Difficulty in Obtaining the Approval of an Individual Surety

Cohen Seglias Pallas Greenhall & Furman PC
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In a recent decision issued by the United States Court of Federal Claims, Anthem Builders, Inc. v. United States,  April 6, 2015, WL 1546437, the Court considered a protest involving the proposed use of an individual surety to furnish required bonds.  Under FAR 28.203, an individual surety may be accepted on a federal construction project, instead of a corporate surety on the approved list found on Treasury Department Circular 570, provided that certain requirements are met.  FAR 28.203 provides, in relevant part:

Bond(a) An individual surety is acceptable for all types of bonds except position schedule bonds. The contracting officer shall determine the acceptability of individuals proposed as sureties, and shall ensure that the surety’s pledged assets are sufficient to cover the bond obligation. . .

(b) An individual surety must execute the bond, and the unencumbered value of the assets (exclusive of all outstanding pledges for other bond obligations) pledged by the individual surety, must equal or exceed the penal amount of each bond. . .

(c) If the contracting officer determines that no individual surety in support of a bid guarantee is acceptable, the offeror utilizing the individual surety shall be rejected as nonresponsible. . .

The proposed use of an individual surety has frequently been problematic because of the questionable practices of some individual sureties, and because the required assets have often been difficult to verify.  In addition, when questions arise, FAR 28.203(a) grants the Contracting Officer with the discretion to “determine the acceptability of individuals proposed as sureties” and to reject “the offeror utilizing the individual surety . . . as nonresponsible.”  Although there were a number of arguments that the Court considered, the Court ultimately agreed with the Government’s position that Anthem was nonresponsible because its proposed individual surety offered an Irrevocable Trust Receipt issued by First Mountain Bancorp (FMB”) that was unacceptable because FMB was not a FDIC insured financial institution.  (The Court also cited other reasons for agreeing that the individual surety should be rejected).

In our experience, it is very difficult to convince a Contracting Officer to accept an individual surety.  First of all, the inability of the bidder to obtain bonding from a surety on the approved list raises a red flag and, secondly, there have been a number of cases of fraud in the proposed use of individual sureties.  Contracting Officers, therefore, will rightfully exercise great caution in protecting the government’s interests.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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