BNUMBER: B-278215; B-278215.2
DATE: January 7, 1998
TITLE: Alamo Aircraft Supply, Inc.; Merchants World Surplus E, B-
278215; B-278215.2, January 7, 1998
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Matter of:Alamo Aircraft Supply, Inc.; Merchants World Surplus
Enterprises, Inc.
File: B-278215; B-278215.2
Date:January 7, 1998
John J. Fausti, Esq., and Stephanie L. Buser, Esq., for the protester.
Robin Walters, Esq., and Michael Malone, Esq., Defense Reutilization
and Marketing Service, Defense Logistics Agency, for the agency.
John L. Formica, Esq., and James A. Spangenberg, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
1. Solicitation for the sale of surplus property under a term
contract is not transformed into something other than a sale because
of the inclusion of a provision requiring that the successful
contractor pay the government 80 percent of the net proceeds, if any,
it obtains from the property in addition to its bid price.
2. Sale of surplus property is not an unauthorized sale on credit
where at the time of the sale there is no credit extended or debt
incurred; a provision which requires that the contractor pay the
government 80 percent of the net proceeds, if any, the contractor
obtains from the property does not render the transaction a credit
sale.
3. A solicitation for the sale of surplus property will not result in
an illusory contract because of a termination clause, where the clause
does not allow the parties to terminate at will, but rather allows the
parties to terminate only if certain specified contract performance
thresholds are not attained.
4. Neither the financial requirements imposed by a solicitation which
provides for the award of a term sale contract, nor the size, scope,
or length of the contract contemplated by the solicitation, violates
the requirement set forth in the Federal Property and Administrative
Services Act of 1949 that solicitations for the disposal of property
be "on such terms and conditions as shall permit that full and free
competition which is consistent with the value and nature of the
property involved," given the apparent reasonableness of the agency's
explanation for the challenged provisions and the protesters' failure
to substantively respond to the agency's position.
DECISION
Alamo Aircraft Supply, Inc. and Merchants World Surplus Enterprises,
Inc. protest the terms of a solicitation issued by the Defense
Reutilization and Marketing Service (DRMS), Defense Logistics Agency
(DLA), for the sale of surplus property.[1]
We deny the protest.
The solicitation represents a pilot initiative under which DRMS will
award a term sale contract, with a 5-year performance period, to the
high bidder for five categories of surplus Department of Defense (DOD)
industrial property.[2] The solicitation provides for a "two-step
approach," under which firms are first required to submit technical
proposals in response to request for technical proposals (RFTP) No.
99-7005. The technical proposals are to include, among other things,
an operational plan demonstrating the firm's "capability to market,
transport, store and add value to the material," and a business plan
describing the corporate and project organizations to be used in
disposing of the property acquired under the sales contract, and
evidencing that it had access to a $3 million line of credit.
Technical proposals were submitted by September 30, 1997.[3]
Those bidders whose technical proposals are found by the agency to be
technically acceptable, based upon the RFTP's evaluation criteria,
will be invited to submit sealed bids in response to an invitation for
bids (IFB).[4] The bids are to be expressed as a percentage of the
government's established acquisition value of each category of surplus
property, with the high bid being determined by multiplying the
acquisition value of each category by the appropriate percentage bid,
and totaling these amounts.
The successful bidder will be required to establish and fund a "stand
alone" entity that will be the actual purchaser of the surplus
property from the agency, and whose single purpose will be to perform
the proposed contract. This entity, or purchaser, is required to
provide DRMS with a performance bond of $1 million, or establish a
fund to be held by DRMS, in which 10 percent of all contractor
distributions will be deposited until a balance of $500,000 is
reached. The purchaser is also required to provide a $400,000 payment
deposit, which, in addition to the contractor's $100,000 bid deposit,
will be held by the agency until completion of the contract.
