By Vern Edwards on Thursday, May 30, 2002 - 11:00 am:

anon5-30:

In response to your three questions:

1. When Corp A is sold to Corp B, but Corp A will continue to perform the contract under the new ownership, a novation is not necessary. See FAR § 42.1204(b).

2. A novation is not necessary when a firm merely changes its name. All that is needed is an agreement to recognize the name change. See FAR § 42.1205(a).

3. The intent of the anti-assignment statute is to "prevent fraud and, principally, the undesirable effects of the Government's 'having to deal with several persons instead of one'; 'the introduction of a party who was a stranger to the original transaction'; or improper influences engendered by the transfer to and prosecution of a claim by one or more persons 'not originally interested in it.' Seaboard Air Line Railway v. United States, 256 U.S. 655, 657 (1921)."

Also, keep in mind that a novation may take place by "operation of law," without government consent via a FAR novation, as demonstrated in the cases I cited in my last post. (Thanks to John Ford.)

Finally, keep in mind that a FAR "novation" is not the same as a common law novation. A common law novation replaces the original contractor with another and discharges the original contractor. A FAR "novation" is really a delegation (or assignment), and the original contractor ordinarily remains liable for contract performance. See: FAR § 42.1204(h)(3) and The Government Contracts Reference Book, 2d ed., by Nash, et al., p. 369.

By Anon 5-30 on Thursday, May 30, 2002 - 04:17 pm:

Thankyou, sir.

By Vern Edwards on Thursday, May 30, 2002 - 08:43 pm:

Anon 5-30 and all other interested readers:

For a nice, succinct summary of the novation law arising out of 41 U.S.C. 15, see Mancon Liquidating Corporation, ASBCA No. 18,304, 18,218, 74-1 BCA ¶ 10,470, in the section entitled, "Legal Principles Applicable to the Assignment of Government Contracts." The board quotes the applicable paragraph of the statute (as it still reads today) as follows:

"No contract or order, or any interest therein, shall be transferred by the party to whom such contract or order is given to any other party, and any such transfer shall cause the annulment of the contract or order transferred, so far as the United States are concerned. All rights of action, however, for any breach of such contract by the contracting parties are reserved to the United States."

The board then states the rule that John Ford has been alluding to, as follows:

"Involuntary assignments, such as those effected by operation of law, are outside the purview of the statute, such as transfers pursuant to corporate reorganizations, mergers and consolidations."

The rest of the board's discussion reviews the rules concerning the need for government consent to transfer (novation).

It appears that Mancon is still good law. The ASBCA has cited Mancon as recently as 1999. See Siracusa Moving & Storage, ASBCA No. 51433, July 7, 1999, and Certified Abatement Technologies, Inc., ASBCA No. 39852, May 18, 1999.

By Eric Ottinger on Thursday, May 30, 2002 - 09:30 pm:

Vern,

The topic may merit a longer discussion, but your last three posts do not.

You quote a paragraph out of Broadlake without noting that, in the end, the Court did NOT permit the assignment. My CCH database only provides a summary of BCA cases. However, my CCH summary of Broadlake is clear enough

“The board lacked jurisdiction over an appeal by an assignee of a defaulted government lease because the assignee acquired its interest in the lease IN VIOLATION of the Anti-Assignment Act.”

“Although a court-ordered assignment of a defaulted lease was an assignment by operation of law, IT WAS NOT EXCEPTED FROM THE EFFECTS OF THE ANTI-ASSIGNMENT ACT, because it created a risk of multiple litigation. The Act was designed to minimize the risk of multiple litigation, and the recognized exception for transfers by operation of law is limited to transfers that pose no risk in that respect.”

Ball, Ball, & Brosamer, Inc., was a joint venture partner and a contract signatory which merged with the other joint venture partner.

Dickman Builders was a “mere change in name.”

So far, Carolina Parachute is the on point case. The District Court plainly stated that executory contracts (distinct from claims) assigned “by operation of law” are NOT excepted from the Anti-Assignment Act.

Broadlake flatly contradicts Mancon. Does this mean that Mancon is lo longer "good law." Or, does it mean that the rule is not quite as simple as you represent.

Eric

By Vern Edwards on Thursday, May 30, 2002 - 11:54 pm:

Eric:

Are you aware that the Court of Appeals for the Fourth Circuit overturned Carolina Parachute in part, and declined to confirm the district court's interpretation of the interplay between the bankruptcy statute and 41 U.S.C. 15? See: 907 F.2d 1469 (July 12, 1990).

In any event, Carolina Parachute was about the right of a "debtor in possession" to continue performance, not about transfer to a third party by operation of law, which is what John was talking about and which is a different matter. In no way does Carolina Parachute contradict the ASBCA's analysis in Mancon.

Tell me--did you actually read Carolina Parachute, or did you just read the CCH summary?

As for your analysis of the board cases that I cited, you are simply wrong. But I know better than to try to reason with you about that. I will leave it to the other readers of this thread to check my references for themselves and to verify or refute my conclusions. You, of course, will continue to quote out of context and misconstrue, but I trust in the intelligence of the other readers to figure things out for themselves.

I have learned a lot about novation during the course of my participation in this thread. It's been very rewarding. I only wish that you had learned something, too. To paraphrase Ving Rhames to Bruce Willis in Pulp Fiction: Pride is [bleeping] with you.

So long.

By Roy on Friday, May 31, 2002 - 11:51 am:

OK. I have been following this thread since it started and it has been interesting. Eric and Vern, I really enjoy it when you two are engaged in these types of discussions, doing the extensive research, presenting different viewpoints and sharing all of this with us "readers". I know you two must enjoy these exchanges and respect each others viewpoints. Please keep up the good work, some good comes from it all.

Vern, what I find interesting regarding yours and Johns position on when novations must be executed is that it seems to contradict the requirements in the FAR. Correct me if I am wrong, but it seems as if you two are sending a message that if an assignment is by "operation of law" then a novation agreement is not required, forget the FAR. In one of John's posts he said "when there is a transfer that does not require a novation, the transferee is the contractor whether the government has consented or not."

I don't believe that John's conclusion here that the transferee is now the contractor is correct. The real issue here seems to be does the Government have to recognize this new entity as the successor in interest to the Government contract, and what instrument should be executed, if any, to affect this recognization/change. The FAR seems to be specific that if the Government has concluded that it would be in its best interest to recognize this new entity as a successor in interest, a novation agreement would be a requirement in most cases. I believe this is the point that Eric is making, and I agree with him.

FAR Part 42.12 covers procedures that must be followed when contractors assets are transferred or a contractors name is changed. Execution of two specific instruments are provided for, "Novation Agreements' or "Change of Name Agreements". When Contracting are faced with these situations, one or the other of these instruments must be executed.

The "one" example cited in the FAR where a novation agreement may not be required is where there is a change of ownership 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". Even in that one situation it is suggested that a "Novation Agreement" should be executed.

Now, I realize that the FAR may not always be consistent and there may be some things in there that I just don't agree with, but I also believe that if there is a requirement in the FAR that is contrary to law, or what the courts are finding through litigation, it is generally recognized and fixed. I also believe that to CO's and Government procurement professionals the FAR is the law and must be followed when there is specific prescriptions for its use. In this case the Contracting Officer is required to do something, and I believe the Novation Agreement is the correct course of action. Just thought I would throw in my two cents worth.

Roy

By Vern Edwards on Friday, May 31, 2002 - 12:32 pm:

Roy:

It is true that what John and I are saying appears to be inconsistent with the FAR. That had bothered me, as well, before I did my research. But a careful reading of the FAR and the case law shows that, in fact, there is no inconsistency, because FAR requires a novation only when the Anti-Assignment Act, 41 U.S.C. 15, applies -- see FAR § 42.1204(a) and (b) -- and the courts have found that 41 U.S.C. 15 does not apply to transfers effected by operation of law.

The key to understanding the FAR is to recognize that what the courts have said is that 41 U.S.C. 15 does not apply to all transfers, including transfers effected by operation of law. The courts have reached this conclusion based on their analysis of the intent of Congress in enacting the Anti-Assignment Act. The Supreme Court summarized this analysis in Seaborn Air Line Ry. v. United States, 256 U.S. 655 (1921), as quoted in Johnson Controls World Services, Inc., v. U.S., 44 Fed. Cl. 334 (1999), as follows:

"We cannot believe that Congress intended to discourage, hinder or obstruct the orderly merger or consolidation of corporations as the various States might authorize for the public interest. There is no probability that the United States could suffer injury in respect of outstanding claims from such union of interest and certainly the result would not be more deleterious than would follow their passing to heirs, devisees, assignees in bankruptcy, or receivers, all of which changes of ownership have been declared without the ambit of the statute."

Underlining added.

It was on the basis of the Supreme Court's decision that Court of Federal Claims said, in Johnson, "Transfers or assignments occurring by operation of law are exempt from the Act's application." A Lexis headnote for the Johnson decision summarizes it nicely: "Transfers or assignments occurring by operation of law are exempt from the Anti-Assignment Act's application."

The purpose of novation, as described in FAR Subpart 42.12, is to evidence the government's assent to a transfer when 41 U.S.C. 15 applies, when such assent is a necessary prerequisite to the transfer. When the statute does not apply, then FAR does not require government assent prior to the transfer.

Do you see? The courts have interpreted 41 U.S.C. 15 as being inapplicable to transfers effected by operation of law. Thus, the FAR requirement for a novation -- i.e., government assent -- does not apply to such transfers. What appears to be a conflict is not a conflict at all.

Make sense?

There are many instances in which FAR is not fully cognizant of case law. Consider FAR Part 15 and the rules about discussions. Novation is another instance in which you cannot understand the FAR simply by reading the FAR.

Vern

By Eric Ottinger on Friday, May 31, 2002 - 08:17 pm:

Please go back and take another look at the Carolina Parachute Court of Appeals case. You will note that the court did not address the Anti-Assignment issue one way or the other.

Yes, I did read it.

The District Court’s opinion is based on West Electronics. In re West has been cited several times and it has not been overturned.

Let’s clarify the rules of this game. I don’t need to demonstrate a deep knowledge of the law. All I have to do is to demonstrate that the rule is not as “simple” a John would have us believe.

Eric

By Eric Ottinger on Friday, May 31, 2002 - 08:20 pm:

The previous message should have been addressed to Vern.

Apologies.

Eric

By Anon2U on Friday, May 31, 2002 - 11:36 pm:

I want to present a case for your comment and also get back on my soapbox to defend the poor little contracting officers who are swamped with work and don't have time to debate the intricacies of when a novation is needed and when one isn't.

The majority, myself included, would automatically take the FAR procedures literally. Until this discussion, I had no concept of what "by operation of law" meant. We are supposed to be business managers, not lawyers. If the FAR isn't correct then someone needs to correct it. Don't expect most contracting officers to be mind readers. 90% don't have the mental capacity and the other 10% don't have the time.

Off the soapbox and onto the case.

We have always done novations if the Transferee was determined to be responsible and we have let the contract die if the transferee is not responsible. Our legal supports this position.

It has been our interpretation that unless we do a novation the contract no longer exists based on the wording of FAR part 42.

Case in point. IDIQ contract with no outstanding orders or invoices - Contractor A with whom we had the contract went bankrupt. Contractor B bought the company from the bankruptcy court for about $100K. They basically wanted the name and the client list. Contractor B is also very close to bankruptcy based on a finacial evaluation. Our legal said not to novate based on Contractor B's shaky financial picture. So the contract is being summarily closed and sent to archives with no further paperwork.

