Petition — Gary Aircraft Corp. v. United States

Supreme Court brief1983

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MAY 26 «©

82-1917

NO. ——

Supreme Court of the United States

OCTOBER TERM, 1983

IN THE MATTER OF

GARY AIRCRAFT CORPORATION,

Debtor.

GARY AIRCRAFT CORPORATION,

Petitioner,

Vv.

THE UNITED STATES OF AMERICA,

Respondent.

On Writ of Certiorari To The

United States Court of Appeals

For the Fifth Circuit

PETITION FOR A WRIT OF CERTIORARI

JOHN H. BENNETT, JR.

Attorney for Petitioner,

Gary Aircraft Corporation

Of Counsel:

GILPIN, MAYNARD, PARSONS,

PoHL & BENNETT

Three Riverway, Suite 400

Houston, Texas 77056

(713) 623-8800

Alpha Law Brief Co., Inc.—5606 Parkersburg—Houston, Texas 77036—223-3003

QUESTION PRESENTED

Whether a bankruptcy court may exercise its jurisdic-

tion to disallow claims alleged against a debtor made in

a proof of claim filed by the Government, if those claims

arise out of a contract with the United States otherwise

subject to litigation before an agency board of contract

appeals or the United States Claims Court.

LISTING OF PARTIES

The Official Creditors Committee of Gary Aircraft

Corporation is a party appellee to the proceeding before

the United States Court of Appeals for the Fifth Circuit

that is not listed in the caption of the case in this Court.

Pursuant to Supreme Court Rule 28.1, Petitioner lists

the following of its subsidiaries and affiliates which are

not wholly owned by the Petitioner: Madison Equipment

Corporation, Hondo Municipal Airport, Hondo, Texas;

Aircraft Machinery Corporation, Hondo Municipal Air-

port, Hondo, Texas.

TABLE OF CONTENTS

OPER BED 5 oo bi hoc sen i nccawcevencens

Be EE NE 56 in oo wove vcore ew ccaneneeens

pe ee

TPs OE AU TRIS ooo icc ence ccs eeneeees

ROU ROMUEO URI occ ere is pent wen mencsewnn nea

JURISDICTIONAL, SEAWMN LL oes ccc ccc ce eee eces

STATUTORY AND REGULATORY PROVISIONS IN-

MUS BS AEN EE ELE EE a Pa a

DAML eeeerre OF Beem CASE 2... cece ccc cen ceesees

A WRIT OF CERTIORARI SHOULD ISSUE BECAUSE

THE COURT OF APPEALS HAS DECIDED AN

IMPORTANT QUESTION OF FEDERAL LAW

WHICH HAS NOT BEEN BUT SHOULD BE SET-

Me EC ork eck ences ccs ncsne.

SO Oe ee kk cicctencencs:

APPENDIX A—Opinion of Court of Appeals—Gary Ai-

craft Corp. v. United States of America (In re Gary Air-

‘craft Corporation), 698 F.2d 775 (Sth Cir. 1983) ....

APPENDIX B—Opinion of District Court—/n re Gary Air-

craft Corp., No. 79-CA-342 (W.D. Tex. June 24, 1981)

APPENDIX C—Decision of Bankruptcy Court Denying

Motion of United States to Stay Proceedings (excerpted

ee og a

APPENDIX D—Opinion of Bankruptcy Court on Motion

of United States to Stay Proceedings—/n re Gary Air-

craft. Corp., No. SA-76-Bk-443 (W.D. Tex. Bankr. Ct.,

a a a ha oh oh bck vccicneens

APPENDIX E—Decision of the Bankruptcy Court on Ob-

jection to Claim of United “States (transcript, February

a a a oo ee eee ieee

APPENDIX F—Order Denying Motion to Stay and Vacate

and On Claim of United States (June 29, 1979) .......

Page

oe.

25a

52a

54a

107a

118a

APPENDIX G—Excerpts from Bankruptcy Act of 1898,

oP Uo ©, Oe Oe. CO, PUTT) occ ccsecc.

APPENDIX H—Excerpts from Federal Priority Statute,

St USA. OG ets Pee Ce TRF) nik ccs cece ene.

APPENDIX I—Excerpts from United States Bankruptcy

i es ca eh hc a ea ceed ks

nee ee... we

APPENDIX K—Excerpts from Bankruptcy Reform Act of

76, 1) USL. S108 of sew. (Sem. 1979) .........

APPENDIX L—Excerpts from Uncodified Provisions of

Bankruptcy Reform Act of 1978, §§ 201, 241, 402 & 404.

Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2549 .........

APPENDIX M—Excerpts from Contract Disputes Act of

1978. Pub. L. 95-563, Nov. 1, 1978, 92 Stat. 2383:

ey Oe eis kik es

APPENDIX N—‘Disputes Clause’, Excerpted from Armed

Services Procurement Regulations, 32 C.F.R. § 7-103-12

Ok sk ca hk hckew ink

APPENDIX O—*Disputes Clause’, Excerpted from Defense

Acquisition Regulations, 32 C.F.R. § 7-103.12 (1982)

155a

158a

167a

169a

TABLE OF AUTHORITIES

CASES

ee re Be, FOE UG GID CAGE) nw cn ccc ccen cece

Gary Aircraft Corp. v. United States of America (In re

Gary Aircraft Corp.), 698 F.2d 775 (Sth Cir. 1983) ....

In re Gary Aircraft Corp., No. 5A-76-Bk-443 (W.D. Tex.

OO hi acc nn incneees

Malones ©. LOGE, S02 US. 325 CISGS) «oon cc ccc veces.

eee W. TP, BO UE. FO CEFR) og cain es ec ese ee cecs

Pee © Be, Se Cie Fee CRF GO) cok ei cee cine cass

Nathanson v. National Labor Relations Board, 344 US.

a ah win a ee aivke ies ewes

Northern Pipeline Construction Co. v. Marathon Pipeline

Co., US. 7a Ek ae $06 (1982) .........

Order of Railway Conductors v. Pitney, 326 U.S. 561 (1946)

Smith v. Hoboken Road Warehouse & Steamship Connect-

OT FU Te 0O CRREE f kc ibkinccscccevecens

Thompson v. Magnolia Petroleum Co., 309 U.S. 478 (1940)

United States v. Joseph A. Holpunch Co., 328 US. 234

es ew ckenasaceseass

United States v. Moorman, 328 U.S. 457 (1950) .........

United States Fidelity & Guaranty Co. v. Bray, 225 US.

ME a a a ik vain swan e cn ecnsawes

United States v. Press Wireless, Inc., 187 F.2d 294 (2d Cir.

1951), interpreting United States v. Oklahoma, 261 U.S.

BO BO oie he oa 0 ee hice beet cscciee cee

Page

STATUTES

BANKRUPTCY ACT OF 1898, 11 U.S.C. §1, et seg.

ON io ek tc te cehuwes scans 4,6, 7,12, 13

BANKRUPTCY REFORM ACT OF 1978, 11 U.S.C. § 101

Oe oo ee hk inte cdcdccuens 7,9, 10, 11, 12

KLANKRUPTCY REFORM ACT OF 1978 (uncodified pro-

visions). Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2549 .. 9,14

CONTRACT DISPUTES ACT OF 1978, Pub. L. No. 95-

563, 92 Stat. 2383 [codified at 28 U.S.C. § 1491 (Supp.

1983) and 41 U.S.C. § 601, et seg. (Supp. 1983)] ..4, 7, 8,10, 13

FEDERAL PRIORITY STATUTE, 31 U.S.C. §§ 191, 192

CO ak hie cis wevbe sess 4

RULES

UNITED STATES BANKRUPTCY RULES

ian cvck vee woe ucencs

es dns ne pe cmaee bade uh

re ee ces cus

a lea bk buen keene

ee oc

koe vec acet vce ckecoanes

a ee a

eee ee.

became

SuwrouUuUnNnot>

REGULATIONS

ARMED SERVICES PROCUREMENT REGULATIONS,

32 C.F.R. § 7-103.12 (1976) (“DISPUTES CLAUSE”) 4,7

DEFENSE ACQUISITION REGULATION, 32 C.F.R.

§ 7-103.12 (1982 (“DISPUTES CLAUSE”) ........... 8

OTHER AUTHORITIES

| COLLIER ON BANKRUPTCY (14th Ed. 1976) ...... 9

3 COLLIER ON BANKRUPTCY (14th Ed. 1976) ...... 9

C. WRIGHT, A. MILLER, E. COOPER and E. GRESS-

MAN, 16 FEDERAL PRACTICE AND PROCEDURE

I a ah oo oo hick cance ces 7

NO.

IN THE

Supreme Court of the United States

OcTOBER TERM, 1983

IN THE MATTER OF

GARY AIRCRAFT CORPORATION,

Debtor.

GARY AIRCRAFT CORPORATION,

Petitioner,

Vv.

THE UNITED STATES OF AMERICA,

Respondent.

On Writ of Certiorari To The

United States Court of Appeals

For the Fifth Circuit

PETITION FOR A WRIT OF CERTIORARI

Petitioner respectfully petitions for a writ of certiorari

to review the opinion and judgment of the United States

Court of Appeals for the Fifth Circuit. Gary Aircraft

Corporation v. United States of America (In re Gary

Aircraft Corporation), 698 F.2d 775 (Sth Cir. 1983).

OPINIONS BELOW

The opinion of the Court of Appeals is reported. Gary

Aircraft Corp. v. United States of America (In re Gary

Aircraft Corporation), 698 F.2d 775 (Sth Cir. 1983).

The opinion of the District Court is not reported. In re

Gary Aircraft Corp., No. 79-CA-342 (W.D. Tex. June

24, 1981). The opinion of the bankruptcy court on the

motion to stay proceedings in the bankruptcy court (APP.

D) is not reported. In re Gary Aircraft Corp., No. 5A-

76-Bk-443 (W.D. Tex. Bankr. Ct., June 29, 1979).

JURISDICTIONAL STATEMENT

The opinion and judgment of the United States Court

of Appeals for the Fifth Circuit, from which this petition

is brought, was issued on February 25, 1983. No rehear-

ing was:sought, and no extension of time for the filing of

this petition has been sought. The jurisdiction of this

Court is invoked under 28 U.S.C. § 1254(1).

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

BANKRUPTCY ACT OF 1898, 11 U.S.C. § 1, et seg. (Supp.

1977) [hereinafter referred to as Act]. (APP. G at

123a).

BANKRUPTCY KEFORM ACT OF 1978, 11 U.S.C. § 101

et seq. (Supp. 1979) [hereinafter referred to as CopgE].

(APP. K at. 142a)

BANKRUPTCY REFORM AcT OF 1978 8§ 201, 241, 402,

404 (uncodified ); Public Law 95-598, November 6, 1978,

92 Stat. 2549 [hereinafter referred to as REFORM Act]

(APP. L at 155a).

ConTRACT Disputes Act OF 1978, Pub. L. No. 95-563,

92 Stat. 2383 [codifed at 28 U.S.C. § 1491 (Supp. 1983)

and 41 U.S.C. § 601, et seg. (Supp. 1983)] [hereinafter

referred to as Disputes Act]. (APP. M at 158a).

FEDERAL PRIORITY STATUTE, 31 U.S.C. §§ 191, 192

(Supp. 1977). (APP. H at 13la).

WUNDERLICH AcT, 41 U.S.C. §§ 321, 322 (1976).

(APP. J at 141a).

UNITED STATES BANKRUPTCY RULES (APP. I at 1328).

ARMED SERVICES PROCUREMENT REGULATIONS, 32

C.F.R. § 7-103-12 (1976). (APP. N at 167a).

DEFENSE ACQUISITION REGULATION, 32 C.F.R. §7-

103.12 (1982). (App. O at 169a).

STATEMENT OF THE CASE

In 1970, Petitioner, Gary Aircraft Corporation

(“Gary”), entered into Air Force Contract No. F41608-

71-D-0289 (“Contract 0289”) with the Respondent, the

United States of America (“Government”), to overhaul

R2800 aircraft engines. In 1974 Gary and the Govern-

ment entered into Air Force Contract No. F41608-74-D-

1645 (“Contract 1645”) providing for continued engine

overhaul after conclusion of Contract 0289. In 1975 the

Government terminated Contract 1645. This litigation

arose out of that termination and related but separate

disputes regarding control of property, production and

quality in performance of Contracts 0289 and 1645.

In 1975 Gary initiated claims against the Government

under Contracts 0289 and 1645 to recover increased

contract performance costs and to set aside the purported

default termination of Contract 1645. Pursuant to the

contract “disputes clause”, the claims were presented to

an administrative contracting officer and then appealed

to the Armed Services Board of Contract Appeals

(“ASBCA”). The ASBCA docketed these two claims

against the Government on January 21, 1977, and later

scheduled a hearing on them for October 3, 1977.

On October 28, 1976 Gary filed its original petition

commencing the reorganization proceeding below with

the United States District Court for the Western District

of Texas, San Antonio Division, and the matter was re-

ferred to the bankruptcy court. On November 30, 1976,

the Government elected to file a proof of claim in bank-

ruptcy court. Initially, the Government’s proof of claim

alleged two claims against Gary, one for $145,533.52 in

excess reprocurement costs allegedly incurred from ter-

mination of Contract 1645, and the other for $566,399.12

in serviceable property allegedly lost during performance

of Contract 0289. The Government’s proof of claim, as

finally amended, alleged six claims against Gary totalling

$2,686,114.15. The Government’s proof of claim alleged

that there were no setoffs or counterclaims to Gary’s

alleged debt to the Government. The Government asserts

its claim is entitled to priority in payment.

The Government never sought bankruptcy court leave

to continue prosecution of claims against Gary. Never-

theless, on April 13, 1977, an administrative ccatracting

officer issued a decision purportedly holding Gary liable

for $1,895,203.12 for unserviceable property allegedly

1. ACT § 64a(5), 11 U.S.C. § 104 (Supp. 1977), together with

31 U.S.C. §§ 191, 192 (Supp. 1977). See, United States v. Press

Wireless, Inc., 187 F.2d 294 (2d Cir. 1951), interpreting United

States v. Oklahoma, 261 U.S. 253 (1923).

lost by Gary. The decision gave notice that any appeal

by Gary to the ASBCA was required within thirty days.

The Government amended its proof of claim filed with

the bankruptcy court to include this $1,895,203.12

claim.*

On June 10, 1977, Gary moved the bankruptcy court

to disallow the claim of the Government, and the matter

was set down for trial as a contested matter.* On July

7, 1977, the Government moved to stay all discovery in

the bankruptcy court concerning issues raised in Gary’s

motion to disallow the Government’s claim. On July 18,

1977, at the conclusion of an evidentiary hearing on the

Government’s motion to stay, the bankruptcy court denied

the Government’s motion to stay.‘

Following denial of the Government’s motion to stay,

the bankruptcy court tried the claims and objections of

the parties, rendered an opinion on the Government’s

motion to stay (APP. D), announced its decision of the

case (APP. E), and on June 29, 1979, signed and entered

an order denying the Government’s motion to stay and

2. Neither this claim nor the other claims for allegedly lost prop-

erty were included in the ASBCA case set for hearing October 3,

1977. However, except for two comparatively small claims, the Gov-

ernment’s claims against Gary and Gary’s claims against the Gov-

ernment arose out of the same basic transaction and occurrences.

APP. D at 68a-69a (ff 51-56).

3. BANKR. R. 914: 11-63.

4. The court of appeals opinion implies that the Government’s

motion to stay was not denied on July 18, 1977 but was carried

along until after trial. “On February 22, 1979, the bankruptcy court

denied, finally, the Government’s Motion to Stay and Vacate.” APP.

A at 3a-4a. In fact, the Government’s motion was denied on July 18,

1977. APP. C. However, the Government did not request or propose

entry of an appealable written order denying its motion. BANKR.

RULES 801, 803.

vacate. APP. F. The district court affirmed. Jn re Gary

Aircraft Corporation, No. 79-CA-342 (W.D. Tex. June

24, 1981). APP. B. The court of appeals reversed and

remanded, holding that the bankruptcy court improperly

exercised its jurisdiction in liquidating the Government's

contract claims against Gary because it was required to

defer to the ASBCA for purposes of liquidating Gary’s

claim.

The court of appeals only reviewed whether the bank-

ruptcy court erred in denying the Government’s motion

to stay. App. A at 5a, n.2. Accordingly, although other

issues were presented for review to the district court and

court of appeals, the sole question before this Court is

whether a bankruptcy court may exercise its jurisdiction

to disallow claims made against a debtor in bankruptcy

reorganization proceedings and alleged in a proof of claim

filed by the Government with the bankruptcy court, if

those claims arise out of a contract with the Government

otherwise subject to litigation before an agency board of

contract appeals or the United States Claims Court.

The basis for federal jurisdiction in the court of first

instance is Section 2a of the Act, 11 U.S.C. § 11 (Supp.

1977).

A WRIT OF CERTIORARI SHOULD ISSUE BE-

CAUSE THE COURT OF APPEALS HAS

DECIDED AN IMPORTANT QUESTION

OF FEDERAL LAW WHICH HAS NOT

BEEN BUT SHOULD BE SETTLED

BY THIS COURT

The opinion of the court of appeals aimed to resolve

conflicts between two conflicting sets of federal law and

policy. This holding is of a public importance, and will

have widespread general impact that will extend far be-

yond the parties to this litigation. The issues merit this

Court’s review by certiorari. See 16 C. WRIGHT, A. MIL-

LER, E. COOPER and E. GRESSMAN, FEDERAL PRACTICE

AND PROCEDURE, § 4004 at 508 (1977).

The jurisdiction of a bankruptcy court to disallow

claims against a debtor in bankruptcy is longstanding and

has been recently reaffirmed and strengthened by Con-

gress. ACT § 2(1)-(2), (7); Cope § 502(a)-(b). This

Court has several times written that a bankruptcy court

has full power to inquire into and disallow any claim

asserted against the estate of a debtor in bankruptcy.