The purchaser will have the right and obligation (with certain limited
exceptions) to remove, upon payment of its bid price,[5] all surplus
property generated by the agency within the designated federal supply
classifications set forth in the solicitation that remains after the
agency's completion of the Reutilization/Transfer/Donation (R/T/D)
process.[6]
The proposed contract also requires that 80 percent of the "net
proceeds" the purchaser obtains by any means from the surplus
property, including the purchaser's sale or lease of the property, be
paid to the United States Treasury. Specifically, the proposed
contract defines "net proceeds" as the purchaser's "gross proceeds"
minus its "direct costs." "Gross proceeds" are defined as all
proceeds obtained by the purchaser from the property, by sale, rental,
or other means; "direct costs" are essentially all costs actually
incurred by the purchaser solely for the management, preservation,
improvement, and transportation of the property (not including the
amount paid to DRMS for the purchase of the property).
For example, should the purchaser purchase surplus property from DRMS
for $5 million, incur $12 million in direct costs in managing,
preserving, improving, and/or transporting the property, and realize
$60 million in gross proceeds from the property, the purchaser would,
upon realization of the $60 million, be required to pay to the U.S.
Treasury $38.4 million, which equals 80 percent of the purchaser's net
proceeds.[7] Because of this feature--which entitles the government
to 80 percent of the net proceeds, if any, realized by the purchaser
from the property (in addition to the amount paid for the purchase of
the property from DRMS)--the contract has been referred to by the
agency as a "proceeds sharing sale."
The proposed contract also requires that the purchaser, beginning with
the fourth quarter of contract performance, prepare "quarterly
reports" setting forth "performance ratios" depicting the rate of
return resulting from the contract, and provides both the agency and
contractor with the right to terminate the contract after 15 months of
performance should certain performance thresholds not be attained.
The proposed contract provides for a "wind-up" period of unspecified
length to follow either the contract's 5-year performance period or
its termination by either party. The proposed contract specifies that
during the wind-up period the agency will not make any surplus
property available to the purchaser for purchase, and requires that
the contractor submit a "closing report" to DRMS within 120 days of
the contractor's determination that the sale or disposition of all
remaining assets has been completed and certain accounting and
bookkeeping actions have been performed.[8]
Alamo and Merchants World contend that this "proceeds sharing sale"
solicitation is actually a solicitation for property disposal
services, and that the solicitation is therefore flawed because it
does not contain provisions of the Federal Acquisition Regulation
associated with service contracts. The protesters also argue that,
because of the proposed contract's proceeds sharing feature and
certain other provisions, DRMS retains an ownership interest in the
surplus property after its "sale" to the purchaser, and that the
disposal of surplus property provisions of the Federal Property and
Administrative Services Act of 1949 (FPASA), 40 U.S.C. sec. 484 (1994 and
Supp. I 1995), and the Federal Property Management Regulations (FPMR),
41 C.F.R. Part 101-45 (1997), are therefore applicable to any resale
of the surplus property by the purchaser.
In this regard, the protesters point to a number of the proposed
contract's provisions which they argue are not consistent with a sales
contract. The most significant aspect of the proposed contract in the
protesters' view, and the one on which the protesters mainly rely for
their argument that the proposed contract cannot properly be
considered a sales contract, is the proposed contract's requirement
that the purchaser pay an amount equal to 80 percent of the net
proceeds it obtains from the property to the U.S. Treasury. The
protesters point out that the proposed contract includes a number of
provisions authorizing the agency to review the purchaser's accounts,
and question the need for such provisions if the proposed contract is
actually a sales contract.
The protesters also argue that any award under the solicitation will
effectively create a "partnership" or "joint venture" composed of DRMS
and the successful contractor, and conclude that "[t]he foremost legal
flaw in DRMS' approach is that DRMS is attempting to do by contract
that which it cannot do directly, i.e., circumvent applicable property
disposal laws."
Neither the FPASA nor FPMR specifically defines the term "sale." See
40 U.S.C. sec. 472 (1994) and 41 C.F.R. Part 101-45. Because a "sale" is
a common event, and is used in applicable statutes and regulations
without a limiting definition and without legislative or regulatory
history indicating a contrary result, the common and ordinary meaning
of "sale" should be applied here. Commissioner v. Brown, 380 U.S.
563, 571 (1965). That is, "[a] sale, in the ordinary sense of the
word, is a transfer of property for a fixed price in money or its
equivalent . . . ."[9] Id. (citation omitted). In determining
whether a transaction is a sale or some other transaction, the
"objective economic realities of a transaction rather than . . . the
particular form the parties employed" should be considered. Frank
Lyon Co. v. United States, 435 U.S. 561, 573 (1977).