Is there anything wrong with the way we handled this?

By Anonymous8 on Saturday, June 01, 2002 - 09:23 am:

Can you give examples of operation of law? In Layman's (Contracting Officer's) terms?

Thank you

By Anoncon on Saturday, June 01, 2002 - 06:41 pm:

Relevant to anonymous8:
I was thinking about operation of law and an example. Say that subject A (the father-widower) owns a corporation and this corporation has several government contracts. Subject B (the son) owns another corporation. Subject A dies and through operation of law (law of inheritance)all assets and liabilities pass on to subject B. Subject B may decide to keep the corporate name or may bring the assets under his corporate name. In either case I don't believe a novation has to be done, however, if the assets fall under the new name, a name change might be appropriate to not confuse the paperwork.
Curious on other views.

By interested observer on Saturday, June 01, 2002 - 09:20 pm:

An Alaska case is interesting. It has an example of "operation of law" and not. This case did not turn on this issue. It is mentioned and a footnote contains specific examples as well as other case references, some already mentioned. The case is AGBCA No. 97-160-1 (Jill Reese) (.pdf file).

Footnote 10 discusses the "operation of law" issue. For those not wanting to read the case that footnote reads (emphasis added):

The anti-assignment statutes, 31 U.S.C. 3297 and 41 U.S.C. 15, prohibit the assignment of claims against the Government except in limited circumstances not relevant here. The Supreme Court has recognized certain exceptions to the prohibition where the assignment involves interests passing to heirs/devises, assignees in bankruptcy, and receivers. The Court extended the prohibition to mergers and consolidations, where the assignor ceased to exist. Seaboard Air Line Railway v. United States, 256 U.S. 655 (1921). Cases interpreting this decision indicate that unless the transfer of rights is by operation of law, or otherwise involuntary, the anti- assignment statutes prohibit recovery. E. Harold Patterson, Receiver, 173 Ct. Cl. 819 (1965); Bolivar Cotton Oil Co. v. United States, 95 Ct. Cl. 182 (1941); Doblin v. United States, 64 Ct. Cl. 352 (1928); Broadlake Partners, GSBCA No. 10713, 92-1 BCA ¶ 24,699; Albert Ginsberg, GSBCA No. 9911, 91-2 BCA ¶ 23,784; CBI Services, Inc., ASBCA No. 34893, 88-1 BCA ¶ 20,430; Mancon Liquidating Corp., ASBCA No. 18304, 74-1 BCA ¶ 10,470.

This case was interesting in light of this discussion in that the marital settlement (an operation of law) that placed the property under Jill Reese's ownership was apparently recognized by the agency without issue. Her subsequent transfer of the property J. Reese Investments & Brokerage, Ltd. could perhaps have become an issue had other, more pertinent issues, not been foremost. There is a discussion of the assignment issue on page 14 ending with "However, for the reasons expressed below we need not address this issue further."

Personally I am discouraged by this discussion. I would hope contracting professionals have the general knowledge needed along with an ability to quickly research specific areas they find they need to know more about. If not individually, I would hope, assume and require (if in my power) that contracting offices have this capability.

I am increasingly less in sympathy with the community that constantly seems to whine about overwork and lack of training. Everyone is "overworked" these days. The old 40 hour week seems part of the New Deal tossed years ago -- at least for so called professionals. I will note that real professionals do not wait to be trained so that they can better handle the work load. I sometimes wonder if part of the difficulty for some is not a lack of expertise - a problem they can solve.

Do not mistake me. I too have been in an organization that was cut and cut as it got better and better until it began to collapse. I, and others, left for a better managed world. In one of those attempts I also experienced a number of people, called and paid as professionals, who could not complete simple tasks on time because they simply did not have (and would not acquire) the skills. Truthfully, that was a bleaker world than the one where we were cut and cut while getting better and better. Back there we had deep pride in the face of adversity, something missing in the other organization where whining and excuses seemed fairly common. Pride and doing with two better the job once done by five did not save us. It did not feel near so dismal. The other organization also fell. That is the way things go. Better to go the first way.

By John Ford on Sunday, June 02, 2002 - 03:12 pm:

Vern, thanks for getting to the research before I could respond. My research capabilities are somewhat limited right now. For a more recent case, please refer to Omega Invironamental, Inc., ASBCA No. 51639. This is a 1999 case and dealt with the sitution where a corporate subsidiary was merged into the parent with the parent becoming the contractor by operation of law.
When there is a transfer of a contract by operation of law, the transferee becomes the contractor. In that case, if the government does not like who it is dealing with, it usually has its T4C remedy. However, it cannot T4D merely because of the transfer. Instead the contract must be in a default position. As for an IDIQ contract being transferred by opertion of law, if the government has ordered the minimum quantity stated in the contract, it has no obligation to place further orders under that contract. However, for multiple award IDIQ contracts, caution should be exercised because of the "fair opportunity" requirement. A contractor by operation of law cannot be denied that fair op.

By Vern Edwards on Sunday, June 02, 2002 - 06:37 pm:

Eric:

I don't need to take another look at the appeals court's decision in Carolina Parachute. I know what the appeals court said, that's why I brought it to your attention. I referred to it when I said that the court "declined to confirm the district court's interpretation of the interplay between the bankruptcy statute and 41 U.S.C. 15."

In Carolina Parachute, the district court relied on West Electronics, Inc., 852 F.2d 79 (3d Circuit, 1988) in making its decision. But the 4th Circuit held that West was not pertinent to Carolina Parachute, saying:

"As supporting authority for its position, the government relies on In re West Elecs, Inc., 853 F.2d 79 (3d Cir. 1988).... The West court reasoned that because the Anti-Assignment Act would annul government contracts if they were transferred to third parties other than the debtor, under section 365(c)(1) the government was excused from accepting performance from the debtor in possession. See id. at 82-84. We need not decide whether the Anti-Assignment Act prevents Carolina Parachute from assuming these government contracts because, unlike the situation in West, the government failed to object to the plan or to appeal the confirmation order, both of which expressly provided for the assumption of these contracts by Carolina Parachute...."

Underlining added.

The decision of the 3d Circuit in West and the decision of the district court in Carolina Parachute addressed the interpretation of bankruptcy law, specifically, 11 U.S.C. §§ 362 and 365. Under 11 U.S.C. § 362(a)(1), a petition for bankruptcy results in an automatic stay against "the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title." Thus, when a contractor declares bankruptcy the government cannot terminate for default until the bankruptcy court lifts the statutory stay.

In both of the court cases, the government contractor defaulted and then declared bankruptcy, which resulted in a stay against termination for default. The contractors submitted reorganization plans and were permitted to remain in possession of their assets as "debtors in possession." In each case the government argued that the bankruptcy court should lift the stay and allow it to terminate for default. In each case the bankruptcy court refused, and the government appealed based on an interpretation of 11 U.S.C. § 365(c)(1).

In West, the district court held in favor of the contractor, so the government appealed to the 3d Circuit. The 3d Circuit held that 11 U.S.C. § 365(c)(1) prohibited the transfer of a contract to a debtor in possession because 41 U.S.C. § 15 requires government assent to transfers to third parties, saying:

"West could not force the government to accept the 'personal attention and services' of a third party without its consent. It therefore necessarily follows that under 11 U.S.C. § 365(c)(1) West, as a debtor in possession, cannot assume this contract."

Thus, the 3d Circuit's holding was that 11 U.S.C. 365(c)(1) prohibited the transfer by operation of law. It did not hold that transfers by operation of law were not exempt from 41 U.S.C. § 15. How could they? The Supreme Court had already held [in Seaboard Air Line Ry V. United States, 256 U.S. 655 (1921)] that such transfers are exempt from 41 U.S.C. § 15.

In Carolina Parachute, the district court held for the government based on West, so the contractor appealed. The 4th Circuit ordered the bankruptcy court to lift the stay, but on different grounds than West.

The decision of the 3d Circuit in West and the district court in Carolina Parachute were about what transfers by operation of law are permitted under the bankruptcy statute, not about the applicability of the anti-assignment act to transfers by operation of law.

You quoted the following passage from the district court's decision in Carolina Parachute as making your case:

"Debtor relies on Erwin v. United States, 97 U.S. 392, 24 L.Ed. 1065 (1878) and subsequent cases as standing for the proposition that an assignment by operation of law, including a transfer incident to a proceeding in bankruptcy, is an exception to the Anti-Assignment Act. Debtor’s reliance is misplaced. Erwin addresses the assignment of claims against the government, not the assignment of executory contracts as does the instant case. Cases subsequent to Erwin are inapposite because they apply and construe 31 U.S.C. §203, the Assignment of Claims Act, instead of 41 U.S.C. §15, which is at issue in this case. See e.g., Keydata Corp. v. United States, 205 Ct.Cl. 467, 504 F.2d 1115 (1974), Danielson v. United States, 416 F.2d 408 (9th Cir. 1969)."

Relative to that passage, you said: "Carolina Parachute flatly contradicts John’s argument."

You have misread the quote, which merely says that Erwin did not support the debtor's argument, because it was not on point ("addresses the assignment of claims against the government, not the assignment of executory contracts"), and that cases after Erwin were not on point because they were not about 41 U.S.C. § 15. You have misread that quote as somehow saying that transfers by operation of law are not exempt from the anti-assignment act. The quote does not say that. Moreover, a lower court court could not say that even if it wanted to, because the Supreme Court has already held, in Seaboard, that transfers by operation of law are exempt from the anti-assignment statute. I quoted the pertinent language from that case in an earlier post.

If you are continuing this discussion merely to make the case that things are not as simple as I've made out, then what a waste of your time! Simple is in the eye of the beholder. If it's not simple to you, then so be it. It's simple for me. I'm sure that some people agree with you. But what do you care what I think or say in that regard?

What counts is the proper interpretation of statute and FAR. As you, yourself, pointed out on May 23 at 12:28 p.m., as recently as 1999 the U.S. Court of Federal Claims, in Johnson Controls World Services, Inc. v. United States, 44 Fed. Cl. 334, held: "Transfers or assignments occurring by operation of law are exempt from the [Anti-Assignment] Act's provisions."

By Roy on Monday, June 03, 2002 - 08:31 am:

Is all of this case law you guys are citing really relevant to this issue?

The way I read the rules for Federal Procurement, a novation agreement is required to continue performance with the third party under the contract, whether the transfer is by operation of law or not. I have always been under the impression that Contracting Officers were required to follow these rules. I believe the subject of most of the cases cited here has been to decide if the third party has legal standing under a claim, and it has been shown that if the transfer was by operation of law then the general rule to follow is that it does.

I don't have any arguments with Johns position regarding operation of law, but the Government is not required to continue with this new party. There are many reasons why it would not be in its interest to do so. Conflicts of interest, capability, security issues, etc. I don't agree that this new entity is "now the contractor", as John so boldly suggests.

The FAR rules should govern. If it is determined to be in the Governments interest to recognize the third party as a successor in interest, do a novation agreement.

Roy

By interested observer on Monday, June 03, 2002 - 09:41 am:

Good grief! Roy seems to think FAR takes precedence over law. Not quite! The FAR is far down the list in that scheme! One of the responsibilities of contracting officers is to be aware of the rules and, in general, the laws governing contracting. At the very least they must be aware of legal structure governing the FAR to ask the right questions and avoid actions amounting to legal suicide.

