News
December 18, 2020

Navigating the Bankruptcy Process to Acquire Distressed Government Contractors or Their Assets

Advisory

The COVID-19 pandemic and efforts to contain its impacts have upended the US and global economies, leaving a wake of financial distress.1Although the US economy has shown signs of recovery, many companies, including government contractors, will continue to face significant challenges in the near term and potentially also in the medium and long term. The US government has tried to mitigate the impact of the COVID-19 pandemic on government contractors through various financial relief programs, including section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). For many contractors, however, this and other relief may be insufficient to resolve financial challenges, especially for those that were troubled before the public health emergency. Inevitably, many companies that contract with the government will face financial distress so severe that it threatens their solvency, forcing them to consider selling their businesses or substantial portions of their assets or seeking relief through the bankruptcy process. In light of the foregoing, it is a fitting time to consider the unique challenges that are attendant to transactions involving distressed government contractors and their assets, including their federal contracts.

Overview of Bankruptcy Processes

Government contractors and other companies facing financial distress may consider various options to maintain sufficient liquidity to remain solvent, including stock sales, debt-equity swaps, and asset sales. In some cases, these options may not be viable or may not align with the company's objectives, leaving a sale, bankruptcy, or a combination of the two as the only realistic option. Filing for bankruptcy protection can provide significant benefits, including allowing debtors to reject unprofitable contracts and discharge pre-petition liabilities under Chapter 11 reorganizations and protecting debtors from judicial and administrative proceedings that could have been commenced prior to the bankruptcy petition. However, bankruptcy will not discharge all debts, and it may cause business disruption, be costly to pursue, and create uncertainty. Filing for bankruptcy may damage a company's reputation with customers, suppliers, and employees and harm its trade credit. Companies may be able to mitigate some of these risks through pre-packaged or pre-negotiated bankruptcy plans.2

There are two principal types of corporate bankruptcies: Chapter 7 liquidation and Chapter 11 reorganization or liquidation. Under Chapter 7, the debtor's assets are placed into an estate managed by a court-approved trustee, who is in charge of liquidating those assets. The trustee, subject to court approval, then sells the debtor's assets. In Chapter 11 proceedings, the debtor typically retains possession of and control over its assets and is allowed to continue operating, while the bankruptcy process is pending. The debtor under those circumstances is known as a "debtor-in-possession" (DIP). Chapter 11 cases can produce results similar to Chapter 7 filings, as Chapter 11 is not limited to reorganizations and contemplates that a debtor may sell all or substantially all of its assets and liquidate any remaining assets.3 If during the bankruptcy proceeding the debtor decides that filing under the other chapter would be more advantageous, it can move to dismiss and refile or move to convert.4

Many bankruptcy proceedings, including both liquidations and reorganizations, involve selling some portion of the debtor's assets. Section 363 is the default mechanism for asset sales in Chapter 7 proceedings and also applies to pre-plan sales under Chapter 11.5 Under Chapter 11, debtors may not sell assets without court approval, except for sales in the ordinary course of business.6 This limitation requires the debtor to notify creditors and other interested parties of the impending sale and the court to hold a hearing to approve the sale.7 When debtors sell assets under Section 363, those assets may be sold "free and clear of any interest in such property of an entity other than the estate" if the statutory conditions are satisfied.8 When selling assets in connection with a reorganization plan, sales are effected under Bankruptcy Code section 1123.9

In addition to the traditional Chapter 7 and Chapter 11 options, the Small Business Reorganization Act (SBRA), effective February 19, 2020, created within Chapter 11 a new subchapter (Subchapter V) to streamline bankruptcy procedures for and expand the rights of small businesses,10 which play a significant role in many aspects of federal government contracting. These companies are frequently targets for acquisition by both private equity and strategic buyers. Subchapter V allows small business owners to retain an ownership interest in the company,11 generally eliminates creditors' committees,12 typically removes disclosure statement requirements,13 and permits small business debtors to amortize administrative expense claims across the term of the reorganization plan.14

There are protections, including an automatic stay and non-discrimination rules, built into the bankruptcy process. As discussed below, those protections may not be as effective for government contractors as they are for companies that do not perform government work.

Automatic Stays

The automatic stay, a central tenet of the bankruptcy process, provides significant protections for the debtor. The Bankruptcy Code automatically enjoins creditors from taking unilateral action against the estate or DIP immediately upon the filing of the bankruptcy petition.15 The stay applies to all creditors, including federal, state, and local governments, and continues until certain events trigger its termination, such as resolution of the bankruptcy case or a court decision granting a creditor relief from the stay.

