860 F.2d 1104 (D.C. Cir. 1988), 87-5162, ATC Petroleum, Inc. v. Sanders

Docket Nº:87-5162, 87-5179.
Citation:860 F.2d 1104
Party Name:ATC PETROLEUM, INC., et al., Appellants, v. John C. SANDERS, Administrator, Small Business Administration. KOCH FUELS, INC., Appellant, v. John C. SANDERS, Administrator, Small Business Administration.
Case Date:November 04, 1988
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

Page 1104

860 F.2d 1104 (D.C. Cir. 1988)

ATC PETROLEUM, INC., et al., Appellants,


John C. SANDERS, Administrator, Small Business Administration.

KOCH FUELS, INC., Appellant,


John C. SANDERS, Administrator, Small Business Administration.

Nos. 87-5162, 87-5179.

United States Court of Appeals, District of Columbia Circuit.

November 4, 1988

Page 1105

As Amended Nov. 25, 1988.

Argued Feb. 17, 1988.

Page 1106

Appeals from the United States District Court for the District of Columbia (Civil Action Nos. 85-00828 and 85-03701).

Edward J. Tolchin, Washington, D.C., for appellants ATC Petroleum, Inc. and Tidewater Fuels, Inc. in No. 87-5162.

Louis K. Obdyke, with whom William E. Shull, Wichita, Kan., and Larry P. Ellsworth, Washington, D.C., were on the brief, for appellant Koch Fuels, Inc. in No. 87-5179.

Michael J. Ryan, Asst. U.S. Atty., with whom Joseph E. diGenova, U.S. Atty., Claire M. Schenk, Atty., Small Business Admin., John D. Bates and R. Craig Lawrence, Asst. U.S. Attys., Washington, D.C., were on the brief for appellee.

Eric S. Benderson, Associate Gen. Counsel, Small Business Admin. and George P. Williams, Asst. U.S. Atty., Washington, D.C., also entered appearances for appellee.

Before WILLIAMS, D.H. GINSBURG and BOGGS [*] , Circuit Judges.

Opinions for the Court filed by Circuit Judge D.H. GINSBURG.

D.H. GINSBURG, Circuit Judge:

These two cases arise out of two contracts, let under the section 8(a) program established by the Small Business Act of 1958 (the Act), between the Small Business Administration (SBA) and the Defense Fuel Supply Center (DFSC); related subcontracts between SBA and a supplier of fuel oil, Tri-Par Combustion Corp.; and further subcontracts between Tri-Par and appellants Koch Fuels, Inc. (No. 87-5179), and ATC Petroleum, Inc. and Tidewater Fuels, Inc. (No. 87-5162). Appellants raise various equitable claims to recover from SBA the considerable losses they allegedly incurred as a result of steps taken by SBA to collect money owed it by Tri-Par.

The district court granted summary judgment on all counts to SBA. Although we agree with the district court's conclusion that equitable estoppel will not lie against SBA, we reverse in part and remand the case for further proceedings on another aspect of appellants' claims.


    Before discussing the facts of these cases in greater detail, we briefly review the salient features of the section 8(a) program.

    A. Statutory Framework

    Section 8(a)(1) of the Act, 15 U.S.C. Sec. 637(a)(1) (1982), authorizes the SBA,

    whenever it determines such action is necessary or appropriate--

    (A) to enter into contracts with the United States Government and any department, agency, or officer thereof having procurement powers obligating the [SBA] to furnish articles, equipment, supplies, services, or materials to the Government ...; [and]

    (C) to arrange for the performance of such procurement contracts by negotiating or otherwise letting subcontracts to socially and economically disadvantaged small business concerns....

    The Act further provides that a socially or economically disadvantaged small business shall be eligible for this type of SBA assistance only if the agency determines that the benefited small business "will be able to perform [such] contracts ... and has reasonable prospects for success in competing in the private sector." 15 U.S.C. Sec. 637(a)(1) (1982). Additionally, SBA may assist a qualified small business in performing

    Page 1107

    its SBA contracts by providing technical and management support. 15 U.S.C. Sec. 637(b)(1)(A) (1982).

    A section 8(a) firm may also obtain financial support from SBA under the agency's "advance payment" program, which provides an interest-free loan to assist the firm in performing procurement subcontracts. Such a loan may be made, however, only if SBA finds that the "public interest" so requires and that the loan is backed by "adequate security." Adequate security may consist of a "lien in favor of the Government on the property contracted for, on the balance of an account in which such payments are deposited, and such of the property acquired for performance of the contract as the parties may agree." 41 U.S.C. Sec. 255(c) (1982).