Anyone reading those decisions should come to realize that Roy and others agreement "that this new entity is 'now the contractor'" is unnecessary and not material. It is the contractor under the operation of law. The only way a contracting agency can undo operation of law is under the processes used to terminate an existing contract. A court will be glad to insturct you if you do not "believe" this and operate on that false belief.

If, under operation of a state's laws, I come into posession of a contracted entity a contracting officer can not undo that legal process by simply not issuing the novation. You can waste effort and do a novation or not. The fact remains that I have a contract. Fail to recognize that and I will have an opportunity to have you and your agency instructed in a way you, your agency and taxpayers probably will not appreciate.

These decisions are pretty clear on that issue. You can terminate for convenience, even default on some other basis, but a power superior to contracting officers has taken this action and you are under contract like it or not due to these defined legal actions.

It may be an obscure subject. It may not be in your ordinary experience. When faced with an involuntary transfer of a contract by a court's action under state or federal laws dealing with inheritance, divorce, bankrupcy the cases are there and easily found. Any contracting officer or contracting organization entangling their agency in a possible lawsuit on this issue, through ignorance and not doing the research, needs to be terminated for convenience!

By Vern Edwards on Monday, June 03, 2002 - 09:47 am:

Roy:

Yes, the case law is relevant. And I think that you are reading the FAR rules to be clearer than they are. I have read and re-read those rules during the past two weeks, and, as in so many cases, they raise more questions than they answer.

FAR § 42.1203(a) says, "If a contractor wishes the Government to recognize a successor in interest to its contracts or a name change, the contractor must submit a written request to the responsible contracting officer (see 42.1202)."

That paragraph exists because 41 U.S.C. § 15(a)says:

"No contract or order, or any interest therein, shall be transferred by the party to whom such contract or order is given to any other party, and any such transfer shall cause the annulment of the contract or order transferred, so far as the United States is concerned. All rights of action, however, for any breach of such contract by the contracting parties, are reserved to the United States."

FAR § 42.1203(a) supposes that the original contractor still exists and wants to transfer its contract to a third party. So FAR §§ 42.1203 and 42.1204 prescribe a procedure for government review and approval or rejection of a contractor's request that the government approve and recognize such a transfer. They do so because, "41 U.S.C. § 15 prohibits transfer of Government contracts from the contractor to a third party." If 41 U.S.C. § 15 applied, then transfer without the government's approval would annul the contract.

But, what if the transfer is involuntary, by operation of law? The transfer has already happened. There is nothing for the government to approve or reject. The courts have said, repeatedly, that involuntary transfers, i.e., by operation of law, are exempt from 41 U.S.C. § 15.

Note, too, that FAR § 42.1203(a) says, "If a contractor wishes...." Underlining added. Well, if the transfer is involuntary, by operation of law, then the contractor is not wishing to make a transfer, the transfer has happened.

I suppose that if the transfer were unacceptable to the government it could terminate the contract for convenience. But, as John has said, the government cannot terminate the contract for default unless the contractor is in default.

Suppose, for instance, that there has been a transfer by operation of law. The contracting officer asks the original contractor and the new contractor to sign the novation agreement set forth in FAR § 4.1204(i), and they say, "No. Why should we? We don't like the terms of your agreement. The novation has already happened. We don't need your assent to do what's already been done by operation of law." What could the CO do? I think that the Government's only recourse would be to terminate the contract for convenience. What if the new contractor had an organizational conflict of interest? Same thing.

FAR Subpart 42.12 makes no mention of transfers by operation of law, yet we know that they happen. We have seen that the U.S. Supreme Court and the U.S. Court of Federal Claims have said that transfers by operation of law are exempt from 41 U.S.C. § 15. FAR does not address every situation that a contracting officer might face. I don't know what the right thing to do would be in every situtation. I do know that the problem of transfers by operation of law has generated a fair amount of litigation, yet the FAR does not appear to address them or to provide guidance about what to do when they happen.

I do know that in case after case the government has argued that some entity had no rights under a contract because that parties had not signed a novation agreement, only to be told by a board or court that a novation agreement was not necessary. See, e.g., Omega Environmental, Inc., ASBCA No. 51639, Feb. 5, 1999; Pettibone Corporation, ASBCA No. 41073, April 18, 1991. What this tells me is that many contracting officers (and government lawyers) believe, as you do, that a novation is always necessary in order to effect a transfer.

I think FAR could be clearer and more helpful about what to do when there has been a transfer by operation of law. But what else is new? Think about the hundreds of GAO and court decisions since the mid-1960s about the rules for communicating with offerors during source selection. The old rules in FAR § 15.610 were very unclear. The new rules in FAR § 15.306 are anything but transparent. (Read Cy Phillips' recent article about discussions in the Analysis section of this site.)

You say that the FAR rules should govern. Well, what are those rules when it comes to transfers that are exempt from 41 U.S.C. § 15? I can't find them.

By Roy on Monday, June 03, 2002 - 11:40 am:

Vern,

Just a couple of quotes from 42.1204:

"The Government may, when in its interest recognize a third party as the successor in interest to a Government contract when the third party's interest in the contract arises out of the transfer of-- ...(2)...(ii) Transfer of these assets incident to a merger or corporate consolidation...

Under documents to be provided to support the Novation Agreement:

"42.1204(f) (1) An authenticated copy of the instrument affecting the transfer of assets; e.g. bill of sale, certificate of merger, contract, deed,agreement,or court decree."

These terms "merger", "corporate consolidation" or "court decree" seemed to have all been referred to as by "operation of law" in this thread.

To the "interested observer", I'm not sure what you meant by "FAR taking precedence over Law". FAR is based a lot on Laws. It is the Federal Regulation that implements many Federal laws. I had previously indicated in a previous post under this thread that when the FAR is found to be in conflict with applicable laws, these conflicts are generally fixed.

Maybe I am way off base, but I don't think so. Also, don't think this will change the way novation agreements are handled here.

Roy

By Vern Edwards on Monday, June 03, 2002 - 12:53 pm:

OK, Roy.

Vern

By Anonymous on Monday, June 03, 2002 - 04:44 pm:

I also thought the FAR to be clear that novations had to be written or the contract ceased to exist. And I would bet that if I had 10 contracting officers here read part 42, at least 9 would also agree. I believe our legal thinks its pretty cut and dry too.

If mergers are a "operation of law" that do not need novating, then the FAR should say so and save us all a lot of work. Companies merge faster than you can novate them now days.

Maybe they should mandate a Law Degree for all COs GS-13 and above. Wait, lets not suggest that or it will happen.

By interested observer on Monday, June 03, 2002 - 08:43 pm:

Roy, the quote is based on your comment above that "The FAR rules should govern." Implementing "rules" do not govern the "law." It is clearly the other way around. Whether rules not in alignment are fixed or not will not effect outcome.

The record seems quite clear here. Something well above the "pay grade" of contracting authorities (not just contracting officers) has ruled. Their agreement is unnecessary, though I suppose they can "ratify the tide" if they choose. Actions refusing to recognize the new fact can be unhealthy and expensive for the government in loss of lawsuits.

It is logical and clear. Congress has not granted the government in its contracting role the right to cancel the effect of federal and, more commonly, state laws dealing with certain conveyance of property. This seems to be particularly true of actions not voluntary on the part of the original contractor.

More argument seems pointless. I will simply say that if I held a contract as a result of one of these legal operations and a contracting authority refused to perform their part of the contract I would first try a friendly call to inform them of the case law. I'd get my legal folks to prepare a case with a probable "slam dunk" result if they still refused. I'd hand legal the cites given here and tell them to have fun.

I'd also tell legal to prepare for a follow on action in the event the contracting authority began trying to terminate for any reason other than convenience. The premise would be that the agency is spitefully trying to accomplish what it had just been told it could not do by trumping up other excuses. I suspect the agency might be held to some courtly oversight on that matter too.

That would all be unfortunate. If the agency really wanted out I'd gladly agree to termination for convenience and be rid of bad actors.

By interested observer on Monday, June 03, 2002 - 10:28 pm:

Here is a bit on the "operation of law" subject (really quite interesting) with a tie to another recent discussion here. GPO gives sound advice in a Printing Procurement Regulation, CHAPTER VI. CONTRACT FINANCING, 10. Transfer of Businesses and Corporate Mergers (emphasis added):

Transfers of an entirebusiness, corporate mergers, and assignments by the operation of law, each of which may affect the assignment of claims under a contract, are not prohibited by the Federal statutes and hence do not depend upon the Assignment of Claims Act of 1940, as amended, for their validity. However, in the case of transfer of a business or corporate mergers, notices of assignment of claims under the contract made by the transferee or successor corporation should not be acknowledged until the transferee or successor corporation involved has been recognized by GPO as the lawful successor in interest of the Government contract. Similarly, before acknowledging an assignment made by a party who is a transferee by operation of law, the Contracting Officer should require the submission of a certified copy of the document evidencing the transfer by operation of law. Procedures for novation agreements are covered in XIII-3.
Sounds as if GPO gets it and has a good process to verify and document operation of law contract transfers.

By Roy on Tuesday, June 04, 2002 - 08:00 am:

Vern,

Does your response mean that you agree that the FAR rules for novation agreements do cover situations where the transfer is by operation of law? I'm really not sure of what all is actually covered/recognized under the term "operation of law". Maybe someone can provide a list of examples.

Hope you don't think I am a hopeless case. I believe I have already been terminated for convenience.

Roy

By interested observer on Tuesday, June 04, 2002 - 11:48 am:

Examples are plentiful in this discussion. I really cannot understand these calls for examples when they are discussed in the cited decisions. I've collected some of those and others and underlined the examples given. I've also provided some links to full cases.

"We cannot believe that Congress intended to discourage, hinder or obstruct the orderly merger or consolidation of corporations as the various states might authorize for the public interest. There is no probability that the United States could suffer injury in respect of outstanding claims from such union of interests and certainly the result would not be more deleterious than would follow their passing to heirs, devisees, assignees in bankruptcy, or receivers, all of which changes of ownership have been declared without the ambit of the statute. The same principle which required the exceptions heretofore approved applies here." SEABOARD AIR LINE RY. v. U S, 256 U.S. 655 (1921) [Findlaw's links Cases citing this case: Supreme Court and Cases citing this case: Circuit Courts]

"We recognize that a third party by operation of law, such as bankruptcy or court order, may under certain circumstances not pertinent to this appeal, become the successor to a Government contract without the Government's express approval." (Huffman Lumber Company, AGBCA (Department of Agriculture) No. 85-208-1, 86-3 BCA ¶ 19,027)

"Involuntary assignments, such as those effected by operation of law, are outside the purview of the statute, such as transfers pursuant to corporate reorganizations, mergers and consolidations." (Mancon Liquidating Corporation/Intercontinental Mfg. Co., Inc., ASBCA Nos. 18304, 18218, 74-1 BCA ¶ 10,470)

"These include, for example, assignments such as the passage of claims to heirs and devisees, transfers made incident to proceedings in bankruptcy or receivership, transfers by the succession of one business entity for another, assignments made by judicial sale or order, and assignments produced by operation of the law of subrogation." (Broadlake Partners, GSBCA No. 10713, 92-1 BCA ¶ 24,699)

"The Supreme Court has recognized certain exceptions to the prohibition where the assignment involves interests passing to heirs/devises, assignees in bankruptcy, and receivers. The Court extended the prohibition to mergers and consolidations, where the assignor ceased to exist." Noted in this case as being accepted by the government was "Ownership of the Hillstrom Building was transferred from Robert Stevens to Jill Reese (Appellant or Jill Reese) in November 1995 as a result of a marital property settlement." This is another example of a legal transfer we can almost certainly assume would be covered under operation of law. (Jill Reese, AGBCA No. 97-160-1; footnote 10)

Several examples, each containing a cite, are cited in one case as follows:

- "TMC changed its name to Hood. A mere name change is a transfer by operation of law and exempt from the application of the Act. United International Investigative Services v. United States, 26 Cl. Ct. 892 (1992), citing Tuftco."

