Following the promulgation of a final rule by the United States Department of the Treasury's Bureau of the Fiscal Service containing noteworthy revisions to 31 C.F.R. Part 223, NASBP and other groups need to stay apprised of federal agency rulemaking as agencies have greater individual discretion in determining the reasons why a bond can be declined and a surety's Treasury-listed status can be revoked, attorney Scott Lichtenstein said.
The changes to Part 223 set forth in the Final Rule were outlined in an article co-authored by Lichtenstein
“The chief concern is that the Treasury’s final rule as promulgated contains very little in the way of substantive or procedural safeguards,” which could “set the stage” for agencies to misuse their authority to deny a bond, said Lichtenstein, an associate at the law firm of Wolff & Samson, which is transitioning its name to Chiesa Shahinian & Giantomasi.
A new provision in Part 223 instructs each agency to promulgate regulations for determining its particular procedures and “for cause” reasons why a bond might be declined. Therefore, each agency will decide its own “for cause” reasons, which will vary from agency to agency, Lichtenstein said.
“For cause includes, but is not limited to, circumstances when a surety has not paid or satisfied an administratively final bond obligation due the agency,” the regulations state.
The regulations also delegate to agencies how to determine when a bond obligation is considered “administratively final,” Lichtenstein said.
Surety companies should seek, at the minimum, to assure the availability of procedures to protect those sureties that do not pay a disputed bond claim because of good faith defenses from unfair retaliation. Lichtenstein said that one such form of protection could involve a refundable deposit being placed in escrow to fund satisfaction of the bonded obligation in the event the surety’s alleged defenses are ultimately determined not to be meritorious, with such deposit being sufficient to avert the threat of a bond being declined or Treasury-listed status being revoked as a claim is evaluated.
A surety's recourse if a bond is declined “ultimately depends on what definitions and procedures the agency has in place,” he said. Rejection of a bond would be improper if the agency hasn't complied with the rule or if a court has stayed the “for cause” reason cited by an agency, he said.
A surety also could potentially seek judicial review of an agency's determination to decline a bond, “but the agency's decision would likely be afforded some deference” as a court determines whether the decision was arbitrary or capricious, Lichtenstein said. Other recourse also may be available depending on the particular agency involved and what it has done in terms of promulgating its “for cause” reasons, he added.
New sections in Part 223 set forth the new procedures for revoking a surety's Treasury-listed certification. The changes effectively place the burden of proof on a surety, which “creates a real threat of misuse in order to leverage bond claims,” Lichtenstein said. That's because an agency can now pursue revocation if it submits a complaint that a bond claim is not satisfied and certifies that the bond obligations in question are administratively final, a designation “the agency itself defines,” he said.
A few options appear to exist for sureties that face the possibility of certification being revoked, Lichtenstein said. One of those is obtaining a judicial stay. But a surety disputing revocation will essentially have to demonstrate to the Treasury why the claim involved in the agency’s complaint or revocation proceedings is not due, he said.
In addition, the rule changes no longer guarantee a 20-day cure period in cases where sureties' nonpayment is found to be “willful,” which Lichtenstein noted “is a circumstance not clearly defined by the final rule” and which therefore “gives the surety less assurance that it can protect its interests by curing its alleged default after the Treasury has issued a decision,” Lichtenstein said.