Although the stay applies to government contracts and claims, courts may grant governments relief from the stay under certain circumstances. Consistent with restrictions on assuming and assigning government contracts, courts in what are known as "hypothetical test" jurisdictions have signaled that they are more willing to grant governments relief from automatic stays because debtors cannot assume contracts without government approval.16 Courts have also indicated that they are comfortable with granting governments relief from automatic stays to recover property if title to that property is vested in a government. This may include government-furnished, contractor-acquired property and property where title has vested in the government.17

Under the Bankruptcy Code, governments are exempt from the automatic stay when exercising their "police and regulatory power."18 Some courts, such as the Fourth Circuit,19 interpret this exception to the stay narrowly, while others, such as the Ninth Circuit, interpret this exception more broadly.20 The government may find that it is able to use this exception to enforce statutes and regulations such as the Service Contract Labor Standards (formerly known as the McNamara-O'Hara Service Contract Act),21 which require contractors to, among other things, comply with prescribed wage standards and provide employees with certain minimum fringe benefits.22 False Claims Act (FCA) actions, which are the government's principal enforcement mechanism for violations of government contracts and compliance requirements, are also generally considered exempt from the automatic stay under this police and regulatory power exception, at least where the action is brought by the government and not a qui tam relator.23This can make contractors and other companies vulnerable to the draconian remedies that the government (and potentially relators) can recover under that law.

Additionally, the government has broad rights to terminate contracts for convenience for nearly any reason at any time or to terminate in the event of a contractor's default. The automatic stay generally will not affect pre-petition terminations that have not finalized prior to the contractor filing the bankruptcy petition. However, it typically bars the government from terminating contracts for convenience or default (regardless of whether they were entered into before or after the petition) without court-ordered relief. The impact of bankruptcy proceedings on the government's termination rights are discussed in more detailed in our May 2020 Article.

Anti-Discrimination Rules

Section 525 of the Bankruptcy Code prohibits the government from discriminating in many contexts against debtors "solely" because they filed for bankruptcy, including when issuing licenses, permits, and grants.24Although the Bankruptcy Code does not expressly preclude the Government from declining to award a contract to a debtor that otherwise would receive the contract, certain courts have interpreted the Bankruptcy Code's prohibition on discrimination to extend to contract awards.25 There is, however, a tension between this prohibition on discrimination and the concept of "responsibility" in federal government contracts. The government is required to determine whether the prospective contractor (i.e., the successful offeror or bidder) is "responsible" prior to awarding a contract to that entity.26 When making responsibility determinations, agencies must consider, among other things, whether an offeror has (or has the ability to obtain) the technical and financial resources necessary to successfully perform the contract.27 Notwithstanding this tension, the Government Accountability Office (GAO) and the Court of Federal Claims (COFC) have denied bid protests challenging agency non-responsibility determinations based on an offeror's bankruptcy.28 The Federal Circuit has also upheld a contracting officer's affirmative responsibility determination notwithstanding a contractor's bankruptcy declaration, indicating that bankruptcy is not an absolute bar to doing business with the government where the contracting officer is willing to conclude a company is otherwise responsible.29 This case law shows that a bankruptcy filing is something that a contracting officer can cite as a basis to decline to award a contract but it is not necessarily disqualifying.

Considerations for Acquiring Distressed Government Contractors or Their Assets Through Bankruptcy

The balance of this article discusses various considerations relevant to acquiring contractors or government contract assets through the bankruptcy process. It is not, and is not intended to be, a discussion of all considerations when acquiring government contractors and instead focuses on issues that have unique applications in the bankruptcy context.

Strategic or financial buyers looking to invest in or purchase assets from a distressed government contractor must navigate unique regulatory requirements applicable to federal government contracts. Principal among these requirements are the Anti-Assignment of Contracts Act (Anti-Assignment Act) restrictions on transferring any rights or interests in government contracts; successor liability standards that vary from those in the purely commercial context; and when applicable, national security concerns, including those stemming from foreign ownership, control, and influence (FOCI). If the target is in bankruptcy or is likely to end up there, acquirers may face difficulties in transferring certain government contracts, discharging liabilities, and navigating national security concerns. The parties must consider these issues in concert with all the standard considerations when structuring the transaction and planning for how to address the government-unique processes both before and after closing.

Assignment and Transfer of Government Contracts

A primary concern of any prospective acquirer of a government contractor or its assets is ensuring that government contracts transfer from the contractor to the acquirer or that the contractor retains the contracts following a reorganization. The Anti-Assignment Act generally prohibits contractors from assigning government contracts to third parties.30 There are exceptions to this prohibition, including government consent (i.e., through a novation), transfer by operation of law, and waiver. To effect these exceptions, advanced planning is necessary. Such planning is even more important and complicated in the bankruptcy context, especially if the seller is liquidating due to insolvency and will be pursuing dissolution after the bankruptcy case closes. Where novations are required, this planning should include consideration of how best to bridge the period between closing and the effectuation of the novation. Buyers and sellers, following notice to the contracting officer, may need to execute a transition agreement, typically some form of agency or subcontracting arrangement, pending approval of the novation. These arrangements present their own challenges, and their viability may depend on the terms of the underlying prime contract, including any consent-to-subcontract requirements.