- "The anti-assignment acts do not insulate the Government from the debtor in possession assuming the contract for purpose of prosecuting appeals. Raymond R. Lyons, Jr.; Antenna Products Corp., ASBCA No. 34134, 88-3 BCA ¶ 21,060, aff’d on recon., 89-1 BCA ¶ 21,336."

- "It is well settled that a voluntary assignment of all the assets of an insolvent debtor for the benefit of the creditors is exempt from the prohibition of the Acts. Goodman v. Niblack. The question here is whether the sale to DS&P constitutes such a sale."
(HOOD LUMBER COMPANY, FORMERLY HANEL LUMBER CO., INC., AGBCA No. 98-156-1}

As for this question on the FAR applicability, Mr. Edwards has clearly stated the logic (Vern Edwards on Monday, June 03, 2002 - 12:18 pm). The FAR is never triggered because, effectively, the anti-assignment act is null in these cases and the "novation" has already been executed by order of a superior authority, a court. I suppose someone could go ahead and in effect "ratify" a courts decison with a novation. That is not only senseless, it raises issues of the contracting authority attempting illegal changes to the actual state of affairs. That is a recipe for trouble. What about that is unclear?

By Eric Ottinger on Tuesday, June 04, 2002 - 09:51 pm:

Vern,

I am looking back at your Jun 3 post. 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.”

Eric

By Vern Edwards on Thursday, June 06, 2002 - 11:36 am:

Roy, Eric, Anonymous of June 3 at 4:44 p.m., et al.:

I haven't responded during the last couple of days because I've been traveling on business. Sorry.

Gang, I think we've exhausted the possibilities of this discussion, which started when John Ford said that Denise might not need a novation. I agree with John and have done everything that I know how to do to explain why I believe that a novation agreement is not always necessary when there is a change of contractors.

The "novation" process in FAR Subpart 42.12 (which isn't really a novation process at all) prescribes a procedure through which the government reviews and approves or denies contractor written requests [see FAR 42.1203(a)] for assignments and delegations -- collectively called "assignments" or "transfers" -- which are ordinarily prohibited by 41 U.S.C. § 15. Notwithstanding the statute (which does not mention any exceptions to the prohibition), the FAR permits such assignments and delegations as long as the new contractor is acceptable to the government and the original contractor agrees to guarantee the new contractor's performance and remain liable to the government under the terms of the original contract (which is why it's not really a novation) [see FAR § 42.1204(h)].

If a contract is transferred involuntarily by operation of law, then why would the old contractor (assuming that it remains viable) either (a) request a novation, or (b) agree to guarantee the new contractor's performance and remain liable to the government? [I have noted the use of the word "ordinarily" in FAR § 42.1204(h), which suggests that a true novation, which would relieve the old contractor of contractual liability, is a possibility.]

In the event of a transfer by operation of law, the contracting officer may have to acknowledge the transfer for administrative purposes, but a novation agreement is not required, because government agreement is not necessary -- the novation has already happened, whether the government likes it or not.

If the old contractor was in default, then the government can terminate for default, unless prohibited from doing so by court order. If the government does not approve of the new contractor, then the government can terminate for convenience.

If a contract was transferred by operation of law, and if the government decides to terminate for convenience, then the new contractor will be entitled to a termination settlement, notwithstanding the lack of a novation agreement, because the new contractor is the contractor by operation of law.

Sometimes, FAR doesn't cover all the bases.

At this point I have used up all my arguments and it's clear that I haven't convinced you. Oh, well.

I have a month-long business trip ahead of me starting next Monday and I am long overdue on a couple of articles that I've promised to write. I simply cannot devote any more time to this topic. Besides, I have nothing more to say.

So long, fellas.

Vern

By Roy on Thursday, June 06, 2002 - 03:24 pm:

Thanks Vern,

Roy

By Eric Ottinger on Thursday, June 06, 2002 - 08:07 pm:

Vern,

Since you didn’t answer the question, I will answer it for you. A transfer of an “executory contract by the trustee” under any chapter of the bankruptcy code would not be “by operation of law.” However, it is unlikely that Denise (or any of us) would have known this unless we did serious research or we obtained the advice of competent counsel. If she had taken advice from John she would most likely have assumed that any transfer approved by a bankruptcy court must be “operation of law,” as the plaintiff mistakenly assumed in Carolina Parachute. John’s advice to the effect that maybe she should just do nothing (like “most of the ACOs employed by DCMA”) was seriously flawed and misleading.

Just to be perfectly clear, I don’t believe that that I have ever questioned that an assignment might occur in some instances by operation of law. (Heck, the government can provide consent by simply acting oblivious and pretending that nothing has happened. See Tuftco.) I question whether anyone other than agency counsel should be doing that analysis or making that call.

Looking forward to seeing what you might have to say in a month.

Eric

By Eric Ottinger on Thursday, June 06, 2002 - 08:13 pm:

For the benefit of those who probably find this discussion confusing, here are a few definitions that I found using Internet legal dictionaries.

Bouvier’s

“OPERATION OF LAW. This term is applied to those rights which are cast upon a party by the law, without any act of his own; as, the right to an estate of one who dies intestate, is cast upon the heir at law, by operation of law; when a lessee for life enfeoffs him in reversion, or when the lessee and lessor join in a feoffment, or when a lessee for life or years accepts a new lease or demise from the lessor, there is a surrender of the first lease by operation of law.”

Law.com

“a change or transfer which occurs automatically due to existing laws and not an agreement or court order. Examples: a joint tenant obtains full title to real property when the other tenant dies; a spouse in a community property state will take title to all community property if the the spouse dies without a will that leaves some of the dead mates interest in the community property to another; or a guardianship of a minor ad litem (for purposes of a lawsuit) ends automatically upon the child turning 18.”

(This is the reason that John, Vern and Interested Observer put so much emphasis on the automatic character of the transfer. It appears to me that the concept has been stretched to include some situations that don’t appear to be all that automatic to a layman. For instance, a transfer to a third party can’t be entirely automatic if there is more than one third party to choose from.)

Res judicata – “A rule of civil law that once a matter has been litigated and final judgment has been rendered by the trial court, the matter cannot be relitigated by the parties in the same court, or any other trial court. A court will use res judicata to deny reconsideration of a matter [even if the decision was made incorrectly].“

(Hence, the only relevant phrase in the Carolina Parachute Appeals Court decision was the following: “WE NEED NOT DECIDE whether the Anti-Assignment Act prevents Carolina Parachute from assuming these government contracts because ...”)

Bernstein's Dictionary of Bankruptcy Terminology
“Executory contracts are contracts where obligations are yet to be performed by both parties. The bankruptcy code gives special treatment to unexpired leases and executory contracts by allowing the debtor, in many cases, to choose whether it wants to continue with the agreement (assume) or terminate the agreement (reject).”

“A contract to sell goods where the goods have not yet been delivered is an executory contract. A contract for the sale of goods where the goods have been delivered and the receiving party has yet to pay, is not an executory contract. Most leases of personal property or real estate are executory contracts. A collective bargaining agreement is an executory contract and is given special treatment.”

Merriam-Webster's Dictionary of Law
.
“: designed or of such a nature as to be performed in the future or to take effect on a future contingency
Example: cancellation of the executory portion of the contract -- J. J. White and R. S. Summers
(compare contingent)”

The following should convey a sense of what was going on in Carolina Parachute. It should also demonstrate that Carolina Parachute (and In re West) is still “good law.”

In re: American Ship Building Company, Inc., United States Bankruptcy Court for the Middle District of Florida, Tampa Division, No. 93-11552-8B1, February 22, 1994 164 BR 358

“The gravamen of the Navy’s motion for summary judgment regarding the Debtor’s ability to assume the contract is related to the limitation set forth in Section 365(c)(1)(A). 2 This Code provision limits the trustee or the debtor-in-possession’s ability to assume or assign the executory contract if “applicable law” would excuse the Navy from accepting the performance of a party, other than the Debtor-in-possession, on the contract without the consent of the Navy. According to the Navy, the juxtaposition of Section 365(c)(1)(A) and the Non Assignment Act, 41 U.S.C. §15, bars the Debtor as a debtor-in-possession from assuming its own contract under the hypothetical test set forth in the Third Circuit’s opinion in In re West Elecs., Inc., 852 F.2d 79 (3d Cir. 1988).”

“In other words, under bankruptcy law the debtor-in-possession, as a post-petition entity, is an entirely different party than the pre-petition debtor which entered into the Tagos contract with the Navy. The debtor-in-possession thereby becomes a hypothetical third party who cannot assume the contract which it entered into pre-petition because Section 365(c)(1)(A) would preclude that assumption without the Navy’s consent. Of course, the Navy does not grant its consent. 3”

Eric

By John Ford on Thursday, June 06, 2002 - 09:44 pm:

Eric, you have seriously misstated and mischaracterized what I said earlier. I did not say that most ACOs in DCMA would do nothing when faced with the situation Denise posed. I said most of them know when a novation is required. Next, I did not recommend that she do nothing. Rather, I suggested she might want to consider that instead of embarking on a course of conduct that might wind up being a big waste of time. Most of the novations that I have been involved with are lengthy and costly. Many take several years to accomplish. Thus, if a contract has only a short time to run before it is complete, it makes a great deal of common sense merely to let it run as the novation process likely would not be completed before the contract is complete.

Another point, in Denise's case, her contractor had been purchased by another company. Thus, her case does not raise the issue of whether a transfer to a debtor in possession or a trustee constitutes a transfer by operation of law. Further, we know nothing of the nature of that purchase and what happened to the contractor after it was purchased. If the purchase was a stock purchase, no novation would be required, even under the language of the FAR. Further, if the purchase was a stock transfer and the purchaser then merged the contractor into the purchaser, under the Omega rationale, no novation would be required. We simply don't have these facts or a lot of other facts that would be germane to making a definitive judgment as to whether a novation was required. That is why I said she may not need a novation after you, in an admitted haste, made a misstatement by telling her unequivocably that she needed a novation. She may or may not need one. We simply don't know because we don't have all the facts.

By Anonymous on Saturday, June 08, 2002 - 01:13 am:

Bankrupcy is apparently the most problematic among the operation of law examples. This seems to be due to language within the bankrupcy law itself. West Electronics seems to be an oddity and in (Textualism's Failures: A Study of Overruled Bankruptcy Decisions by Daniel J. Bussel) he comments "For a while it looked as though West Electronics would wither and die in the face of strongly critical cases from several bankruptcy courts and the First Circuit rejecting its holding and finding that the true meaning (if not the literal language) of the 1984 and 1986 Amendments was to clarify that in a Chapter 11 case the debtor-inpossession (but not a trustee or assignee) could assume the debtor's personal service and other non-assignable contracts."

