Vern,

Thanks for the summary in your June 20 11:30 pm post. My reading of the cases and discussions on the subject written by lawyers leads me to pretty much the same conclusion, with one exception. That exception is that "operation of law" is slightly more broadly defined than that being used by others in this particular discussion. Some of my posts demonstrate that conclusion. For example, it certainly appears that if Jane Doe inherits her father's interest in a contracting company a government demand for novation will probably fail.

Many of the lawyers point out that results are not entirely predictable. Courts do draw differing conclusions on evidence and law. They seem entirely together, perhaps for ulterior motives, in that no entity holding judicially ordered possession of an interest with such contracts should rush into a novation agreement. The Executive's ability to take action is now contingent on the court's rulings.

In the specific case of bankruptcy the code dealing with the matter itself wedges opens a door for the government to argue its ability to affirm or deny acceptance; however, the courts are split in how they apply that wedge. Firms were even advised to examine their structure for the possibility of filing in geographical areas where courts applying the "actual test" vice the "hypothetical test" on assignment.

I cannot and should not give legal advice. My reading on the subject tells me that if I were ever faced with a novation demand when in possession of a court ordered transfer of such interests my first response would be to see my lawyers. My feeling, from reading the record so far, is their answer to the contracting officers would simply be "No. Here is the court ruling. Accept it or see us before the court that has already effected the transfer." Why? Because, despite disclaimers at the legal firm sites, I find a number of papers advising companies not to simply accept demands for novation agreements before seeking legal advice as such demands are often without merit. I have also read a number of cases not cited here that support the view that the government will most probably fail in overturning such rulings.

The webmaster apparently decided your advice to me and my reply were too personal. I, unlike some, can see the uselessness of argument against a tide. I therefore do not plan to answer any more of the somewhat random arguments against what appears to me to be quite clear from the legal sources readily available.

Personally I see no real reason to proceed further into Part 3 of an already long discussion. Some people can learn from others what "hot" means, some have to stick their hands into fire. Perhaps these individuals will have an opportunity to learn directly from a judge. Others need to recognize they are outside FAR territory whenever there is court action on these matters and go straight to legal. Let legal work the problem where there are any questions of whether the government should recognize or not recognize continuation of the contract. Contracting officers should not rush in where lawyers tread with caution and due preparation.

By Eric Ottinger on Monday, June 24, 2002 - 06:50 pm:

On the topic of legal advice—

If I were pretending to be one of these genuine expert types, I would tell you that I photocopied FAR 42.1204 to my left temporal lobe sometime back in 1990, which is the last time I encountered a novation, and somehow neglected to update it for FAC 97-3. I was just citing the explicit direction in the FAR. And why would Vern or anyone think that constituted “legal advice.”
The truth is much simpler. My only intention was to direct Denise to a section in the FAR. The title for this section is “Novation and Change of Name Agreements.” This was clearly more than a change of name. So I said, “You need a novation.” This was the outer limit of the thought or intention that I put into that response.

If I had given a very general piece of good advice like, “Denise should eat a variety of fruits, nuts and vegetables to stay healthy.” John or Vern or might reply, “What makes you think you are qualified to be a nutritionist. Denise might eat a peanut, and she might be allergic, and she might die.”

I trust that only extremely literal minded people would think that I was giving Denise legal advice. Actually, I assumed she would read between the lines in the FAR and realize that the first thing she should do is to talk this over with her agency general counsel. If the FAR isn’t so explicit, the “One Book” is.

(By the way-- The biggest jump to a conclusion in this whole thread is the assumption that Denise is going to be the contracting person responsible for the novation. If there is an ACO, the ACO will do the novation. If there is more than one contracting officer, the contracting officer with the largest remaining dollar balance will do the novation. A novation is typically a team effort with agency counsel giving legal guidance and several contracting offices doing the legwork.)

Vern has switched from Denise’ side of the table to the contractor’s side. And the “simple truth” argument has disintegrated. But let’s let that rest for a minute, while I demonstrate that I actually agree with some folks more than they think.

John didn’t indicate any knowledge of the FAC 97-3. Hence, I infer that John was critiquing the FAR as it stood before FAC 97-3, when the FAR did not, in any way, acknowledge a transfer “by operation of law.” In 1995 the American Bar Association recommended certain modifications to the FAR to acknowledge assignment by operation of law. These recommendations were eventually incorporated in FAC 97-3. Hence, John’s critique of the FAR as it stood before FAC 97-3 is almost certainly correct. Ditto professor Cibinic and, to a large degree, Ms. Manos.

On the other hand, the fact that none of us was aware of FAC 97-3 until Ms. Manos brought it to our attention, demonstrates that all of us were essentially clueless.

Anonymous6-8 got bent out of shape arguing that I might antagonize a federal judge. In my experience contracting officers don’t talk to federal judges, unless they are giving testimony. Agency counsel does that. I am sure that agency counsel talks very politely when they talk to judges. But that was my advice to Denise at the outset. She should get legal help from agency lawyers, not chat rooms.

Since there seems to be some confusion –

I don’t disagree that a contractor might refuse to sign a standard novation agreement. I am sure that if ITT had it to do over again, ITT would think twice before signing the agreement that they signed. (Whether they would have done better with no agreement at all is a somewhat different issue. They had some 400 contracts, and I expect they wished to be paid.) I understand what Ms. Manos is saying, but I would characterize her approach as a hardball negotiating tactic. It is certainly no reason to revise the FAR

Eric

By Vern Edwards on Monday, June 24, 2002 - 08:45 pm:

FAR Subpart 42.12 should be changed in at least the following ways:

First, FAR should be changed to clarify the differences among novations, assignments, and delegations, based on ordinary common law usage. FAR should use the term novation for transfers in which a new contractor takes over performance and the original contractor is discharged, either through negotiation or by operation of law.

Second, FAR should be changed to clarify the requirements of 41 U.S.C. § 15 as interpreted by the boards of contract appeals and the U.S. Court of Federal Claims. At the very least, FAR should mention that (a) the boards and the Court have held that 41 U.S.C. § 15 does not apply when a contract has been transferred by operation of law, (b) that the government's approval is not required for such transfers, and (c) that contractors need neither seek the government's approval nor sign a novation agreement with respect to such transfers. At present, FAR § 42.1204(b) is not adequate in that regard.

Third, FAR should be changed to advise contracting officers about the government's options when a contract has been transferred by operation of law and about what factors to consider when weighing those options.

Fourth, FAR should be changed to advise contracting officers about how to officially recognize transfers that have been effected by operation of law, when the government decides not to terminate the contract for convenience.

By Eric Ottinger on Tuesday, June 25, 2002 - 09:40 pm:

For those who prefer logic to bombast--

Both the Toftco court and Ms. Manos thought the ITT Gilfillan case was pertinent to the discussion. Maybe Vern walked into the wrong discussion.

ITT Gilfillan puts Vern et. al. on the horns of a classic dilemma. If in fact the transfer did take place by operation of law, we have two courts stating that the government can still negotiate a novation agreement and the agreement will be enforced. If, as Vern seems to think, the ITT Gilfillan court didn’t decide “operation of law” and effectively determined that there was some doubt about whether the transfer was by operation of law or not, then we have to conclude that there is an element of doubt regarding every “transfer by operation of law.” The ITT Gilfillan transfer fits the ABA approved operation of law criteria to a “t”, as John immediately understood. If this isn’t transfer by operation of law, nothing is.

Clearly the Tuftco court and Ms. Manos are not in any doubt about whether the transfer was in operation of law. And I don’t think the ITT Gilfillan court was either.

ITT Gilfillan says something interesting about the relationship between case law, statutes and regulations. I presume that as much as courts honor stare decisis there is always a possibility (however small) that a subsequent court will decide that the dissenting opinion had a better argument. And any juris doctor who wishes to enlighten us on this issue is invited to do so.