Scope of and Exceptions to the Anti-Assignment Act

Certain transactions are not subject to the Anti-Assignment Act's restrictions and FAR novation requirements. Stock purchases, for instance, do not involve the transfer of government contracts from one entity to another.31 While the contractor may be required to inform the government of the change in ownership,32 the Anti-Assignment Act prohibition on transferring government contracts does not apply. In other transactions, including asset sales, the government must either consent to the assignment of contracts or waive the Anti-Assignment Act's restrictions.33To obtain the government's consent, the parties must comply with the novation process detailed in FAR 42.1204. This process requires the parties to submit a proposed tri-party novation agreement and certain supporting documentation to the cognizant contracting officer, which, in many cases, is an administrative contracting officer acting on behalf of all of the contractor's agency customers. A complete novation package cannot be submitted to the government until a transaction has closed, due in part to the documentation requirements. There are also certain types of transactions, such as mergers, that arguably fall within the operation of law exception to the Anti-Assignment Act prohibition but which agencies often subject to a more limited novation process requiring less documentation, though they sometimes require some form of guaranty from the transferring entity.

There is no guarantee that an agency will consent to a transfer of a government contract, and the decision to accept or reject a novation falls within the broad discretion of the contracting officer.34 For an acquisition that will require the novation of one or more contracts, this creates significant risk for both the seller and the purchaser. Additionally, there is no prescribed timeline for the government to decide whether to accept or reject a novation request, which can delay the transfer for weeks or months. This is where contracting officer-approved transition arrangements come into play. However, such arrangements may not provide sufficient protection if the government ultimately withholds any required consent.35 It is prudent, therefore, to negotiate provisions in the purchase agreement for unwinding the transaction if the government fails to approve the novation for material contracts, or to otherwise provide for a reduction in the purchase price or other consideration. Subcontracting arrangements may also be unattractive or infeasible when the prime contract is a small-business set-aside contract and the buyer is not a "similarly situated" business.36

Transferring Government Contracts in Bankruptcy

Transferring and assigning government contracts in the bankruptcy context is generally more complicated than transferring and assigning commercial contracts. One factor that bears on this issue is the venue in which the bankruptcy proceeding is pending; another concerns unique challenges in implementing subcontract transition arrangements pending approval of a novation.

Importance of Bankruptcy Venue

As we discussed in our May 2020 Article, the jurisdiction in which the bankruptcy is pending will affect the debtor's ability to assume (or to assume and assign) its government contracts. Section 365(f) of the Bankruptcy Code, which applies to Section 363 asset sales37 and Chapter 11 reorganizations,38 sets forth the general rule that a debtor may "assume" and/or "assume and assign" an executory contract39 or unexpired lease, notwithstanding a contractual provision that prohibits, restricts, or conditions assignment.

"Assumption" is a term of art in bankruptcy law and defined under the Bankruptcy Code. It does not refer to a debtor's mere continuation of performance under an agreement subsequent to a bankruptcy filing. Rather, assumption is the mechanism by which a debtor, upon notice to creditors, seeks authorization from the bankruptcy court to reaffirm its obligations under an executory contract. It requires the debtor to cure monetary and other defaults and to prove that it has the capability going forward to meet its contractual obligations. The formal assumption of an agreement by a debtor during its bankruptcy proceeding is essentially equivalent to the debtor entering into a new agreement. The normal rule for commercial, non-government contracts, is that once a debtor assumes a contract, it can generally override anti-assignment provisions and assign that contract to a third party.40

Notwithstanding this broad authority of debtors (as DIPs or through trustees) to assume and assign contracts, section 365(c) of the Bankruptcy Code provides that a counterparty may enforce a prohibition or restriction on assignment where " applicable law" (i.e., non-bankruptcy law) would excuse the counterparty from accepting performance from, or rendering performance to, an entity other than the debtor, and the counterparty does not consent to such assumption or assignment.41 Nearly all jurisdictions consider the Anti-Assignment Act to be an "applicable law." However, application of the Anti-Assignment Act varies across jurisdictions based on whether the jurisdiction where the case is pending applies the so-called "actual test" or "hypothetical test." These distinctions are discussed in depth in our May 2020 Article. In sum, courts applying the actual test hold that the Anti-Assignment Act applies only where the contractor seeks to assign a contract to a third party, but not to the debtor's assumption of the contract (through which the debtor essentially assigns the contract to itself). In hypothetical test jurisdictions, however, the contractor can neither assume nor assign a contract, including to itself as a DIP, without government approval.

While it may seem that reorganizations or asset sales effected through a judicial order should fall under the "operation of law" exception to the Anti-Assignment Act, this is not the case in hypothetical test jurisdictions, which view the pre- and post-petition company as distinct entities. Thus, the pre- and post-petition companies are not considered to be "essentially the same entity." Indeed, at least one court has held that section 365(c) is a "general non-transferability statute" that "precludes any assumption of the contract even where such an assumption might otherwise occur by operation of law."42 Where an agency refuses to consent to an assumption, the contractor transferring the contract to a DIP will be deemed to have breached the contract, which could result in the government pursuing a termination for default. Even if the government were to consent to a debtor assuming its contracts, filing in hypothetical test jurisdictions imposes significant administrative burdens because it guarantees at least one novation will be required. Where the debtor intends to assume and then assign its contracts to a third party, two novations will be required.