The proposed contract will result in the transfer of property from the
agency to the purchaser for a fixed price, and as such, is a sales
contract. As mentioned previously, the proposed contract provides
that title to the property will transfer from the government to the
purchaser upon payment by the purchaser of its entire bid price for
the relevant property and the removal of the property from the
relevant agency installation. Specifically, the proposed contract
provides:
Title to the Property shall vest in the Purchaser upon removal of
the Property . . . any subsequent resale transactions are between
the Purchaser and resale buyers, not between the Government and
resale buyers. Any disputes or claims resulting from such
transactions are between Purchaser and resale buyers, not the
Government.
Further, under the proposed contract, the purchaser, not the
government, assumes the ownership obligation of risk of loss when
property is removed from the site.[10] See Federal Data Corp., 60
Comp. Gen. 584, 588 (1981), 81-2 CPD para. 28 at 6 (risk of loss is
evidence of ownership in government contracts).
The solicitation also specifies that "there are no requirements for
including DRMS in any way in [the contractor's or purchaser's]
operational decision-making." That is, once the purchaser pays its
bid price for the property and removes it from the relevant
installation, thereby obtaining title to the property in accordance
with the terms of the proposed contract, the agency has no input into
the manner in which the purchaser operates during the performance of
the contract or during the contract's wind-up period, including its
decisions regarding whether to sell or lease the surplus property, or
in what manner to sell or lease the surplus property (so long as the
purchase does not commit one of the enumerated prohibited
activities).[11]
Finally, the language of the proposed contract, which includes many of
the standard provisions common to all DRMS sales solicitations and
contracts, evidences the intent that it constitute a sales contract.
The proposed contract expressly states:
Contract for Sale. This contract is an agreement for the
proceeds-sharing sale of the Property by DRMS as seller to
Purchaser as buyer. Contractor and DRMS expressly disavow the
creation of any relationship, including without limitation
principal-agent, master-servant, employer-employee, general or
limited partnership, or joint venture, between DRMS and either
Contractor or Purchaser.
In sum, under the proposed contract, there will be a transfer of goods
from the agency to the purchaser for a price, with the purchaser
obtaining title to the goods by the proposed contract's express terms;
the proposed contract is thus one for sale.
Contrary to the protesters' view, the proposed contract's inclusion of
the "proceeds sharing" provisions does not transform the proposed
contract into something other than a sales contract. A contract for
sale may provide that the seller receive payment of a certain
percentage of the purchaser's net profits as consideration, or as
here, partial consideration, for the property sold. In re Sitkin
Smelting & Refining, Inc., 648 F.2d 252, 254 (5th Cir. 1981)
(transaction where the processor of scrap materials obtained scrap
from a seller and was required to process the scrap, with the purchase
price for the scrap being determined by an agreed-upon formula
dependent upon the outcome of the processing, was a contract for sale
with the processor obtaining title to the scrap upon its receipt from
the seller); see Commissioner v. Celanese Corp. of America, 140 F.2d
339, 340 (D.C. Cir. 1944) (transaction where the purchaser obtained
exclusive use of the seller's patent was a sale, where the purchase
price for the patent was a fixed amount plus a fixed percentage of the
purchaser's future profits, and the seller had the right to cancel the
agreement and terminate the purchaser's rights to the patent, if
within 10 years of the date of the agreement the purchaser dissolved).
