Cecile Industries, Inc. v. Cheney

Decision Date15 June 1993
Docket NumberNo. 92-1010,92-1010
Citation995 F.2d 1052
Parties38 Cont.Cas.Fed. (CCH) P 76,527 CECILE INDUSTRIES, INC./Ronald Lipshie, Trustee in Bankruptcy, Appellant, v. Dick CHENEY, Secretary of Defense, Appellee.
CourtU.S. Court of Appeals — Federal Circuit

Marc Lamer, Kostos & Lamer, P.C., Philadelphia, PA, argued for appellant.

John K. Lapiana, Atty., Commercial Litigation Branch, Dept. of Justice, Washington, DC, argued for appellee. With him on the brief were Stuart M. Gerson, Asst. Atty. Gen., David M. Cohen, Director and James M. Kinsella, Asst. Director. Also on the brief was Kathleen D. Hallam, Office of General Counsel, Defense Personnel Support Center, Philadelphia, PA, of counsel.

Before PLAGER, and RADER, Circuit Judges, and PLUNKETT, District Judge. *

RADER, Circuit Judge.

Cecile Industries, Inc. (Cecile) appeals from a decision of the Armed Services Board of Contract Appeals. The Board held that the administrative offset provisions of the Debt Collection Act of 1982, Pub.L. No. 97-365 § 10, 96 Stat. 1749, 1754-55 (1982), codified at 31 U.S.C. § 3716 (1988) (DCA), do not apply to the Federal Government's offset of money within a single contract. Cecile Industries, Inc./Ronald Lipshie, Trustee in Bankruptcy, 91-3 BCA (CCH) p 24,099 at 120,626, 1991 WL 129851 (1991). The Board also permitted the Government to cure its failure to comply with those provisions before effecting an offset between separate contracts with Cecile. Id. at 120,627. Because the DCA did not abrogate or constrict preexisting common law rights to intra- or inter-contractual offsets, this court affirms.

Background

On June 14, 1979, the Defense Personnel Support Center (Center) awarded Cecile contract DLA100-79-C-2851 (contract 2851) for the manufacture of 40,572 extreme cold weather sleeping bags at a price of $3,634,034.04. The contract called for insulation in the bags to contain more than 80% goose down. Contract 2851 also contained a Value Engineering Clause, which entitled Cecile to share in any cost savings suggested by Cecile. Due to a cost-saving suggestion, Cecile earned $272,865.30 in Value Engineering royalties.

Later the Center awarded Cecile contracts DLA100-81-C-2414 (contract 2414) and DLA100-82-C-4247 (contract 4247) for additional sleeping bags. Both contracts contained a standard Government Furnished Material (GFM) bailment clause. Under this clause, the Center supplied basic materials to Cecile and deducted their cost from the contract price. Cecile did not use all of the furnished materials. Therefore it returned unused materials for a refund. The GFM refunds due to Cecile totaled $18,853.15 under contract 2414 and $65,587.22 under contract 4247.

Cecile delivered the bags covered by contract 2851 and received full payment. The Center discovered later that the bags did not contain 80% goose down. After Cecile failed to correct the problem, the Center terminated the contract for default. The estimated cost of correcting the problem came to $1,605,998.40. The Center reduced the contract price by that amount. Cecile did not appeal the termination or the price reduction.

When Cecile sought payment under the Value Engineering clause of contract 2851, the Center offset the royalty amount against Cecile's debt from the nonconforming bags. The Center also withheld Cecile's GFM refunds under contracts 2414 and 4247 as offsets against Cecile's debt from contract 2851.

Cecile submitted a claim to the contracting officer seeking release of these withheld funds. When the contracting officer did not issue a final decision, Cecile appealed to the Board.

The Board held that the DCA did not apply to the mutual offset of debits and credits between parties under the same contract. Thus, the Board concluded, the notice and opportunity provisions of 31 U.S.C. § 3716 did not apply to the Center's withholding of Value Engineering royalty payments under the 2851 contract. The Board applied, however, those provisions to the Center's inter-contractual offsets of GFM refunds under contracts 2414 and 4247. The Board gave the Center ninety days to cure its failure to comply with those provisions.

Standard of Review

The scope of this court's review of Board decisions is set forth at 41 U.S.C. § 609(b) (1988):

[T]he decision of the agency board on any question of law shall not be final or conclusive, but the decision on any question of fact shall be final and conclusive and shall not be set aside unless the decision is fraudulent, or arbitrary, or capricious, or so grossly erroneous as to necessarily imply bad faith, or if such decision is not supported by substantial evidence.