This appears to be due ambiguity in the bankrupcy law. The Department of Justice recommended clarification (See National Bankrupcy Review Commission, Appendix F-2, Report of the United States Department of Justice Bankruptcy Working Group of September 1996; "C. Clarify the Applicable Non-Bankruptcy Limitations on a Debtor's Ability to Assume a Government Contract"). I saw no clear indication in the main report that Justice's position is supported. I've still not traced this issue into the most recent changes in bankrupcy law and time constraints may prohibit doing so.

It seems to me that this changes little for contracting officers who cannot presume to overcome lawful processes underway in court. The advice against getting involved when the elephants wrestle is probably sound. What may become critical in bankrupcy will be the agency's involvement in the bankrupcy process as an interested party. I can certainly see the agency's possible objection to continuing with a debtor in possession or anyone else with the confused remains of a company in such trouble. Those arguments should might be more appropriately made during the process rather than trying to doing something that could be considered counter to or just meddling in a court's jurisdiction.

By Eric Ottinger on Saturday, June 08, 2002 - 09:59 am:

Anonymous,

Many thanks for adding what appearss to be some real expertise to the discussion.

I don't really care whether In re West is going to hold up over time, or not. It is sufficient that I haven't misread it.

Everything that you say sounds reasonable. However, I don’t think anyone is advocating that we should interfere with a court’s jurisdiction.

On the other hand, as you indicate, if the government has serious problems with a potential successor in interest, I am sure the court would want to know and take the government’s concerns into consideration. For instance, if the court assigns the contract to a contractor that doesn’t have an adequate accounting system or an adequate quality control system, it is unlikely that the government would award any new contracts after the current contracts are complete. Everybody would lose in this scenario.

The FAR requires that we should negotiate either a novation agreement or some other formal agreement to protect the government’s interest.

Among the issues addressed in the FAR and the DCMA one book are 1) protecting the government’s rights regarding inventories, if there are progress payments, 2) limiting the amount or potential costs that might be allocated to the government contract, particularly reorganization costs, and 3) addressing potential conflict of interest issues.

Transfer by operation of law might make it more difficult to negotiate such an agreement. It doesn’t really change the imperative to protect the government’s interests.

Denise shouldn’t decide to do nothing until she has talked the matter over with her counsel and her supervisor.

I suspect that if they chose to do nothing it will be for purely pragmatic reasons. It doesn’t make much sense to start a six month novation process if the contract will be physically complete in two weeks. Further, the customer needs the product. Termination or starting over is rarely an attractive option.

Since you actually seem to have some expertise, allow me to ask a couple of questions.

The dictionary definition suggests that “operation of law” is strictly something that happens automatically without anyone, including the court, exercising discretion. An assignment to a third party would seem to involve some element of choice unless there is only one possible third party. Does the dictionary definition of “operation of law” get stretched to include selection of a third party?

Some of the case law seems to indicate that the operation of law precedents for the anti-assignment acts are limited to situations where the initial contractor ceases to exist as an entity. Is this correct.? (That would answer my first question.)

Again, Many Thanks,

Eric

By Vern Edwards on Saturday, June 08, 2002 - 11:20 am:

Eric:

Ah, but you have misread West! The holding in West is that 11 U.S.C. § 365(c)(1) prohibits transfer of an executory contract to a debtor in possession by operation of law. It says nothing about the need for a novation agreement once transfer has, in fact, been effectuated by operation of law.

As to your question for me: "[A]m 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.'[?]"

My answer is: No, you are not correct. West did not say that such a transfer is not a transfer by operation of law; West said that bankruptcy law did not permit such a transfer by operation of law in that case. Since we have been talking about the applicability of FAR § 42.1204 when transfer has been made by operation of law, West is inapposite, which you don't understand because you keep misreading it.

You are also misreading the Carolina Parachute cases. You don't seem to understand that the 4th Circuit distinguished Carolina Parachute from West, as you will see if you read it again (carefully, this time) or if you Shepardize West.

Anonymous of June 8's comments do not help you, which you also don't seem to understand. You apparently missed these two sentences: "It seems to me that this changes little for contracting officers who cannot presume to overcome lawful processes underway in court. The advice against getting involved when the elephants wrestle is probably sound."

Now, kindly apologize to John for mis-stating and mischaracterizing his remarks.

By anonymous6-8 on Saturday, June 08, 2002 - 12:15 pm:

Eric, I can't say I have any particular expertise here. I'm certainly not a lawyer. I have been following the discussion and have had the time to look at a number of the decisions. I also have a personal opinion based on that alone and some general experience. That is all.

Based on that, for what it is worth, I cannot say that I agree with you on this. For example, you gave a number of dictionary definitions. Yeah, they are fine. In real life the legal definition is what the courts say it is, not some dictionary. On this subject the record seems clear to me that they are honoring those dictionary definitions without being constrained to them. In particular I disagree if you are implying that somehow an operation of law in terms of the Supreme Court case and the topic here when a court exercises its discretion. Let me put it this way. Woe to any contracting officer or agency deciding to put itself into the path of a court order on the basis of the FAR. It is a good way to get into a figurative meat grinder.

Some of the cases mention the instance of the original contractor ceasing to exist. This is particularly true of the mergers and such. I think you would be reading too much into that to form any general rule that an original corporate entity must cease to exist. Court assignment to debtor in possession seems clearly an option.

The business about West seems to be one where two appeals courts have muddied waters considered clear elsewhere. That is perhaps ripening for Supreme Court clarity. It appears Justice, probably lining up behind agencies and contracting, is trying to clarify in a way that would bring into play the assignment prohibition for bankruptcy. Note bankruptcy. This is the area where the bankruptcy law itself allows for the other acts to enter. I found it interesting that Justice's recommendation was not clearly followed in the report and possibly even countered to some extent. This assignment business is government unique and a recognized hazard. It is not an issue in most commercial contracts and apparently scares business. I would expect the business lobby to be strongly against having an additional special Federal exception to normal legal process.

That does not appear to be the case for the other types. For example, a state's inheritance law will trump any contracting office's opinion or action in its operation. If Jane Doe inherits John's company you can like it or not, but not recognizing that legal transfer it is not an option. The Supreme Court is unlikely to intrude on the state's prerogatives here or in other such instances. Merger and incorporation are two other specific examples of this.

While I think it would be wise for an agency holding contracts to be aware of what is going on legally with its contractors and perhaps file briefs in legal actions to present its concerns I have no doubt the FAR novation issue is pretty much dead in these cases. Right or wrong, the issue is obviously a legal action outside the scope of contracting agencies wishes and in the court's hands. Some sort of court order has been issued. The others are correct in my opinion. The court has already done the "novation" here and you are left with one of two alternatives. Are you going to defy that? Are you going to start setting conditions to accept a "new" contractor when the court says this is the holder of the contract? If so, be prepared for some serious burns as courts tend to take badly such interference. I think your alternatives are these:

1. Do as GPO does. File the court order recognizing the contract holder, then deal with your issues with them being the contractor as if they were the original contractor. You are not "novating." You are dealing normally with a contract that has soured. I agree that you might have potential court involvement if you appear to be trying to find reasons to undo what the court has done. It is likely the new holder will be sensitive on the subject and run to the court for help. For that reason any immediate action probably must be termination for convenience. Any other probably had better be on clear terms of the court directed contractor's performance post court action. I'd have to check, but if I recall an issue in West was continuation of some action triggered before the court's assignment of the continuing contract.

2. File an appeal to the court's decision challenging its authority to act. That is an expensive, long running, and probably poor option. It tends to be lose-lose.

As I said earlier, when the elephants wrestle it is time for the little guys to stay clear. Contracting officers trying to meddle among these elephants by using FAR novation rules to either undo or tweak a court's action will probably do so at their peril. I do think a protection from unpleasant surprises is use wording in contracts to require immediate notification by the contractor of any legal action that could bring about such a situation. Then the contracting agency has a chance to influence the outcome rather than appearing to undo or modify a court's order.

By anonymous6-8 on Sunday, June 09, 2002 - 05:36 pm:

I went back to the discussion and scanned my previous post in picking up the conversation. I find that Vern answered as I was writing. I also found garbled words in my previous post (too much cut and paste!)

First, correcting my garbled text: "In particular I disagree if you are implying that somehow an operation of law, in terms of the Supreme Court case and the topic here, does not occur when a court exercises its discretion."

I cannot understand an apparent failure to recognize that operation of law is nothing more than the ordinary process of compliance with law that will include the involvement of the courts and discretion of the judges. I feel the term, "operation of law," is somehow being given talismanic properties here. It simply describes the normal process of applying laws to life. Operation of law is probate, bankruptcy, divorce, legal name change, adoption, incorporation, merger and all those other things taking place under law that result in a court order or other legal recognition of a status that, in this case, may influence contract or property rights.

I have to agree with Vern. You, and others, are apparently reading entirely too much into West and other exceptions. The Supreme Court seems to have ruled that the law dealing with assignment or assumption of federal contracts is subordinate to general law, explicitly including state law, dealing with orderly transference of interests. West deals with an interal bankruptcy code entry for the special case.

For an interesting discussion see Government Contracts Newsletter, "Financially Troubled Contractors and Their Creditors — Beware," Volume 3, Issue 3 (dealing with United States v. TechDyn Systems Corp., 235 B.R. 857 (Bankr. E.D.Va. 1999)), where it is noted [italics added]: "The bankruptcy court's decision flows from the interplay between the Bankruptcy Code and the Anti-Assignment Act." In particular note "The TechDyn court appeared to agree with the contractor's argument that the fundamental purposes of the bankruptcy code may be ill-served by its decision. Indeed, the court acknowledged that refusing to recognize the debtor-in-possession as the actual contractor would present problems for debtors whenever the debtor's business includes large unassignable contracts. And, as a practical matter, the benefits and protections of Chapter 11 would be foreclosed in such case. The court, however, would not take on a 'judicial rewrite' of the Bankruptcy Code to fix 'poor bankruptcy policy.'" A listing of the districts with differing views is given.

The Supreme Court's intent in the base case seems quite clear to me. While specific examples are plentiful, I suspect this can be taken as a statement of a general principle: We are not going to allow federal contracting law to be a unique source of mischief in all those other areas of law dealing with the orderly transfer of interests. There is one clear qualification. The courts will consider whether the legal process is being used to create the problems the anti-assignment statute is directed against.

In a number of cases the courts have precisely noted that nothing in the transfer according to another law's operation creates the mischief federal contracting law is aimed against; therefore, those federal contracting laws have no bearing on the case at hand. Those notes appear to be in cases where someone has tried to nullify the effect of an ordinary process under other law; i.e., operation of law; by calling attention to the special contracting law.

There is no other private or public exception of such scope concerning contracting rights of this specific type. Allowing another (remember termination for convenience is a huge exception already) such unique and broad power to federal contracting would create chaos in all those transfers mentioned above and others. Can you imagine the mischief if each legal action mentioned above had to examine itself in light of the peculiar federal contract situation that might apply? If each one completed, then had to await some contracting "bureaucrat" to act and then might find important settlements undone or modified? Chaos.

I'd also bet on less, rather than more, inclination in Congress and the courts ("poor bankruptcy policy" from a court supportive of applying the Anti-Assignment Act) to except federal contracts from operation of other law in the future. I would bet that this may well "ripen" into another Supreme Court or Congressional clarification toward the narrow application of the Anti-Assignment Act.