The protesters contend that the amended wind-up provisions require
that the purchaser sell the property and therefore show that the
solicitation is actually a solicitation for property disposal
services. The protesters argue that if the wind-up provisions do not
require that the purchaser sell the property, they allow the purchaser
"to keep property that remains unsold at wind-up . . . essentially
handing the [purchaser] a 'license to steal.'" These assertions are
based upon the protesters' misunderstanding of the requirements of the
proposed contract's wind-up provisions. As indicated previously, the
wind-up provisions simply do not require the sale or other disposition
of property purchased by the purchaser during the contract's
performance period. Contrary to the protesters' assertion, this does
not mean that the purchaser will be allowed to keep the property after
wind-up; no property will remain unsold at completion of wind-up,
because wind-up is completed only after it has been determined that
all property has been sold or disposed of.[12]
Also, the provisions in the contract which are designed to protect the
rights of the parties under the contract, including the agency's
access to the purchaser's books and records, do not alter the
fundamental nature of the transaction from that of a contract for
sale; such precautionary provisions do not affect the intent and
purpose of the contract to vest title in the purchaser upon payment of
the purchase price and removal of the property from the agency
installation.[13] See Commissioner of Internal Revenue v. Celanese
Corp., 140 F.2d at 341.
The protesters next argue that because of the proceeds sharing aspect
of the proposed contract, which requires that 80 percent of the net
proceeds the purchaser obtains from the purchased property be paid to
the U.S. Treasury, the contract will result in the unauthorized sale
of the surplus property on credit. Although the FPASA specifically
authorizes the sale of surplus property on credit, 40 U.S.C. sec. 484(c)
(1994), its implementing regulations, the FPMR, provide in relevant
part that "personal property shall not be offered for sale or sold on
credit without the prior approval of the Administrator of General
Services or his designee."[14] 41 C.F.R. sec. 101-45.304-9.
Neither the FPASA nor the FPMR define the phrase "sale on credit" or
the term "credit." Because like the term "sale," the phrase "sale on
credit" (or credit sale) refers to a common event, and is used in the
FPASA and FPMR, without a limiting definition, and without legislative
or regulatory history indicating a contrary result, the common and
ordinary meaning of "sale on credit" should be applied here.
Commissioner v. Brown, 380 U.S. at 571. In ordinary usage, "sale on
credit" or "credit sale" means "[a] sale in which the buyer is
permitted to pay for the goods at a later time, as contrasted with a
cash sale." Black's Law Dictionary 369-370 (6th ed. 1990). A sale on
credit necessarily involves the extension of credit, which in turn
requires a debtor and creditor relationship. In re Ford, 14 F.2d 848,
849 (W.D. Wash., N.D. 1926).
Under the proposed contract, there is no credit extended nor debt
incurred at the time of DRMS' sale of the surplus property to the
purchaser because the purchaser is required to pay DRMS its full bid
price for the relevant property. Although the purchaser must also pay
80 percent of the net proceeds, if any, that it obtains from the
property purchased from DRMS, this payment is necessarily contingent
upon the purchaser obtaining net proceeds, that is, gross proceeds
exceeding the purchaser's direct costs, through, for example, the sale
or lease of the property. In other words, not only is the
distribution of such net proceeds to the government dependent upon
some future event, it is unclear whether any such distribution will
occur, since, as explained earlier, there is no guarantee, contractual
or otherwise, that net proceeds will be realized by the purchaser and
thus owed to the government. Accordingly, because the concept of
indebtedness requires an unconditional obligation to pay and because
at the time of the sales under this contract any debt is contingent or
inchoate, see C.L. Downey Co. v. Commissioner, 172 F.2d 810, 812 (8th
Cir. 1949), there simply is no credit extended nor debt incurred at
the time of the sale, and the sale is therefore not a sale on credit.
The fact that the purchaser may become liable under the contract to
pay the government further sums does not make the prior sales "on
credit."
The protesters argue that the provision in the proposed contract which
allow either DRMS or the contractor to terminate the contract, should
certain performance thresholds not be met, "may make the contract an
illusory one because neither party is legally bound to continue." The
protesters explain that the proposed contract may be illusory because
"the rate of return under the contract could be manipulated by the
Purchaser should it determine, for whatever reason, that it wishes to
get out of the contract."
The proposed contract includes specific, objective measurements to
determine whether the performance thresholds are met, and expressly
requires that the "Contractor and Purchaser carry out their
responsibilities under the contract with honesty, good faith and
fairness towards DRMS." That is, neither party can terminate the
contract, should the proposed contract's performance thresholds be met
or exceeded. Given that neither party can terminate the contract at
will, and that the protesters' argument that the contract is illusory
is predicated upon the purchaser deliberately attempting to manipulate
the proceeds it obtains from the property in a manner that ensures the
performance thresholds will not be met--conduct which under the terms
of the contract places the purchaser in material breach--we fail to
see why the proposed contract can properly be considered illusory.
