a placer mine valued 

by a CPA at around a billion dollars that was in a trust, held in 

another trust, that lived in an escrow account at a Wells Fargo 

Bank. 

When I called the escrow official at the bank to see what was actually in the account, the surety threatened to sue me for violation 

of an obscure banking privacy act that did not remotely apply. 

While that example may seem laughable, it is indicative and 

very, very serious. H.R. 3534 would end that kind of bullying behavior and those kinds of assets from being proffered. 

It could be that individual sureties do have extensive commodities at their disposal, valued in billions of dollars. The fact that I 

have seen no evidence of it is hardly determinative. But it does 

make me wary, and I only hope it makes others wary as well. 

One final point. If H.R. 3534 becomes law, there will be absolutely no incentive for contracting officers to preclude individual 

surety bonds. They will literally become the gold standard. Why 

would any contracting officer prefer arguing with a corporate surety when he or she can execute against what is essentially a cash 

asset? Indeed, one might expect agencies to find ways to get individual sureties preferential treatment. 

Thank you. 

[The prepared statement of Mr. Little follows:] 

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Mr. COBLE. I don’t know that I can recall any hearing when all 

of the first three witnesses, all three, beat the red light. I am not 

trying to impose pressure on you, Ms. Barbour, but good to have 

you with us. 

KAREN PECORA-BARBOUR, PRESIDENT, 

THE BARBOUR GROUP, LLC 

Ms. BARBOUR. Thank you. Thank you, Chairman Coble, and 

thanks for listening to me on my views of suretyship and the benefits of individual sureties. 

I, too, think H.R. 3534’s intent is noble. I think individual sureties will or should have to prove that their assets are real and tangible, but I think that this bill has unintentional flaws, I am sure, 

that would eviscerate individual sureties. 

According to General Zafros, who is past Director of Contract 

Policy Division, Chief Acquisition Officer, General Services Administration, this bill essentially is a jobs creation killer. He says if 

this bill is passed, a change to the FAR would need to be proposed, 

and it would effectively kill individual sureties on FAR contracts. 

Right now, the current language in the Code prohibits a contracting officer from requiring the bond issued by a corporate surety. The proposed change would give the contracting officers the 

authority to require the use of a corporate surety. So it would be 

easier for them just to simply look up on a T list and say okay, 

fine, that is the corporate surety rather than to try to vet the assets. 

So what happens when a minority or small business owner tries 

to get corporate surety credit and is declined because of their stringent guidelines? They are not going to have anyplace to go. 

Individual surety bonds have helped many. There are over 7,000 

success stories, and while I can’t readily dispute what Mr. Little is 

saying, I can say that the assets supporting those bonds were just 

fine and accepted by legal counsel in review. They weren’t with 

NAVFAC, however. 

The contractor right now can seek advise from U.S. Treasury and 

even their own legal counsel, and as Mark McCallum has pointed 

out in that letter from U.S. Treasury in his testimony, they are required to do so. So they are not overburdened by any stretch. 

In fact, one veteran recently I provided an individual surety bond 

for, he was a graduate—he is a graduate from the Naval Academy 

and he came back home and he had financial problems. His house 

was foreclosed on, and the Army gave him a $1 million bond, and 

he was denied corporate surety credit. So we provided an individual surety bond. He is doing fabulously well. He is going to heal 

himself with this one job, and he is doing so well they want to 

award him another $1 million job. Where would he be without this 

product? 

So there are many interpretations of the FAR. It varies with contracting officer and/or agency, and it is very difficult to predict predictability and assurance to contractors that the individual surety 

bonds will be accepted, so I agree with H.R. 3534. I think that 

sureties should be preapproved, either by FAR counsel or by U.S. 

Treasury, and those that pass the FAR requirement should be enrolled on a list of acceptable individual sureties, and that these 

33 

sureties are able to provide their data and have their attorneys 

present to address any legal issues with regard to FAR compliance. 

There should also be an appeal process if the individual surety believes that they were not treated fairly. And this will alleviate concerns for general contractors and for agents like me. I don’t see 

that in this bill. 

