[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]







                    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

                                _____

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                       COMMITTEE ON THE JUDICIARY

                      LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina         JERROLD NADLER, New York
ELTON GALLEGLY, California           ROBERT C. ``BOBBY'' SCOTT, 
BOB GOODLATTE, Virginia                  Virginia
DANIEL E. LUNGREN, California        MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio                   ZOE LOFGREN, California
DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana                  MAXINE WATERS, California
J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona                  Georgia
LOUIE GOHMERT, Texas                 PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio                     MIKE QUIGLEY, Illinois
TED POE, Texas                       JUDY CHU, California
JASON CHAFFETZ, Utah                 TED DEUTCH, Florida
TIM GRIFFIN, Arkansas                LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania             JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada

           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           STEVE COHEN, Tennessee
TRENT FRANKS, Arizona                HENRY C. ``HANK'' JOHNSON, Jr.,
DENNIS ROSS, Florida                   Georgia
BEN QUAYLE, Arizona                  MELVIN L. WATT, North Carolina
                                     JARED POLIS, Colorado

                      Daniel Flores, Chief Counsel

                      James Park, Minority Counsel












                            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

 
                    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.
    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:]
    
    
    
                               __________

    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 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.
    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 adequate 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:]
    
    
    
                               __________

    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 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:]
                 Prepared Statement of Jeanette Wellers



                               __________

    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.

        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:]


    
    

                               __________
    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 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.
    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:]
    
    
    

                               __________

    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.
    Without objection, they will be made part of the record.
    [The information referred to follows:]

    
    
    
                               __________

    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.
    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.
    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----
    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.
    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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               Material Submitted for the Hearing Record





                                 
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