Opinion ID: 499748
Heading Depth: 2
Heading Rank: 3

Heading: Reconciling the Code and the Act

Text: 34 In holding that the government did not possess a claim under Sec. 101(4) of the Code, the bankruptcy court and the district court concluded that the Act, and not common law contract law, defined the rights of the parties. The district court observed that the government was estopped from initiating legal action on its claim until a contracting officer certified the claim pursuant to Sec. 605(a). See App. at 525-26. Moreover, it held, the government's right to payment did not manifest itself until the May, 1982 completion of the post-award audit. See App. at 527-31 (district court); accord id. at 478-84 (bankruptcy court). 35 The district court seemed to hold that the Act determined when a right to payment exists. Relying on the Act and the decision in Paragon Energy Corp., 645 F.2d 966, the district court found that the certification procedure of Sec. 605 was a prerequisite to any claim. Yet, apparently recognizing the inequity of allowing the government to wait nearly five years before asserting a claim, the district court ultimately abandoned its reliance on the Act by finding that the claim arose upon completion of the post-award audit rather than after certification of the claim by the contracting officer. Although the Act does not suggest this result, the district court affirmed the bankruptcy court's holding that the claim arose upon completion of the post-award audit. 36 By looking to completion of the audit process, both courts implicitly recognized the need to look beyond the Act and consult contract principles in determining the existence of a claim under the Code. Because the Act establishes procedures to resolve existing causes of action and does not create substantive rights, we hold that the district court erred to the extent it relied on the Act to determine the existence of a bankruptcy claim. In addition, we conclude that the courts erred by determining that completion of the post-award audit triggered the government's claim. 37 In ascertaining when the government's right to payment arose, we recognize that a party may have a bankruptcy claim and not possess a cause of action on that claim. See Schweitzer, 758 F.2d at 942 (citing In re Radio-Keith-Orpheum Corp., 106 F.2d 22, 26-27 (2d Cir.1939)). To be sure, Schweitzer and In re Radio-Keith discussed this principle in the context of a more clearly established right to payment. In Schweitzer, we concluded that an as yet nonexistent tort cause of action was not a claim for purposes of the Code. Schweitzer, 758 F.2d at 943. Nevertheless, we noted that a party who contracts with a debtor pre-bankruptcy should not be permitted to avoid the consequences of that legal relationship in the context of a bankruptcy proceeding. Id. Any interest cognizable under the Code, however, must stem from a legal relationship relevant to the purported interest from which that interest may flow. Id. at 943 (citing In re Frenville, 744 F.2d 332). For example, in In re Radio-Keith, the parties cognizable interest was a debtor's rent guaranty enabling one of its subsidiaries to lease property. In re Radio-Keith, 106 F.2d at 26-27. 38 Although recognizing these principles, the district court nevertheless concluded that no legal relationship developed which would require that the Government assert any claim it might have against Remington at the time it filed its bankruptcy petition in 1981. App. at 530. We disagree. 39 As a threshold matter, Remington's breaches occurred in July through November, 1980; August, 1980; and January through February, 1981. Although not dispositive, each underlying wrong occurred well before the December, 1981 confirmation of the Chapter 11 plan. We recognize that in the context of the government's nationwide catalog-type purchasing system, it would have been virtually impossible for the government to learn of these breaches without the benefit of an in-depth audit. 40 Here, however, the government initiated such an audit. Beginning in April, 1981, government auditors embarked on a 300-hour pre-award audit to examine costs and sales figures submitted by Remington in support of a proposed 1982 contract. In the course of this investigation, the government uncovered evidence that Remington had breached favorable pricing provisions by not passing along discounts granted to other customers. The July, 1981 pre-award audit report expressly acknowledged breaches, which if proven, would have resulted in favorable judgment. 6 The report also noted that it was reported that Remington had filed for Chapter 11 reorganization in April, 1981. 41 The government contends that the pre-award audit was not designed to determine possible breaches of the 1980 and 1981 contracts. This argument ignores the obvious. Although the audit was not designed to uncover possible contract claims, it uncovered them nonetheless. Thus, the government cannot now say it was entitled to ignore the findings of its own auditors. 42 In addition, the results of this pre-award audit prompted government officials to launch a more comprehensive post-award audit in June, 1981--six months before the plan's December, 1981 confirmation. Although the final post-award audit was not released until two months after the confirmation, field work for the post-award audit was completed in September, 1981. These factors, viewed as a whole, establish that the government knew it possessed a right to payment for breach of contract before December 24, 1981. That the government had not established the precise amount of its claim is immaterial. See 11 U.S.C. Sec. 101(4)(a). 43 We are not unsympathetic to the government's difficulty in determining a breach when it must review a nationwide catalog purchasing system, and then compare its findings with a contractor's records of dealings with other customers. In this case, however, the auditors uncovered irregularities indicating a right to payment for contract breach in sufficient time to permit GSA to give notice of its claim to the bankruptcy court. 7 Accordingly, we shall not reward a subsequent lack of diligence by those responsible for asserting the government's claim.