The SBA’s “successor-in-interest” affiliation rule provides that a government contractor can be affiliated with a dissolved or liquidated company, but only if the government contractor acquires “all, or nearly all” of the dissolved company’s assets and liabilities.

According to a recent commonsense decision of the SBA Office of Hearings and Appeals, the successor-in-interest affiliation rule does not apply when a government contractor acquires only some of the dissolved company’s assets and liabilities.

SBA OHA’s decision in Size Appeal of Willowheart, LLC, SBA No. SIZ-5484 (2013) involved an Army solicitation for security guard services.  The solicitation was set aside for 8(a) Program participants.

After evaluating competitive proposals, the Army announced that Willowheart, LLC was the apparent successful offeror.  An unsuccessful competitor then filed a SBA size protest, alleging that Willowheart was affiliated with Alpha Protective Services, Inc., or APSI.

APSI had been the incumbent contractor for the security services in question.  However, in April 2012, APSI filed a petition in bankruptcy.  On December 21, 2012, the court-appointed trustee discontinued all of APSI’s operations, including the incumbent contract.

After APSI discontinued its operations, the Army awarded an emergency 30-day bridge contract to Willowheart, which had never previously performed a similar contract.  In order to perform the bridge contract, Willowheart hired APSI’s incumbent employees and took possession of assets APSI had been using to perform the contract, such as firearms, office equipment, and vehicles.

Willowheart, APSI and the bankruptcy trustee subsequently negotiated two purchase agreements under which Willowheart was to purchase the assets in question.  The agreements specifically excluded all of APSI’s other assets, including computers and related equipment, cash on hand, accounts receivable, and so on.  However, one of the two agreements was never signed.

Evaluating the size protest, the SBA Area Office found that Willowheart was affiliated with APSI under the successor-in-interest affiliation rule.  That rule, codified at 13 C.F.R. 121.105(c), provides that a firm will not be treated as a separate business concern if a substantial portion of its assets and/or liabilities are the same as those of a predecessor entity.

After receiving the adverse SBA size determination, Willowheart filed a size appeal with SBA OHA.

SBA OHA wrote that “it is clear that the successor-in-interest rule is meant to apply to situations where a business reorganized, and a new entity emerges with essentially the same assets and liabilities as the old concern.  That is not the case here.”

SBA OHA pointed out that Willowheart did not receive all of APSI’s assets and liabilities, but only those related to the security guard contract.  SBA OHA noted that the legal status of the purchase agreements was not clear, given that one was unsigned and that the parties apparently were in litigation.  “However,” SBA OHA wrote, “it is clear that this is not a wholesale transfer of all, or nearly all, of APSI’s assets and liabilities, such that [Willowheart] is now APSI under a different name, but rather just those assets and liabilities associated with the Fort Bragg contract.”

SBA OHA noted that its prior decisions have held that the successor-in-interest affiliation rule does not apply “if a challenged firm is purchasing only some of the assets of a concern that has ceased operations . . ..”  SBA OHA concluded:

“[Willowheart] is not APSI reborn, with all of its assets, liabilities, and employees.  Rather [Willowheart] undertook to take over one of APSI’s existing contracts, and bought the equipment and hired the employees associated with that one contract.  [Willowheart’s] existing business remains. It is not essentially the same concern as APSI, and so the successor-in-interest rule is not applicable.”  SBA OHA granted Willowheart’s size appeal.

The Willowheart SBA OHA size appeal decision demonstrates the commonsense limits of the successor-in-interest affiliation rule.  As SBA OHA determined, the rule applies only when one company effectively takes over all (or almost all) of the assets and liabilities of another.  It does not apply in more limited cases.

One final note: because the successor-in-interest affiliation rule is codified at 13 C.F.R. 121.105(c), it can be easily overlooked, as most of the SBA’s affiliation rules are codified in 13 C.F.R. 121.103.  Companies engaging in internal size affiliation audits should take note.