Lesser vA Gray, 236 US. 70, 74 (1915); accord

Pepper v.\Litton, 308 U.S. 295, 304 (1939); Katchen

v. Landy, 382 U.S. 323, 329 (1966); see United States

Fidelity & Guaranty Co. v. Bray, 225 U.S. 205, 218

(1912). However, no decision of this Court specifically

holds that a bankruptcy court may disallow claims held

by the Government which under non-bankruptcy law

would be subject to litigation before an agency board of

contract appeals or the United States Claims Court. This

Court has twice limited bankruptcy court jurisdiction in

favor of administrative tribunals on matters not involving

claims against the debtor, Order of Railway Conductors

v. Pitney, 326 U.S. 561 (1946); Smith v. Hoboken Road

Warehouse & Steamship Connecting Co., 328 U.S. 123

(1946), and once held that wise administration required

a bankruptcy court to defer to the National Labor Rela-

tions Board to liquidate a back wage claim “giving the

Board a reasonable time for its administrative determina-

tion”. Nathanson v. National Labor Relations Board, 344

U.S. 25, 30 (1952). This Court has written approvingly of

the contract “disputes clause” (APP. N) which limits judi-

cial, though not by its terms bankruptcy court, determination

of disputes arising out of a Government contract. United

States v. Joseph A. Holpunch Co., 328 U.S. 234 (1946);

United States v. Moorman, 338 U.S. 457 (1950). The

jurisdiction of an agency board of contract appeals to

resolve Government claims against contractors, long con-

tractual if not regulatory (APP. A at 5a-9a), is now statu-

tory. Disputes Act, 41 U.S.C. §§ 601 et seg. (Supp.

1983); see APP. O.

The court of appeals, despite “conflicting mandates”

from decisions of this Court, attempted to resolve the

conflict between “two inclusive, exclusive, sweeping

schemes, both of which the Supreme Court has endorsed”.

APP. A at lla. The court below expressly sought to

articulate a general, jurisdictional rule for resolution of

government contract disputes pending before an agency

board of contract appeals.° Recognizing that the bank-

ruptcy court did not commit any abuse of discretion in

its decision not to defer to the ASBCA,® the court of

appeals announced a “rule of decision” that as a “matter

5. The Court considered whether there should be a jurisdictional

rule regarding government contract disputes before the ASBCA. APP.

A at 18a. The ASBCA is an agency board of contract appeals under

the Disputes Act 41 U.S.C. §§601(b), 706 (Supp. 1983) and

revised Defense Acquisition Regulation § 7-103-12 (APP. O). In

terms going beyond the ASBCA the court of appeals also considered

whether the “generalized ideas about a bankruptcy court’s ancillary

jurisdiction . . . justify articulating a general rule for resolution of

government contract disputes pending before a Board of Contract

Appeals.” APP. A at 19a.

6. “The bankruptcy court below made detailed findings to sup-

port its determination that it should not defer. If the question facing

us today were simply whether the bankruptcy court abused its dis-

cretion in making that determination, we would clearly have to hold

that it did not; the bankruptcy court’s decision was neither arbitrary

nor capricious, but rather deliberate and reasoned.” APP. A at 16a.

of law, almost pure law” a bankruptcy court should never

exercise its jurisdiction to disallow Government claims

against a debtor in bankruptcy if the claims would be

subject to administrative review by an agency board of

contract appeals were the debtor not in bankruptcy.

The historically broad jurisdictional grant to bank-

ruptcy courts to determine claims against the debtor has

been tempered to permit flexible discretion to defer ex-

ercise of that jurisdiction. Thompson v. Magnolia Pe-

troleum Co., 309 U.S. 478 (1940); In re Baldwin, 291

U.S. 610 (1934); 1 CoLLIER ON BANKRUPTCY, 4 206

(14th ed. 1976); see 3 COLLIER ON BANKRUPTCY 4 57.15

(3.2) (14th ed. 1976). But the inflexible and nondis-

cretionary “rule of decision” announced by the court

below, call it what you will, is a judge made abolition

of bankruptcy court jurisdiction to hear claims asserted

against the debtor if they arise from Government con-

tracts.’ If anything, recent Congressional policy should

propel the bankruptcy courts to use flexible discretion

rather than a pre-set “rule of decision” in determining

whether or not to abstain from exercising their jurisdic-

tion.®

The policy favoring “discretion by choice” rather than

a “rule of decision” is shown by the hasty generalizations

7. See, eg., ACT $§ 2a(2), (7), (15); CODE §§ $02(b) fc);

101(9), (14), (21); 106(b); BANKR. R. 302(a); 11-33(b)(1).

See also, CODE § 106(a).

8. REFORM ACT § 405(b), makes 28 U.S.C. § 1471(d), en-

acted by REFORM ACT § 201 but not effective until April 1, 1984,

essentially effective for current courts of bankruptcy until April 1,

1984. Section 1471(d) permits a district court or a bankruptcy court

to abstain “from hearing a particular proceeding under Title 11 .. .”

and “‘{s]Juch abstention, or a decision not to abtain, is not reviewable

by appeal or otherwise’”’.

made by the court of appeals on “various factors” which

the court concluded were “common to most, if not all”

Government contract disputes before agency boards. Per-

haps as a general rule liquidation of Government contract

disputes does not impair the primary goal of bankruptcy

(APP. A at 19a); but in the case at bar the bankruptcy

court expressly found that ASBCA liquidation would enable

another forum to embarrass and unduly delay the arrange-

ment proceedings (APP. D at 102a[4 110]), would be fruit-

less in many respects because of the ASBCA’s limited juris-

diction (APP. D at 102a-103a [€112]), and would

materially interfere with and prevent the orderly adminis-

tration of the Chapter 11 case. (APP. D at 103a [4 113]:

102a [4 111]). Perhaps as a general rule Government

contracting law “tends to be technical and esoteric” so

that the court of appeals could not “help but think that

the ASBCA mght .. . [be] better qualified by its ex-

perience and expertise” than the bankruptcy court to

resolve Government contract litigation (APP. A at 20a);

but in the case below the record did not show that special-

ized technological or other expertise possessed by the

ASBCA would be required to determine the Government’s

claims and the evidence was to the contrary. APP. D at

10la (4 108). Indeed, the bankruptcy court found that

the Government made no showing of harm that would

result from liquidation of its claims by the bankruptcy

court (/d.) or that liquidation would impair a strong

federal policy (Jd. [§ 109]). The common use of the

“disputes clause” to prevent work stoppage by a Govern-

ment contractor during existence of a dispute (e.g., 41

U.S.C. § 605(b); APP. D at 74a [§ 74]) could not be

hampered in the case at bar because Contract 1645 had

been terminated and relet to another contractor (APP.

D at 94a [4 103]). The court of appeals overgeneralized

in concluding that “claims running against the Govern-

ment in addition to claims against the contractor” favor

deferral as a “rule of decision” because the bankruptcy

court lacks jurisdiction to determine claims against the

Government (APP. A at 20a); Cope § 106 provides the

Government is now deemed to waive sovereign immunity

by filing a proof of claim with the bankruptcy court. In

truth, the actual facts of the particular case below® pro-

vide factual exceptions to each of the factors underpin-

ning the “rule of decision” adopted by the court of

appeals, and this is shown by findings that the court

of appeals characterized as “neither arbitrary nor ca-

pricious, but rather deliberate and reasoned”. APP. A

at 16a.

Moreover, the “rule of decision” was adopted by the

court of appeals with no consideration of several import-

ant public issues that this Court should address. Nowhere

9, Another fact apparently persuasive to the court of appeals was

that “{t]he only substantial asset Gary had was its claim against

the Government for termination for convenience of the second con-

tract... valued... at $3,170,724.” APP. A at 4a.

We would not dream of giving the Board of Contract Appeals

the broad equitable jurisdiction given to the bankruptcy court.

By similar logic, we see no reason to give to the bankruptcy

court the determination of the existence of a claim and its valu-

ation when that is within the peculiar expertise of the Board

of Contract Appeals. This may be especially true when the sole

significant asset of the debtor is a claim against the Government,

which must pass through the Board of Contract Appeals and

Court of Claims.

APP. A at 23a. Gary’s Statement of All Debts of Debtor, filed in the

bankruptcy court, reflected $4,771,592.70 in debts and its Statement

of All Property of Debtor, $7,244,160.72 in assets, as of October 28,

1976. APP. at § 26. As of that time, Gary’s liabilities, exclusive of

any liability to the Government, were $4,771,592.72, and the aggre-

gate value of its assets, exclusive of its claims against the Govern-

ment, was $4,275,373.82. APP. D at 62a ({ 33). Gary’s claim against

the Government obviously was not its only “substantial” or “sig-

nificant” asset.

in its opinion does the court of appeals address the Gov-

ernment’s failure to seek or show cause for modification of

the stay. (APP. Dat 91a-93a [4 99-101]). The stay against

prosecuting claims against a debtor without bankruptcy

court consent has recently been reconsidered and re-

enacted by Congress’® in language clearly showing that

Congress contemplated that Government claims would

be stayed because it provided limited express exceptions

to the stay for Government units.’ By transmogrifying

the bankruptcy court’s “discretion by choice” into a “rule

of decision” the court of appeals ignores the automatic

stay of BANKR. R. 11-44 and effectively has abolished

the bankruptcy court’s jurisdiction to allow or disallow

claims arising out of a Government contract and asserted

against a debto:. The holding of the court of appeals

thus makes questionable the initial presumption of validity

of claims filed with the bankruptcy court (APP. D at

80a [§ 79]), questions the court’s power to discharge

claims not timely filed and allowed (APP. D at 80a-81a

[{ 80]), and frustrates the performance of fiduciary duties

of the trustee or debtor-in-possession (APP. D at 82a

[q 81]).”

Jurisdictional power by the bankruptcy court to dis-

allow claims against the debtor has been provided since

1898 and is as essential to the jurisdiction of a bankruptcy

court under the CopDE as it was under the Act. The policy

underpinning the jurisdictional grant to the bankruptcy

court is tempered by flexible discretion under the Code

10. CODE §§ 363(a)(1), (3), (6), (7): 101 (4), (9), (14),

(21).

11. CODE § 362(b)(4), (5).

12. Compare CODE § 502, presuming validity of claims filed,

with CODE § 1111, deeming claims filed if scheduled except when

scheduled as disputed, contingent or unliquidated. See also, CODE

§$§ 704(4): 1106(a) (1); 1107.

to defer to other tribunals to liquidate claims against the

debtor, just as it was under the Act.’* Indeed, the courts

of bankruptcy presently functioning under the CopgE are

identical to the court of bankruptcy that authored the

decision below under the Act.'* In a _ broad sense

the jurisdiction granted to the bankruptcy court by

the CopE extends beyond that which was provided by

the Act. Northern Pipeline Construction Co. v. Marathon

roe Line Co, .._US...., 73 LECH SR, GM

(1982). The issue presented to this Court by the case

below is limited to the judicial power of a bankruptcy

court to disallow a claim against the debtor in a proof

of claim filed by the Government in a bankruptcy court.

That issue historically is a matter of summary rather than

plenary jurisdiction under the AcT. United States Fidelity

& Guaranty Co. v. Bray, 225 U.S. 205, 218 (1912).

The substantially contemporaneous DispuTES ACT

(APP. M) and Cope provide for precisely the same juris-

dictional face off between the bankruptcy court and the

agency board or Claims Court as that which absorbed the

attention of the three courts below. The DispuTEs ACT

(APP. M), provides that Government “claims against a

contractor relating to a contract shall be the subject of a

13. CODE § 502(c); ACT § 57N.

14. The proceeding below was filed with the district court which,

under Sections 1(10) and 2a of the ACT, is defined and created as

a “court of bankruptcy”. Upon filing, the proceeding below was re-

ferred under BANKR. R. 102(a) to the bankruptcy court. Pursuant

to Section 404(a) of the REFORM ACT, the courts of bankruptcy,

as defined under Section 1(10) of the ACT, and created under Sec-

tion 2a of the ACT, are continued until April 1, 1984. The bank-

ruptcy court established by Section 201 of the REFORM ACT does

not come into existence until April 1, 1984, perforce of Section 402(b)

of the REFORM ACT. In short, the bankruptcy court below is

identical to the bankruptcy courts now functioning under the CODE.

decision by the contracting officer,” (41 U.S.C. § 605(a) ),

“not subject to review by any forum, tribunal, or Govern-

mient agency” unless an appeal or suit is timely com-

menced, (/d. at § 605(b)), to an agency board of con-

tract appeals, (Jd. at §$ 606, 607) or “in lieu of appeal-

ing the decision of the contracting officer . . . a con-

tractor ... bring[s] an action directly on the claim in the

United States Claims Court... .” Jd. at $ 609. The CoDE

continues bankruptcy court jurisdiction to allow or dis-

allow claims against the debtor. Thus, the issue presented

for review, and the general jurisdictional rule announced

by the court of appeals, are precisely the same under the

ACT as under the Cong, and are precisely the same under

the DispuTEs AcT as under the “disputes clause”. (APP.

N: see APP. O).

The current recession has caused numerous businesses,

many of them having contracts with the Government, to

seek the protection afforded by the Cope. Clear rules to

guide the bankruptcy courts, agency boards of appeal,

and the United States Claims Court are presently of great

public importance, for the practical consequences of a large

reorganization proceeding regarding a large Government

contractor are as obvious as inevitable. The far-reaching

policy consequences of the non-discretionary rule of de-

cision adopted by the court of appeals should be reviewed

on writ of certiorari issued by this Court.

Respectfully submitted,

CAV GL Fd.

Joun/H. Penioce ~

Three Riverway, Suite 400

Houston, Texas 77056

(713) 623-8800

Attorney for Petitioner,

Gary Aircraft Corporation

Of Counsel:

GILPIN, MAYNARD, PARSONS,

POHL & BENNETT

Three Riverway, Suite 400

Houston, Texas 77056

(713) 623-8800

CERTIFICATE OF SERVICE

I hereby certify that three (3) copies of the above and

foregoing Petition for Writ of Certiorari have this day

been served on each of the following by first-class mail,

postage prepaid:

Solicitor General

Department of Justice

Washington, D.C. 20530

Mr. J. Christopher Kohn

Mr. Richmond I. McKay

Attorneys, Civil Division

Department of Justice

Ben Franklin Station

Washington, D.C. 20044

Mr. Edward C. Prado

United States Attorney

655 East Durango Blvd.

San Antonio, Texas 78206

Mr. Joe Warren Jones

Jones & Partain, Inc.

812 N.B.C. Building

San Antonio, Texas 78205

SIGNED this the <=" hay of May, 1983.

. ow f\ oe ee! so}

JouN H. BENNETT, JR.

APPENDIX A

In the Matter of GARY AIRCRAFT

CORPORATION, Debtor.

GARY AIRCRAFT CORPORATION, et al.,

Plaintiffs-Appellees,

UNITED STATES of America,

Defendant-Appellant

No. 81-1391

United States Court of Appeals,

4 Fifth Circuit

February 25, 1983.

Appeal from the United States District Court for the

Western District of Texas.

Before GOLDBERG, GEE and HIGGINBOTHAM,

Circuit Judges.

GOLDBERG, Circuit Judge:

This is a stretch case with potential for elastic juridical

power in either the bankruptcy court or the Armed

Services Board of Contract Appeals. In this appeal we

are called upon to review various matters pertaining to

the liquidation by a bankruptcy court of claims by the

United States against Gary Aijrcraft Corporation

(“Gary”) flowing from a contract between the govern-

ment and Gary to overhaul airplane engines.’ We hold

that the bankruptcy court improperly exercised its juris-

diction in liquidating the contract claims and that it

should have deferred jurisdiction for the purpose of liq-

uidation to the Armed Services Board of Contract Ap-

peals.

I. INTRODUCTION

A. Facts—Government Reservations and the Engines

Gary entered into a contract with the United States

Air Force to rebuild Model 2800 aircraft engines, ef-

fective as of December 1, 1970. Under the contract Gary

was supplied with materials from various government

sources to use in the rebuilding process. Beginning in late

1973, the General Accounting Office developed some

doubts regarding Gary’s handling of government fur-

nished property. The first contract, after extensions, ex-

pired on August 31, 1974. Despite the GAO problems,

Gary was awarded a second contract to perform the

same services beginning September 1, 1974.

During August, 1974, the GAO told the Air Force

that drastic measures were needed to protect the govern-

ment’s interests. In response, the Air Force sent a fifty

person team to Gary’s plant. The team imposed some

stringent property and quality control procedures, which

appear to have had the effect of severely disrupting

Gary’s work. Consequently, Gary was unable to meet its

1. This proceeding arises under the Bankruptcy Act of 1898 as

amended, rather than the Bankruptcy Reform Act cf 1978, 11 U.S.C.

§§ 101-151326 (Supp. 1979), so we are not affected by the uncon-

stitutionality of the latter act. See Northern Pipeline Constr. Co. v.

Marathon Pipe Line Co., US. , 102 S.Ct. 2858, 73 L.Ed.2d

598 (1982).

delivery deadlines and the government terminated the

second contract for default in March of 1975.

B. Procedural History

The contracts between Gary and the government con-

tained the standard disputes clause, establishing a heir-

achy for resolving disputes arising under the contract.

First, the Contracting Officer would address the dispute.

Second, the Armed Services Board of Contract Appeals

(“ASBCA”) would hear the case. Third, the case could

go to the Court of Claims under the Wunderlich Act, 41

U.S.C. §§ 321, 322 (1976).

Gary first filed claimus under both contracts for the

additional costs caused by government changes in the

contract. These claims were filed with the Contracting

Officer who decided against Gary. The matter was

docketed by the ASBCA on January 21, 1977, together

with other claims on the contracts. The ASBCA sched-

uled a hearing for October 3, 1977.

