Tip Top Construction, Inc. v. United States

United States Court of Appeals for the Federal Circuit
2008-5183
TIP TOP CONSTRUCTION, INC.,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
Michael A. Gordon, Michael A. Gordon PLLC, of Washington, DC, argued for
plaintiff-appellant.
Amanda L. Tantum, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-
appellee. With her on the brief were Jeanne E. Davidson, Director, and Harold D.
Lester, Jr., Assistant Director.
Appealed from: United States Court of Federal Claims
Judge Lynn J. Bush

-- 1 of 16 --

United States Court of Appeals for the Federal Circuit
2008-5183
TIP TOP CONSTRUCTION, INC.,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
Appeal from the United States Court of Federal Claims
in 08-CV-352, Judge Lynn J. Bush.
__________________________
DECIDED: April 29, 2009
___________________________
Before MICHEL, Chief Judge, BRYSON, Circuit Judge, and POSNER, Circuit Judge.*
BRYSON, Circuit Judge.
In this bid protest case, the unsuccessful bidder claims that the contracting officer
improperly rejected its bid on the ground that the bid was not accompanied by a
satisfactory bid bond. The Court of Federal Claims dismissed the bidder’s protest
action because the asset pledged by the bidder’s surety was not acceptable. We agree
with the court that the bidder did not pledge an acceptable asset and therefore affirm.
* The Honorable Richard A. Posner, Circuit Judge, United States Court of
Appeals for the Seventh Circuit, sitting by designation.

-- 2 of 16 --

2008-5183 2
I
In 2007, the Federal Highway Administration (“FHWA”) issued an invitation for
bids for the construction of a traffic circle and related work on the island of St. John in
the U.S. Virgin Islands. The solicitation required bidders to submit a bid bond in the
amount of either 20 percent of the bid price, or $3 million (whichever was less), and it
allowed bidders to use individual sureties to provide the bid bond. The appellant, Tip
Top Construction, Inc., submitted a bid. Of the three bids submitted, Tip Top’s was the
lowest. The contracting officer rejected Tip Top’s bid, however, on the ground that Tip
Top’s bid bond did not comply with the requirements of the Federal Acquisition
Regulation (“FAR”) pertaining to bid bonds.
Tip Top used Edmund C. Scarborough as an individual surety to furnish its bid
bond asset. As required by the solicitation, Mr. Scarborough submitted a bid bond, an
Affidavit of Individual Surety, and a Certificate of Pledged Assets. In the Certificate of
Pledged Assets, Mr. Scarborough identified the proffered asset as an “allocated portion
of $191,350,000.00 of previously mined, extracted, stockpiled and marketable coal,
located on the property of E.C. Scarborough” in West Virginia.
In a letter dated February 19, 2008, the contracting officer rejected Tip Top’s bid
on the ground that marketable coal was not an acceptable bid bond asset under the
FAR. The contracting officer offered this explanation for rejecting the bid guarantee:
We have reviewed the Bid Bond submitted with your Bid in response to
the subject Invitation for Bid and find it to be inadequate. It does not meet
the requirements of the Federal Acquisition Regulations (FAR) for an
Individual Surety at Section 28.203. Individual Surety Bonds must be
supported by acceptable assets, as listed in the FAR. Acceptable assets
include cash, United States Government securities, stocks and bonds that
are actively traded, real property owned in fee simple, and irrevocable