Let’s be exact. The Court of Claims did not decide the issue on some other grounds. It is clear that the Court is making a point of very explicitly not considering the case law precedents regarding “operation of law” and the Anti-Assignment Acts.

The relevant section of the case is not too long, and as Vern says, we can all read.

Incidentally, this case should make it perfectly clear why it would be plain foolish for the FAR to specifically reference a problematic concept like “operation of law,” notwithstanding much tendentious carping earlier in this thread.

ITT Gilfillan, Inc. and International Telephone and Telegraph Corporation v. The United States., In the United States Court of Claims. No. 356-68. Decided , January 18, 1973 200 CtCl 367 471 F2d 1382 ,

“Previously before the Armed Services Board of Contract [Appeals] In its first claim for relief (count I of plaintiff’s petition), plaintiff contends (1) that the novation agreement lacked consideration and was therefore a nullity, and (2) …”

“That the novation agreement lacked consideration and therefore is of no effect is urged on the premise that the transfer of the contracts took place by operation of law, as the result of a corporate merger. If the transfer was by operation of law, the plaintiff argues, then there was no need to enter into a novation agreement. The Government’s consent to the transfer was, it says, not required. In support of this argument the plaintiff points to an administrative decision made by the IRS in response to questions concerning plaintiff’s tax liability as the result of its taking over the assets of Gilfillan Corporation. The plaintiff also argues that the instant case does not present the evils intended to be dealt with in the anti-assignment statutes. See 31 U. S. C.§203, and 41 U. S. C.§15 (1964).”

“The defendant argues that what has taken place is a complete corporate reorganization, the costs of which are specifically barred by the Cost Principles which control Cost Reimbursement Contracts, 32 C. F. R.§15.205-23 (1960, Supp.) and that the antiassignment statutes were intended, among other things, to prohibit incurrence of extra costs to do the same job which might result from the assignment of contracts.”

“From the defendant’s point of view, since the transfer would have been barred by statute, without the signing of the novation agreement, there was adequate consideration on the part of the Government, and the novation agreement should be given effect.”

“In dealing with the question of consideration it is not necessary to examine the character of the acquisition of Gilfillan Corporation by ITT Corporation, as the Board did, to determine if the transfer was a “reorganization” or not. It is clear that at the time of the acquisition the defendant believed and claimed in good faith that the transfer of the contracts in question, even by reorganization, was barred by the antiassignment statutes unless consented to by novation. ASPR 1-1602. THERE IS NOTHING IN THE TEXT OF THE STATUTES OR THE REGULATION TO ESTABLISH THAT A TRANSFER INCIDENT TO A REORGANIZATION WAS SPECIFICALLY EXCEPTED. As a result of the parties signing the novation agreement the defendant refrained from asserting its position. It has been held by this court that such a compromise leading to forbearance is in itself consideration. …”

“… In holding that the compromise agreement was supported by consideration the court quoting from 1 Williston, Contracts (3rd Ed.)§128, fn. 18, stated at page 1088, 354 F. 2d 268:”

“’***** it is settled law that a compromise “is supported by sufficient consideration when there is a bona fide claim which is ***** disputed or doubtful, the real consideration to each party being, not the sacrifice of the right, but the settlement of the dispute.” (Cites omitted.)’”

“Likewise in the case of State of Oklahoma v. United States, 146 Ct. Cl. 185, 173 F. Supp. 349 (1959), this court held forbearance on the part of state officials in asserting legal claims for damages to be adequate consideration to support a promise by the Government to pay certain sums of money.”

“It is obviously unlikely that ITT Corporation would have been interested in a “merger” without acquiring an uncontested right for its subsidiary to take over the contracts. Assertion by the Government of its bona fide [i.e. good faith] claim that the transfer was barred by the anti-assignment statutes would have put the whole transaction in jeopardy. Defendant’s forbearance in asserting a bar against the transfer resulted from the parties entering into the novation agreement, in the form defendant had prescribed for such circumstances. SUCH FORBEARANCE, UNDER THE CIRCUMSTANCES IS SUFFICIENT CONSIDERATION TO SUPPORT THE COMPROMISE THEREBY REACHED.”

Eric

By Vern Edwards on Wednesday, June 26, 2002 - 07:57 am:

I don't know what Eric's last post was about.

The discussion is over. I'm happy to conclude my participation by saying that the FAR coverage of novation is inadequate and ought to be revised in the ways that I suggested on June 24.

By Anon2U on Wednesday, June 26, 2002 - 04:37 pm:

I agree with Vern entirely. The FAR needs to say what is intended and not beat around the bush about it.

By Eric Ottinger on Wednesday, June 26, 2002 - 10:11 pm:

FAC 97-3 revised the FAR to incorporate recommendations by the American Bar Association with regard to novations and operation of law. I expect the American Bar Association understands novations and operation of law.

At the bottom line, much of this discussion doesn’t matter.

We all have to acknowledge the clear direction in the FAR and agency guidance like the DCMA “One Book.” The novation process is a team effort involving several contracting officers and agency counsel. The idea that a single contracting person can unilaterally choose to NOT go through the novation process is unlikely, improper and illogical. The purpose of the novation process is clearly to identify and address issues where it is necessary to protect the interest of the government.

The government can withhold consent to obtain negotiating leverage for the purpose of assuring that the government’s legitimate interests are protected, or the government can just as easily terminate. Both consent or potential termination can be used by the government as negotiating leverage to 1) assure mitigation of an organizational conflict of interest, 2) protect progress payment inventories, 3) assure compliance with CAS, 4) protect the government’s interest regarding overfunded pension liability, 5) ensure environmental protection, 6) ensure that the cost of the contract will not increase (or not increase unreasonably), etc. THE FACT THAT CONSENT AND TERMINATION ARE ESSENTIALLY EQUIVALENT MAKES THE WHOLE ARGUMENT ABOUT WHEN AND HOW CONSENT MAY OCCUR AUTOMATICALLY A MOOT AND POINTLESS ARGUMENT.

The contractor’s willingness to accede to such requests is probably more a question of maintaining good relations with the customer than the contractor’s exact legal rights under a particular contract. Keep in mind that the novation process addresses all of the contractor’s contracts, not just a single contract.

As for case law, it is the dog that doesn’t bark which is most telling. Almost all of the case law cited in this thread applies to physically complete contracts and claims. Case law regarding ongoing executory contracts is sparse and the government usually wins.

The significance of ITT Gilfillan is that it may be appropriate to negotiate a novation agreement, even if strictly speaking, it is not required. And the agreement will be enforceable, even if the transfer takes place by operation of law. Whether Ottinger believes this or not doesn’t matter. Acknowledged experts like Ms. Manos and the Court of Claims have made this point. As Casey Stengel said, “You can look it up.”

Eric

By Vern Edwards on Thursday, June 27, 2002 - 07:53 am:

The significance of ITT Gilfillan is that contractors should beware signing government-proposed novation agreements when a transfer has already been effected by operation of law. ITT Gilfillan learned that lesson the hard way.

As Virgil (or somebody else) said, "Beware of Greeks bearing gifts."

By Roy on Thursday, June 27, 2002 - 09:10 am:

I agree with Eric. The regulatory requirements in the FAR while not perfect, are clear to me.

I questioned all of this case law that has been brought up in this thread before, as to its relevance as compared to compliance with the specific requirements in the FAR. The implications in this thread that a third party can be forced upon the Government to complete performance of a contract, whether the Government likes it or not, is very puzzling to me.

Seems as there was not much resistance or arguments from the legal folks during the rule making process that resulted in the language changes included in FAC 97-03. The only real change I could find that was made by that Circular was the addition of a paragraph that addressed situations where there is a change in ownership as a result of a stock purchase. It was emphasized however that even in those situations there may be issues that should be addressed in an agreement between the contractor and the Government.