This orderly procedure was complicated on October

28, 1976, when Gary filed under Chapter XI of the

Bankruptcy Act of 1898, as amended, 11 U.S.C. §§ 1-

151326 (1976 & Supp. 1979). The government filed

proofs of claims which Gary moved to disallow in June,

1977. The bankruptcy court set a trial date for the claims

for July 18, 1977. The government filed a Motion to

Stay and Vacate the bankruptcy court proceedings on

July 7, 1977. A hearing on the Motion to Stay was held

July 18, 1977. From July 19, 1977 to March 9, 1978,

the bankruptcy court heard the testimony on the merits

of the government’s claims and related issues. This

produced a transcript of some 17,000 pages. On Febru-

ary 22, 1979, the bankruptcy court denied, finally, the

government’s Motion to Stay and Vacate. On June 29,

1979, the bankruptcy court essentially adopted Gary’s

proffered 1,107 Findings of Fact and Conclusions of

Law, covering some 383 pages.

The bankruptcy court determined that the government

basically had caused Gary’s default, thus the termination

for default was viewed as a termination for the conve-

nience of the government. The government’s claim was

valued at $59,166.06. In order to determine whether the

government’s claim was entitled to priority over other

creditors, the bankruptcy court had to determine whether

Gary was solvent. The only substantial asset Gary had

was its claim against the government for termination for

convenience of the second contract. The bankruptcy

court valued this claim at $3,170,724. The bankruptcy

court did not purport to be entering a judgment against

the government, but merely to be making collateral find-

ings necessary to resolve the question of priority. The

government appealed the bankruptcy court’s decision to

the district court on September 11, 1979; the district

court affirmed the bankruptcy court on June 24, 1981.

This appeal followed.

Meanwhile, things were still going on back at the

ASBCA and Court of Claims. On August 30, 1978, the

ASBCA dismissed Gary’s appeals without prejudice. On

August 1, 1980, on the strength of the bankruptcy court’s

findings, Gary fiiled a petition in the Court of Claims for

recovery on its claim against the government. Addition-

ally, Gary petitioned for recovery of legal fees, lost profits,

consequential damages and so on. On January 9, 1981,

the Court of Claims dismissed Gary’s claim for legal fees

and stayed the remainder pending exhaustion of adminis-

trative remedies in the ASBCA. On August 28, 1981,

Gary reinstated its appeals before the ASBCA. Those

appeals are still pending waiting for this Court’s resolu-

tion of the government’s appeal before us.

C. Issues on Appeal

The government on appeal raises two jurisdictional

arguments and two groups of substantive government con-

tract law arguments. First, the government argues that the

bankruptcy court should have deferred to the ASBCA for

liquidation of all of these claims. Second, the government

argues that the bankruptcy court need not have precisely

valued Gary’s claim against the government. Finally, the

government argues the bankruptcy court erred in its valu-

ation of the government’s claim against Gary and Gary’s

claim against the government.

We agree with the government that the bankruptcy

court improperly exercised jurisdiction over the liquida-

tion of these government contract claims.* We shall first

address the nature of the mechanisms for resolution of

government contract disputes. Next, we probe the inner

reaches of the bankruptcy process. Finally, we shall medi-

ate between the immovable object and the irresistable

force.

II. RESOLUTION OF GOVERNMENT CONTRACT

DISPUTES

Before turning to the core question of whether the

bankruptcy court or the ASBCA should liquidate the

government contract claims, we must first delve a little

2. Accordingly, we do not reach the government’s other points of

error.

deeper into the nature of governmental dispute resolution.

More specifically, we are concerned with how the ASBCA

gets its customers, by what right the ASBCA resolves dis-

putes. The parties present two polar positions, believing

that the correct characterizations of the disputes clause

is dispositive of the jurisdictional issue. See infra Part

IV.C.1. On one hand, the government believes the dis-

putes clause is as binding as if it were statutorily man-

dated; on the other hand, Gary believes the disputes

clause is of no more force than an arbitration clause in

a contract between two private parties. We find, on the

third hand, that an intermediate view is most compelling;

accordingly, our characterization of the disputes clause is

not automatically dispositive of the jurisdictional issue.

See infra Part IV.C.2

The government’s most aggressive position is that

the disputes clause is, in effect, statutorily mandated. The

government claims that the Armed Services Procurement

Act, 10 U.S.C §$§ 2202-2774 (1976), which provides

the authority to issue the Armed Services Procurement

Regulations (“ASPR”). ASPR § 7-203-12, 31 C.F.R.

§ 7-3.12 (1976), mandates the dispute clause in question.

Thus, the dispute clause is, in effect, congressionally man-

dated. The Court of Claims has held, in fact, that this line

of reasoning results in contracts being read as if they con-

tained required clauses, even when the actual contract did

not. G.L. Christian & Assoc. v. United States, 312 F.2d

418, 424 (Ct. Cl.), cert. denied, 375 U.S. 954, 84 S.Ct.

446, 11 L.Ed.2d 315 (1963). See also Chris Berg, Inc.

v. United States, 426 F.2d 314, 317 (Ct. Cl. 1970).°

3. The Fifth Circuit has noted the position of the Court of

Claims without endorsing or rejecting it. Hayes International Corp.

v. McLucas, 509 F.2d 247, 261 n. 21 (5th Cir.), cert. denied, 423

U.S. 864, 96 S.Ct. 123, 46 L.Ed.2d 92 (1975).

We do not agree with the government’s analysis. It is

worth noting that the Contract Disputes Act of 1978, 41

U.S.C. $$ 601-613 (Supp. 1979) does indeed make the

disputes clause statutorily mandated, but that was not in

effect at the time of the contracts in question here. Our

initial point of disagreement is that we find no specific

authority in the Armed Services Procurement Act for the

ASPRs. Indeed, the Legislative history of the Contract

Disputes Act of 1978 notes that “[b]asically the methods

and forums for handling such disputes exist by executive

branch fiat—that is, by the insertion of contract terms

specifying how disputes in specific areas will be resolved

—and by agency regulations governing the procedural

and substantive adjudication of disputes.” S. Rep. No.

1118, 95th Cong., 2d Sess. 2 (1978), reprinted in 1978

U.S. Code Cong. & Ad. News 5235, 5236. See also S &

E Contractors, Inc. v. United States, 406 U.S. 1, 18, 92

S. Ct. 1411, 1421, 31 L.Ed.2d 658 (1972) (Board of

Contract Appeals “are not statutory creations but are es-

tablished by administrative regulations. $. Doc. No. 99,

89th Cong., 2d Sess., Operation and Effectiveness of

Government Boards of Contract Appeals 20-21.”). Many

cases hold that dispute clauses gain their compelling force

through contractual agreement. See, e.g., Patton Wreck-

ing and Demolition Co. v. TVA, 465 F.2d 1073 (Sth

Cir. 1972), Bethlehem Steel Corp. v. Grace Line, Inc.,

416 F.2d 1096, 1105-06 (D.C. Cir. 1969). In summary,

we do not view the dispute clause as having the force of

congressional enactment.

Gary takes the complementary extreme position that

because the dispute clause gains its force through contrac-

tual agreement, it is merely a contractual clause. We be-

lieve this conclusion is not supported by law, logic, or

common sense. First, the logical underpinnings of the con-

clusion are flawed. The fact that Gary became subject to

the dispute clause by contractual agreement does not en-

tail the conclusion that all the consequences of the dispute

clause are “merely” contractual and of little moment.

After all, the Constitution is “merely” the product of

agreement by the citizens and governments of the thir-

teen colonies.

Second, the fact that dispute clauses were not statutorily

mandated does not mean that they have no official stature.

Congress was certainly cognizant of the existence of dis-

pute clauses and at the least condoned them. See, e.g.,

United States v. Moorman, 338 U.S. 457, 460, 70 S.Ct.

288, 290, 94 L.Ed. 256 (1950) (“Contractual clauses

such as these have long been used by the Government.

No congressional enactment condemns their creation or

enforcement.” ). In face, the only enacted evidence of con-

gressional knowledge of dispute clauses, the Wunderlich

Act, 41 U.S.C. §§ 321, 322 (1976), providing for judicial

review of Board of Contract Appeals decisions, suggests

at least tacit approval. As the Supreme Court has said,

a dispute clause

is something more than a dead letter to be revived

only at the convenience or discretion of the con-

tractor. It is a clear, unambiguous provision applic-

able at all times and binding on all parties to the

contract. No court is justified in disregarding its letter

or spirit... . This mechanism, moreover, is exclusive

in nature. Solely through its operation may claims

be made and adjudicated as to matters arising under

the contract.

United States v. Joseph A. Holpuch Co., 328 U.S. 234,

239-40, 66 S.Ct. 1000, 1003, 90 L.Ed. 1192 (1946)

(citations omitted, emphasis added). This is something

more than mere contractual verbiage.

Finally, and perhaps most importantly, common sense

Suggests it is a bit disingenuous to treat the dispute clause

as just another binding arbitration clause in a contract

between two parties. One has merely to look at the vast

body of case law, digests, and treatises, to realize that

government contracting law is complex, technical, esoteric,

important and monumental. The raison d’etre of the

various Boards of Contract Appeals is that both expertise

and unifomity are needed to resolve adequately and fairly

questions within the purview of government contracting

law. The keystone of this entire edifice is the dispute

clause—hardly just another contract clause.

The parties have attempted to confine our choices by

classifying the dispute clause along a spectrum from pri-

vate law to public law, with their preferences at the two

extreme ends of the spectrum. Our quarrel lies not so

much with the extremities as with the spectrum. Focusing

on the dispute clause unduly narrows the scope of our

inquiry. The dispute clause itself is undoubtedly a crea-

ture of contract. The clause, however, is but one creature

in the zoo of government contracting. To compare the

nature of the triggering event of government contract

dispute resolution, a purely contractual clause, with the

nature of the entire process is to compare appaloosas

and orangutans.

II. BANKRUPTCY

Before investigating the overlap between bankruptcy

and government contract dispute resolution we must briefly

examine the great American institution of bankruptcy.

10a

Bankruptcy serves a role in corporate life eerily similar

to that of the doctrine of reincarnation in some eastern

religions. Bankruptcy is the belief that the souls of a cor-

porate entity, the equityholders, do not just vanish when

their corporeal form dies. Rather, they learn from the

mistakes of a previous incarnation and can once again

live on the earth in corporate form. True, they may suffer

for the sins of previous incarnations and have trouble

raising venture capital, but such is the karmic burden.

With luck, some day a corporation may achieve enlighten-

ment and reach a plane of eternal bliss and nirvana—

the Fortune 500.

Though the relatives of a departed soul may receive

intellectual comfort at the thought of reincarnation, they

are often more touched by the pain and immediacy of

their personal loss. Just as it is in life, so it is in bank-

ruptcy. The close cousins of the equityholders, the debt-

holders, take little spiritual comfort from the knowledge

that the equityholders may someday be reincorporated.

Instead, they are more aware of the anguish of their per-

sonal loss, the money they loaned the deceased corpora-

tion.

It is at this point that the black robed judge steps in

as the saffron robed monk and comforter. Perhaps the

corporation has left behind some small amount of world-

ly goods, some trinkets to remind the debtholders of their

friendship with the departed. Ah, but how to divide the

estate so that everyone can have some little item of

memorabilia?

This is a question of great spiritual and temporal im-

port. Fortunately, the sacred writings can provide guidance

and inspiration. It is written in United States Code, vol-

lla

ume 11, section 11, (1976), that bankruptcy judges have

great latitude in comforting those left behind. These

words, like any sacred writings, may be read in different

ways by different people. Happily, we have an authorita-

tive exegesis to guide us in our interpretation.

Among the granted powers [of bankruptcy judges]

are the allowance and disallowance of claims; the

collection and distribution of the estates of bank-

rupts and the determination of controversies in re-

lation thereto; the rejection in whole or in part

“according to the equities of the case” of claims

previously allowed; and the entering of such judg-

ments “as may be necessary for the enforcement of

the provisions” of the act. In such respects the juris-

diction of the bankruptcy court is exclusive of all

other courts.”

Pepper v. Litton, 308 U.S. 295, 304, 60 S.Ct. 238, 244,

84 L.Ed. 281 (1939) (emphasis added, footnotes omit-

ted).

IV. WHEN WORLDS COLLIDE

We have been presented with two inclusive, exclusive,

sweeping schemes, both of which the Supreme Court has

endorsed. The disputes clause is something that no court

can disregard. Bankruptcy courts have jurisdiction ex-

Clusive of all other courts. Given such conflicting man-

dates, what is a poor circuit judge to do?

The standard statement of the rule regarding a bank-

ruptcy court’s summary jurisdiction to liquidate claims

is that bankruptcy judges may, in their discretion, defer

a claim to another tribunal for liquidation. See, e.g., 11

U.S.C. § 93(d) (1976) (allowing bankruptcy court to

12a

specify manner of liquidation of unliquidated claims);

3 Collier on Bankruptcy § 57.15[3.2] (14th ed. 1977).

In resolving whether the bankruptcy court below properly

exercised its jurisdiction, we shall make a three-stage in-

quiry. First, we will consider what it means to say that

the resolution of a question is discretionary. Second, we

will examine the guidance given us by three Supreme

Court decisions on exercise of bankruptcy jurisdiction.

Third, we will mediate between the ASBCA and bank-

ruptcy court.

A. On the Nature of Discretion

The discretion of a judge is said by Lord Camden

to be the law of tyrants; it is always unknown, it is

different in different men; it is casual, and depends

upon constitution, temper, and passion. In the best,

it is oftentimes caprice; in the worst, it is every vice,

folly, and passion to which human nature is liable.

1 J. Bouvier, Bouvier’s Law Dictionary 885 (F. Rawle

ed. 1914).

Fortunately, this rather bleak view is not the only in-

sight we have into the nature of discretion. Chief Justice

Marshall said on this subject:

Judicial power, as contradistinguished from the

power of the laws, has no existence. Courts are the

mere instruments of the law and will nothing.

When they are said to exercise a discretion, it is a

mere legal discretion, a discretion to be exercised

in discerning the course prescribed by law; and,

when that is discerned, it is the duty of the court to

follow it. Judicial power is never exercised for the

purpose of giving effect to the will of the judge;

always for the purpose of giving effect to the will

13a

of the legislature; or, in other words, to the will

of the law.

Osborn v. Bank of the United States, 22 U.S. (9 Wheat.)

740, 866, 6 L.Ed. 204 (1824).

Marshall’s is a much more helpful concept of discre-

tion. Discretion does not imply complete freedom to

choose a decision, but rather an area of the law that

has not matured enough to provide a rule of decision.

Within an area of discretion, as yet uncluttered by par-

ticular rules, a judge is charged with determining what

decision is dictated by more general rules of law.

Holding that a type of decision is subject to discretion

is not necessarily an eternal statement of the law, but

rather a comment on the state of the law at that time.

What was once a virgin terrain of discretion may become

spotted with landmarks of rules as decisions are made.

“The life of the law has not been logic; it has been ex-

perience.” O. Holmes, The Common Law 5 (M. Howe

ed. 1968). As experience with an area of the law de-

velops, what was once discretionary may become re-

stricted by a general rule, then qualified by exceptions,

and then littered with exceptions to the exceptions. Dis-

cretion in areas of the law existing due to those areas’

immaturity we shall call “discretion by default.”

This progress from discretion to rule is not inevitable,

however, in some cases, as courts gain experience with

an area of the law, they may decide it is inappropriate

to govern that area by rules. It is the nature of a rule to

prescribe a uniform treatment for a class of cases; for

such a rule to be useful the class of cases must share

enough salient characteristics to justify being treated as

14a

a group.* If an area of the law is too fact-specific, if the

cases do not share enough important characteristics, it

would be pointless to have a rule and the courts then

may affirmatively decide to leave that area permanently

to discretion. This kind of discretion we shall call “dis-

cretion by choice.”

Thus, in reviewing an exercise of discretion, we must

always ask an antecedent question: Is this decision truly

discretionary? In the particular field of jurisdiction of a

bankruptcy court to decide collateral questions, we find

some narrowing of the area of discretion in three Su-

preme Court decisions.

B. Supreme Court Balancing

On three occasions the Supreme Court has held that

bankruptcy jurisdiction should yield to the expertise of

an administrative tribunal. In Order of Railway Con-

ductors v. Pitney, 326 U.S. 561, 66 S.Ct. 322, 90 L.Ed.

318 (1946), the Court held that a railroad reorganiza-

tion court should not have decided a dispute between two

rival unions regarding which union had the right to con-

duct trains of the bankrupt inside and outside railroad

yards. The Court in part relied on the Railway Labor

Act, 45 U.S.C. §§ 151-188, which gave the Railway

Labor Adjustment Board jurisdiction over such contro-

versies.

Smith v. Hoboken Railroad Co., 328 U.S. 123, 66

S.Ct. 947, 90 L.Ed. 1123 (1946), held that the re-

4. There is an extensive body of literature dealing in detail with

the subject of when a rule of decision is needed. See, e.g., Brock,

Recent Work in Utilitarianism, 10 Am. Phil. Q. 241, 253-61 (1973).

This overly simplistic statement is adequate for our purposes.

15a

organization court should have deferred to the Inter-

state Commerce Commission for it to decide whether a

bankrupt railroad had forfeited its right to leased tracks.

Again, the Court relied on statutory enactments. Sec-

tion 1(18) of the Interstate Commerce Act, 49 U.S.C.

§ 1(18) provided that no railroad shall abandon its

track without first obtaining a certificate of public con-

venience and necessity from the Commission. Further-

more, section 77 of the Bankruptcy Act, 11 U.S.C. § 205,

“leaves no doubt that Congress did not mean to grant

to the district courts [in bankruptcy] the same scope as

to bankrupt roads that they may have in dealing with

other bankrupt estates.” Smith, supra, 328 U.S. at 133

n. 5, 66 S.Ct. at 953 n. 5 (quoting Palmer v. Massachu-

sells, 208 US. 79, 87, GO St 34, 38, 84 Ld.

93 (1939)).

Most recently, though not very recently, in Nathanson

v. NLA, 344 US. 25, 73 S.Ct. 80, 97 L.Ed. 23 (7952),

the Court held that the bankruptcy court must defer to

the NLRB for liquidation of unfair labor practice claims.

The NLRB had found the employer guilty of unfair

labor practices and ordered payment of back wages.