But if such a system is adopted, how long would that process 

take and would time be of the essence? I would hope so. We are 

hearing all of these things about individual sureties. Well, let’s talk 

about First Sealord Surety, a corporate surety that went defunct 3 

weeks ago. They were T listed. They were A.M. Best A-minus one 

day, and literally the next day, they were rated C-plus. The next 

day they declared bankruptcy. And then the regulators found out 

they walked away with $8 million of contractors’ collateral. They 

were a small corporate surety themselves, so to hedge their losses 

they took collateral from contractors. Where is the collateral? Now 

the contractors are in breach of their contracts. They have to go 

and secure a new bond, pay for that premium, and they can’t get 

paid on their contracts because they don’t have a valid bond. So 

that surety alone has caused more damage than any individual 

sureties I know. 

So I think we should support legislation for Federal contracting 

officers to disclose what type of security was provided by the general contractor. Moreover, I have done consulting for the Corps, 

and I can tell you that sub-guard was taken in lieu of a bond on 

a mega project. This job could not get a surety bond, a corporate 

surety bond, so Zurich puts out this product called sub-guard. The 

Army accepted sub-guard because it affords subcontractor failure 

on the job. Now, those subcontractors, I am sure, don’t realize that 

there is not a surety bond in place. They don’t have any Miller Act 

claims on a bond, I don’t believe, on that job, because the GCs don’t 

have a bond. I have also seen it where on the mega projects, too, 

that are over a billion dollars where the contractors have put up 

a corporate guarantee. That is not afforded small business, but it 

has afforded big business. 

So individual surety is a great tool to bring contractors, and the 

Miller Act hasn’t been updated since 1934. Well, $100,000 it was 

back then. That was a huge sum of money. It is $150,000 now. 

That is not a big jump. That probably wouldn’t even build a 

McDonald’s. So here you are having $150,000 Miller Act requirement that has its tentacles all through small business and preventing them from getting bonding. And then you want to—well, 

and also States, by the way, there is like 30 pieces of legislation 

out there where States want to up the Miller Act requirements in 

their States to a million. 

But I just wanted to end this and say in terms of the Tip Top 

case, that there is a—his name is, excuse me, Professor Nash, the 

Grand Poohbah of government contracts law, who started the 

George Washington University Law School’s program on government contract law, in his article says: ‘‘One of the best aspects of 

government contracting is that sometimes it gives us a good laugh.’’ 

And this is regarding the Tip Top case. 

The humor is found in the FAR—am I done? There is no red 

light. 

34 

Mr. COBLE. Go ahead and finish. 

Ms. BARBOUR. Okay. I didn’t see any red light, I apologize—oh, 

I am sorry. 

The humor is found in the FAR, not the decision. Under the FAR 

stocks traded on specific exchanges in real property are good, acceptable assets, while under FAR 28-203 personal property such as 

jewelry, furs, antiques are bad, unacceptable assets. Since the 

mined coal was personal property, it arguably fell within the FAR 

definition of bad assets. On the other hand, General Motors’ stock 

could have been pledged last year and would have been counted as 

security at 90 percent of its value. Similarly, the surety’s house 

could have been pledged and counted at 100 percent of its tax assessment value, which are all upside down in this market. But the 

value of coal can’t be predicted, so it doesn’t count. 

So this gentleman says, well, I would take the coal. All that Tip 

Top proves is that FAR was written before we got our recent lesson 

in modern economics. And those good assets turned out to be bad 

assets—I have just one sentence left—and that coal still has quite 

a large amount of value without regards to FAR, and maybe someone should try to pledge a retirement account. So this is an esteemed professor who disagreed with the Tip Top case. 

[The prepared statement of Ms. Barbour follows:] 

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ATTACHMENT 


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Mr. COBLE. Thank you, Ms. Barbour. Thanks to each of you for 

your terse statements. I appreciate that. 

Without objection, I want to introduce into the record the letter 

from the National Association of Surety Bond Producers and the 

Security & Fidelity Association of America. It features 10 corporations that endorsed the bill, and the Surety & Fidelity Association 

of America, their statement as well. 


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Without objection, they will be made part of the record. 

[The information referred to follows:] 


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Mr. COBLE. And we try to comply with the 5-minute rule also. 

So we will try to do that. We have been joined by the distinguished 

gentleman from Atlanta, the land of the palmetto, Mr. Trey Gowdy. 

Trey, good to have you with us. 


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Mr. McCallum, can you describe in more detail how the government suffers a pecuniary harm when a bid or performance bond 

proves to be worthless? 

Mr. MCCALLUM. Yes, Mr. Chairman. Two different items here. 

The bid bond is to secure that you have a good-faith bidder who 

intends to enter into the final contract and supply the final bonds. 