For those folks that would like to be flies on the wall in court rooms, and have declared that the specific requirements in the FAR are irrelavant and that we should instead follow what is declared in all these court decisions, I say they don't understand the Federal Procurement process. I believe that most Contracting Officers keep up with court decisions that impact the procurement process, but I also believe that most Contracting Officers follow the FAR rather than attempt to figure out complicated conclusions made in court decisions. Most will also follow the advise of General Counsel, when their opinions are sought out.

Maybe there is room for more clarifications to the language in the FAR. However, I disagree with my hero (Vern) in this regard. Termination for Default is also an option.

Roy

By Eric Ottinger on Thursday, June 27, 2002 - 07:02 pm:

Roy,

Thanks. I am glad that at least one person is still paying attention.

Now that John, Vern and I all seem to agree that ITT Gilfillan fits FAR 42.1204(b) (as recommended by the ABA and incorporated by FAR 97-3), we can all agree that the current FAR would not require ITT to sign a “novation” agreement per se.

To determine whether the government should negotiate, and whether the contractor should sign any agreement, requires that we go through the whole information gathering process described in the FAR and look at all of the contracts and all of the issues. Presumably, the contractor will be doing a similar analysis.

Take a look at the specific issues referenced under FAR 42.1204(b). In the short term a contractor may be able to gain or protect some financial advantage on a particular contract. In the long run the contractor would tar itself as a contractor with a bad attitude with regard to “long-term incentive compensation plans, cost accounting standards noncompliances, environmental cleanup costs, and final overhead costs” etc. That is a good way to antagonize the customer, win a battle and lose the war.

There may be instances of assignment by operation of law outside of the ABA approved criteria in FAR 42.1204(b) (very similar to the criteria which Ms. Manos finds “boards and courts” [have] “generally held to be outside the prohibition of the Anti-Assignment Act.”) But I don’t understand why anyone wants the FAR to recognize legal theory which is obviously in a gray area. Let the contractor make his case, and let agency counsel deal with it.

Eric

By Vern Edwards on Friday, June 28, 2002 - 09:33 am:

Eric:

When you talk about "bad attitude" and antagonizing the customer, are you suggesting that an agency should consider a contractor's refusal to sign a novation agreement to be an instance of poor past performance? Do you think that agencies should consider this in source selections?

Please, don't dodge the question by changing the subject.

Roy:

Eric now agrees with me that, in his own words: "There may be instances of assignment by operation of law outside of the ABA approved criteria in FAR 42.1204(b)." He also agrees that under such circumstances a contractor would not have to sign a novation agreement. These are the points that I have been making all along. See my remarks of June 30 at 11:30 p.m. Since Eric now agrees with me about this, and you agree with him, do you also now agree with me?

Vern

By Eric Ottinger on Friday, June 28, 2002 - 10:09 am:

Vern,

My point is that neither party really wants to kill the contract. Hence, the hypothetical ability to do so is at best a bargaining tool in the real world.

In the real world a customer that gets conspicuously ripped off is going to be reluctant to continue the relationship. A contractor that weaseled out of its commitments with regard to environmental cleanup costs is probably going to leave the customer with a very bad taste in the mouth.

By the same token, a contractor that sticks the government customer with exorbitant overhead rates and serious CAS noncompliances is going to have a hard time convincing the government that costs are going to be reasonable and properly accounted for on subsequent contracts. This is most likely to play as a realism issue in a source selection.

“I know what you are promising, but why should I believe it in light of what you just did to me.”

I don’t agree that a “contractor would not have to sign a novation agreement” for “operation of law” in a gray area outside of the ABA recommended exception in the FAR. The contractor would have to go to court, and the contractor would probably lose.

By the way, I am trying to be polite. But it is nice to see that you are back to normal. I doubt I have dodged anything.

Eric

By Roy on Friday, June 28, 2002 - 10:57 am:

Vern,

From reading Eric's post, I don't believe he concluded that a novation agreement would be unnecessary in those "gray" areas he alludes to. It's obvious that the FAR does not recognize them as exceptions. The one exception cited in the FAR was riddled with very specific criteria; i.e., "with no legal change in the contracting party, and where that contracting party remains in control of the assets and is the party performing the contract".

My biggest problem throughout these discussions as been with the positions by some that any third party through this thing called "assignment by operation of law" can assume the role of contractor and continue performance of work under a government contract. It has been suggested that procurement officials through their FAR procedures had better not hinder this party in any way or face the wrath of the judiciary branch. Can you imagine one of these third parties involved in a transfer "by operation of law" taking over a contract that involves special nuclear materials and requiring security clearances, etc. What if the "contractor by operation of law" was not able to meet the security requirements. I don't see how it would be possible for the Government to allow this party to perform.

I believe the FAR covers the process of recognization of a "successor in interest" properly in a way that protects the Governments interest when these situations arise. I think that if we start interjecting these gray areas into the language in the FAR, the process could get very confusing.

I will let Eric speak for himself regarding the conclusions you made.

Thanks Roy

By Roy on Friday, June 28, 2002 - 11:10 am:

Vern,

I was playing around with drafting a response to you earlier and did not know about Eric's response at 10:09.

It seems as if I was correct about Eric's position on the gray areas.

Roy

By Vern Edwards on Friday, June 28, 2002 - 11:24 am:

Eric:

I don't know what you mean by "back to normal"; I haven't changed. But putting that aside, you did not answer the question. Is your answer yes or no?

Let me lay it out for you: If a contract has been transferred by operation of law (no "gray area"), and the government and the new contractor disagree over an accounting issue that affects contract costs, and the contractor refuses to sign the government's proposed novation agreement, should the government consider the contractor's refusal to be evidence of a "bad attitude" and antagonistic, and rate the new contractor's past performance negatively? What's your answer: yes or no?

I'm don't plan to argue with you about your answer, but I do want to know where you stand, since you seem to consider this to be a matter of customer relations. When you said that the contractor might "win a battle and lose the war" you seemed to suggest that the government should retaliate against the contractor for its victory by denying it future contracts. I thought you might want to clarify your remarks.

So what's your answer: yes or no?

By Vern Edwards on Friday, June 28, 2002 - 11:56 am:

Roy:

My problem with Eric's "gray area" comment is that I don't know what he's talking about. What does he mean by "gray area"? What's gray?

By "gray area" does Eric mean that the courts are not sure what kinds of transfers are transfers by operation of law? If that is what he means, then I'm not sure that he's right. It may be that lawyers and judges know what transfers are by operation of law, even if we here at Wifcon don't know. I didn't see anything in my case law readings to indicate that the courts are uncertain in that regard.

Or, by "gray area" does Eric mean that it's unclear what the novation rule is when a transfer has been made by operation of law? If that's what he means by "gray area," then I disagree. I have read enough to be confident that the courts and the boards of contract appeals consider it to be well-established that (a) 41 U.S.C. § 15 does not apply to transfers that have been effected by operation of law, (b) government assent to such transfers is not required, FAR Subpart 42.12 notwithstanding, and (c) a contractor is not required to sign a novation agreement when a transfer has been effected by operation of law.

But, Roy, I respect your disagreement with me and I accept it, even if I don't understand it.

Vern

By Eric Ottinger on Friday, June 28, 2002 - 10:01 pm:

Roy,

Exactly.

I started out asking why we were giving legal advice. Now I am asking why we think we know more about novations than the American Bar Association.

A transfer that conforms to FAR 42.1204(b) is clearly by operation of law, and the agreement (if any is required) should not be a novation agreement.

Outside of that, the contractor would have to convince my agency counsel or take me to court.

At this point Vern and I probably agree about the meaning of “operation of law.” It is something that happens so automatically that even the court doesn’t have any discretion.