While an action to enforce the order was pending in the

court of appeals, an involuntary bankruptcy petition was

filed against the employer. The court of appeals subse-

quently enforced the NLRB order and the NLRB filed

a claim in bankruptcy. The bankruptcy court denied the

claim and the Supreme Court reversed on the following

rationale:

The bankruptcy court normally supervises the liq-

uidation of claims. But the rule is not inexorable. A

sound discretion may indicate that a particular con-

l6a

troversy should be remitted to another tribunal for

litigation. And where the matter in controversy has

been entrusted by Congress to an administrative

agency, the bankruptcy court normally should stay

its hand pending an administrative decision.

It is the Board, not the referee in bankruptcy nor

the court, that has been entrusted by Congress with

authority to determine what measures will remedy

unfair labor practices.

Id. at 30, 73 S.Ct. at 83 (citations omitted). Now we

must decide how these three decisions suggest that we

mediate the conflict between the ASBCA and_ bank-

ruptcy court.

C. Bankruptcy Court v. ASBCA

Finally we have the necessary predicate to mediate

between the bankruptcy court and the ASBCA. We have

some basic understanding of the nature of the two institu-

tions, we know a little better what it means to say that

a bankruptcy court may, in its discretion, allow another

court to liquidate claims, and we know of three occa-

sions where the Supreme Court has held that a bank-

ruptcy court should have deferred.

The bankruptcy court below made detailed findings to

Support its determination that it should not defer. If

the question facing us today were simply whether the

bankruptcy court abused its discretion in making that

determination, we would clearly have to hold that it did

not; the bankruptcy court’s decision was neither arbitrary

nor capricious, but rather deliberate and reasoned. We

do, however, have an antecedent question: Was this de-

cision a truly discretionary decision? Was this discretion

by choice?

17a

1. The Supreme Court Trilogy—The first inquiry in

determining whether the decision was truly discretionary

is to determine whether the trilogy of Supreme Court

cases discussed above has enunciated a rule of decision

controlling the present case. The parties to the present

case viewed these three Supreme Court cases as holding

essentially that when Congress has committed a type of

decision to a specialized tribunal, a bankruptcy court

should defer. This view of the three cases explains why

the parties disagreed so sharply over the characteriza-

tion of the ASPRs, the disputes clause, and the ASBCA

as being creatures of Congress or the product of a private

law contractual agreement. If the mechanisms of govern-

ment dispute resolution are congressionally created, the

case lies within the rule of the trilogy of Supreme Court

cases, and not within the bankruptcy judge’s discretion.

In discussing the mechanisms of governmental con-

tract dispute resolution, supra Part II, we found that they

were not congressionally mandated. Thus, we do not view

this case as being within the rule of the trilogy of Su-

preme Court cases.

2. Time for a Rule.—Gary would have us read these

three Supreme Court cases as also standing for their

negative pregnant—if Congress has not specificaly com-

mitted a particular class of disputes exclusively to a

specialized agency, then those disputes are within the

free discretion of the bankruptcy court to adjudicate. As

we discussed earlier, a decision may be discretionary for

two reasons. It may be discretionary because the field

has not matured enough for there to be rules governing

everything—discretion by default—or it may be dis-

cretionary because of an affirmative judgment that it is

18a

not amenable to a rule—discretion by choice. It is our

view that the three Supreme Court cases do not repre-

sent an affirmative judgment that cases are permanently

committed to discretion by choice unless they are com-

mitted by Congress exclusively to a specialized tribunal.

And so we must now decide whether liquidation of a

government contract claim should be given over to dis-

cretion by choice.

Congress initially gave over to discretion the question

of whether a bankruptcy judge should defer to another

tribunal for resolution of a particular issue. This discre-

tion is not unguided, however; it has both latitudinal and

longitudinal dimension. It is neither cosmic nor omni-

scient, but rather discretion guided by “the will of the

law.” In determining the will of the law, we are guided

by the broad principles of bankruptcy. The three Su-

preme Court cases represent a judgment that in a parti-

cular class of disputes, judgments committed by Con-

gress to the exclusive expertise of an administrative © ody,

the broad principles of bankruptcy would consistently

lead to one particular decision, i.e., the bankruptcy court

should defer. Thus that formerly discretionary question

was an appropriate subject for a rule of decision. We are

now faced with a similar question: Should there be a

jurisdictional rule regarding government contract dis-

putes before the ASBCA?

To determine whether a rule is appropriate, we must

look to the nature of the two processes involved. The

primary purpose of a proceeding in bankruptcy is to

ensure that all creditors are treated fairly. This primary

5. It is the purpose of the Bankruptcy Act to convert the assets

of the bankrupt into cash for distribution among creditors, and

then to relieve the honest debtor from the weight of oppressive

19a

purpose makes it absolutely essential that all claims be

satisfied in one forum. The ancillary jurisdiction of a

bankruptcy court to liquidate claims, however, involves

more nearly the administrative convenience of settling

all disputes in a single forum; it just is not as vital .to

the purpose of bankruptcy. So, for example, we are told

that in proper circumstances bankruptcy courts should

defer unsettled questions of state law to state courts.

Thompson v. Magnolia Petroleum Co., 309 U.S. 478,

483, 60 S.Ct. 628, 630, 84 L.Ed. 876 (1940). See also

First State Bank and Trust Co. v. Sand Springs State

Bank, 528 F.2d 350, 354 (10th Cir. 1976) (“Bankruptcy

courts should be reluctant to entertain questions which

may be equally well resolved elsewhere.” ). Furthermore,

though Smith, Order of Railway Conductors, and Nathan-

son do not specifically control this case, they at least can

stand for the general proposition that a bankruptcy court

should defer a complicated, technical dispute to a special-

ized forum.

Given these generalized ideas about a bankruptcy

court’s ancillary jurisdiction, we must now investigate

whether they justify articulating a general rule for reso-

lution of government contract disputes pending before a

Board of Contract Appeals. First, allowing a Board of

Contract Appeals to liquidate claims arising out of a

government contract would not impair the primary goal

of bankruptcy—requiring satisfaction of all claims against

the bankrupt’s estate proceed in a central forum; once

the Board of Contract Appeals liquidated the claim, the

government would look to the bankruptcy court for satis-

indebtedness and permit him to start fresh free from the obliga-

tions and responsibilities consequent upon business misfortunes.

Williams v. United States Fidelity & Guaranty Co., 236 U.S. 549,

554-55, 35 S.Ct. 289, 290, 59 L.Ed. 713 (1915).

20a

faction. Second, government contracting law tends to be

technical and esoteric. For example, the trial below took

eight months and generated a 17,000 page transcript.

The findings of fact constitute a moderate-sized book in

themselves. Third, there are specialized fora designed

specifically to resolve government contract disputes.

Boards of Contract Appeals were created precisely be-

cause of the needs for expertise, speed, and uniformity

in resolving government contract disputes. One cannot

help but think that the ASBCA might have been better

qualified by its experience and expertise to resolve the

present case than was a bankruptcy judge who was at

one stroke forced to master government contracting law.

Fourth, government contract disputes may often have

claims running against the government in addition to

claims against the contractor. Resolution of the claims

against the government is in the exclusive jurisdiction

of the Court of Claims; thus, if a bankruptcy court did

not defer to the Board of Contract Appeals, the same

basic contract dispute might have to be tried twice.°

6. This potential problem is illustrated quite nicely by this case.

The bankruptcy court here affirmatively valued Gary’s claim against

the government, ostensibly to determine whether the government’s

claim against Gary was entitled to priority. Gary then attempted to

use that “collateral” valuation of Gary’s claim to support a claim

for damages in the Court of Claims.

In that proceeding the government successfully argued that the

claim against the government should be remanded to the ASBCA

for administrative exhaustion. Gary Aircraft Corporation v. United

States, No. 407-80C (Ct. Cl. Jan. 9, 1981). Before us the government

argues that the bankruptcy court’s findings were beyond its jurisdic-

tion, relying on United States v. Shaw, 309 U.S. 495, 60 S.Ct. 659,

84 L.Ed. 888 (1940), and United States v. United States Fidelity &

Guaranty Co., 309 U.S. 506, 60 S.Ct. 653, 84 L.Ed. 894 (1940).

We do not pass on the merits of this argument. We mention the

issue now solely to point out that the considerable time and energy

spent already on this jurisdictional question could all have been saved

had the bankruptcy court deferred.

2la

Finally, though the Board of Contract Appeals were not

specifically created by Congress, Congress certainly was

aware of them and has endorsed them in the Wunderlich

Act and the newly enacted Contract Disputes Act of 1978.

In summary, this does seem to be an area where

a rule of decision would be proper. The various factors

we have just discussed seem common to most, if not all,

government contract disputes normally heard before

Boards of Contract Appeals. This common nature is the

key indicator for whether a rule or discretion by choice

is appropriate; given these common factors, a rule for

deferral is appropriate. We hold that a bankruptcy court

should defer liquidation of a government contracting dis-

pute to the Board of Contract Appeals.‘

CONCLUSION

A judge is more a philosopher than a scientist, a

mechanic, or a builder. But the philosophy a judge ex-

pounds in his or her judicial expostulations has as its

foundation the materials furnished by those more tech-

nical and empirical disciplines. De novo determinations

of technical questions by judges are on the wane, and

that is all for the good. That is not to say, however, that

7. 11 U.S.C. §93(d) (1976) provides that unliquidated claims

“shall not be allowed if the court shall determine . . . that such

liquidation or estimation would unduly delay the administration of

the estate or any proceeding under this title.’ Certainly the rule we

announce today requiring liquidation in the Board of Contract Ap-

peals cannot be used per se to support a finding of undue delay, the

normal tests for delay would still apply. See, e.g., Schaefer v. Smith,

469 F.2d 1256, 1258 (10th Cir. 1972) (“In an appropriate case a

one year period could very possibly ‘unduly delay the administration

of the estate.’ Under other circumstances, however, when considered

with all other factors, a contingent claim should not be disallowed

solely on the basis of administrative delay.’’). In this case, considering

all factors, deferring to the ASBCA should not cause undue delay.

22a

a judge should sit in cloistered chambers and make deci-

sions far removed from the mechanical details giving rise

to the issue at hand.

Accounting for the mechanical details, however, pre-

sents its own problems. No individual, no matter how

robed, can be a renaissance person in this modern, com-

plex society. And a judge therefore cannot be prepared

to tackle the mundane and the celestial, the orbital and

the suborbital, the oceanographic and the subterranean

with the facility that might have been possible centuries

ago. We are living in an age and era of specialization,

with no end in sight, save perhaps a fiery holocaust where

all knowledge and experience would be obliterated. The

judicial philosophers have not been immune from this

specialization, and the different cloisters may now house

different orders with different vows and specialties.

These juridical turfdoms are not easily geodisized or

surveyed for a metes and bounds description of their

rights, powers, and duties. Bankruptcy and government

contract dispute resolution are both institutions to be

treated with great respect and deference. The life of

judges would be easier if institutions such as these never

came into conflict. When they do, we must mediate be-

tween them in the manner that least impairs their re-

spective goals and purposes.

We read much today in the press and in the reported

decisions and in the commentaries about the role of the

bankruptcy judges in the jurisprudential cosmos in which

we dwell. There are unanswered questions remaining, to

be sure, but it can be said with some degree of certainty

that a corporation or individual entering into the pale of

bankruptcy does not relegate all other governmental

23a

agencies, regardless of their powers, strengths, and _ his-

tories, to the back burner, without even permitting the

stove to be lit. We searched the statutes and legislative

history and can reach no absolute certitude, but in view-

ing the problems presented by this case it seems to us

that it would be a misreading of our developing juris-

prudence to believe that a bankruptcy court should be

vested with nigh-unreviewable discretion to adjudicate

highly esoteric and technical claims not subject to a

purely jurisprudential solution.

Whether such discretion is to be exercised is a matter

of law, almost pure law. The methodology of the exercise

of discretion is brought to the judge, freighted and bur-

dened by very high level principles of law. We are here

dealing with a model form of deference because the

forum to which the adjudication is initially assigned is

technically equipped and experienced in the field to such

an extent that it can make the job of a bankruptcy judge

making ultimate determinations regarding the debtor

easier, with greater harmony and symmetry within the

existing body of government contracting law.

We would not dream of giving the Board of Contract

Appeals the broad equitable jurisdiction given to the

bankruptcy court, merely because the bankrupt was a

party to a government contract. By similar logic, we see

no reason to give to the bankruptcy court the determina-

tion of the existence of a claim and its valuation when

that is within the peculiar expertise of the Board of

Contract Appeals. This may be especially true when the

sole significant asset of the debtor is a claim against the

government, which must pass through the Board of Con-

tract Appeals and Court of Claims. We need a narrow

24a

turf and a legal tightrope walker to determine the validity

and magnitude of the contract claims, if any. Assuming

there be such, we may then return to bankruptcy turf

to see if reorganization is to be found in the grass.

Accordingly, we reverse the ruling of the bank-

ruptcy court on the government’s motion for stay, and

remand this case to the bankruptcy court with instruc-

tions to stay further action on the claim of the United

States pending proceedings in the Armed Services Board

of Contract Appeals.

REVERSED AND REMANDED.

25a

APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF TEXAS

SAN ANTONIO DIVISION

CAUSE NO. SA-79-CA-342

(Filed June 24, 1981)

IN RE

GARY AIRCRAFT CORPORATION,

Debtor.

Appeal From The Judgment of the United States

Bankruptcy Court For The Western District of

Texas on the Contested Matter Respecting

Objection to Claim of The United States

of America in Cause No. SA-76-BK-443

MEMORANDUM OPINION AND ORDER

CAME ON TO BE HEARD the Appeal of the United

States of America from the Judgment of the United States

Bankruptcy Court for the Western District of Texas, the

Honorable Bert W. Thompson, Bankruptcy Judge, on the

Contested Matter Respecting Objection to the Claim of

the United States of America, Cause No. SA-76-BK-443,

entered June 29, 1979. Appellant filed its brief on Novem-

ber 21, 1979. Appellees Gary Aircraft Corporation and

the Official Creditors Committee filed a joint brief on

March 5, 1980, which was replied to by Appellant’s brief

of April 28, 1980. The Court, having carefully considered

the record, the Findings of Fact and Conclusions of Law

26a

of the United States Bankruptcy Court, and the arguments

and authorizaties of the parties, enters the following

Memorandum Opinion and Order.

Gary Aircraft Corporation entered into contract

F41608-71-D-0289 (hereinafter contract -0289) with the

United States Air Force effective December 1, 1970 to

rebuild Model R2800 aircraft engines. Contract -0289

expired, after extensions, on August 31, 1974. Under the

contract, Gary was supplied with materials from various

Government sources. Beginning in late 1973, serious ques-

tions were raised by the Government Accounting Office

(GAO) about Gary’s property control systems. However,

in the summer of 1974, Gary was awarded a new contract,

No. F41608-74-D-1645 (hereinafter contract -1645) to

continue performing the same services, effective Septem-

ber 1, 1974. Meanwhile, the GAO investigation continued

and in August, 1974, GAO recommended that the Air

Force take drastic action against Gary to protect Govern-

ment interests. A fifty person “surveillance team” was sent

to Gary’s plant which imposed much more stringent prop-

erty and quality control requirements. As a result, pro-

duction was severely disrupted and completely halted at

some times. Gary was unable to meet its delivery sched-

ules. The Government terminated the contract for default

in March of 1975.

In 1975 Gary pressed claims against the Government

through administrative channels for termination and

changes ordered by the “surveillance team.” The Govern-

ment asserted claims against Gary for excess reprocure-

ment costs and unaccounted for government property.

On October 28, 1976, Gary filed this Chapter XI bank-

ruptcy proceeding. On November 30, 1976, the Govern-

27a

ment filed its proof of claim in the bankruptcy proceeding,

including its claim on contracts -0289 and -1645. Gary

moved to disallow the claim, and the Official Creditors’

Committee supported Gary. Hearing was set for July 18,

1977. The Government moved that the hearing be stayed

or vacated pending liquidation of the claims and counter-

claims by the Armed Services Board of Contract Appeals.

That motion was heard July 18, 1977, and finally denied

on February 22, 1979. The hearing commenced July 19,

1977 and continued for approximately eight months. The

record consists of a seventeen thousand page transcript

and exhibits of similar gravity. On June 29, 1979, the

Bankruptcy Court essentially adopted Gary’s proferred

1,107 Findings of Fact and Conclusions of Law, covering

383 pages. The Bankruptcy Court found generally that

the alleged defaults were caused by the Government.

Therefore, the termination for default was converted to

one for the convenience of the Government, absolving

Gary of liability for reprocurement costs and making the

Government liable for Gary’s losses. The Government’s

claim against Gary for lost parts was valued at $26,049.83

(F. 911, 1081).* Gary’s claim against the Government

was valued at not less than $3,337,990.00 (F. 1069-70,

1084).

The Government urges that the Bankruptcy Court

erred in:

1. Denying the Government’s Motion to Stay and

Vacate, and proceeding to the merits of the

claims and counterclaims;

1. The Court adopts the abbreviations used by the parties: “MF”

for findings of the Bankruptcy Court on the Motion to Stay and

“F” for Findings of Fact and Conclusions of Law on Claim of the

United States of America.

28a

2. Disallowing portions of the Government’s claim

for unaccounted for servicable government-fur-

nished property;

3. Determining the fair market value of the unac-

counted for serviceable government-furnished

property;

4. Precisely valuing Gary’s affirmative claim against

the Government; and

5. Determining the nature and value of Gary’s claim

against the Government.

The threshold question in this case is whether the Bank-

ruptcy Court had jurisdiction to adjudicate the merits of

these claims. The contracts in question were subject to

the “standard” disputes clause present in all government

procurement contracts, providing that all disputes would

be presented to and decided by the Government’s contract

ing Officer. Appeal therefrom was to the Armed Services

Board of Contract Appeals (hereinafter ASBCA). The

Supreme Court has stated that this clause,

is something more than a dead letter to be revived

only at the convenience or discretion of the con-

tractor. It is a clear, unambiguous provision applic-

able at all times and binding on all parties to the

contract. No court is justified in disregarding its

letter or spirit. . . . This mechanism, moreover, is

exclusive in nature. Solely through its operation may

claims be made and adjudicated as to matters aris-

ing under the contract.

