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By Scott Stermer on Thursday, December 07, 2000 - 07:36 am:

Good Morning All:

I would like to describe a situation my agency faces in contracting out for a form of
services. I work for the Federal Bureau of Prisons (FBOP) in the Privatized Corrections Contracting Section.

Currently, we contract out various federal offenders to private industry. We use a performance-based contract. These correctional facilities (prisons) are contractor owned and operated. We house approximately 7,500 inmates in these types of facilities. One of the many problems faced in these contracts is the possibility of contractor bankruptcy.

I don't want to get into the different types of bankruptcy, I would like to focus on the contractor actually closing his doors. The contract contains language that in a time of emergency the government may come in operate the facility, we believe due to public safety concerns this will take care of the immediate problem. However, the long term problem remains of housing these inmates. There are several internal ways of solving it, however, I was wondering if any of you might have some contractual way with dealing with this. We have discussed running a separate lease, a facility buy-out clause, etc.

Do you all have any thoughts?


By John Ford on Friday, December 08, 2000 - 11:28 am:

Scott, while you are seeking a contracting solution to your potential problem, bankruptcy is an area where you need sound legal advice. I know DoJ has a lot of smart bankruptcy lawyers. I suggest you run some of your ideas by them for their take on them. They can point out any pitfalls and landmines that may be hidden in your possible solutions. I would not want to go on this journey alone.

By carol elliott on Friday, December 08, 2000 - 02:02 pm:

In addition to the Government having the right to buy the facility, I would try to structure an option for the Government to designate a third party to purchase the facility. This could include making sure the financing allows this third party to assume the mortgage on the facility.

I assume that's what you really want. The ability to hire another firm to come in and run the prison.

I also assume that if the business has gone bankrupt, they have also defaulted on the contract. If you structure this clause properly, the Government could accept the capital vested in these facilities in lieu of whatever is owed by the contractor under the termination for default.

John's right, you need to work closely with a lawyer that is familiar with bankruptcy. No contract clause will help if the law requires the facilities to be used to pay off other creditors first.

By Scott Stermer on Monday, December 11, 2000 - 07:12 am:

Thanks...all. The FBOP is part of DOJ, and they have come to us and asked our advise.