By joel hoffman on Friday, October 25, 2002 - 09:57 am:

I don't believe that you are prohibited from defaulting a bankrupt contractor. I remember a situation, some years ago, where one of our contractors defaulted on four contracts in progress, due to bankrupcy. The bonding company was responsible to complete the contracts. Does your contract include a performance bond and a payment bond? Do you have an attorney to consult? happy sails! joel hoffman

By Harley Hartley on Friday, October 25, 2002 - 10:44 am:

You need to consult with your attorney. My recent experience is that you can't T4D (or take any other adverse action) without the bankruptcy court's permission.

By Anonymous on Friday, October 25, 2002 - 11:52 am:

At this time the attorney will not be back till next week.There is a performance bond on this project. Also this project is involed with National Security in some levels.Determining the potential impact and the best interest of the Government,is the concern.

By Eric Ottinger on Friday, October 25, 2002 - 12:23 pm:

Anon,

The answer is a resounding “maybe.” Different courts have radically different opinions on this issue. This is the “In re West” issue that we debated a few months back.

You definitely need competent legal counsel. Some relevant cases are cited in my June 18, 2002 post in the http://www.radix.net/~ambrose/forum407.htm thread.

My subjective opinion is that the line of cases in which contractors have attempted to use bankruptcy protection to avoid a default termination sputtered out somewhere around 1994. The contractors consistently lost the war, even if they won the battle. I don’t believe any of these contractors actually came out ahead in the long run.

If this were my contract, I would not let this hypothetical legal issue stop me from going ahead with the termination. It probably isn’t worth the contractor’s cost and effort to contest the issue. There is a litigation risk, but I don’t believe it is very great.

Although this does not appear to be a current hot topic in procurement law, it is very current and very contentious topic for intellectual property law.

Just for clarity --

The “debtor in possession” is the same contractor that you have been dealing with all along. In re West views the debtor in possession as a “virtual” third party distinct from the original contractor.

From the point of view of 11 U.S.C 365(c)(1), the debtor in possession is the same as the trustee.

There are two Anti-Assignment Acts, the Anti-Assignment Act per se and the Assignment of Claims Act. The courts tend to lump the two acts, which leads to much confusion.


Maybe this doesn’t need to be said-- I would try to do what is fair. It may be to the government’s long term advantage to give this contractor the opportunity to get back to solvency or to facilitate a novation to another contractor.

I would be curious to know what your competent legal counsel thinks.

If you wish to talk off-line, let me know. If your attorney is not available, you may want to consult with the attorney’s at DCMC. They should have the greatest amount of experience and expertise in this area.

I don’t agree or disagree with Hartley Hartley. He may have better or more current information than I have.


Apropos to the argument in the earlier thread. Trustees and successors in interest have been known to submit proposed novations to the contracting officer for approval. See JA & Associates, Inc.; Son’s Quality Food Co., Comptroller General Decision , No. B-256280.2; B-256280.4, August 19, 1994.

See also -- Marvin Land Systems, Inc., Comptroller General Decision , No. B-276434; B-276434.2, June 12, 1997

Eric

By joel hoffman on Friday, October 25, 2002 - 12:31 pm:

My attorney just advised me that bankruptcy does not protect a non-performing contractor from being terminated for default. What - are you supposed to forebear non-performance until they get re-organized???? You have a performance bond.

However, in my opinion, you'd be a fool to take action to terminate without the advice of counsel in your agency. There must be somebody available, in the absence of your regular one. happy sails! joel hoffman

By Harley Hartley on Friday, October 25, 2002 - 01:51 pm:

For what it's worth, here's an excerpt from the Corps of Engineers Office of Counsel's website:
Bankruptcy: Cases

Automatic Stay

* C/O cannot terminate a contract for default after the contractor has filed for
bankruptcy without first obtaining relief from the automatic stay.