In any case this is a court matter, not one under the jurisdiction of FAR and contracting officers. Read "Financially Troubled Contractors and Their Creditors — Beware" and note the "Army filed a motion seeking relief from the automatic stay so that it could terminate for default and reprocure the contracts at issue" and "Instead, the government can obtain permission from the bankruptcy court to immediately terminate such contracts." The Army went to the court. It got this bankruptcy court's permission. The article ends with a discussion of where a contractor might file bankruptcy to obtain a differing outcome.

By Vern Edwards on Sunday, June 09, 2002 - 07:19 pm:

Before the discussion goes much further, let me point out that the issue under discussion is not bankruptcy law. The issue is whether a novation agreement is always necessary when a government contract is transferred from one party to another.

As John has pointed out, the Supreme Court, the Court of Federal Claims, and several boards of contract appeals have said that a novation agreement is not always a prerequisite to a transfer.

As to the meaning of "operation of law," there are many. Black's Law Dictionary defines it as follows:

"The means by which a right or a liability is created for a party regardless of the party's actual intent <because the court didn't rule on the motion for rehearing within 30 days, it was overruled by operation of law>."

That definition is much broader than the one quoted by Eric.

In Seaboard Air Line Railway v. United States, 256 U.S. 655, the Supreme Court said:

"We cannot believe that Congress intended to discourage, hinder or obstruct the orderly merger of consolidation of corporations as the various States might authorize for the public interest. There is no probability that the United States could suffer injury in respect to outstanding claims from such union of interests and certainly the result would not be more deleterious than would follow their passing to heirs, devisees, assignees in bankruptcy, or receivers, all of which changes of ownership have been declared to be without the ambit of the statute. The same principle which required the exceptions heretofore approved applies here."

Underlining added.

This case has been frequently cited by the Court of Federal Claims and its predecessors as standing for the principle that the Anti-Assignment Act does not apply to transfers by operation of law.

By Eric Ottinger on Monday, June 10, 2002 - 11:44 am:

Vern,

The issues are –

Should Denise make a determination regarding “operation of law” without first consulting her agency general counsel? I think not.

Should Denise go ahead and negotiate a formal agreement to protect the government’s interest? I believe the FAR requires that she should. It doesn’t matter whether the formal agreement is regarded as a novation agreement or something else.

Lastly we might ask whether we have enough legal expertise to make a determination that the FAR is flawed. I think the argument that you and John are making relies on several dubious assumptions.

For one thing, it is true that courts use generally the same approach with regard to both the Anti-Assignment Act and the Assignment of Claims Act. Does this mean that the courts will always reach the same result for an executory contract that it would for a claim? I think not. It is interesting that the article in CCH identifies the Supreme Court case as an Assignment of Claims Act, not an Anti-Assignment Act case.

I don’t agree that, “The issue is whether a novation agreement is always necessary when a government contract is transferred from one party to another.”

The FAR already acknowledges that a novation agreement is not required for a transfer by operation of law in the case 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.” Since you and John seem to regard this as a big issue, we are asking whether the FAR should acknowledge other transfers by operation of law.

Eric

By Vern Edwards on Monday, June 10, 2002 - 12:41 pm:

Eric:

Well, I certainly agree that Denise should consult her agency attorney. No one, including John, ever said that she shouldn't. So that is not the issue.

Should Denise negotiate some kind of agreement other than a novation agreement? Well, you think the FAR "requires" it. I do not. Such an agreement may be helpful to the parties -- heck, a voluntary novation agreement might be helpful --but I don't think that FAR "requires" such an agreement. How can FAR "require" it when the government cannot compel the contractor to sign it when a novation has already happened by operation of law? John and I have been talking about the necessity for novation agreements.

Is the FAR adequate in its discussion of novation agreements? I don't think so. It should provide better guidance about all of the things we have been talking about. My "dubious assumptions" are based on case law, which I have fully cited and discussed.

You say that you don't agree that the issue is whether or not a novation agreement is always necessary? Well, then I don't know what you have been talking about all this time. I have certainly been talking about that. I think that John has, as well. What a misunderstanding!

You now say:

"The FAR already acknowledges that a novation agreement is not required for a transfer by operation of law in the case 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.' Since you and John seem to regard this as a big issue, we are asking whether the FAR should acknowledge other transfers by operation of law."

I don't think that's an issue, that was the very point that John made at the outset of this discussion.

By anonymous6-8 on Tuesday, June 11, 2002 - 12:00 pm:

The argument is getting redundant. It is obvious we will disagree. Let those who think they can perhaps negotiate what a court has determined go ahead. Perhaps they will find a willing new contract holder ready to accommodate. I expect they will also find parties who, with the able assistance of judges, will explain to them the error of their assumption.

I think the case law is pretty clear with the regional exceptions already noted on the bankruptcy issue. To me the lesson here is to become involved early in any legal proceeding that will potentially have an effect on ownership. Do what is possible to require contractors to notify the agency of such proceedings. These troubles generally do not suddenly rise with no warning signs. Keep your intelligence channels open.

Now a final comment on this business. Go back to the original: "My contractor has filed chapter 11 and they have been purchased by another company as approved by the court. Where is the FAR does it talk about the sale of all or nearly all the assets of a contractor to a new corportation?"

It is evident there is too little in FAR on the subject. So what? "Purchased by another company as approved by the court" says to me that FAR is now irrelevant. The court has ruled, presumably taking into full account the relevant law. I see no remedy here except back through the court. To do otherwise puts Denise's agency in the potential position of being in defiance of the court that has jurisdiction in the matter.

By Eric Ottinger on Tuesday, June 11, 2002 - 01:50 pm:

Anonymous6-8,

Are you saying that bankruptcy courts routinely ignore 11 U.S.C 365(c)(1).

(c) “The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if – “
(1) (A) “applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and”
(B) “such party does not consent to such assumption or assignment; or …“

Eric

By Eric Ottinger on Tuesday, June 11, 2002 - 02:47 pm:

Vern,

In your 9 Jun post you cite Seaboard Air Line Railway v. United States, 256 U.S. 655, as follows:

”This case has been frequently cited by the Court of Federal Claims and its predecessors as standing for the principle that the Anti-Assignment Act does not apply to transfers by operation of law.”

Take a look at Carolina Parachute Corporation. United States of America, Department of Air Force v. Carolina Parachute Corporation., (Dec. 08, 1989)

“Debtor relies on Erwin v. United States, 97 U.S. 392, 24 L.Ed. 1065 (1878) and subsequent cases as standing for the proposition that an assignment by operation of law, including a transfer incident to a proceeding in bankruptcy, is an exception to the Anti-Assignment Act. Debtor’s reliance is misplaced. Erwin addresses the assignment of claims against the government, not the assignment of executory contracts as does the instant case.”

You seem to think that Erwin is an Anti-Assignment Act case. The District Court states that Erwin addresses only assignment of claims, not executory contracts. (Ditto my CCH.)

Do you know something that the District Court doesn’t know.

Eric

By Vern Edwards on Tuesday, June 11, 2002 - 03:32 pm:

Eric:

I understand Erwin and Carolina Parachute perfectly well. Please see my remarks of June 3 at 12:15 p.m.

By Eric Ottinger on Tuesday, June 11, 2002 - 04:13 pm:

Vern,

I note that I conflated Seaboard and Erwin in the previous post.

Until I can get a look at Seaboard, I will withdraw the question.

Eric

By Eric Ottinger on Tuesday, June 11, 2002 - 04:29 pm:

Vern,

In that case let me ask you the same question which I asked Anonymous6-8. If an assignment by a trustee must first pass the test in 11 U.S.C 365(c)(1), how can the assignment be automatic “by operation of law.”

To ask the question another way-- If 11 U.S.C 365(c)(1) bars the automatic transfer to the “virtual third party” (i.e. the debtor in possession), why do you think the rule would not be same for an actual third party?

Eric

By Vern Edwards on Wednesday, June 12, 2002 - 06:54 am:

Eric:

Why do you ask me this question? I already addressed it in my remarks of June 3 at 12:15 p.m. I addressed it again in my remarks of June 8 at 11:20 a.m.

By anonymous6-8 on Wednesday, June 12, 2002 - 12:38 pm:

No Eric, I do not contend the courts "routinely ignore" that section. Neither do I have statistics on cases to say anything on frequency of differences. What I do know is that your obtuse arguments fly in the face of evidence there is a difference in how courts interpret the section. If you had read and understood the article I cited above as well as mentions in previously cited case records you would recognize the issue hinges on the application the "hypothetical test" or the "actual test" and not courts "ignoring" the law.

Courts applying the hypothetical test say the government must give consent. Those applying the actual test "view the contractor and the newly minted debtor-in-possession as one in the same and not subject to the constraints of the Anti-Assignment Act (that is, the debtor-in-possession is actually the contractor and therefore no assignment has occurred)."

I'm afraid you remind me of a person standing on the sands of a bay with twenty foot tides arguing that "the tide is coming in" is not the equivalent to high water and you will continue walking further out. No, "coming in" and "rising" are completely separate concepts generally. Applied to the extremely long wave form that is the tide their special meaning is that if you stand there arguing too long you will be in deep, deep trouble.

If, as a presumed employee of the Executive Branch, you decide you don't like a court ruling that your former contractor as "debtor-in-possession is actually the contractor and therefore no assignment has occurred" what are you going to do? Perhaps you'd like to tell the judge he is ignoring the law and you will not recognize the ruling. Sounds to me as if you might as well stroll in that empty bay ignoring warnings. What you can do is appeal. From my reading the appeals results are also mixed.

I don't think I can help any more with your "understanding" difficulty. There is no simple clarity. What is clear is that once in the courts contracting officers and agency do not have latitude to do much except go to the court for clarification to their relief. They need to recognize it may be clarification to their dismay. If you are really interested I suggest you do some serious reading of the actual state of affairs. Some good web searching will give some results. A legal library should give more. Perhaps you could take a couple of bankruptcy lawyers to lunch for a roundtable discussion. I have other things to do now.

By Vern Edwards on Wednesday, June 12, 2002 - 12:48 pm:

To All Readers:

For a law professor's comprehensive overview of novation in government contracting, see "Novation," by John Cibinic, Jr., in The Nash & Cibinic Report, September 1990, 9 N&CR ¶ 56.

Prof. Cibinic reviews government and private law concepts of novation, assignment and delegation; discusses the novation statutes; and reviews the case law concerning the application of 41 U.S.C. § 15 to transfers by operation of law.

Among other things, Prof. Cibinic criticizes the ASBCA's Mancon decision as improperly limiting the operation of law exception to involuntary transfers. He thinks that it applies to many voluntary transfers, as well, and believes that the distinction between voluntary and involuntary transfers is incorrect.

In his concluding remarks, Prof. Cibinic says, "Although Government consent is not necessary for assignments by operation of law, novation agreements can facilitate the administration of the contract following transfer, particularly the payment of invoices to the acquiring entity." He also says, "If the Goverment refuses to negotiate the terms in an operation of law transaction, the contractor should consider foregoing the novation agreement. If the Government refuses to make payments absent a novation, the contractor can recover by bringing suit for payment. Thus, whether the administrative convenience of the agreement outweighs the potential cost consequences must be determined on a case by case basis."