The bid bond acts to provide the difference between the bid, the 

lowest bid that was accepted, and the next lowest bidder. And it 

will pay that amount to the government to help for its reprocurement costs. 

The performance bond is guaranteeing the obligation of the 

awarded prime contractor. If, for whatever reason, that party defaults in their performance, the surety will step in, and they have 

a variety of actions that they can take, but essentially to guarantee 

up to the penal sum of the bond any amounts that it needs to pay 

out to complete that contract obligation. 

Typically, there are delays, reprocurement costs, and other costs 

that the contracting agency and, hence, taxpayers may suffer in the 

absence of a valid performance guarantee. So that bond is there to 

secure those debts. 

Mr. COBLE. Thank you, sir. Ms. Wellers, opponents of H.R. 3534 

have suggested that the bill will harm minority contractors’ ability 

to secure surety bonds. Yet the National Association of Minority 

Contractors supports the bill. Can you cover that, what appears to 

be an inconsistency? 

Ms. WELLERS. Well, in my opinion, if a contractor doesn’t have 

a good balance sheet, or P&L, they shouldn’t get a bond. It is a detriment, I think, to the contractor itself. Because if I go, you know, 

my business, for example, we know that we can do from $1 million 

to $10 million projects, and I know I couldn’t do a $50 million 

project. So I wouldn’t be looking for a bond that size. Plus, you 

know, when I got into the struggle with the surety bonds, with the 

individual surety bond that didn’t have any assets, we went back 

to the SBA, and they have a bond program which I was able to get 

in. And then I spoke to a regular surety, and 2 years later I was 

back on my feet. 

So, you know, unfortunately, not everybody can be bonded and, 

you know, if you don’t, you know, running a business is tough and 

you need to know a little bit about money and finances. 

Mr. COBLE. I thank you, Ms. Wellers. 

Mr. Little, as a former acquisition counselor for the Federal Government, what were some of the assets that you saw individual 

sureties trying to pledge to support their bonds, and why did you 

find them unacceptable? 

Mr. LITTLE. The assets, many of them we couldn’t find. The way 

they were presented was not unlike the way I described in my 

statement. That is, it would be an asset hiding in a trust, lurking 

behind another document or another legal instrument, and as you 

tried to unravel it and unravel it, you would eventually either give 

up or you would just reject the bond and say we can’t figure out 

what this asset is. We can’t figure out not only what the asset is, 

we can’t figure out how we would ever liquidate it if we could ever 

figure out what it was and if we could ever get our hands on it. 

Mr. COBLE. Yeah. 

66 

Mr. LITTLE. That is the biggest problem. Now, we did see some 

obvious things wrong, like one of my earlier ones was Wachovia 

Bank stock. Now, when you get Wachovia stock, there is nobody to 

call to ask what Wachovia stock is valid. What you have to do is 

you have to start with Wachovia. If you ever did that, you would 

find that it is very hard to find somebody in Wachovia who knows 

anything about issuances of Wachovia stock and what it might be 

worth, and whether the CUSIP numbers that were on those stocks 

were valid. Couple that way the fact, that very—when somebody 

comes and tells you that they have got an escrow account full of 

Wachovia stock—I am preaching to the choir, I am sure—but you 

probably have never seen a stock certificate from Wachovia stock 

because they don’t print them anymore. So one of the problems is, 

and there is a fair number of anachronisms involved in the process. 

But when you get something like a stock certificate, you have no 

idea—you don’t have the stock certificate, by the way. The stock 

certificate was placed in escrow, so you have to call the escrow office to see whether or not that Wachovia’s stock is in there, and 

so forth. 

Mr. COBLE. Yeah. 

Mr. LITTLE. So it is difficult. We see instruments that you have 

never heard of in your life before, and you see them on all sorts 

of fancy paper. You see debentures. You see gold certificates. You 

see all sorts of amazing documents that ostensibly, if you were to 

suspend disbelief and pretend like this was a play, you would be 

very entertained. But if you actually start trying to pull on the 

threads of these things, it very soon comes unraveled and there is 

literally no there, there. 

Mr. COBLE. Thank you, Mr. Little. 

Ms. Barbour, do you believe that individual sureties ought to be 

able to leverage the same asset several times over to secure multiple surety bonds, and what happens when that asset needs to be 

liquidated to support more than one bond? 