The protesters argue that "[t]he solicitation violates the antitrust
approval requirements set forth in the [FPMR]." The FPASA, 40 U.S.C. sec.
488 (1994) and the FPMR, 41 C.F.R. sec. 101-45.310, require that the
Attorney General of the United States be notified whenever an award is
proposed to be made to any private interest of personal property with
an estimated fair market value of $3,000,000 or more. In this regard,
the FPMR requires that the agency provide the Attorney General with
considerable information regarding both the property to be sold and
the proposed purchaser, including, for example, the proposed
purchaser's name, address, trade name, sales volume as of the latest
fiscal or calendar year, and nature of business. 41 C.F.R. sec.
101-45.310. There is no requirement in the applicable statute or
regulation that a solicitation for the sale of surplus property
expressly inform bidders that the terms of the sale, including the
identity of the proposed awardee, may be referred to the Attorney
General. Moreover, as pointed out by the agency, the record reflects
that DRMS advised bidders regarding the applicability of antitrust
laws to this sale.[15] As such, we see no basis to find that the
solicitation violates either 40 U.S.C. sec. 488 or 41 C.F.R. sec.
101-45.310.
The protesters contend that the sheer size of the contract in terms of
dollar amount and length of contract as well as the requirements for
up-front financial commitments, that is, the submission of a $100,000
bid bond, a $400,000 payment bond, and access to a $3 million line of
credit, unduly restrict competition because prospective bidders, such
as the protesters, may not be able to perform a contract of this size
or comply with the required financial commitments.
The FPASA provides that solicitations for the disposal of property be
"on such terms and conditions as shall permit that full and free
competition which is consistent with the value and nature of the
property involved." 40 U.S.C. sec. 484(e)(2)(A) (1994); see William D.
Garrett, B-192592, Nov. 16, 1978, 78-2 CPD para. 350 at 2. The
determination of the agency's needs in this regard and the best method
of accommodating them are primarily within the agency's discretion
and, therefore, we will not question such a determination unless the
record clearly shows that it was without a reasonable basis. Resource
Recovery Int'l Group, Inc., B-265880, Dec. 19, 1995, 95-2 CPD para. 277 at
3.
The agency contends that this pilot solicitation is intended to allow
DRMS to get out of the business of conducting local and national sales
by combining certain categories of surplus property into proceeds
sharing term sales. Such sales are designed to enhance DRMS' rate of
return by enlisting the marketing abilities of the private sector.
This is necessary because DRMS is scheduled to have its work force
drastically reduced, and the previous methods of disposing of surplus
property had not been profitable overall to the government.
DRMS adds that the size, scope, and term of this contract are
"designed to attract the best bidders and to achieve the greatest cost
efficiencies and revenue enhancements possible." The agency states
that because the successful purchaser will be required to pay for and
remove considerable amounts of surplus property from the relevant
government installations shortly after contract award, and the
immediate generation of revenues from these properties by the
purchaser is unlikely, it determined that requiring the purchaser to
have access to a $3 million line of credit was reasonable to ensure
that the purchaser was able to adequately finance its initial costs.
The agency also points out that the $500,000 payment deposit
(comprised of the initial $100,000 bid deposit and additional $400,000
required after award) is relatively small in light of the agency's
estimate that the surplus property that will be made available to the
contractor during each year of the contract will have a market value
of $30 million.
Given the apparent reasonableness of the agency's explanation, and the
protesters' failure to substantively respond to it, we have no basis
to determine that the financial requirements imposed by the
solicitation or the size, scope, or length of the contract
contemplated by the solicitation are unreasonable. Resource Recovery
Int'l Group, Inc., supra; see Aalco Forwarding, Inc., et al.,
B-277242.12, B-277241.13, Dec. 29, 1997, 97-2 CPD para. __ at 6-8.
The protesters finally question the propriety of the "two-step
approach" set forth in the solicitation. Our Bid Protest Regulations
require that protests based upon improprieties apparent from the face
of the solicitation be filed prior to its closing date. 4 C.F.R. sec.