THERE IS NO SIMPLE OPERATION OF LAW EXCEPTION TO THE ANTI-ASSIGNMENT ACT. There are a specific number of judicially recognized exceptions under the “operation of law” heading.

As simple as the “operation of law” concept may be, courts and boards disagree about the application to specific situations. That is what I mean by “gray areas.”

For instance, one of the judicially recognized exceptions is death. If the contractor gets hit by a bus, the transfer takes place in a very automatic fashion.

Chapter 7 bankruptcy is the way corporations die. Nobody is questioning that the transfer from the contractor to the trustee is automatic, “by operation of law.”

Chapter 11 is a different matter because the corporation is hoping to have a near death experience and live to talk about it.

After that, we have mergers and other forms of restructuring. That is a topic more than adequately addressed by Ms. Manos, the ABA and FAR 42.1204(b).

The answer to Vern’s question is as follows. If the successor in interest contractor has a CAS non-compliance issue, the CAS issue would be an issue for all of the contractor’s contracts, not just the contracts which are being transferred. The ACO would note the CAS non-compliance during the information gathering phase of the novation process. Even if the transfer is by “operation of law” (i.e. FAR 42.1204(b)) the ACO would attempt to resolve the CAS noncompliance issue by negotiation, as the FAR clearly directs.

If a PCO wishes to award a new contract to the successor in interest contractor, the PCO would call the ACO to determine if there are any CAS noncompliances. (Every standard negotiation clearance format has a block which must be completed with this information.) If the ACO indicates a noncompliance, the PCO has to take this into account. The PCO will consider the seriousness of the noncompliance, the credibility of the ACO’s argument and the likelihood that the issue will eventually be resolved in a satisfactory manner.

(With large contractors, CAS issues are like sniffles for children attending day care. That is-- This must be taken into account, but the condition is more or less constant.)

In short, given the normal sequence of events, there is no way that a CAS noncompliance will not have some impact on a selection decision. On the other hand, nobody has been debarred for a CAS noncompliance. We frequently make awards in spite of these negative indicators.

You can plug “environmental cleanup costs” or “exorbitant overhead rates” into the above equation and get essentially the same answer.

I have a war story regarding a novation which I would love to work into this discussion at some point. After our legal counsel had given us the legally correct answer, I asked how long the novation would require. The shortest possible time was three months. I protested that we would have a crisis within two weeks. Counsel slowly intoned, “Process, process.” That is the correct answer to Vern’s “yes” or “no” question.

Maybe it would be best to ask Vern a question.

Vern,

Since these issues cut across all of the firm’s contracts, why do you think this is a “past” performance issue?

To put it another way-- If the contractor fixes the CAS noncompliance, funds the environmental cleanup and cuts out the unreasonable overhead costs; of course, I will be happy to do business with the contractor.

If he doesn’t, we still have a problem. “Retaliation” has nothing to do with it.

Eric

By Eric Ottinger on Saturday, June 29, 2002 - 08:30 am:

Vern,

We have already discussed gray areas in this thread.

I think the application of claims related precedents to executory contracts is about a gray as you can get. But I can’t find enough relevant cases to even begin to sort that out. In fact if anyone has a simple, “Somebody wants to assign an executory contract to a government customer, and the government objects, and the contract is assigned anyway (or not assigned and the government is sued)” I would love to read that case.

The few accessible executory contract cases generally have a counterintuitive “man bites dog” character to them. For instance, Johnson Controls tries to walk off with $56 million of overfunded pension costs. The successor in interest contractor cites the Anti-Assignment Act to deny the government privity of contract. The government never explicitly consented to the assignment, but the government’s “knowledge, assent, and action consistent with the terms of the assignment” would do just as well as a formal novation. The government still has privity of contract.

(Note that the government can consent “by operation of law,” by acting oblivious and doing nothing for some unspecified period of time. Does anyone want to argue that this is a clear, simple rule, which should be endorsed by the FAR?)

Per the Court of Federal Claims, “These circumstances [i.e. similar to FAR 42.1204(b)] resemble closely the instances in which courts have recognized a transfer by operation of law…” If the Court of Claims uses squishy language like “resemble closely,” Ottinger is not going posit any “simple” black and white rule.

Per Ms. Manos, “…the boards and courts have largely ignored the form of the transaction and focused instead on how the transaction affects the and liabilities of the parties.” (I don’t really speak this legalese, but “form” sounds like “simple answer,” and “rights and liabilities of the parties” sounds highly judgmental.)

Some courts (or boards) cite a “categorical” rule. Others, go back and apply the generally agreed purposes of the law to the specific circumstances of the case. There is disagreement regarding voluntary vs. involuntary. (Vern initially cited Mancon as support for a simple rule. But it turns out Mancon is highly controversial.)

In short, this is not simple.

Eric

By: Vern Edwards on Saturday, June 29, 2002 - 12:52 pm

Eric:

First, you have just said: "A transfer that conforms to FAR 42.1204(b) is clearly by operation of law...." Italics added. That is incorrect, because FAR § 42.1204(b) is not about transfers (assignments or delegations), whether by operation of law or otherwise. Rather, it is about situations in which there has been a change of corporate ownership, but no transfer of contractual responsibility. It says, in pertinent part:

"A novation agreement is unnecessary when there is a change in the ownership of a contractor as a result of a stock purchase, with no legal change in the contracting party, and when that contracting party remains in control of the assets and is the party performing the contract."

Underlining added. [Note that FAR § 42.1204(b) does not apply to changes in the ownership of proprietorships or general partnerships, apparently since such a change of ownership would be a change of contracting party.]

In short, FAR § 42.1204(b) says that you don't need a novation agreement when there is not going to be a transfer of contractual rights and obligations. It does not say that you don't need a novation agreement when there has been a transfer by operation of law. It's the very fact that FAR does not acknowledge the operation of law exception to 41 U.S.C. § 15 that sparked this conversation in the first place.

Second, on June 24 at 6:50 p.m., you said: "In 1995 the American Bar Association recommended certain modifications to the FAR to acknowledge assignment by operation of law. These recommendations were eventually incorporated in FAC 97-3." Italics added. Then, on June 26 at 10:11 p.m., you said: "FAC 97-3 revised the FAR to incorporate recommendations by the American Bar Association with regard to novations and operation of law." Italics added. You rely heavily on these assertions about the ABA, but you err in doing so.

According to the proposed rule that preceded FAC 97-03 (published at 61 FR 43294 on Aug. 21, 1996), the ABA asked the FAR Council to revise FAR Subpart 42.12. Neither the proposed rule nor FAC 97-03 describe the ABA's request in any detail or mention any recommendations. The background statement that accompanied the proposed rule says, in its entirety:

"This proposed rule is in response to an October 2, 1995, request from the American Bar Association to revise FAR Subpart 42.12. The purpose of the change is to facilitate the process of novating contracts and provide guidelines for contracting officers while preserving the Government's interests in business combinations affecting contracts."

FAC 97-03, the final rule (published at 62 FR 64934 on Dec. 9, 1997), does not mention the ABA at all. The phrase operation of law does not appear in the proposed rule, FAC 97-03, FAR Subpart 42.12, or anywhere else in FAR Part 42 for that matter.

In her article in the Public Contract Law Journal, Ms Manos reported that the ABA asked the FAR Council "to revise the current procedures for obtaining a novation agreement to resolve the business uncertainty and administrative problems inherent in the current [pre-FAC 97-03] procedures." She did not say what the specific recommendations were or whether they had anything to do with the operation of law exception to the application of 41 U.S.C. § 15. Nor did she say that the 1996 proposed change to FAR § 42.1204(b) recognizes the operation of law exception.

We have been talking about situations in which contractual rights and obligations have been transferred from one party to another by operation of law. FAR § 42.1204(b) clearly doesn't address such transfers and thus is not pertinent to the topic.