Ms. BARBOUR. Well, the FAR says that the asset cannot be multiple pledged, that it can only be pledged for that transaction. I 

don’t know. First Sealord Surety when they closed their doors, the 

Pennsylvania regulators closed it when they had $5 million in assets and $200 million in outstanding bond liability. I don’t know 

why they didn’t close them any sooner. I don’t know how they could 

exist with $5 million in net worth or surplus to carry on, you know, 

to support $200 million in bonds. 

I think that is a better question for the regulators, and how they 

regulate corporate sureties, because individual sureties back dollar 

for dollar for the bond, and it cannot be multiple pledged. 

Mr. COBLE. I thank you, Ms. Barbour. 

The distinguished gentleman from South Carolina is recognized 

for 5 minutes. 

Mr. GOWDY. Thank you, Mr. Chairman. I also want to thank the 

gentleman from New York, Mr. Hanna, and the gentleman from 

South Carolina, Mr. Mulvaney, for their work on this issue. 

Mr. McCallum, I believe that Maryland has recently passed a 

law that changed how individual sureties are accepted for State 

construction projects. Are you familiar with that, and do you have 

any initial—— 

67 

Mr. MCCALLUM. Yes, I am familiar with that. 

Mr. GOWDY. What is your assessment on how well it is working 

and why? 

Mr. MCCALLUM. That law, the Maryland law was passed in 2006, 

under the intent to benefit or provide an additional market for 

small businesses wanting to perform public works contracts in the 

State of Maryland. There is a requirement that the contracting 

agencies of the State report every 2 years to the General Assembly 

on the use of that law in getting individual surety bonds on public 

works projects. 

The next report is due out this month. I don’t know what it says, 

but the first two reports basically have indicated that no small 

business has benefited from the 2006 law, and you can presume 

certain things. It is not exactly analogous to the Federal requirements. So the State of Maryland decided that they wanted more information about a potential individual surety, and they created an 

additional affidavit that the surety would actually have to sign a 

sworn statement where they would have to provide information 

about criminal convictions and other matters. And that is a requirement that currently we do not have at the Federal level. 

Mr. GOWDY. Thank you. 

Ms. Wellers, during the course of your litigation with the individual surety on the Federal project you described in your testimony, what other facts did you learn about the owner of the Federal surety company and his assets, if any? 

Ms. WELLERS. Oh, I can tell you a lot about him. He—everything 

they had pledged, he had a balance sheet, I think he was worth 

$127 million, but you know, really, he had a house in Texas and 

his own house. I don’t think it was worth more than half a million 

dollars. He had millions of contracts out there where he pledged 

the same, you know, the same real estate. We ended up, we were 

doing a job in Florida, and this company was from Alabama, so we 

ended up just driving by his house, and his office was just, you 

know, like a double wide, and stuff—not to say that that is bad, 

but it was not a real company. He would not return our calls. He 

didn’t have—it was him and his wife, so he didn’t have a place 

where you can make a claim. He was just somebody that claimed 

to have a surety company, and the GSA accepted it. 

Mr. GOWDY. Yes, ma’am. 

Mr. Little, some individuals complain, I suppose, that this bill 

would effectively remove them from the surety market. What do 

you say to those critics? 

Mr. LITTLE. I would say that every representation that I have 

ever seen by an individual surety indicates that they have assets 

in the hundreds and hundreds of millions, even billions of dollars. 

I can’t imagine anything happening to those firms that have hundreds and hundreds of millions and billions of dollars. 

Mr. GOWDY. Thank you, Mr. Chairman. Again, I thank the gentleman from New York, and the gentleman, Mr. Mulvaney, from 

South Carolina for their work on this issue, and I yield back. 

Mr. COBLE. I thank the gentleman from South Carolina, and I 

want to reiterate what you said regarding—Mr. Hanna, I appreciate your leadership on this bill. 

68 

Folks, again, I want to thank you all for your testimony, for your 

attendance today. I apologize for any delay that may result unfavorably. Blame me for it, don’t hold me harmless, in other words. 

Without objection, all Members will have 5 legislative days to 

submit to the Chair additional written questions for the witnesses, 

which we will forward and ask the witnesses to respond as promptly as they can, so that their answers may be made a part of record. 

With that, again, I want to thank you all for being here, and this 

hearing stands adjourned. 

[Whereupon, at 4:50 p.m., the Subcommittee was adjourned.] 

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