-- 3 of 16 --

2008-5183 3
letters of credit. Speculative assets – which would include marketable
coal – are specifically excluded by Subsection 28.203-2(c)(7).
Your bid is hereby rejected in accordance with FAR Section 14.404-2(i),
failure to furnish a bid guarantee in accordance with the requirements of
the invitation for bids.
On February 20, 2008, Tip Top’s president, Percy J. Hollins, sent an email to the
contracting officer requesting the opportunity to “clarify” the assets listed on the bid
bond and noting that the “bid bond entity has other marketable assets including cash.”
In an affidavit filed during the litigation, Mr. Hollins asserted that he followed up that
email with a telephone call to the contracting officer. In his affidavit, he stated that in the
course of the telephone call he offered to have the surety substitute a different asset,
but that the contracting officer told him that “the FARs would not allow for a substitute
asset by the individual surety and that she would not accept it.”
On February 21, 2008, shortly after that telephone conversation, Mr.
Scarborough’s counsel sent a letter to the contracting officer arguing that the proffered
coal was not, as the contracting officer had concluded, a speculative asset or otherwise
unacceptable under the FAR. Mr. Scarborough offered to provide documentation as to
the quality and market price of the pledged coal, and contended that other federal
agencies had accepted coal as security for bid bonds.
The contracting officer responded by letter on February 26, 2008. In that letter,
the contracting officer further explained why she had concluded that coal was not an
acceptable bid bond asset under the FAR:
In our analysis, the asset listed in this instance – mined but not marketed
coal – is closer in similarity to a corporate asset, speculative asset, or
accounts receivable [which are listed as unacceptable assets in the FAR],
than it is to cash, certificates of deposit, or U.S. Government securities
[which are listed as acceptable assets in the FAR]. In any case, the
determination of which category the proposed asset falls into belongs to

-- 4 of 16 --

2008-5183 4
the Contracting Officer – as stated at FAR Section 28.203(a), “The
contracting officer shall determine the acceptability of individuals proposed
as sureties, and shall ensure that the surety’s pledged assets are
sufficient to cover the bond obligation.”
The contracting officer stated that because Tip Top had failed to provide an acceptable
individual surety in support of its bid guarantee, she was rejecting Tip Top’s bid as
nonresponsible under FAR 28.203(c), 48 C.F.R. § 28.203(c).
Three days later, Tip Top filed a protest with the Government Accountability
Office (“GAO”). Tip Top sought a stay of performance of the contract, claiming that
FHWA had failed to offer any reason not to accept marketable coal as a bid bond asset.
In response, the FHWA contracting officer explained that she had concluded that the
coal was a speculative asset because its actual value could not be ascertained until it
was sold, its price could fluctuate depending on its quality and market conditions, and it
would be a difficult asset for the government to liquidate quickly. Tip Top and the surety
replied by submitting a document that described the type, grade, and value of coal
materials owned by the IBCS Mining Corp., a company controlled by Mr. Scarborough.
That document explained that the proffered coal was actually “coal refuse” that would
need to be reprocessed prior to sale.
The GAO rejected the protest. It concluded that mined coal is an unacceptable
asset because it could not be placed into an escrow account, as required for pledges of
assets under FAR 28.203-1(b)(1). The GAO also rejected Tip Top’s argument that
under the circumstances of this case the contracting officer was obligated to accept a
substitute bid bond asset.
Tip Top then filed a bid protest action in the Court of Federal Claims, seeking to
enjoin the award of the contract. The court agreed with the GAO that mined coal is not

-- 5 of 16 --

2008-5183 5
an acceptable asset under the FAR because it could not be placed into an escrow
account. The court also determined that it was permissible for the FHWA to reject the
bid bond without granting Tip Top’s request for a substitution of assets.
II
On appeal, Tip Top makes three arguments: (1) that the contracting officer
incorrectly concluded that the pledged coal was not an acceptable asset under the FAR,
and that the Court of Federal Claims improperly substituted a new basis to affirm the
agency’s responsibility determination; (2) that the contracting officer was required to
provide the surety an opportunity to support the pledged asset or submit a substitute
asset; and (3) that the contracting officer erred in rejecting Tip Top’s offer to provide a
substitute asset. We consider each argument in turn.
A
The FAR requires contracting officers to determine the acceptability of individual
sureties and provides that if “the contracting officer determines that no individual surety
in support of a bid guarantee is acceptable, the offeror utilizing the individual surety
shall be rejected as nonresponsible.” 48 C.F.R. § 28.203(c). The trial court concluded
that the pledged coal was not an acceptable asset because coal cannot be placed in an
escrow account. In reaching that conclusion, the court relied in part on FAR 52.228-11,
which provides that “Pledges of assets from each person acting as an individual surety
shall be in the form of—(1) Evidence of an escrow account containing cash, certificates
of deposit, commercial or Government securities, or other assets described in
FAR 28.203-2 . . . and/or; (2) A recorded lien on real estate.” 48 C.F.R. § 52.228-11(b);
see also 48 C.F.R. § 28.203-1. The trial court also noted that the Affidavit of Individual

