Maritime Administration-Disposition of Funds Recovered from Private Party for Damage to Government Building

B-287738 May 16, 2002 Jump To VIEW DECISION DOWNLOADS RELATED PAGES GAO CONTACTS Highlights The Maritime Administration (MARAD) requested GAO's opinion whether they may properly use escrow accounts to hold funds received from private parties to settle claims by the agency for damages to agency buildings and equipment caused by the private parties. GAO had held that MARAD may not retain amounts recovered from a private party representing liability for damage to a government building and equipment for credit to its own appropriation or deposit into an escrow account for use by the agency in effecting repairs and replacements. MARAD must deposit the amounts recovered into the general fund of the Treasury as miscellaneous receipts. View Decision Maritime Administration--Disposition of Funds Recovered from Private Party for Damage to Government Building, B-287738, May 16, 2002 DIGEST DECISION The Acting Chief Counsel of the Maritime Administration (MARAD) requests our opinion whether MARAD may properly use escrow accounts to hold funds received from private parties (or their insurers) to settle claims by the agency for damages to agency buildings and equipment caused by the private parties. While the question arises out of a claim made by MARAD against a contractor, the claim has since been settled. MARAD has asked us to address its escrow concept, nevertheless. As discussed below, we see no reason to depart from the plain meaning of the miscellaneous receipts statute, which requires that the money be deposited in the general fund of the Treasury. Background In 1996, MARAD awarded a contract for the replacement of garage doors on a building at the U.S. Merchant Marine Academy (Academy). Under the contract, the contractor was required to maintain insurance in the amount of $2 million. According to MARAD, the contractor negligently caused a fire resulting in substantial damage to the building and destroying expensive equipment in the building. The total damages amounted to $1,080,147.84, of which the contractor's insurance company initially paid $166,000, leaving a deficit of $914,147.84. MARAD made a claim against the contractor for the balance under the Contract Disputes Act, and the contractor appealed the contracting officer's adverse final decision to the United States Court of Federal Claims. The Department of Justice (Justice) represented MARAD in the litigation. During the litigation, the Academy expressed concern that, even in the event of a favorable judgment for the government, it might not be reimbursed for the damages it incurred, because the miscellaneous receipts statute, 31 U.S.C. Sec. 3302(b), requires that all monies received for the government from any source be deposited into the Treasury. To ensure that the Academy would be reimbursed for all damages, MARAD's counsel proposed that the Academy and the contractor could stipulate to dismiss the lawsuit with prejudice and jointly establish an escrow account to operate as an intermediary between the contractor and the Academy for the purpose of making necessary repairs and replacements. As the Academy incurred costs for replacing the damaged building and equipment, it would submit the charges to the escrow account agent. Alternatively, the contractor making the repairs/replacements would submit charges to the escrow account agent, who would then bill the contractor that had caused the damage originally. /1/ Justice attorneys recommended against a settlement involving an escrow account for several reasons. First, they concluded that such an arrangement would contravene the express language of the miscellaneous receipts statute since, on its face, the escrow account would appear to be established for the benefit of the Academy. Second, Justice attorneys believed it unlikely that the contractor's insurer would accept the proposal since doing so would virtually assure that the insurer would pay for the entire amount of the damages rather than settling at some lesser amount. Third, Justice attorneys believed that an escrow agreement would give the contractor no finality to the litigation and would cause the contractor additional costs above those of the damages, because the contractor would have to monitor the costs incurred by the Academy in making the repairs long after the parties agreed to the settlement. Moreover, Justice attorneys stated that the proposal would create additional costs for the government and might result in future litigation related to resolving disputes. During the course of the litigation, the contractor's insurance company made several monetary offers to settle the lawsuit on the contractor's behalf.