Third, you just said: "Note that the government can consent 'by operation of law,' by acting oblivious and doing nothing for some unspecified period of time." I think that you are confusing transfers by operation of law with transfers by government "recognition," waiver, or implied approval and without a formal novation agreement.

Transfers resulting from government recognition, waiver, or implied approval are considered voluntary, not by operation of law. See: Tuftco Corporation v. United States, 614 F.2d 740, 222 Ct. Cl. 277 (1980), which distinguishes transfers by operation of law from those resulting from recognition without a formal novation agreement. See, also, Prof. Cibinic's article, which I previously cited, and which notes the distinction between transfers by operation of law and transfers by government waiver or implied approval. Ms Manos discussed this subject briefly, as well.

Finally, you shouted, "THERE IS NO SIMPLE OPERATION OF LAW EXCEPTION TO THE ANTI-ASSIGNMENT ACT. There are a specific number of judicially recognized exceptions under the 'operation of law' heading." Forgive me, Eric, but I do not understand your point, or why you shouted it.

Perhaps there is no simple answer to the question of what kinds of transfers are transfers by operation of law, but it's certainly simple that a transfer effected by operation of law is exempt from the anti-assignment acts, the courts and boards have been very clear about that.

Think of it this way-- All of the various kinds of transfers (assignments and delegations) can be divided into two categories: (a) transfers by operation of law and (b) transfers not by operation of law. You and I may not know which of all the various kinds of transfers fall into the operation of law category (I certainly don't, although Tuftco identifies at least some of them), but I know that those which do fall into the operation of law category are exempt from 41 U.S.C. § 15.

So, if by "gray area" you mean that the courts and boards are unsure about which kinds of transfers are transfers by operation of law, then perhaps you are right. But that's a different issue than the one that we have been discussing. On the other hand, if you mean that there is a "gray area" within the operation of law category, some undefined subset of transfers by operation of law that are not exempt, then I don't understand how you reached that conclusion. The Broadlake decision mentioned by Ms Manos seems to be a rather clearly defined exception that would not establish the existence of a "gray area."

You dodged my question.

By Vern Edwards on Sunday, June 30, 2002 - 05:14 pm:

On June 29 at 8:30 a.m., Eric asked for an example of a case in which the government objected to the assignment of an executory contract and the contract is assigned anyway. Healy Tibbits Builders, Inc., ASBCA No. 45269, 94-1 BCA 26,409 is such a case.

Before I go any further, let me explain what executory contract means. Black’s Law Dictionary, 7th ed., defines executory contract as follows:

"A contract that remains wholly unperformed or for which there remains something still to be done on both sides, often as a component of a larger transaction and sometimes memorialized by an informal letter agreement, by a memorandum, or oral agreement."

See, too, In re TechDyn Systems Corp., 235 B.R. 857 (1999), in which a bankruptcy court discussed the concept of executory contract as follows:

"Congress has not chosen to define the term "executory contracts," but most courts have adopted the classic definition first articulated by professor Vern Countryman: "A contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete the performance would constitute a material breach excusing the performance of the other." Vern Countryman, "Executory Contracts in Bankruptcy: Part I," 57 Minn.L.Rev. 439 (1973). See Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1045 (4th Cir.1985) ("a contract is executory if performance is due to some extent on both sides.").

In short, an executory contract is one under which each party still owes some duty to the other.

Now, here’s what happened in Healy Tibbits Builders, Inc.:

On June 5, 1989, Healy Tibbits Construction Co. (HTC) bid on a Navy construction contract.

On August 7, the Navy notified HTC that it was the low bidder and requested responsibility information.

On August 14, HTC filed for bankruptcy under Chapter 11 due to the insolvency of its parent company. However, HTC continued to pursue the Navy contract and told the Navy that its performance would be funded, bonded and backed by a company named Weeks Marine, Inc. (Weeks).

On September 12, HTC became debtor-in-possession under Chapter 11, and it negotiated a deal with Weeks through which Weeks would acquire all of HTC’s contracts. HTC agreed to continue performance of the contracts until the deal was approved by the bankruptcy court. On September 13, HTC and Weeks submitted the deal to the bankruptcy court for approval. Meanwhile, the Navy continued to investigate HTC’s responsibility, and discussed the matter with both HTC and Weeks.

On September 14, HTC and Weeks gave the Navy a copy of the deal they had submitted to the bankruptcy court.

On September 26, the Navy determined that HTC was responsible and awarded HTC the contract.

On October 11, HTC and Weeks amended their deal to include an "inactive affiliate" of Weeks named Deepwater Construction Co. (Deepwater). On that same date, the bankruptcy court approved the deal between HTC, Weeks and Deepwater and the assignment of HTC’s "executory contracts" to either Weeks or Deepwater, which would be jointly and severally liable for performance.

On October 13, more than two weeks after contract award, HTC and Deepwater entered into an agreement through which Deepwater became the owner of HTC. The management, employees and capital assets of HTC remained intact under Deepwater’s ownership. HTC agreed to continue performing the Navy contract until Deepwater could obtain necessary licensing, at which time the contracts would be transferred to Deepwater.

On October 19, Deepwater changed its name to Healy Tibbits Builders, Inc. (which the ASBCA abbreviated as "HTB," but which I’ll abbreviate as "HTB-Deepwater" to avoid confusion with HTC).

From November 1989 to March 1991, invoices were submitted to the Navy in the name of HTC. The HTC project manager became an HTB-Deepwater employee, but continued to manage the Navy project. The Navy addressed contract correspondence to both HTC and to HTB-Deepwater, and received correspondence from both. By August 1990, the construction work was sufficiently complete to permit beneficial occupancy by the Navy.

On March 3, 1991, the Navy contract specialist sent a novation agreement to HTB-Deepwater with copies of the FAR provisions about novation. HTB-Deepwater’s lawyer objected to a novation on grounds that it would be too costly. The parties never signed a novation agreement.

On March 12, HTB-Deepwater sent the government a claim for equitable adjustments. The parties then began to wait for DCAA's audit of the claim, which took a while. In the meantime, the deducted 115 days worth of liquidated damages at $1,050 per day.

In April 1992, the Navy raised the issue of the identity of the contractor for the first time.

On September 24, the Navy denied HTB-Deepwater’s claim, and on October 30, HTB-Deepwater appealed to the ASBCA.

The Navy asked the ASBCA to dismiss the appeal, asserting that HTB-Deepwater was not the contractor and had no right to appeal. The ASBCA described the Navy's position as follows:

"Essentially, the Government contends that the party contracting with the Government was Healy Tibbits Construction Co. [HTC], which continued to be the entity represented throughout contract performance as the contractor. Thus, the Government at no time had a contract with Healy Tibbits Builders, Inc. [HTB-Deepwater], no privity exists, and appellant has no standing to bring the appeal. Morever [sic], if, at some time during performance, the contract was assigned to HTB, the Government was not informed and any purported assignment is asserted to be contrary to the anti-assignment statutes, 31 U.S.C. § 3721 (formerly § 203) and 41 U.S.C. § 15."

The court denied the Navy’s motion to dismiss the appeal, saying: "It is now well established that assignments which occur by operation of law are excepted from the provisions of the anti-assignment statutes, and that assignments incident to court-ordered bankruptcy proceedings constitute such assignments by operation of law. See, e.g., Goodman v. Niblack, 102 U.S. 556, 26 L.Ed. 229 (1880); Keydata Corp. v. United States, 205 Ct. Cl. 467 (1974); Broadlake Partners, GSBCA 10713, 92-1 BCA ¶ 24,699. As these cases illustrate, in determining whether the anti-assignment statutes apply the threshold [sic] question is whether the assignment is susceptible to the evils against which the anti-assignment statutes were enacted; here, it is not. Accordingly, we find the assignment here in issue, being one by operation of law, to be excepted from the anti-assignment statutes."