United States v. Joseph A. Holpuch Co., 328 U.S. 234,

239-240, 66 S.Ct. 1000, 1003, 90 L.Ed. 1192 (1946)

29a

(citations omitted). On the other hand, the jurisdiction of

bankruptcy courts has been described just as sweepingly:

Courts of bankruptcy are constituted by Sections 1

and 2 of the bankruptcy act 30 Stat. 544, 11 U.S.C.

Sections 1(8), 11, and by the latter section are in-

vested “with such jurisdiction at law and in equity

as will enable them to exercise original jurisdiction

in bankruptcy proceedings.” Consequently this Court

has held that for many purposes “courts of bank-

ruptcy are essentially courts of equity, and their

proceedings are inherently proceedings in equity”.

. . . Among the granted powers are the allowance

and disallowance of claims; the collection and distri-

bution of the estates of bankrupts and the determina-

tions of controversies in relation thereto; the rejec-

tion in whole or in part “according to the equities

of the case” of claims previously allowed; and the

entering of such judgments “as may be necessary for

the enforcement of the provisions of the act. In such

respects the jurisdiction of the bankruptcy court is

exclusive of all other courts.

Pepper v. Litton, 308 U.S. 295, 303-304, 60 S.Ct. 238,

244, 84 L.Ed. 281 (1939) (citations omitted). The

Court has on at least three occasions opined that the

jurisdiction of a bankruptcy court is subservient to that

of an administrative tribunal. In Order of Railway Con-

ductors of America v. Pitney, 326 U.S. 561, 66 S.Ct. 322,

90 L.Ed. 318 (1946), the Court held that a railroad

reorganization court should not have adjudicated a contro-

versy between rival unions as to which union’s members

had the right to conduct trains of the bankrupt railroad

over tracks inside and outside of the railroad yards. The

Court noted that Congress had specifically designated the

Railway Labor Adjustment Board to adjudicate such con-

30a

troversies, by means of the Railway Labor Act, 45 U.S.C.

Sections 151 et seg. Likewise, the Court ruled in Smith

v. Hoboken Railroad Co., 328 U.S. 123, 66 S.Ct. 947

90 L.Ed. 1123 (1946) that the reorganization court

should have deferred to the Interstate Commerce Com-

mission as to whether a bankrupt railroad had forfeited

its rights to leased tracks. The Court specifically noted

that, in light of Section 77 of the Interstate Commerce

Act, 49 U.S.C. Section 1 et seq., there was “no doubt that

Congress did not mean to grant to the district courts the

Same scope as to bankrupt roads that they may have in

dealing with other bankrupt estates.” 328 U.S. at 133

n.5, 66 S.Ct. at 953 n.5. Neither Order of Railway Con-

ductors nor Smith involved monetary claims against the

bankrupt estates, and both involved the special railroad

bankruptcy situation. Therefore, the Court feels that

neither decision controls this case.

The most recent statement is Nathanson v. National

Labor Relations Board, 344 U.S. 25, 73 S.Ct. 80, 97

L.Ed. 23 (1952). There, the NLRB had found the em-

ployer guilty of unfair labor practices, and ordered the

payment of back wages. While an action to enforce the

order was pending before the Court of Appeals, an in-

voluntary bankruptcy petition was filed against the em-

ployer. The Court of Appeals subsequently enforced the

order. The NLRB filed a proof of claim with the bank-

ruptcy court, which denied the claim. The Supreme Court

held that the claim was provable in bankruptcy, but not

entitled to priority as a debt owing to the United States.

The Court said:

The bankruptcy court normally supervises the liqui-

dation of claims. But the rule is not inexorable. A

3la

sound discretion may indicate that a particular con-

troversy should be remitted to another tribunal for

litigation. And where the matter in controversy has

been entrusted by Congress to an administrative

agency, the bankruptcy court normally should stay

its hand pending an administrative decision. . . . It is

the Board, not the referee in bankruptcy nor the

court, that has been entrusted by Congress with

authority to determine what measures will remedy

unfair labor practices.

344 U.S. at 30, 73 S.Ct. at 83-84 (citations omitted).

The Court noted that the National Labor Relations Act

authorized the Board, once an unfair labor practice had

been found, to require the person who committed it to

“take such affirmative action, including reinstatement of

employees with or without back pay, as will effectuate

the policies of this Act.” 344 U.S. at 29, 73 S.Ct. at 83;

29 U.S.C. Section 160(c). Nathanson is distinguishable

from this case. First, the bankruptcy court there was pre-

sented with an already liquidated claim. Here, the ASBCA

hearing had not yet begun. Second, the NLRB plays a

unique role in adjudicating labor disputes. Its judgment

was ancillary to its determination that the employer had

committed unfair labor practices. As with the esoteric,

non-monetary issues involved in Order of Railway Con-

ductors and Smith, the bankruptcy judge was in no posi-

tion to make such a determination. Here, although the

issues were technical and complex, the dispute was over

claims for money arising out of the breakdown of a con-

tractual relationship. This is within the traditional prov-

ince of the bankruptcy court.

The Bankruptcy Court had expert testimony concern-

ing the operations of the ASBCA that the adjudication

32a

of the Government’s claims against Gary and Gary’s

counterclaims against the Government could drag on for

years. MF 68. This would substantially frustrate the Bank-

ruptcy Court in discharging its duty to expeditiously re-

arrange, if possible, Gary’s affairs.

Bankruptcy courts sit as courts of equity. Pepper v.

Litton, supra; Katchen v. Landry, 382 U.S. 323, 327, 86

S.Ct. 467, 471, 15 L.Ed.2d 391 (1966). Their history

and purpose is one of expeditiously and fairly settling the

estates of distressed debtors so that creditors may receive

as much as is realistically possible, circumventing, if nec-

essary and appropriate, the strictures of rigid legalism.

Even reduction of a debt to judgment does not foreclose

their review. Pepper v. Litton, 308 U.S. at 305, 60 S.Ct.

at 244. Ordinarily one who files a proof of claim with a

bankruptcy court expressly invokes that court’s jurisdic-

tion and subjects himself to all the consequences thereof.

Katchen v: Landry, 382 U.S. at 305, 86 S.Ct. at 476.

Therefore, the Court is of the opinion that the Bankruptcy

Court did not err or abuse its discretion in adjudicating

the merits of this dispute.

Il.

The Government next complains that the Bankruptcy

Court erred in determining the amount of serviceable gov-

ernment property lost or unaccounted for by Gary. This

involves interpretation of the contracts, and findings of

fact. Findings of fact may be overturned by this Court

only if clearly erroneous. Bankruptcy Rule 810 provides:

Upon an appeal the district court may affirm, modi-

fy, or reverse a referee’s judgment or order, or re-

mand with instructions for further proceedings. The

33a

court shall accept the referee’s findings of fact unless

they are clearly erroneous, and shall give due regard

to the opportunity of the referee to judge the credi-

bility of the witnesses.

The Bankruptcy Judge expressly stated that the quality

and expertise of Gary’s witnesses, as opposed to the

Government’s, was “utmost in the Court’s mind in reach-

ing its decision. . . .” Decision of the Court on the Ob-

jection to the Claim of the United States, p. 3.

The claim for loss of serviceable government property,

indeed this entire case, rests on Gary’s inadequate records

and the Government’s lack of records. Under the terms

of the contracts, Gary was supplied with materials neces-

sary to rebuild the R2800 engines from various Govern-

ment supply sources. The Government made no attempt

to keep any centralized records of delivery of property

to Gary. This practice was condemned as unsound by

the Government’s own investigators. See F. 684.

Therefore, to prove delivery of property, the Govern-

ment had to rely on Gary’s receipt records. Gary was

contractually obligated to maintain adequate property

control records. Unfortunately, Gary’s records were rid-

dled with errors. The Bankruptcy Court’s disallowance

of the majority of the Government’s claims for lost

serviceable property was based on a study done by ac-

countants hired by Gary analyzing inventory shortages

and overages, and trading off shortages and overages of

identical or very similar parts. The Government now

urges that:

1. Liability should be imposed on the basis of

Gary’s inability to specifically account for short-

34a

ages by showing that specific parts indicated as

received in its records and not recorded as hav-

ing been used in production or found on the

inventory shelves actually were used in specific

production activity or redelivered to the Govern-

ment;

2. The trade-off analysis arbitrarily sets off short-

ages and overages of identical or similar parts

without any showing that the shortage and over-

age are related to one another, without regard

for the length of time between the recorded

shortages and overages, and without regard to

the fact that in many cases inventories were con-

ducted between the times of the shortage and

overage which should have cleared up discrep-

ancies;

3. Once the Government had proved a prima facie

case, Gary bore the burden of proof of the af-

firmative defense of performance of the con-

tractual requirement to account, not simply the

burden of going forward with evidence as re-

quired by the Bankruptcy Court.

The Government submits that Gary is liable under

either of two theories. The first is for direct proof of loss,

as contemplated in the “risk of loss” clause of the con-

tracts. The second is for inability to specifically account

for each item received by showing either that it was used

in production or returned to the Government. This second

theory is said to stem from Armed Services Procurement

Regulations Appendix B, which the Government claims is

part of the contract with Gary. The Government does not

direct the Court’s attention to which portion of Appendix

B purports to make inability to account rather than actual

loss the basis of the contractor’s liability. Paragraph B-

35a

203, entitled “Contractor’s Liability”, provides in relevant

part that:

(a) Subject to the terms of the contract, the con-

tractor may be liable when shortages of Govern-

ment property are disclosed or when Govern-

ment property is lost, damaged, or destroyed,

or when there is evidence of unreasonable use

or consumption of Government property as

measured by the allowances provided for by the

terms of the contract, the bill of material, or

other appropriate criteria.

Thus, it appears to the Court that Appendix B, like the

main text of the contract, contemplates liability for actual

loss.

The Government next argues that, once it established

its prima facie case of delivery of the materials to Gary,

Gary bore the burden of proving redelivery, citing two

ASBCA cases, Export Packing Div. of Novo Corp.,

ASBCA Nos. 18376, 18377, 18482-18484, 75-1 BCA

q 11,291 (May 14, 1875) (Export 1) and Export Pack-

ing Div. of Novo Corp., ASBCA Nos. 18991-18993,

19099, 19657, 78-2 BCA 4 13,286 (May 31, 1978)

(Export II). However, in Export I, the Board had found

that the Government had proved delivery of the goods.

The contractor proved sufficient security measures, giving

rise to an inference that the property had been mistakenly

redelivered to another government agency. The ASBCA

cited Pan-American Petroleum Transp. Co. v. Robins Dry

Dock & Repair Co., 281 F. 97 (2nd Cir. 1922), cert.

denied 259 U.S. 586 (1922) for the proposition that

when a contract bailee pleads performance, it bears the

burden of proof of that affirmative defense. Export II

36a

simply cites the holding in Export 1. Here, the Govern-

ment’s “prima facie” case consisted of introducing Gary’s

Inventory Adjustment Vouchers, which documented dis-

crepancies between records of received property and prop-

erty used in production or still in inventory. Gary did not

plead “performance”. Rather, it plead and proved to the

satisfaction of the Bankruptcy Judge that the vast majority

of these discrepancies existed on paper only. The Govern-

ment complains that Gary’s records do not tie specific

overages to specific shortages. However, the Government

cannot prove its “prima facie” case except by the same

inaccurate records.

The Government argues that the Bankruptcy Court was

too liberal in allowing setoffs of shortages and overages.

The Bankruptcy Court allowed these trade-offs for any

shortage and corresponding overage of a given item or

very similar items that could be visually confused. See

F. 834-837. In light of Gary’s contractual duty to account,

the Bankruptcy Court held it liable for any shortages

which were not balanced by a corresponding overage.

F. 837. The Government complains that the Bankruptcy

Court did not require Gary to show how shortages and

overages were related, improperly assuming misidentifica-

tion or misrecording. Likewise, the Bankruptcy Court

allowed set-offs between overages and shortages arising

years apart, without regard to the fact that inventories

had been taken in between. However, the Bankruptcy

Court found that there had never been a wall to wall

inventory of Government property in Gary’s control dur-

ing the periods covered by these contracts. F. 692. There

was no credible evidence that any of the property shown

as missing on the records had in fact been lost or con-

verted. F. 763-810. Gary showed that it purchased suffici-

37a

ent R2800 parts to meet the demands of its commercial

customers. F. 723-727. Gary’s security measures were

very stringent, extending even to searching employee

lunch boxes to prevent pilfering of small parts. F. 733-

746. Under these circumstances, the Court cannot say that

the finding of the amount of lost property based on the

liberal trade-off allowances was “clearly erroneous”.

Ill.

The Government next complains that the Bankruptcy

Court erred in its determination of the fair market value

of the lost serviceable property. The Bankruptcy Court

was presented with evidence of two disparate markets in

which R2800 engine parts are traded. The Government

insists that the Foreign Military Sales (FMS) market

supplies the accurate measure of fair market value. Gary

proposed, and the Bankruptcy Court found, that the

Surplus After-Market (SA-M) was the relevant r arket.

The Government sells military supplies to friendly foreign

governments through the FMS program. The price is fixed

according to the actual acquisition cost to the Govern-

ment of the item, regardless of whether the item is new

or used. F. 873. The SA-M, on the other hand, consists

of sales to the highest bidder of surplus government prop-

erty. The prices in the two markets are widely disparate.

The Bankruptcy Court found that the fair market value,

as represented by sales in the SA-M, was ten percent of

the acquisition cost of the item. F. 900.

The Government insists that the selection of the SA-M

as the indicator of fair market value was an error of law

rather than fact, being “inconsistent with the fundamental

theory and principles of fair market valuation”. Reply

38a

Memorandum, p. 31. However, it appears to the Court

that this was a determination made on the basis of objec-

tive facts and inferences therefrom, and is entitled to re-

view under the clearly erroneous rule. The Government’s

contention that the Bankruptcy Court ignored the FMS is

not true. The Bankruptcy Court rejected FMS as a deter-

minant of fair market value only after thorough consider-

ation. See F. 850-887.

The Bankruptcy Court had evidence before it that

the FMS was significantly affected by non-market forces,

especially the foreign policy priorities established by the

Government. F. 875, 882. As noted above, FMS sales

did not distinguish in price between new and used service-

able parts. F. 873. There was also no distinction made as

to life expectancy of the materials. F. 880. Government

surplus parts are worth far less on the domestic market

than used commercial parts, due to their age and the num-

ber of times they have been refurbished or rebuilt. F. 885.

Foreign nations participating in the FMS program are

frequently prevented from buying the same items for

lower costs in the SA-M under the terms of their contract

with our Government. F. 886.

On the other hand, the SA-M is a highly competitive

market. The Government often gets over a hundred bids,

varying widely in price, for surplus property. F. 891-893.

Price information is made available regularly through the

Government and at least one commercial service. F. 895.

The Government sold much of the property left at Gary’s

Victoria, Texas, plant after the contract was terminated

on a “case sales” basis, at prices far lower than the FMS

values now claimed. F. 865. Prices of new serviceable

parts are much higher than the price of used serviceable

parts in the SA-M. F. 874.

39a

There is certainly merit in the Government’s position.

Property finding its way into the SA-M must first be de-

clared surplus to the needs of the agency holding it, then

offered to other government agencies and some non-profit

organizations. Only then can it be sold on the SA-M. On

the other hand, the Government was able to document

sales of each item unaccounted for by Gary on the FMS

market. Exhibits U.S. 414 and 415. The prices seem high

for used parts; yet, subject to some coercion referred to

above (F. 886), they were purchased by willing buyers.

The Court agrees with the Government that some factors

relied on by the Bankruptcy Court in rejecting the FMS

market, e.g., the lack of price negotiations, the fact that

some sales are on credit, etc., are not particularly proba-

tive of the inappropriateness of relying on that market.

However, it is clear to the Court that many of the prices

obtained on the FMS are unrealistically high. The conten-

tion that items used for years and refurbished and rebuilt

over and over again are worth the same as new parts is

contradicted by common knowledge and direct expert

testimony. See F. 885. Gary’s proof of fair market value

by way of SA-M valuations does not strike the Court as

compelling. However, there is evidence to support it, and

the Court, having considered the Findings of the Bank-

ruptcy Court on fair market value as well as the defects

in those Findings argued by the Government, is not “left

with the definite and firm conviction that a mistake has

been committed”. United States v. United States Gypsum

Co., 333 US. 364, 395, GE SCA. 325, 342, 92 LE.

746 (1948).

IV.

The Government next argues that the Bankruptcy

Court erred in proceeding to precisely value Gary’s claim

40a

against the Government. All parties and the Bankruptcy

Court agree that the Bankruptcy Court had no jurisdic-

tion to render an affirmative judgment against the Govern-

ment, and no such award was made. However, the Gov-

ernment agrees that it was necessary for the Bankruptcy

Court to determine whether Gary was insolvent, and thus

whether the claim of the Government was entitled prior-

ity. The Government further agrees that the resolution of

the conflicting claims of Gary and the Government was

necessary to determine whether Gary was insolvent. It

was stipulated that Gary’s liabilities, exclusive of any

debt owing the Government, totalled $4,771,592.72. F.

1080. It was further stipulated that Gary’s assets, exclu-

sive of any claim against the Government, totalled $4,-

275,373.82. F. 1083. The Government argues that, once

the Bankruptcy Court had determined that Gary’s liability

to the Government was only $26,049.83, the Bankruptcy

Court only needed to determine that the value of Gary’s

claim was not less than $555,284.96 in order to find

Gary solvent.

In fact, the Bankruptcy Court did not purport to pre-

cisely value Gary’s claims against the Government, but

rather found that the Government’s liability to Gary was

not less than $3,337,990.00. F. 1084. The Bankruptcy

Court noted that the Government’s proof of claim had

been in the amount of $2,686,114.15. F. 1102. The

Bankruptcy Court reasoned that, considering the possi-

bility of modification of its partial allowance on appeal,

it would be in the interest of judicial economy to make

the findings referred to above. The Government has cited

no authority for its contention that the Bankruptcy Court

should not have valued the Government’s claim as it did.