-- 6 of 16 --

2008-5183 6
Surety specifically requires individual sureties to provide evidence of an escrow account
for all assets other than real estate. The court therefore concluded that it was
reasonable for the contracting officer to reject Tip Top’s bid bond as unacceptable.
Tip Top contends that the escrow requirements set forth in the FAR do not apply
to all types of acceptable assets, and that even if the escrow requirements apply to
mined coal, those requirements could be satisfied by placing the coal in a bonded area
in possession of a third-party escrow agent. Tip Top’s principal argument, however, is
that the contracting officer did not actually reject the proffered coal on the ground that it
could not be placed in an escrow account, but rather concluded that the mined coal was
unacceptable because it was a speculative asset. For that reason, Tip Top asserts, the
trial court improperly affirmed the agency’s rejection on a ground not invoked by the
agency, in violation of the principle enunciated by the Supreme Court in SEC v.
Chenery Corp., 332 U.S. 194, 196 (1947). See OMV Med., Inc. v. United States, 219
F.3d 1337, 1344 (Fed. Cir. 2000) (applying the Chenery doctrine in a bid protest case).
The government disputes Tip Top’s interpretation of the FAR’s escrow requirement and
contends that the Chenery doctrine is inapplicable in this case because the legal
interpretation of a regulation such as the FAR is not “a determination or judgment which
an administrative agency alone is authorized to make.” Chenery, 332 U.S. at 196.
We need not determine whether the trial court’s reliance on the FAR’s escrow
requirement was permissible under Chenery because the agency’s rejection of Tip
Top’s bid bond is sustainable on the ground articulated by the contracting officer—
namely, that the pledged coal was not the type of asset that is acceptable under the
FAR as a bid bond asset. Section 28.203-2 of the FAR provides that the “government

-- 7 of 16 --

2008-5183 7
will accept only cash, readily marketable assets, or irrevocable letters of credit from a
federally insured financial institution from individual sureties to satisfy the underlying
bond obligations.” 48 C.F.R. § 28.203-2(a). That section of the FAR then lists specific
assets that are acceptable or unacceptable in support of a bid bond:
(b) Acceptable assets include—
(1) Cash, or certificates of deposit, or other cash equivalents with a
federally insured financial institution;
(2) United States Government securities at market value. . . .
(3) Stocks and bonds actively traded on a national U.S. security
exchange with certificates issued in the name of the individual surety.
National security exchanges are [limited to eight specified exchanges].
These assets will be accepted at 90 percent of their 52-week low, as
reflected at the time of submission of the bond. Stock options and
stocks on the over-the-counter (OTC) market or NASDQ Exchanges
will not be accepted. . . .
(4) Real property owned in fee simple by the surety . . . . These assets
will be accepted at 100 percent of the most current tax assessment
value (exclusive of encumbrances) or 75 percent of the properties’
unencumbered market value provided a current appraisal is furnished
(see 28.203-3).
(5) Irrevocable letters of credit (ILC) issued by a federally insured
financial institution in the name of the contracting agency and which
identify the agency and solicitation or contract number for which the
ILC is provided.
(c) Unacceptable assets include but are not limited to—
(1) Notes or accounts receivable;
(2) Foreign securities;
(3) Real property [having certain characteristics];
(4) Personal property other than that listed in paragraph (b) of this
subsection (e.g., jewelry, furs, antiques);
(5) Stocks and bonds of the individual surety in a controlled, affiliated,
or closely held concern of the offeror/contractor;
(6) Corporate assets (e.g., plant and equipment);
(7) Speculative assets (e.g., mineral rights);
(8) Letters of credit, except as provided in 28.203-2(b)(5).
Id. at § 28.203-2(b), (c). In her February 19, 2008, letter rejecting Tip Top’s bid, the
contracting officer stated that the mined coal proffered by Mr. Scarborough was
inadequate as a bid bond asset because coal is a speculative asset and as such is

