Buying and selling receivables, the obligor of which is the United States government, requires consideration of the Federal Assignment of Claims Act ("FACA"). As is the case with non-government account debtors, the federal government, in its capacity as an obligor, has the ability (with certain limited exceptions) to set off contractual payments owed by it to a seller of the right to receive such payments, against amounts payable to it by such seller for both (x) damages and related payments caused by such seller's failure to perform under the applicable contract and (y) any other amounts owing to the government by such seller (including federal tax liability). In the case of non-government obligors, under the terms of the Uniform Commercial Code, a purchaser of the right to receive a contractual payment owing by such obligor may, generally, limit or cut-off the applicable set off rights of the related obligor, by providing a somewhat simple notice to such obligor that the seller has assigned its right to receive such payments. In order for a purchaser to limit the set off rights of the federal government, however, the purchaser must comply with the more complicated requirements of FACA.

Compliance with FACA generally requires that: (i) the relevant underlying contract specifies payments aggregating $1,000 or more; (ii) the contract does not prohibit assignment; (iii) the assignment covers all unpaid amounts payable under the contract; (iv) the assignment is made only to one party and is not subject to further assignment; and (v) the assignee sends a written notice of the assignment (together with a copy of the assignment instrument) to the contracting officer or the head of the relevant agency, the surety on any bond applicable to the contract, and the disbursing officer designated in the contract.

While failure to comply with FACA will, generally, render the related assignment void, solely as between the seller and the federal government obligor, such failure should have no impact on the validity of the transfer as between the seller and the purchaser (including with respect to any rights of creditors of the seller).

The primary risks, therefore, of non-compliance with FACA are (x) the inability on the part of the purchaser to limit the right of the federal government to set off its contractual payment obligations, against amounts owing by the related seller to the federal government, and not arising under the related contract (including federal tax liability)¹ and (y) payment by the federal government to an account of the seller not controlled by the purchaser.

Dealing with US federal government accounts receivable involve more complicated legal considerations than non-government receivables. Risks and benefits of compliance or non-compliance with FACA should be discussed with your lawyers.

¹ Compliance with FACA, as is the case with the provision of notice of assignment to non-government obligors, allows the applicable purchaser the general ability to limit or prevent set off by the related obligor against general obligations of the applicable seller which arise after compliance (or, in the case of non-government obligors, receipt of notice of assignment), and not relating to claims as a result of the failure by such seller to perform under the related contract (it being understood, that government and non-government obligors generally may, both before and after notice or compliance, as the case may be, continue to set off against claims resulting from the failure of the seller to perform its obligations under the related contract).

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.