By Eric Ottinger on Wednesday, June 12, 2002 - 01:06 pm:

Vern,

Until I can get to the library, it appears that Professor Cibinic feels that the government should at least attempt to negotiate a novation agreement.

The contractor may refuse and bring suit to obtain payment.

Anonymous6-8,

I am not concerned about the virtual third party (i.e. the debtor in possession). Denise indicated purchase by an actual third party. Different courts reach different results regarding the debtor in possession. I don't see any disagreement regarding an actual third party.

Eric

By Vern Edwards on Wednesday, June 12, 2002 - 04:02 pm:

Eric:

I can't put words in Prof. Cibinic's mouth. He did not say that he feels the government should attempt to negotiate a novation agreement. He said: "Although Government assent is not necessary for assignments by operation of law, novation agreements can facilitate the administration of the contract following a transfer."

That's true enough, but what should such novation agreements say? FAR prescribes a tri-partite novation agreement that requires that the old contractor to guarantee the new contractor's performance. Why would the old contractor do that if the transfer has already been effected by operation of law? Indeed, why would the old contractor sign anything? If the government is willing to forgo that commitment by the old contractor, then it may be possible to negotiate a "novation agreement" with the new contractor. But such an agreement wouldn't be a "novation" in any meaningful sense of the word.

In my opinion, once an assignment by operation of law has taken place the government should acknowledge the transfer in writing, unless it intends to terminate the contract. Would such an acknowledgement be a "novation agreement"?

By Vern Edwards on Monday, June 17, 2002 - 10:20 am:

For another good article on novation agreements, see: "Novation Agreements in Corporate Restructuring: The Government's Contractual Stealth Weapon," by Karen L. Manos, in the Public Contract Law Journal, Vol. 26, No. 3, Spring 1997.

The author, an attorney, says:

"Contrary to the implication in the FAR, if the assignment of a government contract is not proscribed by the Anti-Assignment Act, either because it falls within a judicially created exception or because the Government is deemed to have impliedly recognized the successor corporation, a novation agreement is not required. As the ASBCA made clear in Biomass One Operating Co. & Supersystems, Inc., there is no contractual requirement to execute a novation agreement, and the failure to execute one cannot be the basis for a default termination."

The citation for Biomass is ASBCA No. 41972, 94-3 BCA ¶ 27,051.

The author's conclusion includes the following comments:

"Given that a novation agreement is not even required in many instances of corporate restructuring, contractors should carefully weigh the benefits and risks before deciding to enter into a novation agreement."

By Eric Ottinger on Monday, June 17, 2002 - 10:01 pm:

I’m sure Vern did not intend to quote Ms. Manos out of context.

This section starts out, “As currently drafted, the FAR incorrectly implies that a novation agreement is always required in order to transfer a government contract. 27

Footnote 27 reads as follows, “As noted above, the proposed change to FAR 42.1204 would exempt the novation requirements transfers pursuant to a stock purchase. See 61 Fed. Reg. At 43,295.”

This refers to FAR Case 95-034 which was initiated at the request of the American Bar Association.

In short, Ms. Manos took exception with the FAR as it stood in 1997 and noted that the FAR was in the process of being revised.

Earlier Ms. Manos comments, “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.” The reader will note how closely this tracks to the current FAR 42.1204(b).

Beyond that, I would agree that “the Government is deemed to have impliedly recognized a successor corporation” is a valid exception to the Anti-Assignment Act (and much less problematical than “operation of law”), but I have no idea how the FAR could or should be written to recognize forbearance as an approved procedure under the FAR (i.e. “Act as though you don’t even notice and after a while your will have to accept the transfer.”).

Eric

By anonymous6-8 on Monday, June 17, 2002 - 11:14 pm:

Eric, just what is it that you do not understand about "Contrary to the implication in the FAR, if the assignment of a government contract is not proscribed by the Anti-Assignment Act, either because it falls within a judicially created exception or because the Government is deemed to have impliedly recognized the successor corporation, a novation agreement is not required. As the ASBCA made clear in Biomass One Operating Co. & Supersystems, Inc., there is no contractual requirement to execute a novation agreement, and the failure to execute one cannot be the basis for a default termination."? The case law cited previously demonstrates a number of judicially created exceptions. "A judicially created exception" is pretty open and does not rely on your -- or anyone else's -- definition of "operation of law."

I've amused my curiosity with more research and there is one option in the legal discourse: go and ask the court to modify its ruling. Base your request on your interpretation, but freelance here at your peril. That appears to apply whether the court has really stretched things or not. The ball is clearly in the court's court, not that of agency contracting officials.

I sure would like to be a fly on the wall when you defy, by trying to force a novation upon a contractor the court has designated the contractor, a judge who has just ordered such a judicial exception outside your peculiar definitions. Better hope for a mild mannered one. Then, from the record here, you'd probably be making more arguments as you are taken off to serve some contempt time.

In my reading there is one and only one safe course when faced with a legal ruling, even a questionable one, that the contract resides with a given entity. File and recognize the ruling or present the court with your reasoning why other law may apply and request the court recognize that with a modified ruling.

By Vern Edwards on Tuesday, June 18, 2002 - 07:26 am:

Eric:

The FAR change mentioned in the footnote you cite is not pertinent to the quote that I provided from Ms Manos's article. The implication Ms Manos referred to in the passage I quoted was in FAR 42.1203(a), which Ms Manos quotes as saying: "'[w]hen a firm performing a Government contract wishes the Government to recognize (1) a successor in interest to those contracts or (2) a name change, the contractor shall submit a written request to the responsible contracting officer.'" Italics in original. At present, FAR 42.1203(a) says: "If a contractor wishes the Government to recognize a successor in interest to its contracts or a name change, the contractor must submit a written request to the responsible contracting officer." That change is not substantive. It's true, however, that FAR 42.1204(b) now acknowledges that novation agreements are not always necessary. But that was true anyway, whether FAR said so or not.

You have just said: "I would agree that 'the Government is deemed to have impliedly recognized a successor corporation' is a valid exception to the Anti-Assignment Act (and much less problematical than 'operation of law')...." But Ms Manos said: "either because it falls within a judicially created exception or because the Government is deemed to have impliedly recognized the successor corporation." Do you disagree with her about the "judicially created" exception? She said that the judicially created exceptions are "well settled." Are you still disputing that?

Also, I'm surprised that you think implied recognition is less problematical than operation of law. Operation of law (the "well settled" "judicially created" exception) is much more straightforward to me and is something that we have numerous cases about and that a lawyer can readily understand. An assertion of implied recognition, like an assertion of a constructive change, seems much more likely to be disputed by the parties.

In any event, Ms Manos's article is well worth reading, since it explains that novation agreements are not necessary when a contract has been transferred by operation of law and why contractors should be cautious about signing novation agreements.

By Eric Ottinger on Tuesday, June 18, 2002 - 09:27 pm:

Anonymous6-8,

What is there about “The trustee may not assume or assign any executory contract“ that you don’t understand. You quote snippets and buttress your argument with your personal opinions.

I actually read the cases, carefully.

Let’s go back to Carolina Parachute.

In re Carolina Parachute Corporation. United States of America, Department of Air Force v. Carolina Parachute Corporation., United States District Court, Middle District of North Carolina, Nos. B-87-00203 C-11, C-89-117-G, December 8, 1989

“Debtor relies on Erwin v. United States, 97 U.S. 392, 24 L.Ed. 1065 (1878) and subsequent cases as standing for the proposition that an assignment by operation of law, including a transfer incident to a proceeding in bankruptcy, is an exception to the Anti-Assignment Act. Debtor’s reliance is misplaced. Erwin addresses the assignment of claims against the government, not the assignment of executory contracts as does the instant case.”

Vern and several others have cited various Supreme Court cases as authority for the proposition that there are several judicial exceptions to the Anti-Assignment Act. The District Court got it right. All of these cases involve claims and the Act cited is the Assignment of Claims Act NOT the Anti-Assignment Act.

http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=256&invol=655

http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=268&invol=271

Hence-- “Cases subsequent to Erwin are inapposite because they apply and construe 31 U.S.C. §203, the Assignment of Claims Act, instead of 41 U.S.C. §15, which is at issue in this case.”

On the other hand, it should be noted that the courts apply similar legal concepts to both acts.

Tuftco Corporation v. The United States., In the United States Court of Claims. No. 415-78, Decided January 23, 1980 614 F2d 740

“The conceptual difference between the statutes is that 31 U. S. C. §203 pertains to claims for work already done while 41 U. S. C. §15, involving exectuory contracts, is more concerned with continuing obligations. Furthermore, 41 U. S. C. §15 expressly provides that an attempted assignment “shall cause annulment of the contract or order transferred”; 31 U. S. C. §203, in contrast, states that an attempted assignment of a claim shall be “absolutely null and void.” In light of this distinction the court in Colonial Navigation v. United States, 149 Ct. Cl. 242, 181 F. Supp. 237, (1960) held that an attempt to assign a claim whose assignment is prohibited by 31 U. S. C. §203 does not forfeit the claim.”

“The present case, of course, deals with 41 U. S. C. §15. Some of the cases cited in the discussion, infra, of assignment principles, arose under 31 U. S. C. §203. In general terms, however, the concerns of the two statutes and the legal concepts involved in their applicability are the same.”

In fairness to Vern et. al., the reason that Vern keeps confusing the Assignment of Claims Act with the Anti-Assignment Act is because the courts and boards tend to lump the two acts.

Vern made an effort to discredit the Carolina Parachute District Court opinion. Lets see what a bankruptcy court had to say in 1994.

In re: Plum Run Service Corp., United States Bankruptcy Court, Southern District of Ohio, Eastern Division, No. 93-50131, September 30, 1993 30 FedCl 115

“5The District Court decision in Carolina Parachute was affirmed in part and vacated in part inasmuch as the bankruptcy court order confirming the contractor’s plan of reorganization was res judicata as to the government, which did not object to the proposed plan. Department of Air Force v. Carolina Parachute, 907 F.2d 1469 (4th Cir. 1990). However, the reasoning of the District Court with respect to the Anti-Assignment Act is sound.”

This is not rocket science folks. The bankruptcy code says that (1) if there is a law which gives the customer a right to refuse a transfer, (2) the trustee cannot assign the contract to a third party (virtual or otherwise) without the consent of the customer.

11 U.S.C 365(c)(1)

“(c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if—“

“(1)(A) applicable law [i.e. the Anti-Assignment Act] excuses a party [i.e. the Government], other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession whether or not such contract, or lease, prohibits or restricts assignment of rights or delegation of duties; and”

“(B) Such party [i.e. the Government] does not consent to such assumption or assignment.”

Denise inquired regarding a transfer to an actual third party not to a hypothetical third party.

I can quote three bankruptcy courts on that topic. One of them agrees with In re West regarding the “debtor in possession (AKA “the virtual third party”) and two of them disagree. They all agree that 365(c)(1) and the Anti-Assignment Act would bar the automatic transfer of a government contract to an actual third party.