> Martel Truck & Tractor Service, Inc., ENGBCA No. 6191, 96-2
BCA 28,368 [case excerpt]
> Harris Products, Inc., 87-2 BCA 19,807

Here is an excerpt from the case cited above:
Termination for Default

It generally has been held that termination for default of a contractor's right to proceed under the contract after the contractor seeks bankruptcy protection and the stay is imposed violates the stay and is ineffective, absent permission from the bankruptcy court. In re Corporacion de Servicios Medicos Hospitalarios de Fajardo, 805 F.2d 440 (1st Cir.1986); Las Vegas Medical Equip. Repair, Inc., VABCA No. 3848-54, 94-2 BCA ¶ 26,644; Sermor, Inc., ASBCA No. 30576, 94-1 BCA ¶ 26,302, recon. denied, 94-3 BCA ¶ 27,244.

The board decisions cited above, and others, generally hold that a termination for default notice is void if issued by the Government after the bankruptcy petition is filed. Sermor, Inc., ASBCA No. 32824,94-1 BCA ¶ 26,301, recon. denied, 94-3 BCA ¶ 27,244; C. Kennedy Mfg. & Eng'g, ASBCA No. 43341, 93-3 BCA ¶ 25,974; Communications Technology Applications Inc., ASBCA No. 41573, 92-3 BCA ¶ 25,211; Harris Prod., Inc., ASBCA No. 30426, 87-2 BCA ¶ 19,807. However, there is authority for the position that a termination for default in such circumstances is voidable, not void. Bronson v. United States, 46 F.3d 1573 (Fed.Cir.1995); Sikes v. Global Marine, Inc., 881 F.2d 176, reh'g denied, 888 F.2d 1388 (5th Cir.1989). In Sikes, the court held that stay violations are voidable, not void, because the bankruptcy court has the statutory authority, among other things, to annul a stay, which may relate back to implementation of the stay when the bankruptcy action was filed.

On the facts of Martel's appeal, the distinction makes no difference. If the termination for default by the Corps was void, then there was never a valid, effective contract action. In that case, the termination for default was a nullity, having no legal effect. If void, there was no legal significance in whether the CO knew of the bankruptcy petition. Communications Technology, supra. If the Corps' termination of Martel for default was voidable, then the bankruptcy court opted to void the termination at Mar-tel's request in 1988. By that time, the Corps had actual knowledge of the bankruptcy proceedings. (Statements of Fact 9).

We conclude that the termination for default of Martel by the Corps' CO in 1984, was a legal nullity. Insofar as the parties' contractual relationship is concerned, there was no termination and the parties' relative positions under the contract were not changed by the purported termination for default, either in 1984 (that is, a termination of Martel's right to proceed under the contract) or in 1988 (that is, conversion of an incorrect termination for default to a termination for the convenience of the Government). Given all the circumstances present in this case, the parties were returned to their pre-bankruptcy position and rights concerning the contract and the pre-existing potential disputes arising under or relating to that contract and the status of the work as it existed pre-bankruptcy.

By Eric Ottinger on Friday, October 25, 2002 - 03:01 pm:

Anon, Joel and Hartley Hartley,

Here is the “Contract Law Division” (Department of Commerce) “Lawyer’s View” article. The correct answer appears to be: (1) file a motion for release from the stay, then (2) go ahead with the termination.

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

I would note that notwithstanding the Lawyer’s View article, about half of the courts agree with this argument and half don’t.

All and all, you need good legal help.

Eric

By joel hoffman on Friday, October 25, 2002 - 04:04 pm:

Thanks, I agree with needing a lawyer! I'll send the above to MINE! happy sails! joel

By Vern Edwards on Saturday, October 26, 2002 - 01:36 pm:

Anonymous asked: "The contractor files for chapter 11 protection. Question what is the Governments options, can a Termination for Default still be done[?] There is a question about an automatic stay clause in the bankruptcy."

The answer to Anonymous's question is in 11 U.S.C. § 362, entitled, "Automatic Stay," which provides as follows:

"(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of -

(1) 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;

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;

(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and

(8) the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor."

Termination for default is covered by 11 U.S.C. § 362(a)(1) if the cause for termination arose before the contractor filed for bankruptcy, and is precluded while the stay is in effect, unless the government goes to court and obtains relief from the stay. 11 U.S.C. § 362(b) does not make an exception for T for D.