    Because of the considerable risk of loss attending advance payment to section 8(a) firms that are not otherwise creditworthy, SBA regulations further limit advance payment loans to cases in which: (1) the "section 8(a) business concern does not have adequate working capital to perform a specific section 8(a) contract"; (2) other methods of financing are either unavailable or "not conducive to the effective and or business development purposes of the section 8(a) program"; and (3) "[t]he section 8(a) business concern has established or agrees to establish and maintain financial records and controls which will provide for complete accountability and required reporting of advance payment funds." 13 C.F.R. Sec. 124.1-2(b).

    The regulations also provide that the section 8(a) firm must establish a "special bank account for the deposit of payments paid to it by the procuring agency pursuant to the performance subcontracts" and for the deposit of the advance payment funds. 13 C.F.R. Sec. 124.1-2(c). Disbursements from this account may be made only with the countersignature of a designated SBA official, 13 C.F.R. Sec. 124.1-2(c)(1)(A), and advance payment funds may be disbursed only "for the purpose of purchasing materials and labor and paying for administrative and overhead expenses required to perform the specific section 8(a) subcontract." 13 C.F.R Sec. 124.1-2(d)(1). SBA obtains, at the time of making advance payment, "a lien upon the special bank account, any property contracted for, and supplies, material and other property acquired with the advance payment funds." 13 C.F.R. Sec. 124.1-2(c)(1)(C). The small business concern is forbidden from withdrawing proceeds from the special bank account "before the full amount of the advance payments is liquidated." 13 C.F.R. Sec. 124.1-2(a).

    1. The Contracts

      Over a period of years, SBA entered into various contracts with Tri-Par pursuant to the section 8(a) program. In 1976, Tri-Par approached appellant Koch to serve as its supplier of fuel oil in connection with some of these contracts. Koch initially declined to do business with Tri-Par because Tri-Par failed to satisfy Koch's credit requirements. SBA intervened on Tri-Par's behalf, informing Koch Fuels that

      [t]his office will furnish sufficient funds in the form of an advance payment which will permit the timely payment of your invoices for the fuel furnished by your company. These funds will be deposited in a special bank account under the control of this office and all checks drawn on this account will be signed by the SBA authorized representative. The account will remain under the control of this office at all times.

      On the basis of these assurances, which were repeated for other contracts in 1978 and 1979, Koch Fuels supplied fuel oil to Tri-Par on credit.

      In September 1980, SBA entered into an indefinite requirements contract to provide fuel oil to the DFSC, and chose Tri-Par as its section 8(a) subcontractor. As a result, Tri-Par became obligated to supply DFSC with approximately $10.8 million worth of fuel oil during fiscal year 1981. Koch Fuels agreed to serve as Tri-Par's supplier in connection with this contract.

      In January 1981, Tri-Par encountered financial difficulties and, unable to secure financing in the private sector, the company requested a loan from SBA under the

      Page 1108

      agency's advance payment plan. SBA agreed to deposit $4.2 million in advance payments into a special bank account established by agreement between Tri-Par and SBA, and the 1980 subcontract was modified to account for the advance payment. The modification required that all payments under the contract "be marked for deposit only in a Special Bank Account," the administration of which "will be performed by SBA Contracting Officer, New York District Office...." The modification also specified: (1) "SBA shall have a lien upon any balance in the Special Bank Account paramount to all other liens, which lien shall secure the repayment of any advance payments made hereunder"; (2) "SBA shall have a lien on all proceeds received or to be received by virtue of the performance of this contract"; and (3) SBA shall have a "lien on property under contract." A copy of the contract modification was forwarded to DFSC.

      On June 4, 1981, SBA entered into another, entirely separate, contract with DFSC for the delivery of $12.2 million of fuel to DFSC installations in the southeastern United States. Again, SBA subcontracted with Tri-Par under section 8(a). Tri-Par met its fuel supply requirement under this subcontract through agreements with appellants Tidewater Fuels, Inc. and ATC Petroleum, Inc. (hereinafter collectively referred to as TF/ATC). SBA made no advance payments to Tri-Par in connection with this subcontract.

      In July 1981, SBA discovered that DFSC payments under the 1980 contract were not being deposited into the special account. Tri-Par acknowledged that some DFSC payments under the 1980 contract had been deposited in the company's regular business account, and had been used for purposes unrelated to Tri-Par's performance of the contract. SBA later ascertained that Tri-Par had received in excess of $6.8 million in payments on the 1980 contract, but that the funds deposited in the special account were $1.3 million short of the amount needed to repay SBA the money it had advanced. On September 23, 1981, SBA issued stop payment orders to all receiving and paying authorities, and requested DFSC to make all further payments on the 1980 contract directly to it. Through this procedure, SBA recovered approximately $660,000 of the outstanding $1.3 million Tri-Par debt. Upon learning of these actions in September 1981, Koch refused to...

To continue reading