Opinion ID: 779643
Heading Depth: 2
Heading Rank: 2

Heading: The Advance Payments Issue.

Text: 39 As noted above, the Board ruled that, upon JMG's default, the government had the right to demand the repayment of unliquidated advance payments. The Board also ruled that the government had a paramount lien interest in equipment that JMG had purchased for performance of the REAM contract and that the government was entitled to seize the equipment, sell it, and apply the proceeds of the sale to reduce the balance of unliquidated advance payments. See Johnson I, 99-2 BCA at 150,707-08. The Board's ruling was premised on the proposition that HUD's advance payments to JMG gave rise to indebtedness on the part of JMG that could only be satisfied by either repayment or contract performance. 40 Pursuant to 41 U.S.C. § 255(a), a government agency is authorized to make advance payments to a contractor. The statute provides, however, that advance payments may be made only upon adequate security. 41 U.S.C. § 255(d) (2000). The statute further provides that [s]uch security may be in the form of a lien in favor of the Government on the property contracted for, on the balance in an account in which [advance] payments are deposited, and on such of the property acquired for performance of the contract as the parties may agree. Id. 41 The requirements of section 255 are implemented by the FAR in the alternative advance payments clauses set forth at 48 C.F.R. § 52.232-12 (1984). Through Modification No. 1, the REAM contract between JMG and HUD incorporated the provisions of Alternatives II (APR 1984) and IV (APR 1984) of the FAR's Advance Payments clause. That meant that under the contract, advance payments up to a limit of $124,000 would be extended to JMG upon submission of properly certified invoices. 48 C.F.R. § 52.232-12(a). The contract further provided that until JMG had liquidated all advance payments made under the contract, all advance payments were to be deposited in the Contractor's special bank account with the South Trust Bank. 48 C.F.R. § 52.232-12(b). None of the funds in the special bank account were to be commingled with other funds of JMG, and withdrawals could be made from the special account only by means of JMG checks countersigned on behalf of HUD. Id. 42 The concept of liquidation in the context of advance payments is relatively straightforward. The term liquidate is defined in Black's Law Dictionary as to settle (an obligation) by payment or other adjustment. Black's Law Dictionary 941 (7th ed.1999). In order to liquidate an advance payments balance, a contractor must do either of two things: (1) repay the advance payments, or (2) perform contract work and then have the government apply to the outstanding balance of the advance payments the amount that otherwise would be paid to the contractor for the work. As explained in the provision of the Advance Payments clause relating to interest: 43 For the purpose of computing the interest charge — (i) Advance payments shall be considered as increasing the unliquidated balance as of the date of the advance payment check; 44 (ii) Repayments by Contractor check shall be considered as decreasing the unliquidated balance as of the date on which the check is received by the Government authority designated by the Contracting Officer; and 45 (iii) Liquidations by deductions from payments to the Contractor shall be considered as decreasing the unliquidated balance as of the date of the check for the reduced payment. 46 48 C.F.R. § 52.232-12(f). 47 The FAR provision incorporated into the REAM contract provides for repayment of advance payments that have been made to a contractor: 48 At any time, the Contractor may repay all or any part of the funds advanced by the Government. Whenever requested in writing to do so by the administering office, the Contractor shall repay to the Government any part of unliquidated advance payments considered by the administering office to exceed the Contractor's current requirements [or the maximum amount of advance payments allowed under the contract]. 49 48 C.F.R. § 52.232-12(d). The FAR further provides that [o]n completion or termination of the contract, the Government shall deduct from the amount due to the Contractor all unliquidated advance payments and all interest charges payable. 48 C.F.R. § 52.232-12(e). In short, HUD's advance payments to JMG amounted to a loan, the unliquidated balance of which had to be repaid by JMG upon termination of the contract. Treating advance payments as a loan that must be repaid stems from the proposition that while the government may assist a contractor by extending it advance payments, it is not empowered to give a contractor money. See, e.g., Royal Indem. Co. v. United States, 313 U.S. 289, 294, 61 S.Ct. 995, 85 L.Ed. 1361 (1941) (Power to release or otherwise dispose of the rights and property of the United States is lodged in the Congress by the Constitution. Subordinate officers of the United States are without that power, save only as it has been conferred upon them by Act of Congress or is to be implied from other powers so granted. (citation omitted)). Hence, the requirement that advance payments be repaid is mandatory. See Heckler v. Cmty. Health Servs., 467 U.S. 51, 60, 104 S.Ct. 2218, 81 L.Ed.2d 42 (1984); Schweiker v. Hansen, 450 U.S. 785, 789, 101 S.Ct. 1468, 67 L.Ed.2d 685 (1981) (cases recognizing that some requirements are mandatory). 50 As security for its advance payments to JMG, the government was given a lien on the advance payment funds in the special bank account, as well as on property purchased with those funds: 51 (h) Lien on Special Bank Account. The Government shall have a lien upon any balance in the special bank account paramount to all other liens. The Government lien shall secure the repayment of any advance payments made under this contract and any related interest charges. 52 (i) Lien on property under contract. (1) All advance payments under this contract, together with interest charges, shall be secured, when made, by a lien in favor of the Government, paramount to all other liens, on the supplies or other things covered by this contract and on all material and other property acquired for or allocated to the performance of this contract and on all material and other property acquired for or allocated to the performance of this contract. 53 48 C.F.R. §§ 52.232-12(h), (i). Thus, to the extent that unliquidated advance payments remained outstanding, the Government retained a lien on funds in the special bank account and a lien on JMG's equipment. 54 Under the REAM contract, in the event of a termination for default, HUD was given the right to [w]ithdraw ... all or any part of the balance in the special bank account and apply the amounts to reduce outstanding advance payments and any other claims of the Government against the Contractor. 