A distressed seller should consider these issues when selecting the venue in which to file its bankruptcy petition. Prospective acquirers should likewise consider implications of the chosen venue when deciding whether to pursue the transaction and, where possible, may seek to influence the seller's venue decision. Federal law allows debtors to file petitions in the US district court for the district where the company had its principal place of business or maintained its principal assets for 180 days preceding filing the petition or, if they have not been limited to a single district for 180 days, the district in which the company had its principal place of business or held its principal assets "for a longer portion of such [180] day period."43 When this analysis may result in multiple potential venues, government contractor debtors—and companies interested in acquiring the assets of distressed government contractors—should consider the impact of the venue on their ability to assume and assign government contracts through the novation process.

Transition Agreements

Subcontracts pending novation are commonly used to transfer certain performance obligations and financial benefits from a government contractor to its acquirer, while a novation request is pending. When the transferor is a debtor planning to dissolve, this waiting period presents unique challenges. Once the debtor sells all or substantially all of its assets, the debtor will typically be little more than a shell company with only a chief restructuring officer remaining to wind-up the debtor's business. Pending approval of the novation, however, the debtor must continue to serve as the prime contractor and perform, at a minimum, administrative tasks, including invoicing, maintaining a bank account to receive payments, and distributing payments to the subcontractor buyer to avoid termination for default. These obligations, and the buyer's interest in the debtor's continued existence to serve as the prime contractor, may conflict with the debtor's interest in dissolving. To ensure the buyer's interests are adequately protected, a buyer must carefully draft the transaction documents (including any subcontracts) to provide that the seller contractor will continue to perform its prime contractor obligations, until the contracting officer issues the final decision approving the novation.

Due Diligence Considerations

When crafting stock or asset purchase agreements to acquire equity in or assets from a distressed government contractor, buyers must assess and address the unique risks presented by the seller's circumstances. As discussed below, bankruptcy can provide significant liability protections, but acquisitions of distressed companies or their assets carry substantial risk, particularly when the debtor intends to dissolve after the transaction. Much of this risk stems from practical limitations on the utility of representations and warranties, post-closing covenants, indemnification, post-closing escrow, and other post-closing liability protections.

It is therefore particularly important for buyers to conduct as thorough a diligence review as possible and attempt to flush out potential problems and liabilities through information requests and comprehensive representations and warranties. Balanced against this, however, is the fact that distressed sellers generally are selling their assets at significant discounts and therefore are not motivated to respond to what they may view as burdensome diligence requests and representations. Out of court asset sales by the distressed seller may present fraudulent conveyance risk. Distressed sellers also may face restrictions imposed by creditors and the bankruptcy court that prevent them from meaningfully contributing capital to an escrow account. But the bankruptcy process also generally allows the seller to effect a free and clear sale, which will limit the buyer's exposure to legacy liabilities and successor liability claims. All this means that it is imperative for buyers to conduct thorough diligence, carefully structure the transaction to avoid high-risk distressed sale and contractual liabilities, and consider the availability of Rep & Warranty Insurance (RWI) to mitigate other potential risks.

As with any acquisition of a government contractor or government contract assets, it is important to perform specialized due diligence to assess issues related to the contractual and regulatory obligations that apply to government contracts. There are additional particular considerations buyers should consider when acquiring a distressed government contractor or its assets. Such considerations will vary based on the facts and circumstances of the specific target company and transaction, including whether the seller's government contracts are prime or sub contracts, defense or civilian agency, fixed-price or flexibly priced (i.e., cost-type or T&M), supplies or services, and commercial or non-commercial.44 The following highlights some of the diligence issues that take on increased or special importance in a deal involving a distressed company or assets.

Supply Chain Risks

Prospective buyers of government contractors or their assets must consider actual or potential supply chain risks. Such issues tend to be more common for distressed companies and are particularly acute in the current economic climate in light of the fallout from the COVID-19 pandemic. Diligence should consider whether the prime contractor's financial challenges have resulted in breach of important first-tier subcontracts. It is importance for the diligence to assess whether the supply chain is healthy and able to deliver and perform on schedule. Prime contractors are responsible for their supply chains and can be liable to the government for a subcontractor's nonperformance. This is true even when the prime contractor was not at fault for and had no control over the subcontractor's nonperformance, if the prime contractor could have obtained supplies or services from other sources or the contracting officer directed the contractor to purchase supplies or services from alternative sources, and the contractor did not comply with that directive.45

Organizational Conflicts of Interest

Government contractors generally must avoid organizational conflicts of interest (OCIs). OCIs usually do not present insurmountable obstacles to doing business with the Government because they may be able to be mitigated. Plus, agencies have broad discretion to waive OCIs, and GAO has been reluctant to second-guess agency waivers absent procedural errors (e.g., the waiver was not in writing).46 It is still important, however, for prospective acquirers of government contractors to assess whether the transaction would create actual or apparent OCIs that could affect either the target's business, the value of assets to be acquired, or the acquirer's existing business.