This court thus reviews the Board's legal conclusions de novo. Federal Data Corp. v. United States, 911 F.2d 699, 702 (Fed.Cir.1990). The Board's interpretation of the scope of the DCA presents such a legal question reviewable under the de novo standard.

The Debt Collection Act

31 U.S.C. § 3716 provides notice and other procedural protections when the Government undertakes to collect a debt by administrative offset:

(a) After trying to collect a claim from a person under section 3711(a) of this title, the head of the executive or legislative agency may collect the claim by administrative offset. The head of an agency may collect by administrative offset only after giving the debtor--

(1) written notice of the type and amount of the claim, the intention of the head of the agency to collect the claim by administrative offset, and an explanation of the rights of the debtor under this section;

(2) an opportunity to inspect and copy [relevant agency records];

(3) an opportunity for a review within the agency of the decision of the agency related to the claim; and

(4) an opportunity to make a written agreement ... to repay the amount of the claim.

31 U.S.C. § 3701(a)(1) defines "administrative offset" to mean "withholding money payable by the United States Government to, or held by the Government for, a person to satisfy a debt the person owes the Government."

This court must determine whether the DCA abrogates or constricts the Government's long-standing common law right to offset contract debts against contract payments. Indisputably, the Government has long enjoyed the right to offset contract debts to the United States against contract payments due to the debtor. See, e.g., United States v. Munsey Trust Co., 332 U.S. 234, 239, 67 S.Ct. 1599, 1602, 91 L.Ed. 2022 (1947); Project Map, Inc. v. United States, 486 F.2d 1375, 1376, 203 Ct.Cl. 52 (1973); Madden v. United States, 371 F.2d 469, 470, 178 Ct.Cl. 121 (1967). This right extends to offsets between separate contracts which the debtor may have with the Government. Project Map, 486 F.2d at 1376-77; Dale Ingram, Inc. v. United States, 475 F.2d 1177, 1188, 201 Ct.Cl. 56 (1973). In other words, the right to offset applies to inter-contractual debts as well as intra-contractual debts.

The United States Supreme Court has directed:

Statutes which invade the common law ... are to be read with a presumption favoring the retention of long-established and familiar principles, except when a statutory purpose to the contrary is evident. In such cases, Congress does not write upon a clean slate.

United States v. Texas, --- U.S. ----, ----, 113 S.Ct. 1631, 1634, 123 L.Ed.2d 245 (1993) (ellipsis in original, citations omitted); Isbrandtsen Co. v. Johnson, 343 U.S. 779, 783, 72 S.Ct. 1011, 1015, 96 L.Ed. 1294 (1952); see also Astoria Federal Savings & Loan Assn. v. Solimino, --- U.S. ----, ---- - ----, 111 S.Ct. 2166, 2169-70, 115 L.Ed.2d 96 (1991). Thus, without an evident statutory mandate to the contrary, this court must avoid reading the DCA to restrict the common law right of contractual offset.

The language of the DCA does not contain a clear mandate to abrogate or severely restrict the Government's common law contractual offset rights. The enacting clause of the DCA stated the Act's purpose:

To increase the efficiency of Government-wide efforts to collect debts owed the United States and to provide additional procedures for the collection of debts owed the United States.

Pub.L. No. 97-365, 96 Stat. 1749, 1749 (1982); see also S.Rep. No. 378, 97th Cong., 2d Sess. 2, reprinted in 1982 U.S.C.C.A.N. 3377, 3378. Significantly, this statement of purpose speaks of "additional procedures" for debt collection, not replacement or revision of existing contract law doctrines. The Supreme Court read this purpose to "suggest[ ] that Congress passed the Act in order to strengthen the Government's hand in collecting its debts." Texas, --- U.S. at ----, 113 S.Ct. at 1636.

Application of the Act's notice and opportunity requirements to contractual offset procedures would defeat the purpose of providing the United States additional procedures to collect debts. Rather the Act's procedures would reduce the Government's debt collection options by prohibiting exercise of common law contract rights without satisfying previously nonexistent conditions. Under such a reading, the DCA would not "strengthen the Government's hand in collecting its debts," but would instead limit the Government's use of a valuable common law collection tool. Thus, the enacted purpose of the Act underscores that it does not apply to restrict the common law doctrines governing contractual offsets.

The language of the 1982 Act also shows that an administrative offset under section 3716 is a last resort which an agency "may" use "after" other collection efforts fail. 31 U.S.C. 3716(a); see also S.Rep. No. 378 at 12, 1982 U.S.C.C.A.N. at 3388 ("The administrative set-off procedure should be used primarily as a last resort action where other administrative steps...

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