This Court declines to condemn that practice.

Finally, the Government complains of the Bankruptcy

Court’s characterization and valuation of Gary’s affirma-

tive claim against it. The Government submits that:

The court erred in treating the entire claim as a

termination for convenience claim when substan-

tial portions were for a constructive change order;

The court erred in applying a total cost approach

rather than an inventory basis approach in valu-

ing the claim.

The court erred in its evaluation of Gary’s cost

accounting system;

The court erred in its construction of the cost

accounting clause of contract -1645;

The court erred in finding that Gary had com-

plied with the Cost Accounting Standards at 4

C.F.R. 401 and 405;

The court erred in failing to require segregation

of costs between the two contracts; and

The court erred in determining numerous ele-

ments of damages for which it allowed Gary to

recover.

The constructive change order costs arise out of the

activities of the 50 person “surveillance team” sent by the

General Accounting Office to monitor Gary’s operations

in August of 1974. The Bankruptcy Court found that this

team unreasonably imposed higher quality control stand-

ards and intruded into the operations of the Gary plant

to the extent that operations were severely hampered and

at one point completely shut down. See F. 170-247. The

Government’s own auditors had found that Gary’s records

42a

would not permit segregation of the constructive change

order costs from termination costs. F. 939, 941.2 The

Bankruptcy Court had before it expert testimony that

inclusion of a changes claim in a termination proposal

was common practice accepted by contractors and the

Government. F. 940. ASPR Section 8-307.1(b) requires

a terminated contractor to promptly submit a settlement

proposal including all his claims, which by its literal terms

would appear to require inclusion of change order claims.

See F. 943. The Government nonetheless argues that, on

the facts of this case, inclusion was improper. It cites

Okaw Industries, Inc., ASBCA Nos. 17863, 17864, 77-2

BCA { 12,793, which was actually cited by the Bank-

ruptcy Court in support of its inclusion of changes cost

within the termination claim. F. 943. There the Govern-

ment had argued that certain start-up costs should be dis-

allowed because not previously submitted in a separate

changes claim. The Board allowed the costs because the

Government had not demonstrated prejudice. 77-2 BCA

€ 12,793 at p. 62,227. The Government also cites Celesco

Industries, Inc., ASBCA Nos. 21928, 22460 (apparently

unreported) where the Board refused to consider the

claims together. However, the Court is of the opinion that,

in light of the Bankruptcy Court’s findings and the extra-

ordinary nature of the constructive change order in this

case, consideration of change order costs with termination

costs is appropriate.

Under ASPR Section 8-307.2, termination settlement

proposals may be submitted under either the “inventory

basis” or the “total cost basis”. The inventory basis re-

quires the contractor to allocate labor, overhead, materials

2. Finding 941 was erroneously numbered 944 in the Bankruptcy

Court opinion.

43a

and general administrative costs to individual items of

inventory left as of the date of termination. Under the

total cost method, all labor, overhead, materials and gen-

eral and administrative expenses are totalled, and all re-

ceipts from the Government are subtracted from the total.

The inventory basis is preferred; however, the total cost

basis may be used “when use of the inventory basis is not

practicable or will unduly delay settlement”. 7d. Resort

to the total cost basis may be justified where, “the con-

tractor’s accounting system will not readily lend itself to

the establishment of unit costs for work in process and

finished products.” ASPR Section 8-307.2(b) (1) (ii). The

Bankruptcy Court found that Gary’s records would not

supply the necessary information, and proceeded on the

total cost basis. F. 921. Properly applied, the total cost

basis will yield the same result as the inventory basis.

see F. 920.

The courts and the Armed Services Board of Contract

Appeals have been somewhat more cautious in applying

the total cost approach to change order valuations. The

Court of Claims has enumerated four prerequisites:

The acceptability of this method hinges on proof

that (1) the nature of the particular losses make it

impossible or highly impracticable to determine them

with a reasonable degree of accuracy; (2) the plain-

tiff’s bid or estimate was realistic; (3) its actual

costs were reasonable; and (4) it was not responsible

for the added expenses.

WRB Corporation v. United States, 183 Ct.Cl. 409, 426

(1968). See also Meva Corp. v. United States, 511 F.2d

548, 206 Ct.Cl. 203 (1975); Moorehead Construction

Co. v. City of Grand Forks, 508 F.2d 1008 (8th Cir.

44a

1975); Fattore Cor. v. Metropolitan Sewerage Commis-

sion of the County of Milwaukee, 505 F.2d 1 (7th Cir.

1974). Gary’s claim under contract -0289 was solely for

constructive change orders. The Bankruptcy Court found

that the WRB four part test was satisfied. F. 1063-1067.

The Government has not challenged these findings. The

claim under contract -1645 is for termination, with sub-

stantial portions resulting from the constructive change

order. The Bankruptcy Court justified its invocation of

the total cost approach primarily by its finding that use

of the inventory basis was not practicable due to the

nature of Gary’s accounting system, satisfying ASPR

Section 8-307.2. F. 923. Although the Bankruptcy Court

considered the propriety of considering the changes ele-

ment of the claim under contract -1645 along with the

termination element, it did not consider the effect of that

inclusion on the propriety of valuation by the total cost

method. The only case cited to the Court which is directly

on point is Sternberger v. United States, 401 F.2d 1012,

185 Ct.Cl. 528 (1968), where the Court of Claims up-

held the ASBCA’s refusal to apply the total cost approach

to a termination claim containing a substantial changes

claim. The Court set forth the WRB test, but relied pri-

marily on the weakness of the contractor’s evidence on

the amount of costs. 401 F.2d at 1015-1016.

This Court is of the opinion that, under the extra-

ordinary circumstances of this case, the total cost basis

was properly applied to the entire termination claim. The

Bankruptcy Court found that Gary had been performing

Satisfactory work under its contracts. F. 17-24. It found

that the GAO investigation of Gary was conducted under

questionable professional standards. F. 121-126. The re-

sult was that Gary was invaded by the fifty member “sur-

45a

veillance team” which unreasonably ordered changes in

various production and administrative procedures and im-

posed drastically higher quality control standards, bring-

ing production to a virtual halt. F. 170-247. Throughout

the period of disruption, the various Government agencies

were secretly intending to terminate Gary’s contract for

default. To that end, they imposed unnecessarily high

production quotas which could not be met because of the

activities of the surveillance team. Government agents

exhorted Gary to continue to spend money trying to get

production back to capacity when they knew that the

Government’s need for the R2800 engines had been dras-

tically reduced and that Gary was about to be terminated.

F. 273-312, 367-370. The Bankruptcy Court found that

the Government actions were the cause of the delays and

disruptions that led to the changes costs. F. 364-365.

A termination for convenience of a contract comprising

a major portion of the contractor’s business has a devas-

tating impact on that business. The contractor loses em-

ployees, good will and reputation in the community. This

is even more true where the termination is ostensibly for

default, amid charges of impropriety, poor quality and

gross inefficiency. Here, Gary Aircraft Corporation, a

profitable and well-respected business until the events

giving rise to the claims adjudicated by the Brankruptcy

Court, was driven to the brink of bankruptcy and hun-

dreds of workers became unemployed. F. 5-8, 916. The

Government agencies knew when they committed these

acts that Gary’s accounting system would be incapable of

substantiating its claims on an inventory basis. F. 927-

928. Gary cannot be made whole for its losses except by

valuation on the total cost basis.

46a

Alternatively, the Court notes that the Bankruptcy

Court did make findings from which it can be inferred

that the requirements of WRB, supra, were substantially

met. Since Gary employed a “process cost” accounting

system, whereby costs were maintained as to major work

processes rather than individual engines, the cost of plant-

wide delays and disruptions could not be ascertained on

an inventory basis. F. 921, 1063. Gary’s bid on contract

-1645 was reasonable and allowed for profit. F. 1038,

1040. The new quality control requirements imposed by

the surveillance team were “by far the predominant

factor” causing production delay and disruption. F. 364.

Shortages of government-furnished property (GFP) and/

or stringent property control requirements, also attribut-

able to the Government, exacerbated the situation. F.

364-365. Finally, although the Bankruptcy Court did not

find each expenditure to be reasonable, it made extensive

findings concerning costs and considered and rejected

Government arguments of unreasonableness as to some

items. F. 970-1054.

The Government argues that the Bankruptcy Court’s

findings that Gary’s accounting system would not yield

inventory basis data confused the concept of the system

itself with that of the maintenance of the system. It points

to the testimony of two Government witnesses that, prop-

erly maintained, Gary’s accounting system would have

provided data to segregate costs between contracts -0289

and -1645. However, the Bankruptcy Court found that

the contracts did not necessarily require segregation of

costs during the short overlap period where some work

was being done on each contract. F. 924. The testimony

referred to by the Government is contradicted vy wi ieusti

one Government audit. F. 934. Moreover, segregation of

47a

costs by contract still would not permit valuation on an

inventory basis. The Government also notes testimony of

a Gary accountant that if Gary employees had maintained

work order cards properly, it would have been possible

to allocate costs between engine overhaul work and cer-

tain extra work. This still would not supply inventory

basis data. Nothing is before the Court to indicate that

the valuation would be more accurate or sound from an

accounting standpoint if the work done in the overlap

period had been strictly segregated or if engine overhaul

work could be accurately segregated from extra work.

The Government further urges that the Bankruptcy

Court erred in determining that more extra work was

certain to be ordered. F. 946. This was only one of

several findings supporting the Bankruptcy Court’s judg-

ment that Gary’s claim was not limited by the total con-

tract price. F. 944-946. The Bankruptcy Court had evi-

dence that the Government had ordered extra work dur-

ing performance of the two contracts. Its judgment that

the Government would continue to do so is not clearly

erroneous.

The Government takes issue with the Bankruptcy Court’s

finding that it had waived compliance by Gary with the

cost accounting clause of contract -1645, Clause J-21.

F,. 927. This was alternative to the Bankruptcy Court’s

findings that Gary was in compliance with at least one

permissible interpretation of the clause and that the

clause did not require an accounting system which would

have allowed submittal of Gary’s claims on an inventory

basis. F. 924, 925. Clause J-21 provides in relevant part

that:

48a

(a) The Contractor shall maintain a cost account-

ing system which shall be controlled by, or be fully

and readily reconcilable with, the general or financial

accounting system; reports resulting therefrom must

be accurate and prompt (available not more than

three weeks after the end of each month, with the

annual report available not more than two and one

half months following the close of the Contractor’s

fiscal year); and the several shop activities must be

clearly and accurately separated. The cost account-

ing system must be capable of providing accurate

information from which the average unit cost (direct

and indirect) and average direct labor hours in-

curred under this contract in the overhaul of each

engine model and type may be derived for each

reporting individual engine overhauled; however, de-

termination of averages will be considered minimum

essential for fulfillment of this provision.

The Bankruptcy Court noted that, “The meaning of this

Government-drafted clause is far from clear.” F. 924.

The requirement of an average cost for each individual

engine is self-contradictory. The Government argues that

upholding Gary’s accounting system because it does sup-

ply average cost data allows the last sentence to cancel

out the rest of the clause and violates the principle that

a provision is to be read so as to give meaning to all of

its elements. That principle is sound; however, where, as

here, the provision is truly ambiguous, it is construed

against the drafting party. Thanet Corp. v. United States,

591 F.2d 629, 633, 219 Ct. Cl. ___. (1979), and cases

cited therein. Therefore, it appears that Gary’s account-

ing system comported with Clause J-21.

The Government next argues that the Bankruptcy Court

erred in finding Gary in compliance with the Cost Ac-

49a

counting Standards at 4 C.F.R. Section 401 and 405.

F. 954-969. The Government excepts to the Bankruptcy

Court’s assertion that Gary’s compliance with Section

405 was unchallenged after improper exclusion of nine

exhibits which show otherwise. However, reference to

the portions of the record cited by the Government indi-

cates that only two exhibits were excluded. The first,

U.S. 519-A, was illegible. The Bankruptcy Court offered

to allow a legible copy or transcription to be admitted

when available. The second, U.S. 520, related to another

contract at a later date, and dealt primarily with other

regulations. It was properly excluded as irrelevant.

Section 401 requires contractors to report costs in

the same manner as they were proposed. The Government

argues that the Bankruptcy Court erred in not finding

that Section 401 required segregation of costs by con-

tract. However, the Bankruptcy Court had before it

unanimous expert opinion that Section 401 does not

require segregation. F. 961. The Government complains

that the Bankruptcy Court excluded testimony that if

Gary had in fact complied, segregation would have been

possible. However, the Government admitted that the

administrative procedures for determining a Cost Ac-

counting Standards violation had not been pursued. It

was on this basis that the Bankruptcy Court excluded

the testimony. F. 955.

The Government next argues that the Bankruptcy Court

erred in failing to require Gary to segregate costs between

contract -0289 and contract -1645. The Bankruptcy

Court did, however, find that it was not possible to pre-

cisely segregate the costs, and that September 1, 1974

marked a fair chronological division between perform-

50a

ance of the two contracts. The Bankruptcy Court had

found that no engine work (the great bulk of the con-

tract) on contract -0289 had been done after that date,

and that there was no evidence that any extra work had

been done. The Bankruptcy Court approved, and this

Court affirms, use of the total cost method as to both

contracts. The Government has not alleged or demon-

strated any specific prejudice resulting from the failure

to precisely segregate costs.

The Government complains that the Bankruptcy Court

allowed “start-up” costs as part of Gary’s termination

settlement. It points to testimony of a Gary accountant

that consistent amortization would show that these costs

were all recovered under contract -0289, which was not

terminated. However, other testimony indicated that prop-

er amortization allocated part of the costs to contract

-1645. F. 973. The Bankruptcy Court allowed “start-up”

costs in accordance with applicable Armed Services Pro-

curement Regulations. F. 1001. The Government has

not demonstrated that the finding that the allowed costs

were allocable to contract -1645 is clearly erroneous.

Likewise, the Government complains of the allowance

of certain continuing rental costs. It notes that these

premises were actually acquired for performance of con-

tract -0289. However, the Bankruptcy Court found that

Gary was unable, despite reasonable effort, to extricate

itself from its lease obligations entered into for perform-

ance of the R2800 contracts. The losses thus incurred

were allowed by the Bankruptcy Court pursuant to

specific Armed Services Procurement Regulations. F.

991-995. The Government offers no authority or argu-

ment to the effect that these provisions are not applicable

Sla

where the property was originally acquired under a

previous contract to perform the same services.

Finally, the Government complains of certain adjust-

ments to the overhead pool and directs the Court's at-

tention to a twenty-nine page exhibit consisting of the

DCAA audit report of the Gary termination settlement

proposal. However, the Government does not apprise the

Court of which adjustments it objects to or why. There-

fore, nothing is presented for review. Likewise, the Gov-

ernment complains of the Bankruptcy Court’s allowance

of a ten percent profit margin and cites exhibits consist-

ing of ledger sheets which tend to show that Gary was

in a loss position even before the constructive change

order. However, the Bankruptcy Court made specific

findings on profit (F. 1033-1040), and the Government

has not provided the Court with a sufficient explanation

of its position to enable the Court to intelligently review

the findings.

Therefore,

IT IS HEREBY ORDERED that the judgment of the

United States Bankruptcy Court for the Western District

of Texas on the Contested Matter Respecting Objection

to the Claim of the United States of America in Cause

No. SA-76-BK-443 is in all things AFFIRMED.

SIGNED and ENTERED this 24th day of June, 1981,

at 9:30 o’clock A.M.

/s/ WILLIAM S. SESSIONS

William S. Sessions

Chief Judge

52a

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF TEXAS

SAN ANTONIO DIVISION

NO. SA-76-443-BK

IN RE: GARY AIRCRAFT CORPORATION,

Debtor

HEARING ON MOTION TO DISALLOW CLAIM

OF UNITED STATES

APPEARANCES:

FULBRIGHT AND JAWORSKI

BY: John Bennett, Jr. and

Cecil Jay Olmstead

AND

VON BAUER, COBURN, SIMMONS

AND TURTLE

BY: Richard C. Johnson and

W. Bruce Shirk

Appearing for Debtor;

HENRY VALDESPINO

KENNETH BENNIGHT

ROXANNE ARMSTRONG

COLONEL BILL RUDLAND

MAJOR STEPHEN WARREN

Appearing for the Government.

« * *

53a

BE IT REMEMBERED that on the 18th day of

July, A.D. 1977, the above entitled Motion came on for

hearing before the Honorable Bert W. Thompson in the

above styled and numbered cause, and the following pro-

ceedings were had:

[Pages 1-149, comprising trial testimony and

oral argument made prior to court’s order deny-

ing the motion to stay and vacate, have been

omitted. The following appears at p. 150,

Transcript of Hearing on Motion to Disallow

Claim of United States, July 18, 1977.]

* * *

THE COURT: As to the Government’s move to stay

the hearing, which was set for today on the Gary Air-

craft’s motion to disallow the claim of the United States,

that is denied. The Government's motion to stay all dis-

covery in this form, concerning issues raised and such

motion is denied. And the request to vacate the portion

of the Court's order and providing for further pleadings

purports to shorten the time for the United States to file

proof of claim is denied. Gentlemen, are you ready to

proceed with your objection to the claim? .. .

* * *

S4a

APPENDIX D

In The

UNITED STATES DISTRICT COURT

For The Western District of Texas

San Antonio Division

In Re: Gary Aircraft Corporation, Debtor

Chapter XI No. SA-75-BK-443

Contested Matter Respecting Objection of Claim

of United States

OPINION ON MOTION TO STAY

On July 18, 1977, a hearing was held in this Court on

the Motion to Stay and Vacate filed in this Contested

Matter by the United States of America (“Government”),

the Claimant herein. The Court denied the Motion. The

Court now makes and enters findings of fact and con-

clusions of law in this Opinion On Motion to Stay.