In re: Plum Run Service Corp., United States Bankruptcy Court, Southern District of Ohio, Eastern Division, No. 93-50131, September 30, 1993 30 FedCl 115

“As noted by the Third Circuit in Matter of West Electronics, Inc., 852 F.2d 79, 83 (3rd Cir. 1988), §365(c)(1) creates a hypothetical test: Under applicable law, could the government refuse performance from an entity other than the debtor or the debtor-in-possession? RELEVANT INQUIRY IS not whether 41 U.S.C. §15 precludes an assignment from the prepetition debtor to the debtor-in-possession, but WHETHER IT WOULD FORECLOSE AN ASSIGNMENT FROM THE PREPETITION DEBTOR TO ANY OTHER CONTRACTOR. West Electronics, 852 F.2d at 83. This reasoning was accepted by the Court in In re Carolina Parachute Corp., 108 B.R. 100 (M.D. N.C. 1989) which noted that both the performance of the debtor as well as the debtor’s financial status are irrelevant inasmuch as the plain language of 41 U.S.C. §15 precludes assumption of a government contract by a debtor-in-possession. 5 “

“5The District Court decision in Carolina Parachute was affirmed in part and vacated in part inasmuch as the bankruptcy court order confirming the contractor’s plan of reorganization was res judicata as to the government, which did not object to the proposed plan. Department of Air Force v. Carolina Parachute, 907 F.2d 1469 (4th Cir. 1990). However, the reasoning of the District Court with respect to the Anti-Assignment Act is sound.”

In re: American Ship Building Company, Inc., United States Bankruptcy Court for the Middle District of Florida, Tampa Division, No. 93-11552-8B1, February 22, 1994 164 BR 358

“If the Navy was correct in its position, every party entering into a lease or executory contract that subsequently files bankruptcy would be precluded from assuming its own contract under Section 365(c)(1)(A) because bankruptcy created a third party in the form of a debtor-in-possession as distinguished from the original contracting party. It must be recognized the Code’s requirements of having the Debtor assume its own contract is unique in bankruptcy. Part of the uniqueness is the executory contract is property of the estate and is not relinquished because of some hypothetical scenario that makes the debtor-in-possession some other being than the original party to the contract. THE CLEAR READING OF SECTION 365(C)(1)(A) IN CONJUNCTION WITH ANY APPLICABLE LAW, INCLUDING THE NON-ASSIGNMENT ACT, IS TO PREVENT THE DEBTOR FROM ASSIGNING THE TAGOS CONTRACT TO ANOTHER THIRD PARTY SHIPWRIGHT WITHOUT THE NAVY’S APPROVAL. This latter act is not the intent of the Debtor.”

“Bankruptcy Judge Clark of the Western District of Texas articulated the predominant reason why the West Elecs., Inc. test should be rejected:”

“’Section 365(c)(1) is, by its nature, an interactive statute since it requires that we look at applicable nonbankruptcy law. By including the phrase “debtor in possession,” CONGRESS ASSURES THAT ALL ANTI-ASSIGNMENT LAWS ARE GIVEN ESSENTIALLY THE SAME EFFECT IN BANKRUPTCY, I.E., PREVENTING THE ESTATE FROM “RUNNING IN A STRANGER” ON THE NONDEBTOR PARTY WITHOUT ITS CONSENT. By the same token, the additional reference to “an entity other than ... the debtor in possession” makes clear that the debtor in possession should not itself be barred from taking over the duties of the debtor under the contract because of a mere technical change in legal identity that makes the debtor in possession a “legal entity” other than the debtor.’”

“’In this way, the statute also achieves a balancing of interests. ON THE ONE HAND, LEGITIMATE ANTI-ASSIGNMENT LAWS WHICH ARE DESIGNED TO PROTECT THE NONDEBTOR TO THE CONTRACT ARE PRESERVED. On the other hand, legislatures are effectively barred from using the statute to pass laws designed to insulate their constituencies from ever having to do business with debtors in bankruptcy. In this way, the Bankruptcy Code achieves the balancing of interests so essential to the successful uniform application of bankruptcy laws nationwide to a wide variety of business enterprises.’”

(In the interest of total objectivity, let me note that there is one judge who believes that the prohibition in 365(c)(1)(A) only applies to personal services contracts. He may be right. But he seems to be outvoted. “Judge Kahn acknowledges the considerable authority to the contrary.” And you can’t get to that result reading the plain language in the law. See In re: Ontario Locomotive & Industrial Railway Supplies (U.S.) Inc., United States Bankruptcy Court, W.D. New York, No. BK 89-10759C, April 2, 1991 126 BR 146.)

See also this ASBCA case as summarized in the CCH.

Antenna Products Corporation, ASBCA No. July 21, 1988, July 21, 1988, Contract No. . 88-3 BCA

“Payments--Assignment of Claims--Reorganization in Bankruptcy. A bankrupt contractor had standing to litigate a claim for an equitable adustment for changes and delay damages because the transfer of title of a claim against the government to an assignee in bankruptcy was not barred by the anti-assignment statutes. The government asserted that since an anti-assignment statute precludes transfer of a public contract to an assignee, the trustee had no right under the Bankruptcy Code to assume the contract for performance or completion by an assignee. However, the assignee debtor sought to assume the contract not for the purpose of perserving a right to perform the executory contract but rather to prosecute his claim. The transfer of title to a claim against the government to a trustee or assignee in a bankruptcy proceeding was not the type of transfer or assignment barred by the anti-assignment statutes. Since assumption of claims by the contractor as debtor was not proscribed by the anti-assignment statute, that statute was not applicable law that would bar assumption of the contract by the reorganized debtor for the purpose of prosecuting claims against the government. Accordingly, the contractor as debtor had privity of contract with the government, and, therefore, standing to litigate the appeal under the Contract Disputes Act.”

In short, unless you are suggesting that bankruptcy courts are routinely making assignments in defiance of the most generally accepted reading of the bankruptcy code, there is no need to “defy” a court or “force” a novation on the contractor.

In any case, as Ms. Manos makes abundantly clear, the novation process is used to protect the government’s interest. Ms. Manos indicates that the standard novation agreement may sometimes result in an inequitable “Heads I Win/Tails You Lose” result. However, Ms. Manos does not question that, “In consenting to the transfer of its contracts, the Government undeniably has a legitimate interest in ensuring that it is not harmed as a result of the transfer.”

Denise would be highly unprofessional if she does not do everything that she can to protect the government’s interest.

Eric

By Anonymous on Wednesday, June 19, 2002 - 04:58 pm:

Eric, I have read both parts of this thread thru a couple of times and I think that its you who is confused. Seriously. Everything has been explained clearly more than once and cases and articles have been provided that explain it as well. Whats up? What are you trying to prove? I cant figure out what your point is anymore.

By Eric Ottinger on Wednesday, June 19, 2002 - 05:35 pm:

Anon,

Do me a simple favor.

Read 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.

Then, let's discuss.

If the only thing that you are reading is this thread, I am really not concerned about your opinion.

Eric

By Eric Ottinger on Thursday, June 20, 2002 - 06:16 pm:

All,

Let’s see how “confused” I have been over the course of this thread.

On May 10, I quoted Tuftco. “I think the Court of Claims puts it nicely, “…a novation agreement between all three parties is the soundest method of establishing recognition by the government, …”

Let’s see what Ms. Manos has to say, “A novation agreement can nevertheless offer certain advantages, EVEN WHEN NOT ACTUALLY REQUIRED. A novation agreement may preclude later disputes concerning the standing of the successor corporation. It may also ease the administration of ongoing contracts by ensuring that government Contracting Officers and disbursing officials deal only with, and make payments only to, the new corporate entity.”

(Emphasis added)

In Tuftco the Court of Claims cites ITT Gilfillan in a footnote as authority for the proposition that a novation agreement is a good thing (at least for the government) even if the transfer occurs “by operation of law” and the novation is not, strictly speaking, required.

Per Ms. Manos, “In ITT Gilfillan, Inc. v. United States the Claims Court found a novation agreement and its limitation on post-transfer costs enforceable, even though Government consent to the transfer—and thus the novation agreement—were unnecessary, because the transfer occurred by operation of law.”

This is Vern on June 6. “In the event of a transfer by operation of law, the contracting officer may have to acknowledge the transfer for administrative purposes, but a novation agreement is not required, because government agreement is not necessary -- the novation has already happened, whether the government likes it or not.”

What about this “limitation of post-transfer cost.” Does Vern really think that cost limitations are not necessary. It appears that Vern is arguing that if Denise had been the PCO for ITT Gilfillan, she should not have done that novation agreement.

Now, from the point of view of ITT, this would have been a real revenue enhancing windfall. ITT would have been allowed to apply a significantly higher G&A. On the other hand, what do you think is going to happen to Denise’ professional reputation if she ignores the direction in the FAR to negotiate a novation, or at least a formal agreement, and the cost of her contract increases significantly after the transfer.

(Mea Culpa. I should have introduced ITT Gilfillan much earlier in this thread. The thread would have been shorter and more productive. I kept it in reserve for the same reason that I save dessert for last.)

Eric

By John Ford on Thursday, June 20, 2002 - 06:50 pm:

Eric, ITT Gilfillin is a good example of why contractors will be reluctant to negotiate novation agreements when the contractor has become a contractor by operation of law. As you pointed out in your quote, the novation was unnecessary under the statute.
Also, in Denise's situation, it may be that the acquiring company may be entitled to restructuring costs which would enable it to bump up the price/cost of the contracts that were novated by operation of law.
Finally, if the transferor company no longer exists, but has been subsummed by the transferee, who is the contractor for you to terminate for default?

By Eric Ottinger on Thursday, June 20, 2002 - 10:15 pm:

John,

I hear you.

Now tell me why the taxpayers should ever pay more than what was agreed for the original contract.

Eric

By Vern Edwards on Thursday, June 20, 2002 - 11:30 pm:

ITT Gilfillan has no bearing on the issue of whether or not a novation agreement is required when a contract has been transferred by operation of law.

In ITT Gilfillan the parties signed a novation agreement, which the new contractor tried to get out of when the government interpreted it as making certain costs unallowable. The contractor argued that the contract had been transfered by operation of law and thus a novation agreement had not been necessary. It argued that since the agreement had not been necessary it lacked consideration and the court should thus declare it void. The court held that whether the agreement had been necessary or not it was supported by valid consideration in the form of the government's agreement not to challenge the validity of the transfer.

The court did not decide whether or not a transfer had, in fact, been effected by operation of law, and did not address the question of whether or not a novation agreement is necessary when a transfer has been effected by operation of law. (Probably because there is no question in that regard.)

Here's where I stand in this discussion:

1. When a contract has been transferred from the original contractor to a new firm by operation of law, government assent via novation agreement is not required, no matter what the FAR says or seems to say.

2. When a contract has been transfered by operation of law, the usefulness of a voluntary novation agreement to either party will depend on the terms of the proposed agreement.

3. When a contract has been transfered by operation of law, the government cannot force either the old contractor or the new contractor to sign a novation agreement, including the model agreement that appears in FAR § 42.1204(i), and the refusal by either or both of them to sign a novation agreement would not be a valid reason to terminate the contract for default.

4. When a contract has been transferred by operation of law and the government does not like the idea it can terminate the contract for convenience, but the new contractor will be entitled to a termination settlement.

5. The FAR discussion of novation agreements does not adequately reflect the decisions of the boards of contract appeals, the U.S. Court of Federal Claims, and the U.S. Supreme Court, and ought to be revised to provide better guidance to contracting officers.

6. A contracting officer should consult an attorney when the transfer of a contract becomes an issue or potential issue. And that's what Eric should have said to Denise instead of telling her: "You need a novation."

Eric, you really shouldn't have given Denise legal advice like that. It was hasty on your part.