-- 8 of 16 --

2008-5183 8
unacceptable as a bid bond asset under FAR 28.203-2(c)(7). We agree with the
contracting officer that the pledged coal was not an acceptable bid bond asset.
The purpose of a bid bond is to protect the government in the event that the
bidder withdraws its bid. See, e.g., Interstate Rock Prods., Inc. v. United States, 50
Fed. Cl. 349, 358 (2001). Consistent with that purpose, the FAR defines the types of
acceptable bid bond assets as those that have an identifiable value and are readily
marketable, so that they can easily be sold to cover any expenses incurred by the
government as a result of the bidder’s failure to satisfy its obligation. See 54 Fed. Reg.
48,978 (Nov. 28, 1989). The distinction in the FAR between acceptable assets (such as
cash, stocks, and bonds) and unacceptable assets (such as jewelry, antiques, and furs)
reflects that concern with the discernible value and liquidity of pledged assets.
Tip Top argues that the contracting officer erred in concluding that mined coal is
an unacceptable asset because coal is a readily marketable mineral with a known value
that is defined by national price indices and because it is actively traded on commodities
exchanges. But mined coal is clearly less liquid than cash, stocks, certificates of
deposit, and bonds, which are highly liquid assets with readily identifiable values.
Moreover, the fact that there is some market for a product does not mean that the
product is readily marketable. It would obviously be permissible for a contracting officer
to reject a proffer of frozen pork bellies, lean hogs, or oats on the ground that they are
not readily marketable, even though those commodities—like coal—are routinely traded
on commodities markets. Even stocks that are traded on the NASDAQ exchange are
excluded from the FAR’s list of acceptable assets, despite the well-defined market for

-- 9 of 16 --

2008-5183 9
such stocks. Thus, the fact that coal has an identifiable spot price does not undercut
the contracting officer’s conclusion that coal is not an acceptable asset.
Mined coal is a speculative asset because its value is difficult to ascertain and is
highly dependent on variables such as the type, quality, and provenance of the coal
proffered. See 55 Fed. Reg. 4499, 4500 (Feb. 8, 1990) (noting that “speculative” assets
include art, antiques, jewelry, and furs). Tip Top’s own submissions show that coal
value depends on ash content, sulfur content, BTUs, transportation costs, and
processing costs, as well as regular market fluctuations and other factors. Those
variables—and how they interact to affect asset value—may not be readily
ascertainable. Notably, the FAR provides a mechanism to value stocks and bonds that
minimizes the risk of fluctuation in those assets’ value: Those assets are accepted at
90 percent of their 52-week low. 48 C.F.R. § 28.203-2(b)(3). The FAR provides no
comparable method to determine the value of a commodity such as coal in a way that
would protect the government against fluctuations in coal values.
Consequently, pledges of assets such as mined coal place a greater burden on
the contracting officer and present a greater risk of loss to the government. The risks
inherent in accepting speculative assets in support of a bid bond are illustrated by this
case, as it became evident in the GAO proceedings that the pledged coal actually
consisted of coal refuse that would likely require further processing before it could be
liquidated. The purpose of the FAR provisions on bid bond assets is to prevent
precisely that type of surprise. A contracting officer should not have to be an expert on
the market for particular commodities in order to evaluate the value and liquidity of a
pledged asset.

-- 10 of 16 --

2008-5183 10
The government observes that FAR 28.203-2 categorizes “[p]ersonal property
other than that listed in paragraph (b) of this subsection (e.g., jewelry, furs, antiques)” as
unacceptable. 48 C.F.R. § 28-203-2(c)(4). Because coal is personal property and is
not specifically listed in FAR 28.203-2(b), the government contends that mined coal is
necessarily excluded by the FAR as an unacceptable asset. Tip Top’s sole answer to
that argument is to suggest that if the assets listed in FAR 28.203-2(b) were the only
ones acceptable to satisfy a bond obligation, it would be superfluous for the FAR to
enumerate several types of unacceptable personal property in subpart (c). But the fact
that the FAR drafters decided to provide concrete examples of personal property that
are deemed to be unacceptable (such as notes or foreign securities) does not speak
directly to whether any personal property not listed in FAR 28.203-2(b) can be an
acceptable asset to satisfy a bond obligation.
Tip Top emphasizes that contracting officers are typically afforded broad
discretion when making surety financial responsibility determinations. See, e.g.,
Santurce Constr. Corp., 70 Comp. Gen. 133, 135 (1990) (“The contracting officer is
vested with a wide degree of discretion and business judgment in determining the
acceptability of an individual surety.”). A hard-and-fast exclusion of all personal
property not listed in FAR 28.203-2(b) could unduly limit that exercise of discretion. We
do not need to decide whether the list of acceptable assets in FAR 28.203-2(b)
excludes all personal property not specifically enumerated in that subsection, however.
At a minimum, mined coal is unacceptable personal property; coal is clearly less like
cash, stocks, or bonds, and more akin to jewelry, furs, and antiques. Thus, the