It is important to identify OCI issues in diligence involving a distressed company, as there can be a tension between OCI principles and a debtor's obligation in bankruptcy to select the highest and best offer in section 363 asset sales and to act in the best interest of creditors when developing a reorganization plan. For example, a plan might not be in the best interest of creditors if the reorganization would jeopardize existing OCI mitigation plans (i.e., plans already approved by the government) or raise new OCI concerns. These are issues the parties and the court will need to navigate as the bankruptcy proceeds, but they cannot be addressed unless they are identified through diligence.

Property Considerations

Government contracts may require access to and use of government property. In addition, the government often holds rights to property that a contractor acquires or develops during contract performance, including intellectual property. While the allocation of rights and obligations with respect to property are important in any transaction, there are unique considerations in bankruptcy cases. As noted above, the government's property interests can impact the automatic stay (see Section A.1, supra). Additionally, the government may hold prescribed rights to use technical data based on FAR and agency data-rights clauses included the seller's government contracts.47 In such instances, the Government is essentially a licensee—it does not have title to the data, but it has certain rights to use the data. Accordingly, the government's rights in the bankruptcy context should be similar to those of commercial licensees, and the government should be able to benefit from the protections reflected in 11 U.S.C § 365(n), which allow licensees to retain their rights under a license agreement even where the debtor rejects the license.

Limiting Exposure to Legacy Liability

Diligence is critical to assessing liability risks, but it rarely, if ever, reveals all risks and does not eliminate those risks. Thus, a central concern of any prospective acquirer should be limiting exposure to the target's legacy liabilities—known and unknown—to the maximum extent practicable. This concern is often heightened in the context of distressed companies given the likelihood that they face substantial liabilities and lack the assets to satisfy those liabilities, meaning creditors will look elsewhere for relief. Acquirers may attempt to exclude liabilities from an asset purchase or extinguishing liabilities through the bankruptcy process, such as through a Section 363 sale.

Successor Liability in Out-of-Court Transactions

Mergers, Consolidations, and Stock Purchases

In mergers and non-bankruptcy stock purchases, the buyer generally assumes the seller's liabilities.48 However, the buyer often attempts to negotiate protections. For example, the parties can negotiate adjustments in the purchase price, indemnification from the buyer for certain liabilities, and exclusions of certain liabilities. Many of these options are not practicable when acquiring distressed companies. For instance, indemnification from a distressed seller is often not feasible. In some cases, the seller is dissolving, and even if it is not, the seller is unlikely to possess sufficient financial resources after paying creditors to satisfy indemnification commitments.

Asset Sales

Buyers commonly attempt to exclude liabilities from asset purchases, but those attempts are not always successful. Determining whether an acquirer assumes the seller's liabilities through asset sales involves in-depth, fact-specific inquiries. The general rule is that buyers do not inherit the sellers' liabilities,49 but there are several exceptions to this rule, which can vary in substance or application across jurisdictions. These exceptions arise when the purchaser expressly or implicitly assumes the seller's liabilities, the sale is a fraudulent transfer; the purchase is a substantial continuation of the seller,50 or the transaction is a de facto merger or consolidation:51 

  • Express or Implicit Assumption: A purchaser expressly or implicitly assumes liabilities of the seller when the purchase agreement or the acts and representations of the parties demonstrate an intent to assume those liabilities. For example, the Seventh Circuit applied this exception in Kessinger v. Grefco, Inc., where the purchaser agreed "to pay, perform and discharge all debts, obligations, contracts and liabilities."52
  • Fraudulent Transfer: Courts will impute a seller's liability to a buyer when the seller intended "to hinder, delay, or defraud creditors."53 When assessing fraud claims, courts will consider both direct and circumstantial evidence of fraud (e.g., inadequate consideration, transfer to a spouse or relative, and benefits retained by the debtor). Courts may also find constructive fraudulent transfers, such as where consideration is grossly inadequate.54
  • Mere Continuity and Substantial Continuity/Continuity of Enterprise Theories: Acquirers can be found to inherit the liabilities of sellers if the buyer is merely a continuation of the seller or is substantially the same as the seller. The mere continuity theory applies when "after the transfer of assets, only one corporation remains, and there is an identity of stock, stockholders, and directors between the two corporations."55 The substantial continuity/continuity of enterprise doctrine, which is the expansion of the mere continuity test, considers a variety of factors, including whether the buyer retains the seller's employees; the buyer's management is generally the same as the seller's management; the buyer's post-transaction operations and business goals are the same as the seller's pre-transaction operations and business goals (e.g., same facilities, same products and services, same assets); the name did or did not change; and the buyer represents itself as a continuation of the seller.56
  • De Facto Merger: A transaction is treated as a de facto merger when the transaction was not structured as a merger but it is substantively indistinct from a merger or consolidation of the seller and purchaser.57 This doctrine generally applies when there is "a continuity of the selling corporation, evidenced by the same management, personnel, assets and physical location"; "a continuity of stockholders, accomplished by paying for the acquired corporation with shares of stock"; "a dissolution of the selling corporation"; and "the assumption of liabilities by the purchaser."58

If one of these exceptions applies to the acquisition, the purchaser could be deemed to have assumed the seller's liabilities. That can have significant and even catastrophic implications, and the risks are heightened for distressed companies.