Italics added.

The ASBCA also held that the Navy had, in any event, effectively waived the provisions of the anti-assignment act.

So, in Healy Tibbits Builders, Inc. we have a case in which a bankruptcy court assigned an executory contract from one contractor (HTC) to a new legal entity (HTB-Deepwater), the Navy claimed ignorance of the assignment and objected to it while the contract remained executory (the construction work was only substantially complete), and the ASBCA held that the contract had been assigned by operation of law.

I have Key-Cited the case and could find no further reference to it. Apparently, the parties settled after the ASBCA denied the Navy's motion to dismiss.

By Eric Ottinger on Monday, July 01, 2002 - 10:25 pm:

Vern,

You have a fundamental problem. The ABA recommended changes to the FAR to improve the coverage of novations. Substantial changes were made to FAR 42.1204, including new language explicitly intended to clarify when a novation would be required. Nobody is arguing that the ABA does not understand “operation of law.”

So we are still left asking how Vern and John know so much about “operation of law” and the American Bar Association doesn’t know or doesn’t care.

Regarding your first and second point, it was Ms. Manos who tied her analysis of what the courts and boards have “focused” on to the ABA recommended changes and FAR 42.1204(b).

“In analyzing the various types of corporate restructuring, the boards and courts have largely ignored the form of the transaction and focused instead on how the transaction affects the rights and liabilities of the parties. When (1) the transferred contract continues to be performed by the same employees under the same management, (2) the contractor remains intact as a separate entity, and (3) the financial condition of the contractor does not change, the transfer is generally held to be outside the prohibition of the Anti-Assignment Act. 12 Consistent with this analysis, the proposed revisions to FAR 42.1204 would expressly recognize that “’[a] novation agreement is unnecessary when there is a change in the ownership of the contractor as a result of a stock purchase, with no legal change in the contracting party, and where that party remains in control of the assets and is the party performing the contract.’ 13”

“13. 61 Fed. Reg. 43,294, 43,295 (1996) (to be codified at 48 C.F.R. pt. 42) (Proposed Aug. 21, 1996).”

In short, Ms. Manos links “remaining intact as a separate entity” with “no legal change in the contracting party” with the ABA recommended changes to the FAR.

(Ms. Manos and the ABA also recommended that the FAR be revised to allow the contractor to submit documents before the novation rather than being required to transfer first and risk having the government disapprove the transfer. This obviously makes sense, but it has no relevance to our discussion.)

Per Ms. Manos, “the Claims Court found a novation agreement … enforceable, even though Government consent to the transfer—and thus the novation agreement—were unnecessary because the transfer occurred by operation of law.” As, I believe, John immediately recognized, ITT Gilfillan fits FAR 42.1204(b) perfectly.

I will concede your third point with the caveat that it doesn’t really make any difference. Forbearance seems to fit the “operation of law” definitions that I provided earlier. (That is— “a change or transfer which occurs automatically due to existing laws and not an agreement or court order.”) However, I can’t find any case or authority explicitly equating forbearance with operation of law.

This does not help your argument very much, because it becomes apparent that once you take the waiver or forbearance (i.e. “impliedly recognized”) exception out of the equation, everything else which Ms. Manos considers to be consistent with her analysis of what courts and boards have “generally held to be outside of the prohibition of the Anti-Assignment Act”, has been addressed by FAR 42.1204(b).

As for your fourth point, you blame me for shouting then ignore what I have to say. There is only a very short list of generally recognized judicial exceptions under the operation of law heading.

If you really feel that the FAR has failed to recognize one of these exceptions, you need to be more specific. Earlier in this thread you reduced your argument to a tautology. “If operation of law occurs automatically, by golly, it must occur so automatically that it is done and over with before the government can consent or refuse to consent.” I don’t disagree and I don’t think the statement is meaningful.

What specific circumstances do you have in mind outside of FAR 42.1204(b) and what authority do you have to back up your argument?

Regarding Healy Tibbits—

I asked for a contract where the government explicitly objected to the assignment at the time the transfer occurs.

“’Somebody wants to assign an executory contract to a government customer, and the government objects [at the time of the transfer], and the contract is assigned anyway (or not assigned and the government is sued)’ I would love to read that case.”

Here, you gave me a case where the government refused to acknowledge a claim, long after the transfer had taken place. Since it was 1993 by the time that the ASBCA decided this case, I doubt very much that the contract was executory at the time the case was decided.

The government sent a novation agreement over for signature and then let the matter ride when the contractor refused to sign the novation agreement.

There are several cases where the transfer occurs during the executory phase of the contract, but the litigation doesn’t occur until many months after. I am aware of these cases, but they don’t demonstrate anything other than the fact that the courts and boards are reluctant to let the government use either of the anti-assignment acts to prevent the successor-in-interest contractor from pursuing an otherwise legitimate claim.

The reference to a Court “Order” is a red herring. The debtor in possession sold the firm, which puts this case solidly under 42.1204(b), the court merely approved the sale.

Eric

By Vern Edwards on Tuesday, July 02, 2002 - 01:13 am:

Eric:

Your post is largely unresponsive to my comments.

The ABA's recommendations, whatever they may have been, have no bearing on this discussion. As far as I have been able to determine, the ABA recommended nothing to the FAR Council about the operation of law exception to 41 U.S.C. § 15.

You say: "So we are still left asking how Vern and John know so much about 'operation of law' and the American Bar Association doesn’t know or doesn’t care." Eric, what's that comment about? John hasn't said anything about the ABA and I have simply spoken the truth about what is known to us of the ABA's request and recommendations. I don't know what the ABA recommended. How do you know what the ABA recommended? Have you seen the ABA's October 2, 1995 letter?

The Government Contractor discussed the ABA's recommendations in contemporaneous articles published on July 27, 1994 and August 28, 1996. Neither article mentions any ABA comment or recommendation about the operation of law exception. See: "DOD Declines to Issue Policy Guidance on Novation Process," 29 Government Contractor ¶ 390, and "FAR Council Proposes to Ease Novation Requirements," 33 Government Contractor ¶ 416.

How on earth do you link FAR § 42.1204(b) with the operation of law exception to 41 U.S.C. § 15? A novation either replaces an old agreement with a new one or one party with another. See the entry in Black's Law Dictionary, 7th ed. and in The Government Contracts Reference Book, 2d ed. Since a corporation is a legal entity separate from its ownership, a mere change in ownership does not require a novation. FAR § 42.1204(b) simply recognizes that there is no need for a novation agreement if the contracting parties remain unchanged. FAR § 42.1204(b) has nothing to do with transfers of obligation from one party to another by operation of law. It's as simple as that.

You have no basis for claiming that the ABA's recommendations had anything to do with the operation of law exception. And even if they did, FAR § 42.1204(b) does not address that exception. The fact is that you don't know what the ABA recommended and nothing in Ms Manos's article supports your contentions in that regard.

Eric, what is your position at this point? As the ASBCA said: "It is now well established that assignments which occur by operation of law are excepted from the provisions of the anti-assignment statutes[.]" What is it about that statement that is gray to you? What don't you understand? The boards and the courts have identified several specific examples of what kinds of transfers constitute transfers by operation of law. Again, what is gray to you?

My position is simple:

(a) The boards and courts consider it well-established that 41 U.S.C. § 15 does not apply to changes of contractor that are effected by operation of law.

(b) When a contract has been transfered from one contractor to another by operation of law, Government approval is not required and refusal by either the old or the new contractor to sign a novation agreement under such circumstances would not be grounds for termination for default.

(c) FAR does not address transfers by operation of law in any way. FAR § 42.1204 addresses only changes of corporate ownership, and not changes in the contractor.