-- 11 of 16 --

2008-5183 11
contracting officer correctly concluded that the coal asset pledged in this case was not
acceptable to support Tip Top’s bond.
B
Tip Top relies on the GAO’s decision in Gene Quigley, Jr., 70 Comp. Gen. 273
(1991), for the proposition that before rejecting its bid the contracting officer was
obligated to provide Tip Top an opportunity to supply additional information about the
pledged asset or to offer a substitute asset. In Quigley, the contracting officer rejected
individual sureties’ pledges of real estate because, among other things, the sureties did
not submit evidence of a lien pursuant to FAR 28.203-3(d). See 48 C.F.R. § 28.203-
3(d). The GAO ruled that the contracting officer acted unreasonably in rejecting the
sureties as unacceptable:
[S]ince it should have been evident to the contracting officer that [the
contracting officer’s] objections might easily have been remedied if the
protester were given the opportunity to do so, we think the contracting
officer had an obligation to allow Mr. Quigley to obtain further explanations
from the individual sureties regarding the pledged assets or to allow the
sureties to pledge additional assets.
Quigley, 70 Comp. Gen. at 276. The trial court ruled in this case that the contracting
officer was not required to make further inquiries into the nature of the coal asset. In
reaching that conclusion, the court relied in part on our decision in John C. Grimberg
Co. v. United States, 185 F.3d 1297 (Fed. Cir. 1999), in which we stated: “Because
responsibility decisions are largely a matter of judgment, contracting officers are
generally given wide discretion to make this decision. Thus, although the contracting
officer is given the discretion to seek additional or clarifying responsibility information
from a contractor, he is not obligated to do so.” Id. at 1303 (internal citations omitted).
Tip Top argues that Grimberg does not govern here because Grimberg involved a

-- 12 of 16 --

2008-5183 12
contractor responsibility determination under FAR 9.1, whereas the issue in this case is
whether the surety was responsible under FAR 28.203.
Regardless of whether Grimberg extends to surety responsibility determinations,
the contracting officer’s rejection letter of February 19, 2008, clearly put Tip Top on
notice that its pledged asset was inadequate. In effect, the contracting officer informed
Tip Top that if it wanted to secure the contract, it would need to either clarify why the
pledged coal was acceptable or come up with another bid bond asset. Tip Top asserts
that the contracting officer erroneously concluded that the offer by Mr. Scarborough’s
counsel to provide documentation supporting the quality of the pledged coal was
untimely. However, the contracting officer later stated that “even if an independent
proof of value and ownership had been provided, the asset would still be so speculative
as to be unacceptable because of the liquidity issue.” Thus, to the extent that the
contracting officer erred in stating that the surety’s offer was untimely, any such error
was nonprejudicial. See Bannum v. United States, 404 F.3d 1346, 1358 (Fed. Cir.
2005) (plaintiff must show there was a substantial chance it would have received the
contract award but for the agency’s error in the procurement process).
C
Finally, Tip Top contends that the contracting officer unreasonably refused to
accept a substitute asset when one was offered. FAR 28.203-4, entitled “Substitution of
assets,” provides (in relevant part):
An individual surety may request the Government to accept a substitute
asset for that currently pledged by submitting a written request to the
responsible contracting officer. The contracting officer may agree to the
substitution of assets upon determining, after consultation with legal
counsel, that the substitute assets to be pledged are adequate to protect
the outstanding bond or guarantee obligations.