Successor Liability in Bankruptcy

In bankruptcy proceedings, successor liability generally depends on the transaction's structure and the type of liability. The standard successor liability doctrines discussed above can apply where assets are purchased through a Section 363 sale, but the Bankruptcy Code provides unique rules for discharging liability in Chapter 11 reorganizations.

False Claims Act Liability

At least one court has recognized that in Section 363 asset sales, successor liability under the FCA is the same as in out-of-court asset sales.59 (See above for a discussion of successor liability theories.) In reorganizations, however, the question is whether the FCA liability was discharged, which is a fact-intensive inquiry that can vary across jurisdictions. Because of this uncertainty, due diligence on potential FCA liability is critical. This can be problematic, however, because a qui tam action could be pending, and the seller may not have knowledge of the suit. If a buyer has significant concerns about the seller's exposure to FCA liability, a 363 asset sale may place the buyer in a better position to avoid exposure to FCA liability.

For Chapter 11 reorganizations, Section 523 of the Bankruptcy Code provides that non-dischargeable debts include "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by (A) false pretenses, a false representation, or actual fraud"; or "(B) use of a statement in writing . . . that is materially false."60 To satisfy this standard, a "[c]reditor must prove that [the] debtor obtained money through a material misrepresentation that at the time the debtor knew was false or made with gross recklessness as to its truth."61 Historically, this section did not apply to corporate debtors, which could discharge all debts, because Section 523 applied only to "individual" debtors.62

This changed in 2005, when Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This statute amended 11 U.S.C. § 1141 to render non-dischargeable any corporate debt identified in Section 523(2)(A) or (2)(B)—i.e., debts arising from fraud.63 It also excluded from discharge any debt "owed to a person as the result of an action filed under subchapter II of chapter 37 of title 31" (i.e., the FCA) "or any similar State statute."64

It is far from clear whether section 1141's incorporation of Section 523 renders FCA liability per se non-dischargeable. Under section 523(a)(2)(A), which is the general fraud provision, a key question is whether the debtor's intent in committing fraud rose to the level contemplated by the Bankruptcy Code (i.e., actual knowledge or "gross recklessness as to its truth"65) as opposed to the lower level of scienter necessary for liability under the FCA (i.e., "deliberate ignorance of the truth or falsity of the information" or "reckless disregard of the truth or falsity of the information"66).

Section 523(a)(2)(B), which specifically references the FCA and similar state statutes, has rarely been interpreted by courts. At least one court has held that Section 523(a)(2)(B) does not apply to the FCA because it refers to debts owed to a "person" and FCA claims belong to the Government, which is not a person.67

Given these complexities, companies considering acquiring debtors undergoing a reorganization should carefully assess the debtor's exposure to FCA liability and, if that liability is significant, either negotiate protections (possibly though representation and warranty insurance) or explore with the debtor the possibility of pursuing an asset sale.

Government Contracts Claims and Administrative Sanctions

Government contract claims (e.g., demands for money damages) in bankruptcy are generally treated in the same manner as private party claims. This equal treatment is grounded in the sovereign acts doctrine, which provides that when the Government acts as a contracting party, it "stands in the same shoes as any private party would in dealing with another private party."68 Not surprisingly, however, unique issues arise when resolving government contract claims during bankruptcy proceedings, including the forum for resolving those disputes, and contractual notice requirements that are necessary to discharge government claims.

Government contracts are governed by federal common law and a complex web of statutes, regulations, and judicial doctrines. These include the Contract Disputes Act (CDA), the Federal Acquisition Regulation (FAR), agency-specific FAR supplements, prescribed rules regarding deadlines for asserting rights to equitable adjustments that can pose jurisdictional bars to contractor claims, and the so-called "Christian doctrine," among other requirements.

Due to the complex, specialized nature of government contracts litigation, bankruptcy courts often defer to tribunals with expertise in adjudicating those disputes. Those tribunals are the Court of Federal Claims, Boards of Contract Appeals, and, on appeal, the US Court of Appeals for the Federal Circuit.69 In certain circuits, bankruptcy courts are required to stay proceedings and defer to those tribunals absent good cause for doing otherwise.70 This can often result in delays as the bankruptcy court awaits adjudication of those claims.