(d) In light of the case law, and the continuing confusion and litigation associated with transfers by operation of law, the FAR Council ought to revise FAR Subpart 42.12 to provide contracting officers with guidance about the operation of law exception and about the government's options when a contract has been transferred by operation of law.

Which of those points do you disagree with?

Finally, you quoted me as saying: "If operation of law occurs automatically, by golly, it must occur so automatically that it is done and over with before the government can consent or refuse to consent." You put that statement in quotation marks. When did I say that? Please cite the date and time of the post. Please don't deliberately misquote people or attribute your statements to another person, it's unethical. If you're going to put a statement in quotation marks, please quote and attribute accurately.

And don't misquote yourself, either. When you asked for an example case you didn't say at the time of the transfer, and it's disingenuous to put corrective phrases in brackets.

By Vern Edwards on Tuesday, July 02, 2002 - 01:16 am:

Eric:

P.S. You're still dodging my question.

By Eric Ottinger on Tuesday, July 02, 2002 - 09:57 pm:

Roy and all,

Let’s look at a list of these judicially recognized exceptions to the anti-assignment acts.

“[T]he courts have held the following assignments or transfers to be by ‘operation of law, and exempt from the relevant statutory provision: transfers by intestate succession or testamentary disposition, Erwin v. United States, 97 U.S. 392 (1878); by consolidation or merger to the successor of a claimant corporation, Seaboard Air Line Ry. Co. v. United States, 256 U.S. 655 (1921); by judicial sale, Western Pacific R. Co. v. United States, 268 U.S. 271 (1925); by subrogation to an insurer, United States v. Aetna Casualty & Surety Co., [338 U.S. 366 (1949)]; by statutory provision to a trustee in bankruptcy, McKay v. United States, 27 Ct. Cl. 422 (1892) . . . and by voluntary assignment of all the assets of an insolvent debtor for the benefit of creditors, Goodman v. Niblack [102 U.S. 556) (1880) .”

What do we have? We have –

Death (i.e. intestate succession and testamentary disposition)

Corporate death (i.e. “judicial sale” (strictly claims and Assignment of Claims Act), “by statutory provision to a trustee in bankruptcy,” and “voluntary assignment of all of the assets.”)

The condition of remaining intact and being swallowed whole. (i.e. “by consolidation or merger to the successor of a claimant corporation”)

And, “subrogation to an insurer.” (If you don’t already understand this one, don’t worry about it. The insurance company is not going to perform the contract. This is strictly claims.)

That leaves a vast number of scenarios where the firm sells off parts of the business and the contracts that go with them. These are clearly outside of the “generally held” criteria set forth by Ms. Manos and the similar criteria referenced in the Court of Federal Claims in the Johnson Controls case.

If this discussion is going to go forward in some meaningful way, someone needs to identify one or more other specific judicially recognized “operation of law” exceptions to the Anti-Assignment Act.

Eric

By Vern Edwards on Tuesday, July 02, 2002 - 11:36 pm:

Eric:

You said: "If this discussion is going to go forward in some meaningful way, someone needs to identify one or more other specific judicially recognized 'operation of law' exceptions to the Anti-Assignment Act."

No one needs to do any such thing. Just one judicially-recognized exception is enough to prove my point.

As I said on June 29 at 12:52 p.m., transfers can be categorized in two ways: (a) those that are effected by operation of law, and (b) those that are not. I do not claim that all transfers are by operation of law. I only claim that transfers by operation of law do not fall under 41 U.S.C. § 15 and that government consent to them is not required, no matter what the FAR says.

Various courts have included the following kinds of transfers as by operation of law:

1. the passage of claims to heirs and devisees;
2. transfers made incident to proceedings in bankruptcy or receivership;
3. tranfers by succession of one business entity for another;
4. assignments made by judicial sale or order; and
5. assignments produced by operation of the law of subrogation.

According to the U.S. Court of Claims in Keydata Corp. v. U.S., 504 F.2d 1115 (1974): "These classes of assignments are all thought to be outside the statute's scope because none of them threatens the dangers Congress sought to avoid by enacting the prohibition." Most of those same exceptions were mentioned by the U.S. Supreme Court in Seaboard Air Line Railway v. United States, 256 U.S. 655 (1921).

In Johnson Controls World Services, Inc. v. United States, 44 Fed. Cl. 334 (1999), the U.S. Court of Federal Claims, the successor to the U.S. Court of Claims, said: "Transfers by operation of law include corporate mergers, consolidations, and reorganizations."

I do not understand all of the listed exceptions, and for all I know, the list is not all-inclusive.

My point is that transfers by operation of law do not fall under the anti-assignment statute, 41 U.S.C. § 15, and thus do not require government approval or consent. When a contract has been transferred by operation of law, neither the old contractor nor the new contractor is required to sign a novation agreement. Under such circumstances, while a novation agreement may be administratively expedient, whether it is in the best interests of both of the parties, or not, depends on what it says.

FAR does not reflect this simple legal reality and, therefore, ought to be revised to provide better guidance to contracting officers.

Now, if you want to continue this discussion, please tell us which of my four July 2 position points you disagree with. And please tell us your answer to my question of June 28 at 11:24 a.m. Yes or no?

By Eric Ottinger on Monday, July 08, 2002 - 08:18 pm:

Roy and all,

Let’s sort this out.

There really are only a small number of possibilities for mergers and consolidations.

Death is simple and self-evident. Nobody is going to question that death represents an automatic transfer.

Corporate death is somewhat more problematical. The standard list mentions only the transfer to the trustee. As for a transfer to the debtor in possession, different courts have different opinions.

For bankruptcy a transfer to a third party would not appear to fit the definition for “operation of law.” An automatic transfer to a third party by a trustee would appear to be prohibited by the plain language of Section 365(c)(1)(A), although at least one judge has another opinion. In any case, the transfer can’t be all that automatic if there is more than one third party to choose from. And no one has cited any case or any other authority to support the idea that a transfer resulting from a bankruptcy, other than the transfer to the trustee or the debtor in possession, is by “operation of law.”

Partial transfers don’t fit because courts have generally held that the contractor must remain intact as a separate entity for the transfer to be “by operation of law.”

That leaves a transfer of all of the assets or all of the stock. The ASBCA considers a transfer of all of the assets to be a “voluntary” transfer, and not “operation of law.”

This leaves the purchase of all of the stock (i.e. FAR 42.1204(b)).

Here is the ASBCA on the asset vs. stock issue.

Siracusa Moving & Storage, ASBCA No. 51433, Dated: 7 July 1999

“The Anti-Assignment Act generally prohibits transfer of Government contracts from a contractor to a third party. The Board recognizes an exception to this prohibition for transfers that occur involuntarily or “by operation of law.” However, we have long held that “[t]he assignment of Government contracts as an incident to the sale of the assets of a business is not an involuntary assignment or transfer by operation of law and hence is barred by the statute.” Mancon Liquidating Corp., ASBCA No. 18304, 74-1 BCA 10,470 at 49512. Thus, the “operation of law” exception is inapplicable to this case. Accordingly, we find that the attempted transfer of Collings’ contract to Siracusa is invalid and barred by the Anti-Assignment Act. 41 U.S.C. § 15.”

For those who are curious about the legalese, here are the legal dictionary definitions. The definition of "testamentary disposition" is courtesy of Everybody's Legal Dictionary. All of the other definitions are courtesy of Merriam-Webster.

Keep in mind that almost all of the novation case law relates to claims rather than ongoing "executory" contracts. There is no need to strain trying to imagine how someone might buy an ongoing government contract at a bankruptcy sale.

”1. the passage of claims to heirs and devisees;
2. transfers made incident to proceedings in bankruptcy or receivership;
3. tranfers by succession of one business entity for another;
4. assignments made by judicial sale or order; and
5. assignments produced by operation of the law of subrogation.”