21.2(a)(1) (1997). Where a protester supplements its protest with new
and independent allegations, those allegations must independently
satisfy our timeliness requirements; our Bid Protest Regulations do
not contemplate the unwarranted piecemeal presentation of protest
issues. PCB Piezotronics, Inc., B-254046, Nov. 17, 1993, 93-2 CPD para.
286 at 4-5. The protesters' challenge to the agency's use of a
"two-step" solicitation approach is untimely and will not be
considered because it was raised for the first time in the protesters'
comments on the agency report, which were filed with our Office on
November 17, approximately 7 weeks after the solicitation's September
30 closing date.
The protest is denied.
Comptroller General
of the United States
1. We consider this protest under 4 C.F.R. sec. 21.13 (1997). DLA, by
letter dated January 13, 1987, has agreed to our considering bid
protests involving its surplus property sales. See Consolidated
Aeronautics, B-225337, Mar. 27, 1987, 87-1 CPD para. 353 at 1 n.1.
2. DRMS estimates that the surplus property that will be made
available to the contractor during each year of the contract will have
a market value of $30 million.
3. Neither Alamo nor Merchants World submitted a proposal.
4. While the protesters initially contended that if the IFB is
materially changed the competition may need to be reopened, they now
agree that this contention is premature.
5. As initially issued, the draft IFB stated that the purchaser would
be required to pay 20 percent of the purchase price it bid to the
government for the property. The agency amended the solicitation to
clarify that the purchaser will be required to pay its total bid
purchase price to the government for the property.
6. DLA's disposition priorities are to (1) reutilize property within
DOD, (2) transfer items to other federal agencies and organizations
with equivalent priority for the purpose of obtaining excess property
and (3) donate the remaining items to eligible entities such as state
and local governments, among many others. This process is generally
referred to as the R/T/D process. Items that remain after these
priorities are served are sold to the general public, as contemplated
here, or otherwise disposed of. Federal Property Disposal:
Information on DOD's Personal Property Disposal Process,
GAO/NSIAD-97-155BR, July 8, 1997.
7. This figure results from the following calculation: $60 million in
gross proceeds minus $12 million in direct costs equals $48 million in
net proceeds, 80 percent of which is $38.4 million.
8. The wind-up provisions described here reflect amendments made
during the course of this protest.
9. The Uniform Commercial Code (UCC) sets forth a similar definition
of the term "sale," stating that "[a] sale consists in the passing of
title from the seller to the buyer for a price." UCC sec. 2-106(1); see
Manheim Pattern Works, B-186837, July 30, 1976, 76-2 CPD para. 103 at 1-2
(our Office may refer to the UCC for guidance).
10. The risk of loss provision was also modified during the course of
the protest.
11. The enumerated prohibited activities include such things as sales
to affiliates.
12. Although the agency has no input into the manner in which the
purchaser operates during the contract's wind-up period, the agency
believes that its interests in sharing in the proceeds obtained from
such property and a timely wind-up will be protected by the
purchaser's incentive to maximize its investment. That is, because
the purchaser will continue to incur costs in maintaining and storing
property remaining after the contract's performance period, and will
only make money if it obtains net proceeds from the remaining
property, the purchaser has economic incentives to dispose of the
property promptly and in a manner that maximizes net proceeds.
13. Since the solicitation will result in a contract for the sale of
surplus government property, it does not result in the creation of a
"partnership" between the agency and the contractor/purchaser, as
alleged by the protesters. Moreover, because we conclude that the
transaction is a sale, rather than a procurement of services, we need
not address the protest contentions that "if the transaction is
properly considered a procurement transaction, then the contract
violates at least the spirit of the statutory restrictions on fee
percentages that are included in 10 U.S.C. sec. 2306(d)" and "the
statutory prohibition against cost-plus-percentage-of-cost contracts
at 10 U.S.C. sec. 2306(a)."
14. No such approval has been granted in this case.
15. Amendment No. 2 to the solicitation, which among other things sets
forth certain questions and answers, includes the following:
[Question] 85. Is the contract exempt from the Sherman
Anti-Trust Act?
ANSWER: No.