NATURE OF CONTROVERSY

1. An order was entered in this Chapter XI case

which set down for hearing the Contested Matter com-

menced by the objection of the Debtor, Gary Aircraft

Corporation (“Gary”), to the claim of the United States

of America (the “Government”). The Government has

moved to stay the hearing on the objection, to stay all

discovery in this Court concerning the issues raised in

Gary's objection, and to vacate the portions of the order

requiring that amendments to the Government's proof of

claim be filed by five (5) days before the hearing.

55a

PROCEDURAL BACKGROUND

2. On November 30, 1976, the Government filed its

Preliminary and Contingent Proof of Claim of the United

States of America Entitled To Priority of Payment, dated

November 15, 1976. (Exh. M-1). That claim was amen-

ded when the Government, on June 16, 1977, filed its

Amended Proof of Claim of the United States of America

Entitled to Priority of Payment, dated April 22, 1977.

(Exh. M-2). That claim was amended when, on July 5,

1977, the Government filed its Amended Proof of Claim

of the United States of America Entitled to Priority of

Payment, dated June 16, 1977. (Exh. M-3). That claim

was amended when, on July 12, 1977, the Government

filed its Amended Proof of Claim of the United States of

America Entitled to Priority of Payment dated July 6,

1977. (Exh. M-4).

3. After all amendments, the Government claims

that Gary is indebted to the Government in the principal

sum of $2,686,114.15. The consideration of the debt is

alleged as (1) excess reprocurement costs of $145,533.52

resulting from termination of Air Force Contract No.

F41608-74-D-1645 (hereinafter, “Contract 1645”); (2)

costs in the amount of $2,481,253.70 resulting from loss

of Government Property by Gary while performing Air

Force Contract No. F41608-71-D-0289 (hereinafter,

“Contract 0289”); (3) costs in the amount of $26,210.

70 resulting from loss of Government Property by Gary

while performing Air Force Contract No. F41608-73A-

3417-0001; (4) costs in the amount of $605.71 resulting

from loss of Government Property by Gary while per-

forming Navy Contract No. N00019-72-C-0522; (5)

costs in the amount of $25,246.59 resulting from loss of

56a

Government Property by Gary while performing Navy

Contract No. N0O0019-73-D-0043; and (6) costs in the

amount of $7,263.93 resulting from loss of Government

Property by Gary while performing Army Contract

DAAJ01-73-0014. (Exh. M-4).

4. The Government's Proof of Claim alleges that there

are no setoffs or counterclaims to the debt, and that the

debt is entitled to priority of payment in accordance with

Section 65A(5) of the Bankruptcy Act together with

Section 3466 and 3467 of the Revised Statutes. (Exh.

M-4; see Exh. M-1, M-2 and M-3).

5. On June 10, 1977 Gary filed its Motion to Dis-

allow Claim of United States of America. That instru-

ment was emended when, on June 29, 1977, Gary filed

its First Amended Motion to Disallow Claim of United

States of America, dated June 28, 1977.

6. Gary’s First Amended Motion to Disallow es-

sentially denies that Gary has lost any property of the

Government, denies the amount of indebtedness claimed

by the Government for the property alleged to be lost,

asserts affirmative defenses against any such indebted-

ness, denies default in performance of its contracts with

the Government, asserts substantial performance of its

contractual obligations to the Government, asserts that

it was excusably delayed in performance of such con-

tracts by the Government, and pleads affirmative de-

fenses to the Government's claims.

7. Additionally, such Motion denies that there are no

counter-claims to the Government's claims and alleges

that the Government had breached its contractual obli-

gations, has wrongfully terminated and harassed Gary

57a

in performance of its contracts, and alleges that the

Government is indebted to Gary for, among other things,

costs payable in respect of termination and constructive

change orders. The Motion also denies that the Govern-

ment is entitled to priority in payment of any debt Gary

does owe the Government and denies that the Govern-

ment can set off any such debt against any of Gary’s

claims against the Government.

8. Gary’s Motion also applies for an Order permitting

Gary to commence or continue litigation seeking the

relief of recovery of money or property from the Gov-

ernment as might be appropriate separately from this

Contested Matter and without adverse effect from the

rules respecting compulsory counterclaims. Finally, the

Motion applies for an Order setting firm dates for the

filing of amended claims, interventions, appearances,

further objections, and for the hearings of the Contested

Matter.

9. On June 21, 1977, this Court signed and directed

entry of the Order Setting Hearing, Giving Notice and

Providing For Further Pleading and to Show Cause,

dated June 21, 1977. Such Order:

(1) Set a hearing on Gary’s objection to the

Government's claim on July 18, 1977;

(2) Required that any interventions or appear-

ances by the Official Creditors’ Committee and any

amendments to the Proof of Claim filed by the Gov-

ernment be filed and served not later than five

days (5) days in advance of the hearing and re-

quired amended objections be filed and served with-

in five (5) days after receipt of service of any such

amended claim;

58a

(3) Provided for service of the Motion, Notice,

and all subsequent pleadings or notices in the Con-

tested Matter; and

(4) Ordered that Gary be permitted to com-

mence and continue other litigation against the

Government separately from this Contested Matter

and without any adverse effect from the rules re-

specting compulsory counterclaims unless the Gov-

ernment showed cause why Gary should be re-

quired to commence and prosecute adversary pro-

ceedings in the Bankruptcy Court against the Gov-

ernment.

10. The Official Creditors’ Committee intervened in

this Contested Matter on July 11, 1977, by the Inter-

vention of the Official Creditors’ Committee in the Pro-

ceeding to Disallow Claim of United States of America

filed by Gary Aircraft Corporation, Debtor-in-Possession,

dated July 8, 1977. The Official Creditors’ Committee

essentially adopted the pleadings of Gary with respect to

the Government’s claim.

11. On July 7, 1977, the Government filed its Mo-

tion to Stay and Vacate. The Government moved the

Court to stay all discovery in the Bankruptcy Court con-

cerning issues raised in Gary’s Motion to Disallow, and to

vacate that portion of this Court’s Order Setting Hear-

ing, Giving Notice and Providing for Further Pleading,

which shortened the time for the Government to file its

amended proof of claim.

12. The Motion to Stay and Vacate was accompanied

by two affidavits. One was that of the Honorable Richard

C. Solibakke, Chairman of the Armed Services Board of

Contract Appeals (“ASBCA”). That Affidavit stated

that, with respect to Gary’s appeal to the ASBCA from

59a

termination of Air Force Contract 1645, he would “as-

sure an expedited written decision on subject appeal

following hearing thereon and submission of post-hearing

briefs by both parties.” The other accompanying Affidavit

was that of William P. Rudland, the assigned Government

Trial Attorney on an appeal of Gary before the ASBCA.

That Affidavit describes the appeal pending before the

ASBCA and states that Mr. W. Bruce Shirk, one of Gary’s

attorneys, did not avail himself of an opportunity for an

April, 1977, hearing before the ASBCA.

13. On July 14, 1977, Gary filed its Response to Mo-

tion to Stay and to Vacate, dated July 14, 1977. In such

response, Gary asserted that the Bankruptcy Court has

exclusive jurisdiction to allow and disallow claims, that

the Bankruptcy Court has jurisdiction to decide upon an

appropriate forum for the liquidation of contingent claims,

that the Bankruptcy Court should not permit the ASBCA

to liquidate the claims of the Government against Gary,

that the proceedings against Gary before the ASBCA

have been stayed by Bankruptcy Rule 11-44, and by the

Order Granting General Restraining Orders, and that this

Court should not lift the stay imposed by Bankruptcy

Rule 11-44.

14, The Government filed a Memorandum in Support

of Motion to Stay and Vacate, dated July 7, 1977. Gary

filed a Memorandum of Law in Support of Response to

Motion to Stay and to Vacate, dated July 18, 1977.

HEARING

15. The Motion to Stay and to Vacate was heard and

argued on July 18, 1977. The Government relied on its

Motion, Affidavits, and the exhibits thereto and called

60a

no witnesses and offered no evidence in support of its

Motion to Stay and to Vacate, although Government

counsel did cross-examine witnesses called by Gary.

16. In opposition to the Government’s Motion to Stay

and Vacate, Gary called Judge Benjamin Lee Bird, re-

cently retired after ten years’ service as an Administrative

Judge with the Armed Services Board of Contract Ap-

peals (hereinafter, the “ASBCA”), to testify as an expert

witness concerning the practice and procedure of the

ASBCA and government contract and procurement law.

Judge Bird testified as an expert without objection. In

any event the Court finds him eminently qualified to

testify as an expert witness, and finds his testimony to

be of material assistance in determining facts in issue in

this Motion.

17. Gary also called Mr. W. Bruce Shirk to testify

respecting the discussions which occurred between him

and Government counsel with respect to the possibility

of an April, 1977, trial setting before the ASBCA.

18. Gary also called its president, Mr. Arthur W.

Stewart, to testify on the operations of the Debtor-in-

Possession and respecting the effect of the pendency un-

resolved of the Government’s claim on the ability of

Gary to file and seek confirmation of a plan of arrange-

ment.

19. Gary also offered a number of exhibits into evi-

dence, all of which were admitted without objection by

the Government.

DEBTOR, CHAPTER XI CASE AND PLAN

20. Gary is a corporation which was formed in 1962.

It has carried on business at locations in San Antonio,

6la

Victoria, Laredo and Hondo, Texas, although at October

28, 1976 and presently it operates only at its Hondo,

Texas location. Gary has engaged in several business

activities, and its business includes the overhaul of air-

craft engines, accessories and other aeronautical com-

ponents, the manufacture of components for aircraft,

engines and other mechanical devices, and technical

processes such as electroplating, heat treating, X-ray,

magnetic inspection, etc. (Exh. M-7).

21. Gary commenced this Chapter XI case on Oc-

tober 28, 1976, alleging that it was unable to pay its

debts as they matured and that it intended to file a plan

pursuant to Chapter XI of the Bankruptcy Act. (Exh.

M-10).

22. Gary remained in possession of its property. No

receiver or trustee was appointed for Gary’s assets. Gary

was authorized by order herein to operate its business

and manage its property as debtor in possession. (Exh.

M-11, M-12, M-20, M-21 and M-22).

23. On October 28, 1976 Gary entered into an agree-

ment with Victoria Bank and Trust Company for the

temporary financing of its business operations. On De-

cember 13, 1976, the arrangement with such Bank for

the financing of Gary’s business operations was made

permanent. (Exh. M-13, M-14, M-15, M-16, M-23 and

M-24).

24. Gary was performing a substantial contract for

overhaul of the Packette series engine when this Chapter

XI case commenced. (Exh. M-13, M-14). On December

13, 1976, Gary was given specific authority to enter into,

perform and finance a “follow on” contract for continued

62a

overhaul of the Packette series engine at an increased

rate of compensation. (Exh. M-23, M-24). This new

contract would be of assistance in continued operations

and perhaps in proposal of a plan. (TR. 106-08).

25. On October 28, 1976, a general restraining order

was entered herein. (Exh. M-17 and M-18). Additionally,

on November 3, 1976, this Court sent its Notice of Initial

Meeting of Creditors. That Notice, among other things,

gave notice of the filing of Gary's petition commencing

the Chapter XI case, of the First Meeting of Creditors

scheduled for December 12, 1976, of the Order authoriz-

ing Gary to continue its business as debtor-in-possession,

of the general restraining order, and of the financing

arrangements with Victoria Bank and Trust Company.

(Exh. M-19).

26. Gary’s “Statement of All Debts of Debtor,” Sched-

ule A filed in this Chapter XI case, reflects $4,771,592.70

in debts at October 28, 1976. (Exh. M-8). Gary’s “State-

ment of All Property of Debtor,” Schedule B filed in this

Chapter XI case, reflects $7,244,160.72 in assets at

October 28, 1976. (Exh. M-9).

27. Gary scheduled, as priority claims, taxes owing to

the United States (listed as secured by tax liens) in the

amount of $99,469.57, and taxes owing to the States in

the amount of $20,675.51. (Exh. M-8). Gary also sched-

uled, as secured, claims in the total amount of $3,365,-

312.15 (including the mentioned tax claims). (Exh. M-

8).

28. Pursuant to the mentioned financing arrangement,

payments against the priority claim for unpaid income

taxes were being retired at the rate of $5,000 per month.

(Exh. M-13, and M-14 see footnote 3 to Exh. M-25

63a

through M-31). All of those tax debts had in fact been

paid at the time of the hearing. (TR. 94).

29. Gary’s major secured creditor appears willing to

relax its security sufficiently to permit formulation and

filing of a plan of arrangement. (TR. 97-98, 106-08).

30. Gary’s business operations during this Chapter XI

case have generated business revenues in excess of expen-

ditures. (See Exh. M-25 through M-31). Gary has suc-

cessfully negotiated for the award of new overhaul con-

tracts, and the prospects for further profitable business

operations are good. (TR. 98, 100-01; see Exh. M-24).

31. Gary’s claims against the Government, valued for

purposes of the Schedules at $2,968,786.90, were in-

cluded in Gary’s Statement of All Property of Debtor

as contingent and unliquidated claims. (Exh. M-9).

32. Certain of the Government’s claims against Gary

were included in Gary’s Statement of All Debts of Debtor

as an unsecured claim not entitled to priority. (TR. 95-

97). Gary scheduled, as a claimed liability without a

dollar value, the Government’s claim of $595,322.80 for

alleged losses of Government property and for $145,533.-

52 as excess reprocurement costs. (Exh. M-8). Gary did

not know about ali of the Government’s claim when its

Schedules were prepared. (TR. 95-97).

33. The Schedules indicated that Gary’s aggregate li-

abilities and indebtedness is the amount of $4,771,592.72,

exclusive of any indebtedness or liability Gary may be

determined to have to the Government, and that the

aggregate value of Gary’s property is $4,275,373.82, ex-

clusive of the amount of Gary’s claims against the Gov-

ernment,

64a

34. A plan of arrangement may not be confirmed by

this Court unless the Court is satisfied that the plan “is

for the best interests of the creditors and is feasible.” See

Section 366 of the Bankruptcy Act.

35. The prospects for confirmation by this Court of

a plan of arrangement that is both “feasible” and in the

“best interest of creditors” are excellent, except for the

problems caused by the priority claims of the Govern-

ment against Gary. (Findings 20-30).

36. Whether the Government's claim against Gary is

entitled to priority depends upon whether Gary is “in-

solvent,” and whether Gary is “insolvent” depends upon

whether Gary’s assets at a fair valuation are sufficient

for payment of its liabilities. Section 64A(5) of the

Bankruptcy Act and Section 3466 of the Revised Statutes,

31 U.S.C. § 191. See United States v. Press Wireless, Inc.,

187 F.2d 294 (2nd Cir. 1951), interpreting United States

v. State of Oklahoma, 261 U.S. 253 (1923).

37. Whether Gary’s assets are greater or lesser than

Gary’s liabilities depends almost wholly on the amount

of any Government claim allowed against Gary and on

the value of any Gary claim against the Government.

(Finding 31-33).

38. Recovery by Gary on its claim against the Gov-

ernment is not necessary to the formulation and filing of

a plan of arrangement by Gary. (TR. 109-10).

39. Total disallowance of Gary’s claim against the

Government of itself would not necessarily prevent the

formulation and filing of a plan of arrangement by Gary,

but Gary lacks the capacity to pay the entire amount of

the Government’s asserted claim in full and in cash.

(TR. pp. 102, 110-12).

65a

40. However, no plan or arrangement filed by Gary

can be confirmed unless Gary first puts up a cash deposit

adequate for payment in full of all priority claims. Thus,

Bankruptcy Rule 11-38 provides, in pertinent part, as

follows:

“(A) Deposit. At the first meeting of creditors,

after a plan has been accepted and before confirma-

tion the Court shall . . . fix a time before confirma-

tion within which the debtor shall deposit with the

disbursing agent, or in such place and on such terms

as the Court may approve, the money necessary to

pay all prority debts and costs of administration. . . .”

41. Therefore, the Government’s asserted priority

claims, if not resolved, will prevent confirmation by this

Court of a plan of arrangement. See Findings 34-40.

Indeed, the Government in its Brief at p. 14 states:

“The United States does not dispute the requirement

to defer to the ASBCA delays confirmation of a

plan in this arrangement. Ultimately, however, the

interests to be protected in an arrangement are those

of the creditors.”

42. The continuation of these Chapter XI proceedings

with no definite prospect for liquidation and determina-

tion of the Government’s asserted prority claim may re-

quire the adjudication of Gary as a bankrupt. See Bank-

ruptcy Rule 11-42(b).

43. If Gary is adjudicated as a bankrupt, the interests

of Gary’s unsecured creditors will suffer. Liquidation of

the assets of Gary would not result in any equity for the

benefit of Gary’s unsecured creditors. A forced sale of

Gary’s machinery, equipment and inventory would not

66a

generate monies equa! to their fair valuation, and monies

realized upon liquidation probably would not be sufficient

to discharge Gary’s indebtedness to its secured creditors.

(TR. 99-101).

THE GOVERNMENT'S CLAIM AND

GARY’S CLAIM

44. The Government’s initial Proof of Claim asserted

that Gary was indebted to the Government in the prin-

cipal sum of $711,932.64. That indebtedness was based

on alleged excess reprocurement costs resulting from

termination of Contract 1645 in the amount of $145,-

533.52 and upon alleged costs resulting from loss of

Government property by Gary Aircraft Corporation while

performing Air Force Contract 0289 in the amount of

$566,399.12. (Exh. M-1; see also Findings 2-3).

45. On April 13, 1977, Mr. Glen D. Calame, Con-

tracting Officer, made a “final decision” finding Gary

pecuniarily liable to the Government in a purported sum

certain of $1,895,203.12 for loss of unserviceable Gov-

ernment property under Contract 0289. Payment was

demanded within thirty (30) days and advice was given

that interest would accrue on the increased debts there-

after. Further, Gary was given notice that this final deci-

sion of Mr. Calame was “subject to the procedure of

the Disputes Clause” and any appeal therefrom “must be

mailed or otherwise furnished to the Contracting Officer

within thirty (30) days from the date” of receipt of Mr.

Calame’s final decision. (Exh. M-5).