As discussed above, liabilities in asset sales generally transfer through traditional successor liability theories. In Chapter 11 reorganizations, once the bankruptcy court confirms the reorganization plan, all debts—including government claims—are discharged, unless the Bankruptcy Code or the Plan deems them non-dischargeable.71 Although discharges preclude personal liability for those debts, the debts are not extinguished. Notwithstanding the government's inability to collect on that discharged debt from the contractor, the government "may recover on the claim from third parties possessing liability, such as guarantors, sureties, and insurers."72

There is also a tension between limits on assumptions of liabilities, the Bankruptcy Code's discharge provisions, and the standard novation agreement provisions. FAR 42.1204 states that the novation agreement "shall ordinarily provide in part that . . . [t]he transferee assumes all the transferor's obligations under the contract."73 The standard novation agreement provides that it "may be adapted to fit specific cases and may be used as a guide in preparing similar agreements for other situations"74 but includes that standard provision stating that "[t]he Transferee also assumes all obligations and liabilities of, and all claims against, the Transferor."75 Bankruptcy cases may necessitate modifications to, or elimination of, this provision to avoid assuming liabilities extinguished through the bankruptcy process, though agencies may well push back on attempts to remove this assumption of liabilities provision from the standard agreement.

Importantly, discharges may be able to restrict more than just the government's ability to collect on a debt. At least one court has extended discharge protections to suspensions and debarment. For example, in In re Pilgrim's Pride Corp., the bankruptcy court denied the Department of Labor's request that the debtor be excluded from conducting business with the government.76 The court denied the request to the extent it arose from pre-confirmation conduct that itself was a discharged claim. Notwithstanding this lone decision, we are highly skeptical that suspension and debarment officials (SDOs) will defer to bankruptcy courts.

National Security Concerns

For contractors performing classified contracts, issues regarding foreign ownership, control, or influence (FOCI) must be addressed to ensure that the contractor can continue to perform and continuity or transfer of facility security clearances (FCLs), export controls registrations and licenses, and requirements for review and approval by the Committee on Foreign Investment in the United States (CFIUS). FOCI determinations and associated mitigation requirements are different in some respects for each requirement, but each assessment is aimed at evaluating and limiting the ability of foreign interests to access classified or controlled information and to control, direct, or decide, directly or indirectly, issues related to a company's management and operations.

Although FOCI requirements apply equally to transactions involving solvent and insolvent companies, FOCI can inject challenges into bankruptcy proceedings. For instance, there may be tensions between FOCI review and mitigation and the "best interests of creditors" test that applies to Chapter 11 reorganizations or the requirement that a debtor accept the highest and best offer in Section 363 asset sales. If a transaction could be unwound, or if the sale price could be reduced due to national security concerns, an offer that may be the highest-priced could nevertheless prove not to be in the best interests of creditors or the best offer. While a comprehensive analysis of the these issues is beyond the scope of the this article, the following is a brief overview:

FCLs and Defense Counterintelligence and Security Agency Review

For facility security clearances, FOCI issues are addressed based on the guidance in the National Industrial Security Program Operating Manual (NISPOM). For Defense agencies, determinations are made by the Defense Counterintelligence and Security Agency (DCSA) (formerly the Defense Security Service (DSS).77 When DCSA assesses FOCI risks, it considers a variety of factors relevant to risks of disclosing classified information, including:

  • Risk of espionage against the United States;
  • Risk of unauthorized transfers of technology;
  • The nature and level of classification of the information being accessed; and
  • The nature and extent of foreign ownership.78

If based on these factors, DCSA determines that a company is under FOCI, the company is ineligible to a hold a FCL, unless and until the company, with DCSA's approval, implements measures to mitigate FOCI. Mitigation steps can include exclusions of ultimate and intermediate parents typical in private equity structures, and various types of corporate agreements, including board resolutions, special security agreements, and agreements governing shareholder voting rights and procedures.

Export Control FOCI Restrictions

FOCI also presents obstacles where the company holds export-controlled information, though the definitions of what constitutes FOCI is different from those in the security clearance context. Any company that manufactures, exports, imports, or brokers defense articles79 must register with the Statement Department Directorate of Defense Trade Controls (DDTC). DDTC-registered companies are required to notify DDTC "by registered mail at least 60 days in advance of any intended sale or transfer to a foreign person of ownership or control of the registrant or any entity thereof."80 The parties must also notify DDTC that the transaction has closed within five days of the closing and begin the registration and license and agreement transfer process. The International Traffic in Arms Regulations (ITAR) establishes significantly higher thresholds for foreign ownership and control than that applicable in the classified contracts security context. For export control purposes, a company is deemed to be under foreign ownership if "one or more foreign persons" own "more than 50 percent of the outstanding voting securities of the firm."81 A company is presumed to be under foreign control "where foreign persons own 25 percent or more of the outstanding voting securities, unless one US person controls an equal or larger percentage."82 DDTC has authority to reject registration requests and requests to transfer licenses and agreements or require FOCI mitigation.