Death:

intestate succession: “the transmission of property or property interests of a decedent as provided by statute as distinguished from the transfer in accordance with the decedent's will
also
the operation of such statutory provisions in transmitting intestate property ”

testamentary disposition: “Leaving property in a will.”

Corporate Death:

judicial sale: “a sale of property conducted by an authorized official by order of a court
See also forced sale”

assignment for the benefit of creditors: “assignment of property by a debtor to an assignee to be held in trust and used to pay off the debtor's debts”

The condition of remaining intact (or not) and being swallowed whole:

merger: “absorption by one corporation of another
also
any of various methods of combining two or more organizations (as business concerns)
compare consolidate”

consolidate: “to combine (two or more corporations) to form one new corporation
compare merger”

Irrelevant:

subrogation: “a doctrine holding that when an insurance company pays an insured's claim of loss due to another's tort the insurer succeeds to the insured's rights (as the right to sue for damages) against the tortfeasor”


What was this all about. I think this was a potentially interesting thread which was sidetracked by an effort to demonstrate that there must be something wrong with the FAR.

There probably was something wrong with the FAR ten years ago. Subsequently, the ABA made recommendations and the FAR was revised.

It appears that the FAR is right in line with the ABA recommendations, and right in line with the case law as it stands today.

Vern,

I didn’t know that it was such bad manners to put quotation marks on, when the quote is self-evidently meant to be ridiculous. The reader will note that I made up the “by golly” quote and you may have my apology. Your argument is still a tautology.

Eric

By Vern Edwards on Monday, July 08, 2002 - 09:46 pm:

Eric:

Since you're obviously not going to answer my questions, I consider our discussion to be ended.

On to the next topic.

Vern

By Eric Ottinger on Wednesday, July 10, 2002 - 10:14 pm:

Roy and all,

Google turned up a few interesting hits.

Here is a bit of the DLA directives. Note the imperative to notify agency counsel at the start of the process. If we had all agreed on this point at the start of the thread, this would have been a much shorter thread.

I will express a bit of skepticism on one point. “Corporate reorganization” is no doubt a “rapidly changing” and “complex field.” However, novation law is not moving all that rapidly. Cases cited typically go back to 1929 or the 19th century. It isn’t the fast moving character that makes this treacherous for a layman, it is the need to do research in a large legal library.

http://131.70.202.82/dynaweb/dlaps/dladir/@Generic__BookTextView/23759

Here is the ABA view circa 1996.

“The Section believes the proposed amendments to FAR Subpart 42.12 represent a substantial improvement to the current regulations by providing contracting officers with guidelines on utilization of novation agreements and flexibility to accommodate transactions, while preserving the Government's legitimate interests in business combinations affecting its contracts.”

http://www.abanet.org/contract/federal/regscomm/transactions_002.html

This “white paper” is a roundtable discussion on the topic of novations. Some of the comments are intriguing in light of the discussion in this thread. “Operation of law” is characterized as a “magic umbrella.” And, “The courts have essentially split on whether a transfer through bankruptcy is inside the assignment provisions.” (Is this the In re West controversy or other issues?)

www.grantthornton.com/downloads/17089_17089.doc

The following is a fairly comprehensive article on the topic posted at a law firm site.

http://www.wrf.com/db30/cgi-bin/pubs/critcl_thnkng(web).pdf

The redoubtable Carl Peckinpaugh weighed in on this topic in Federal Computer Week in 1996, before FAC 97-3.

http://www.fcw.com/fcw/articles/1996/FCW_060396_348.asp

“In general, a government contractor may not transfer its rights under a contract without prior approval from the responsible contracting officer. However, the contracting officer must consent when the transfer is "by operation of law." This includes situations in which the entire business entity changes hands, either through a stock transfer or a transfer of the complete assets of the company. It may also include transfers of the complete assets of the unit responsible for the government contract.”…

”In contrast to the clearly improper transfers to which the act was addressed, certain transfers do not involve the potential for abuse. The courts and other authorities have recognized that transfers by operation of law are not prohibited by the statute.”

”Some authorities have suggested that this rule extends to transfers of an entire business unit that is responsible for a government contract, even though it is not a separate corporate entity (see, e.g., 9 Comp. Gen. 72 (1929)). However, there is little precedent on this point.”

”Under Federal Acquisition Regulation Subpart 42.12, the parties are required to obtain government approval for all contract transfers, including those by operation of law. However, the government has no right to disapprove transactions that are outside the prohibitions of the Anti-Assignment Act.”

It is clear that in 1996 Mr. Pechinpaugh took a more expansive view of “operation of law” than the ASBCA and the current FAR.

Just for clarity-- I don’t believe that it is the FAR’s job to override the ASBCA. In fact, that would be highly inappropriate. The FAR should reflect settled case law. If an appeals court or the Supreme Court should reverse the ASBCA, the FAR should be revised accordingly.

Since the case law recognizes a short list of judicially recognized exceptions under the “operation of law” heading, the FAR should reflect the specific judicially recognized exception(s), which is what you see in FAR 42.1204(b).

Eric

By Eric Ottinger on Thursday, August 22, 2002 - 08:18 pm:

When I asked, “Keeping in mind that Denise’s contractor is in Chapter 11 bankruptcy, am I correct if I say that in view of In re West, a transfer to either the debtor in possession or a transfer to a third party is not a transfer by “operation of law,” I honestly expected that the answer would be, “Yes, it was now clear that there was no way that Denise’ contract would be assigned to a third party contractor without government consent.” I am still waiting for that reply.

Here are two articles by government lawyers to make the point perfectly clear.

This is the first “A Lawyer’s View” article, which makes it something of a collectible.

http://www.contracts.ogc.doc.gov/cld/LV/Bnkrpty.pdf

I would note that there is more controversy, than this article would leave you to believe, regarding the debtor in possession.

Here is the DOJ position. See Para F.2.(c).

http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/title4/civ00060.htm

In government contracting law, the line of cases following In re West seems to have died out in 1994. However, this issue appears to be a hot topic in intellectual property law.

Journal of Internet Law

“The Code recognizes that a reorganizing debtor must have the ability to hold third parties to existing contractual obligations where beneficial to the estate, and even transfer the contractual obligations to third parties. Section 365 grants the debtor the ability to assume and assign such executory contracts. The debtor's ability to assume and assign a contract is not absolute. The Code recognizes that in some circumstances allowing a debtor to assign a contract to a third party creates too great an imposition on the other party to the contract. Rather than define the specific instances when a contract may not be assigned, Section 365(c)(l)(A) of the Code restricts assignment when nonbankruptcy laws (but not contractual terms) excuse the nondebtor party to the contract from accepting performance from an assignee.28 Thus, the Code looks to other law, either statutory or judicial, to determine when forced assignment of contract rights is too unfair to the nondebtor party to be allowed.”

http://www.gcwf.com/articles/journal/jil_oct00_1.html

Good discussion of catapult case --

http://www.cov.com/publications/222.pdf

http://www.icemiller.com/newsltr/cauapr99.htm

In re West logic applied to intellectual property.

http://www.flhlaw.com/news/May1999.htm

Various relevant cases --

http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=search&case=/data2/circs/9th/9716707.html

http://contracts.corporate.findlaw.com/agreements/geocities/informix.lic.1998.06.30.html

http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=search&case=/data2/circs/9th/9416960.html

http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=search&case=/data2/circs/9th/9556527.html

http://www.law.emory.edu/caselaw/1ca/jan97/96-2028.01a.html

http://www.kentlaw.edu/7circuit/1993/92-3902.html

http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=search&case=/data2/circs/9th/9416960.html

I found this article on the failures of textualism entertaining in light of some of our past dialogues in this forum. Judge Learned Hand is quoted, “it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary.”

http://law.vanderbilt.edu/lawreview/vol533/bussel.pdf

Eric