46. The Government amended its Proof of Claim to

include the additional sums claimed under Air Force

Contract 0289 referred to in Mr. Calame’s letter. Addi-

67a

tionally, the Government’s amended claim included costs

resulting from loss of Government property by Gary

while performing another Air Force contract not referred

to in Mr. Calame’s letter, Air Force Contract No. F-

4160873-A-3417-0001. The Government’s amended Proof

of Claim was dated April 22, 1977, although it was not

filed until June 16, 1977. (Findings 2-3).

47. After all amendments to its claim, the Govern-

ment claims Gary is indebted to the Government for six

different grounds of liability, based on six different con-

tracts. Five of the Government’s claims are based on an

alleged loss of property by Gary. The other claim for

excess reprocurement costs arising out of the Govern-

ment’s termination of Gary for alleged default in perform-

ance of Contract 1645. (Findings 2-3).

48. The nature of the Government's claim for loss of

Government property appears self-explanatory. The Gov-

ernment’s claim for excess reprocurement costs grows out

of a default alleged by the Government as the basis for

termination of Contract 1645 together with the alleged

costs of reletting to another contractor the unperformed

work contracted for pursuant to the terminated Contract

1645. (TR. 48-50).

49. Gary’s claims against the Government, includes

one for alleged “harrassment” or “interference” by the

Government with Gary’s business, and one for termina-

tion of Contract 1645 for the alleged convenience of the

Government. (Findings 7, 31; Exh. M-9). All of the

Government’s claims against Gary and of Gary’s claims

against the Government were pending either before the

Administrative Contracting Officer or the ASBCA, in one

68a

Stage or another of the administratve process, at the time

this Chapter XI case was commenced.

50. A termination which is for the convenience of the

Government rather than occasioned by the contractor’s

default obligates the Government to pay for the cost of

the work performed by the contractor. A termination

which is for default of the contractor does not so obligate

the Government. A contract termination that is improp-

erly made for default may be converted to a termination

for convenience. (TR. 50-52).

51. These claims for the Government against Gary

and of Gary against the Government are related to one

another, although they arose out of different contracts and

although they were pending separately and in different

Stages of the administrative process. There is a “chrono-

logical and factual relationship between Gary’s interfer-

ence claim and the default” of Gary as alleged by the

Government. (Exh. M-6 at p. 2)

52. Gary’s alleged interference claim substantially

stems from a Government property and quality team that

was dispatched to Victoria, Texas in August, 1974 to take

“extraordinary action” and monitor Gary’s Victoria facil-

ity. That team was dispatched as a result of a critical

GAO audit of Gary’s property control system. “Thus,

there is a direct tie-in between the property claims and

the so-called interference claim as the latter would not

have occurred but for the former.” (Exh. M-6 at p. 2).

53. Further, the alleged “property shortages”, regard-

less of the paricular contract under which they were dis-

covered, proximately resulted in the action taken by the

team in August, 1974. (Exh. M-6 at p. 3). Additionally,

69a

the “extraordinary action” to be taken by the Govern-

ment’s property and quality team was allegedly directed

in response to the “extraordinary circumstances” of the

“property situation” at Gary’s Victoria facility, and con-

sideration of Gary’s alleged mismanagement of its prop-

erty accounts is necessary for the evaluation of the Gov-

ernment’s motivation in taking “extraordinary action”.

(Exh. M-6 at p. 4).

54. This is not a simple situation of isolated Govern-

ment claims but rather involves considerations of set-off

and the factual connection between the Government's

claims and Gary’s counterclaims. (Exh. M-6 at p. 5).

55. Failure to give consideration to the Government’s

claims for property at the same time as giving considera-

tion to the propriety of termination of Gary for default

would no doubt encourage further litigation as the Gov-

ernment has indicated that it would resist payment of any

award to Gary on the interference and default claims

pending resolution of the Government’s lost property

claims. (Exh. M-6 at p. 5).

56. In short, the Government's claims against Gary

and Gary’s claims against the Government arise out of

the same basic transaction and occurrence. (Findings

51-55).

57. During discovery in one of the administrative pro-

ceedings, according to Government counsel, Gary had an

opportunity, which it failed to exploi*, for an April, 1977

hearing. However, there appears to have been no agree-

ment respecting such an April trial date, and certainly

there was nothing more formal than a casual, after hours

discussion of the case. (TR. 88-90).

70a

DISPUTES CLAUSE AND ASBCA

58. The contracts between Gary and the Government

each contained as “Disputes Clause”. A “Disputes Clause”

provides as follows:

(A) Except as otherwise provided in this contract,

any dispute concerning a question of fact arising

under this contract which is not disposed of by agree-

ment shall be decided by the Contracting Officer,

who shall reduce his decision to writing and mail or

otherwise furnish a copy thereof to the Contractor.

The decision of the Contracting Officer shall be final

and conclusive unless, within thirty (30) days from

the date of receipt of such copy, the Contractor mails

or otherwise furnishes to the Contracting Officer, a

written appeal addressed to the Secretary. The de-

cision of the Secretary or his duly authorized repre-

sentative for the extermination of such appeals shall

be final and conclusive unless determined by a court

of competent jurisdiction to have been fraudulent, or

capricious, or arbitrary, or so grossly erroneous as

necessarily to imply bad faith, or not supported by

substantial evidence. In connection with any appeal

proceeding under this clause, the Contractor shall be

afforded an opportunity to be heard and to offer evi-

dence in support of his appeal. Pending final decision

of a dispute hereunder, the Contractor shall proceed

diligently with the performance of the contract and

in accordance with the Contracting Officer’s decision.

(B) This ‘Disputes’ clause does not preclude con-

sideration of law questions in connection with de-

cisions provided for in Paragraph (A) above: Pro-

vided, that nothing in this contract shall be con-

strued as making final the decision of any adminis-

trative official, representative, or board on a question

of law.

Tla

The form of the “Disputes Clause” is prescribed by Sec-

tion 7-103.12 of the Armed Services Procurement Regu-

lations (“ASPR”).

59. A Disputes Clause is a so-called mandatory clause

required to be included in every Government Contract.

It provides a means for resolving a question of fact in

dispute between the Government and a contractor without

interruption of the work under the contract. The Con-

tracting Officer resolves the Dispute as he sees fit, and the

contractor is obliged to accept the decision as final, sub-

ject to this right to appeal. (TR. 12).

60. The Contracting Officer is a Government official

given a warrant by appropriate Government officials in

the Government procurement offices. He is authorized to

make final decisions on behalf of the Government respect-

ing such claims. (TR. 14-16).

61. Appeals from the final decision of a Contracting

Officer are made to the Secretary of the Department pro-

curing the contract, or, to the duly authorized representa-

tive of the Secretary. A duly authorized representative of

the Secretary is the ASBCA. (App. A. ASPR; TR. 12,

63).

62. The ASBCA is chartered by Appendix A of the

ASPR. Its jurisdiction is contractual, growing out of the

Disputes Clause. (TR. 61-63).

63. Appeals are made to the ASBCA by the con-

tractor. However, controversies between a contractor and

the Government may represent claims against the con-

tractor, even though technically it is the contractor who

by appeal initiates the proceeding before the ASBCA.

Thus the Government’s “lost property” claims against

72a

Gary involve claims against Gary, although it was Gary

who appealed the Contracting Officer’s final decision to

the ASBCA. (TR. 17-18).

64. Proceedings before the ASBCA are not overly

formal. However, it would not be prudent to proceed with

respect to any sizeable claim before the ASBCA without

an attorney. (TR. 18-19). The rules of pleading and dis-

covery set out in the Federal Rules of Civil Procedure

are followed in ASBCA proceedings. (TR. 19-21). The

Federal Rules of Evidence also are followed. (TR.

38-39).

65. The consequences of failure to appeal a “final

decision” of a Contracting Officer may be severe. The

Government’s claim against the contractor becomes final.

The Government may enforce its setoff rights (although

this is not a matter for ASBCA consideration) or it may

file suit on its contract in the Federal courts. (TR. 23-24).

The same Government remedies are available in the event

the contractor loses the case or takes no appeal from an

adverse decision by the ASBCA (TR. 39-40).

66. It would take at least 18 months for the ASBCA

to reach a final decision respecting the Government’s

claim for property lost under Contract F-41608-71-D-

0289 that was subject of the April 18, 1977 decision of

the Contracting Officer. (TR. 23-24). This assumes use

of minimum time periods, cooperation among the parties,

no extensions (TR. 25, 31), no problems with discovery

of documents, (TR. 27), and therefore is optimistic. (TR.

35). Under conditions that are not optimum the case

could go on unavoidably for years. (TR. 69). Two years

would not be an unreasonable time. (TR. 70).

73a

67. The same lengthy time periods are applicable

respecting a final decision of the ACBCA on the other

“lost property” claims of the Government. However, two

of the other four of the Government’s “lost property”

claims against Gary would be eligible for an accelerated

ASBCA procedure applicable to claims under $25,000.00.

This could shorten the administrative procedure consider-

ably, depending on Gary’s willingness to waive pleadings,

hearings and briefs. (TR. 44-48). And it would be normal

Board practice to consolidate several cases involving the

same type of loss of Government property. (TR. 48).

68. Assuming full development of the case for trial

it would take at least one year from date of commence-

ment of trial for the ASBCA to reach a final decision

respecting the propriety of the Government’s termination

of Gary for default. This also assumes minimum time

periods, cooperation among the parties, and no extensions.

(TR. 52-57). Again, under conditions that are not opti-

mum the case could go on unavoidably for years. (TR.

69).

69. The ASBCA giving the “expedited consideration”

that Judge Solibakke’s affidavit mentioned to the default

issue set for trial in October, 1977, would shorten the

overall time for resolution of the default claim about a

month, no more. (TR. 64).

70. Gary’s claim against the Government for costs of

termination for the Government’s convenience could not

be heard by the ASBCA until the ASBCA’s determination

of the propriety of the Government’s termination of Gary

for default. Success by Gary on the default issue would

result only in an ASBCA remand to the Contracting

74a

Officer for consideration of the question of the proper

amount of costs payable (sometimes referred to as the

“quantum phase” of litigation). (TR. 54-55).

71. It is reasonable to assume negotiations respecting

the amount of costs payable would consume approxi-

mately six months, including time for an audit. Litigation

before the ASBCA could be expected to follow the same

procedural path and consume the same amount of time

as that concerning the lost property claim, except that the

six months normally elapsing between pleading and trial

might be shortened as a result of the extended negotia-

tions. (TR. 56-60). In other words, after final decision

by the ASBCA of the “default” issue, an additional 18

months for liquidation of Gary’s claim against the Gov-

ernment could be required.

72. The ASBCA in such litigation would not con-

sider the applicability of the doctrine of setoff, generally,

or the consistency of setoff with Chapter XI of the

Bankruptcy Act. (TR. 64).

73. The ASBCA appears to do a creditable job dis-

charging its assigned duties and to have established a

general reputation for fairness. (TR. 73).

74. However, qualifications of ASBCA members are

not in any way unique, although they have been selected

from among those with specific experience in Govern-

ment procurement. On a matter that ordinarily would be

heard by the ASBCA, a Bankruptcy Judge or United

States District Judge could accomplish a fair fact finding

with ease if properly instructed by counsel. (TR. 77-78).

75a

THE BANKRUPTCY COURT’S JURISDICTION TO

ALLOW OR DISALLOW THE GOVERNMENT'S

CLAIM

75. The Bankruptcy Act provides for Bankruptcy

Court jurisdiction to allow or disallow claims in a Chap-

ter XI case as well as in a Bankruptcy case under

Chapters I through VII of the Bankruptcy Act. In that

regard, Section 302 of the Bankruptcy Act provides as

follows:

“The provisions of Chapter I to VII, inclusive, of

this Act shall, in so far as they are not inconsistent

with or in conflict with the provisions of this Chapter

[XI], apply in proceedings under this Chapter [XI]

Section 2 of the Bankruptcy Act provides, in pertinent

part:

“The courts of the United States hereinbefore de-

fined as courts of bankruptcy are hereby created

Courts of Bankruptcy and are hereby invested, with-

in their respective territorial limits as now estab-

lished or as they may be hereafter changed, with

such jurisdiction at law and in equity as will enable

them to exercise original jurisdiction in proceed-

ings under this Act, in vacation, in chambers, and

during their respective terms, as they are now or

may be hereafter held, to—

* o* *

“(2) Allow claims, disallow claims, reconsider al-

lowed or disallowed claims, and allow or disallow

them against bankrupt estates;

* * *

76a

“(7) Cause the estates of bankrupts to be collected,

reduced to money, and distributed, and determine

controversies in relations thereto, except as herein

otherwise provided .

“(9) Confirm or reject arrangements or plans pro-

posed under this Act, set aside confirmations of ar-

rangements or wage-earner plans and reinstate the

proceedings in cases;

* * *

“(12) Discharge or refuse to discharge bankrupts,

set aside discharges, determine the dischargeability

of debts, and render judgments thereon;

* * %

“(15) Make such orders, issue such process, and

enter such judgments, in addition to those speci-

fically provided for, as may be necessary for tlie en-

forcement of the provisions of this Act: Provided,

however, That an injunction to restrain a court may

be issued by the Judge only. . . .”

76. It is clear that the power of the Bankruptcy Court

to allow or disallow claims extends to claims filed by the

Government. In that regard, Section 355 of the Bank-

ruptcy Act provides:

“Creditors, including the United States, any State,

and any subdivision thereof, shall file their proofs of

claim before confirmation except [in the case of two

exceptions not here pertinent].” (Emphasis added.)

77a

Similarly, Section 57N of the Bankruptcy Act provides,

in pertinent part:

“Except as otherwise provided in this Act, all claims

provable under this Act, including all claims of the

United States be proved and filed in the manner

provided in this section. Claims which are not filed

within six months after the first date set for the

first meeting of creditors shall not be allowed: Pro-

vided, however, That the court may, upon applica-

tion before the expiration of such period and for

cause shown, grant a reasonable fixed extension of

time for the filing of claims by the United States or

any State or any subdivision thereof .. .”

Accordingly, Bankruptcy Rule 302(a), made applicable

in Chapter XI cases by Bankruptcy Rule 11-33(b) (1),

provides as follows:

“In order for his claim to be allowed, every creditor,

including the United States, any state, or any sub-

division thereof, must file a proof of claim in ac-

cordance with this rule, except as provided in Rules

303 and 304.” (Emphasis added.)

77. A number of decisions sustain exercise by the

Bankruptcy Court of its Congressionally granted juris-

diction to allow or disallow claims against a debtor or its

estate. E.g., United States v. United States Fidelity &

Guaranty Co., 309 U.S. 506 (1940); Danning v. United

States, 259 F.2d 305 (9th Cir. 1958), cert. denied, 359

U.S. 911 (1959); In Re Greenstreet, 209 F.2d 660 (7th

Cir. 1954); United States v. Paddock, 187 F.2d 271

(Sth Cir. 1951); In the Matter of Bruce Construction

Corp., 217 F. Supp. 926 (S.D. Fla. 1963), rev’d on

other grounds, 329 F.2d 678 (5th Cir. 1964). See also

78a

Gardner v. New Jersey, 329 U.S. 565 (1946), where the

Supreme Court in upholding the Bankruptcy Court’s

jurisdiction to allow or disallow a state’s claim for taxes,

stated that the Bankruptcy Act “deals not only with

claims for private parties, but with those of public

agencies as well.” 329 U.S. at 572.

78. Jurisdiction for the final allowance or disallowance

of claims against a debtor or its estate appears to be ex-

Clusively vested in the Bankruptcy Court.

“During the course of the administration of the

estate, many questions may arise, such as the ap-

pointment of receivers and trustees, orders giving

priority to the claim of a creditor, orders directing

a set-off of mutual debts, examinations determination

of exemptions, allowance and disallowance of claims,

and the like. Over such matters the Bankruptcy

Court has exclusive jurisdiction, and proceedings in

relation to them are expressly excluded from the

provisions of § 23(a). Once the Petition has been

filed, the Bankruptcy Court’s jurisdiction is para-

mount and no other Court may order or decree de-

prive it of this jurisdiction. With respect to all pro-

ceedings in bankruptcy the Court may act summarily

and in that manner determine the rights of the parties

affected. And this rule applies even as against the

United States Government seeking to enforce against

the trustee an alleged priority of payment of a Gov-

ernment claim; the Government must maintain its

suit in the Bankruptcy Court, and not by a plenary

suit in equity.” 1A Collier on Bankruptcy, § 23.04

[1] at 450-51 (194th Ed. 1976) (Emphasis added).

Accordingly, in Pepper v. Litton, 308 U.S. 295 (1939),

the Supreme Court of the United States wrote:

79a

“Courts of Bankruptcy are constituted by §§ 1

and 2 of the Bankruptcy Act, 30 Stat. 544, 11

US.C.A. §§ 1(8), 11, and by the latter section are

invested ‘with such jurisdiction at law and in equity

as will enable them to exercise original jurisdiction

in bankruptcy proceedings’ . . . Among the granted

powers are the allowance and disallowance of claims;

the collection and distribution of the estates of bank-

rupts and the determination of controversies in rela-

tion thereto; the rejection in whole or in part ‘ac-

cording to the equities of the case’ of claims previ-

ously allowed; and the entering of such judgments

‘as may be necessary for the enforcement of the

provisions’ of the act. In such respects the jurisdic-

tion of the bankruptcy court is exclusive of all other

courts. United States Fidelity & Guaranty Company

¥. pray, 225 US. 205, 217, 32 S.Ct. 620, 625,

56 L.Ed. 1055.

“Hence, this Court has held that a bankruptcy

court has full power to inquire into the validity of

any claim asserted against the estate and to disallow

it if it is ascertained to be without lawful existence.

Lesser v. Gray, 236 U.S. 70, 35 S.Ct. 227, 59 L.Ed.

471. And the mere fact that a claim has been re-

duced to judgment does not prevent such an inquiry.

309 U.S. at 303-305.” (Emphasis added.)

And more recently, the Supreme Court wrote the follow-

ing respecting the Bankruptcy Court’s jurisdiction to

allow or disallo

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