The Court of Federal Claims in American Gov’t Props. & Houma SSA v. United States recently restated the general prohibition on assignment of federal government contracts and laid out the necessary steps contractors must follow in order to avoid an improper assignment of a lease agreement.

The case involved a contract to design, build and then lease to the Social Security Administration an office building in Houma, Louisiana. The General Services Administration (GSA) terminated the contract for default citing lack of progress. The plaintiffs brought suit alleging termination was improper and sought damages as a result of the alleged breach of contract. The defendant moved to dismiss on the grounds that plaintiff lacked standing to maintain suit against the government due to an improper assignment of the contract. The defendant alleged that the contract was assigned to Houma SSA, LLC (Houma) by American Government Properties (AGP), the original contracting party in violation of the Contracts Act.

41 U.S.C. §6305, otherwise known as the “Contracts Act” (“Anti-Assignment Act”) prohibits the transfer of federal contracts, or any interest in such a contract, to another party. “A purported transfer in violation of this subsection annuls the contract or order so far as the Federal Government is concerned, except that all rights of action for breach of contract are reserved to the government.” Under the act, contract payment may be assigned only to a financing institution, such as a bank or trust company, for the entire balance due to only one party, and the assignee must file a written notice of the assignment, along with a copy of the instrument of assignment with the contracting officer, the surety provider, and the disbursing officer designated in the contract to make payment. Furthermore, there are two judicially recognized exceptions to the requirements. First, the agency may waive the statutory prohibition by giving “clear assent to the assignment” through a novation agreement or by acting consistently with the assignment through the course of conduct. The second exception courts recognize is one by operation of law in cases of corporate succession through merger or consolidation and certain instances of corporate reorganization.

Plaintiffs attempted to argue that the “operation of law” exception should apply because the same individuals were in control of both entities and the transfer to Houma was akin to a corporate reorganization. The court rejected this argument distinguishing between “a voluntary transfer of contract rights like that between AGP and Houma and a transfer forced by law like corporate succession through purchase or merger.” In the alternative, the plaintiffs tried to argue the Contracts Act was never implicated due to the ex post dissolution of Houma and the transfer of its assets back to AGP. However, the court could not “simply ignore the assignment of the lease agreement between AGP and Houma.” There was a period of time where the “rights and duties of AGP under the contract with GSA were transferred and the government did not accede to the transfer.” In conclusion, the court held the assignment from AGP to Houma was in violation of the Contract Acts thus annulling the contract with GSA and therefore the plaintiffs lacked standing to maintain their suit.

Why does this matter?

Any contractor that attempts to assign their contractual rights of a contract with the federal government should be aware of and understand the prohibition as well as the specific ways to avoid an improper assignment to ensure contractual rights are not abrogated.