-- 13 of 16 --

2008-5183 13
48 C.F.R. § 28.203-4. On February 20, 2008, the day after the contracting officer’s
initial rejection letter, Tip Top’s president, Mr. Hollins, sent an email to the contracting
officer stating that “[t]he bid bond entity has other marketable assets including cash.”
Mr. Hollins asserts that he then spoke to the contracting officer on the telephone and
explained that “the surety was willing to provide a substitute asset or cash in support of
the bid bond we provided.” Tip Top thus contends that it offered an acceptable
substitute asset, which the contracting officer improperly refused.
As a threshold matter, it is clear that a contracting officer is permitted to agree to
a substitution of assets but is not obligated to do so. See 48 C.F.R. § 28.203-4. Tip
Top acknowledges that contracting officers have discretion to decide whether to accept
substitute assets, but it contends that in this case the contracting officer erroneously
believed that she was barred from exercising that discretion. According to Mr. Hollins,
the contracting officer told him during their telephone conversation that she would not
accept a substitute asset because the FAR “would not allow” her to do so. We agree
with Tip Top that the contracting officer’s statement, if made, would have been contrary
to the governing regulation, as FAR 28.203-4 permits contracting officers to accept a
valid offer to substitute assets.
As the trial court explained, however, FAR 28.203-4 requires that any request for
a substitution of assets must be in the form of a formal written request from the
individual surety. No such request was ever made in this case. The email from Mr.
Hollins did not actually offer a substitution of assets, but merely referred somewhat
obliquely to the fact that the surety “has other marketable assets.” Moreover, that email
came from the contractor and not, as the FAR requires, from the surety. Although Mr.

-- 14 of 16 --

2008-5183 14
Hollins alleged that he told the contracting officer in his subsequent telephone call that
Mr. Scarborough was willing to provide a substitute asset or cash, that statement was
also made by the contractor and was neither a request made by the surety nor in
writing, as required by the FAR. In short, there was never a valid request by the surety
to permit a substitution of assets. Because there was no formal request by the surety to
provide a substitute asset, there was no formal rejection of an offer for substitution, and
the contracting officer’s purported misunderstanding of FAR 28.203-4 is irrelevant.
While the requirement that the surety submit the substitution request in writing may
appear to be a technicality, it serves the important purpose—well illustrated by this
case—of avoiding later disputes about what was said during informal contacts among
the parties.
After the telephone conversation with the contracting officer, Tip Top seems to
have let the matter drop. The letter sent by Mr. Scarborough’s counsel to the
contracting officer on February 21, 2008, addressed only the acceptability of coal as a
bid bond asset. That letter made no mention of a possible substitution of assets, even
though it was sent shortly after the telephone conversation in which Mr. Hollins allegedly
requested a substitution of assets on Mr. Scarborough’s behalf. It was incumbent on
Tip Top to instruct its surety to make a formal written request to substitute assets.
Having failed to arrange for its surety to make a proper request for a substitution of
assets, Tip Top cannot now complain that the contracting officer impermissibly denied a
request for substitution.
Tip Top contends that the contracting officer’s rejection, based on a
misunderstanding of the FAR, “slammed the door shut” on any future request to provide

-- 15 of 16 --

2008-5183 15
a substitute asset. But the procurement process is a fluid one, and the contracting
officer’s decision not to accept a substitution of assets was not conclusive the moment
she made the alleged comment over the telephone that the FAR does not allow
substitutions. The fact that immediately after the telephone conversation Tip Top and
its surety challenged the contracting officer’s rejection of coal as an unacceptable asset
shows that the contracting officer did not, in fact, dissuade Tip Top from responding to
what it perceived as the contracting officer’s erroneous interpretation of the FAR. Tip
Top cites U.S. Floors, Inc., Comp. Gen. B-241552, B-241555 (1991), for the proposition
that a request to submit a substitute asset can be made even after a protest is filed. Yet
Mr. Scarborough made no such request in the letter sent to the contracting officer the
day after the telephone conversation between Mr. Hollins and the contracting officer.
There is therefore no basis for Tip Top’s claim that “it is undisputed that the surety
would have submitted” a substitute asset; the surety had the opportunity to offer a
substitute asset but did not do so.
In sum, we agree with the agency that the proffered coal was not an acceptable
bid bond asset under the FAR because coal is a speculative asset that is not readily
marketable. We also conclude that the contracting officer did not impermissibly refuse
to accept a substitute asset, because no valid offer to provide a substitute asset was
made by Tip Top’s surety. We therefore uphold the decision by the Court of Federal
Claims dismissing Tip Top’s bid protest action.
AFFIRMED.

-- 16 of 16 --