48 C.F.R. § 52.232-12(k)(2)(i). HUD also was given the right to demand immediate repayment of the unliquidated balance of advance payments and to [t]ake possession of ... and sell... all or any part of the property on which the Government has a lien under this contract and ... apply the net proceeds of the sale to reduce the unliquidated balance of advance payments or other Government claims against the Contractor. 48 C.F.R. § 52.232-12(k)(2)(iii), (iv). 55 When the FAR Advance Payments clause was incorporated into the REAM contract through Modification No. 1, however, the first contracting officer added the following special provision: 56 2. Liquidation of Advance Payments. 57 The payments advanced under this contract will be considered liquidated upon submission of invoices marked as paid by the suppliers. Invoices shall be for the items listed in the Use of Advance Payments clause. 58 Contract No. H04C94079306000, Modification No. 1 (Aug. 8, 1994). On appeal to the Board, JMG argued that, under clause 2, the advance payments that it had received from HUD were liquidated upon the withdrawal and expenditure of the advanced funds for the purchase of start-up equipment. Consequently, JMG's advance payments indebtedness to HUD was repaid. In addition, as a result of the satisfaction of the indebtedness, HUD no longer held a lien interest in the contract equipment. See Johnson I, 99-2 BCA at 150,707. HUD argued in response that, despite the reference in clause 2 to the term liquidated, the advance payments were not liquidated because JMG had not repaid the advanced funds. See id. 59 The Board rejected JMG's argument. In so doing, it ruled that, to the extent that clause 2 operated to liquidate the advance payments balance before the balance was repaid, it was void and would not be given effect. The Board stated: 60 The provisions of Contract Modification Number 1 ..., to the extent that they provide for the liquidation of the advance payments upon their withdrawal and expenditure for the necessary start-up equipment, are not binding upon the Government because the contracting officer was not authorized to consider the advance payments liquidated, absent actual repayment or discharge of the debt under the Advance Payments clause, FAR 52.232-12(d), (e) & (k), which was incorporated into the contract by Contract Modification Number 1. 61 Johnson I, 99-2 BCA at 150,707. 62 In ruling that clause 2 of Modification No. 1 was without force and effect, the Board relied, see id., upon the well-settled principle that the government is not bound by the conduct of its agents acting beyond the scope of their authority. See Harbert/Lummus Agrifuels Projects v. United States, 142 F.3d 1429, 1432 (Fed.Cir.1998) (It is well established that the government is not bound by the acts of its agents beyond the scope of their authority.); Urban Data Sys., Inc. v. United States, 699 F.2d 1147, 1153 (Fed.Cir.1983) ([T]he United States is not bound by its agents acting beyond their authority and contrary to regulation.). 63 We agree with the Board that the contracting officer was not authorized to liquidate JMG's advance payments in the manner prescribed by clause 2. Allowing advance payments to be repaid simply by presentation of subcontractor invoices is squarely contrary to the FAR's Advance Payments clause. As explained above, the Advance Payments clause treats each advance payment as a loan that must be repaid, either directly or through contract performance. 2 Allowing a contractor to satisfy its advance payments indebtedness simply by purchasing equipment for contract performance would, in the circumstance of a default by the contractor, improperly convert what is a loan by the government to a gift. 64 On appeal, JMG does not dispute the proposition that the FAR's Advance Payments clause treats each advance payment as a loan that is satisfied only by either repayment or contract performance. Neither does JMG dispute the proposition that the government is not bound by the acts of its agents that are contrary to statute or regulation. Finally, JMG does not argue that the contracting officer was authorized to agree to clause 2. Rather, JMG contends that the government is estopped from asserting that the contracting officer's actions were unauthorized, because JMG relied upon clause 2 to its detriment. 3 In making this argument, JMG relies on Branch Banking & Trust Co. v. United States, 120 Ct.Cl. 72, 98 F.Supp. 757 (Ct.Cl.1951), and Miller Elevator Co. v. United States, 30 Fed. Cl. 662 (1994). JMG's reliance on these cases is misplaced. Neither of them involved the situation that exists here: a contracting officer agreeing to a contract provision that directly conflicts with the requirements of the FAR. In Branch Banking, the contracting officer approved certain subcontract arrangements that were contrary to a provision of the prime contract. The government argued that, because the subcontracts violated a provision of the prime contract, it was entitled to withhold payment to the contractor of part of the amount claimed on subcontractor invoices. The Court of Claims rejected the government's argument. Although recognizing that [t]he Government is neither bound nor estopped by the acts of its officers or agents in entering into an arrangement to do or cause to be done what the law does not sanction or permit, the court stated: We find nothing in [the procurement statute at issue] expressly or by inference prohibiting the contracting officer from doing what he did in this case. Branch Banking, 98 F.Supp. at 766. Continuing, the court explained: When the Government is acting in its proprietary capacity, its representative has authority to waive or modify a provision in a Government contract, and the Government may be estopped by such act of waiver. Id. In this case, the contracting officer did not merely waive a contract provision. Rather, she agreed to a contract clause that was squarely in conflict with the requirements of the FAR. Miller Elevator is no more helpful to JMG. That case, like Branch Banking, involved the issue of whether the government was estopped from challenging the waiver of a contract provision. It did not involve a contracting officer agreeing to a contract provision that conflicted with the provisions of the FAR. JMG's estoppel argument is without merit. The Board did not err in holding that the liquidation provision of clause 2 was not binding on the government and that the government was entitled to enforce the provisions of the Advance Payments clause that had been incorporated into the REAM contract. 4 65