CFIUS Review

Transactions involving foreign persons can also trigger CFIUS review. CFIUS is a US Government interagency committee that reviews transactions involving foreign investment in US businesses that raise national security concerns, including some non-control transactions. CFIUS has traditionally focused on transactions that could result in foreign control of US businesses. By definition, a foreign interest must hold at least 10% equity in a company—regardless of the dollar value of the interest—or, if less than 10%, have representation on the board or some other direct or indirect right to direct the company's operations.83 In August 2018, Congress expanded CFIUS's jurisdiction by enacting the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). This statute expanded CFIUS's authority to include reviewing non-controlling foreign investments in US businesses involving critical infrastructure or technologies or sensitive personal data of US citizens that may be exploited in a manner that threatens national security (e.g.¸ high volumes of data, data relating to military personnel). Historically, CFIUS has reviewed bankruptcy transactions, but to avoid doubt, FIRRMA expressly extended CFIUS's jurisdiction to bankruptcy transactions. It also provided CFIUS with statutory authority to review real estate transactions involving any purchase or lease by a foreign person of any real estate that is part of an air or maritime port or is in close proximity to a US military installation or another facility of the US government that is sensitive for reasons relating to national security.

*  *  *

The key takeaway for potential acquirers of distressed government contractors is that new issues are presented from those in standard acquisitions of a government contractor. In addition to the contractual and compliance rights and obligations distinguishing government contractors from commercial acquisition targets, options presented to distressed contractors, including asset sales and reorganizations, both within and outside a bankruptcy process, need to be identified and coordinated between government contracts and bankruptcy counsel to ensure the best outcome for the parties.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. This article is a corollary to our May 2020 article titled The Intersection of Government Contracts and Bankruptcy Law in the Era of COVID-19 (hereinafter "May 2020 Article").

  2. For a discussions of antitrust considerations relevant to pre-packaged and pre-negotiated bankruptcy plans, see Michael B. Bernstein, et al.COVID-19: Key US Antitrust Issues in Bankruptcy and Distressed Sales, Arnold & Porter (June 30, 2020).

  3. 11 U.S.C. § 1123(a)(5)(B), (D); see also CHS, Inc. v. Plaquemines Holdings, L.L.C., 735 F.3d 231, 238 (5th Cir. 2013) ("Chapter 11 of the Bankruptcy Code permits a debtor to reorganize or liquidate all or substantially all of its assets.").

  4. 11 U.S.C. §§ 349(a), 706, 1112.

  5. Id. § 103(a) ("Except as provided in section 1161 of this title, chapters 1, 3, and 5 of this title apply in a case under chapter 7, 11, 12, or 13 . . . .").

  6. Id. § 363(b)(1).

  7. Id.

  8. Id. § 363(f).  This section applies if "(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest"; (2) the entity other than the estate consents to the sale; "(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in a bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest."  Id.

  9. See generally In re Ditech Holding Corp., 606 B.R. 544 (Bankr. S.D.N.Y. 2019).

  10.  A company qualifies as a "small business" under this subchapter if the company's debts, exclusive of debts owed to affiliates or insides, do not exceed $2,725,625 and if at least 50% of those debts "arose from the commercial or business activities of the debtor."  11 U.S.C. § 1182(1)(A).  Congress temporarily increased this threshold to $7,500,000 through the CARES Act.

  11. Id. § 1191(b).

  12. Id. § 1102(a)(3).

  13. Id. § 1181(b) (making 11 U.S.C. § 1125 inapplicable except for good cause).

  14. Id. § 1191(e).

  15. Id. § 362(a).

  16. See Section B.1, infra (discussing "hypothetical and "actual" test jurisdictions); May 2020 Article; In re TechDyn Sys. Corp., 235 B.R. 857, 860 (Bankr. E.D. Va. 1999) (hypothetical test jurisdiction where court held that "the debtor's legal inability to assume the contracts over the government's objection" was "more than sufficient 'cause' for relief from {the} stay to terminate the contract").

  17. For instance, in In re American Pouch Foods, Inc., the Seventh Circuit allowed the Government to recover property to which it "held absolute title (and right to possession) to certain goods in the possession of the Debtor."  769 F.2d at 1191 (7th Cir. 1985).  The court based its conclusion on a contract clause that vested title in the Government "to all parts, materials, inventories, work in process and various other categories." Id. at 1192.  Similarly, In re Reynolds Mfg. Co. a district court in the Third Circuit held that courts should interpret government contract vesting clauses literally and concluded that title to all supplies that the debtor acquired in performance of a government contract vested in the Government.  68 B.R. 219 (W.D. Pa. 1986).

  18. 11 U.S.C. § 362(b)(4).

  19. See, e.g.In re Royal, 137 Fed. App'x 537, 541 (4th Cir. 2005) ("The statutory context therefore indicates that we should read Section 362(b)(4) narrowly because the bankruptcy court can quickly and easily correct issues resulting from a problematic stay, but has no power to correct issues caused by a problematic exception to a stay.").

  20. See, e.g.In re Chapman, 264 B.R. 565, 569 (9th Cir. 2001) (explaining that the exemption applies where "the government acted primarily to protect its pecuniary interest in the debtor's property or the public safety and welfare" or where "the government's actions are motivated to effectuate public policy or private rights").

  21. FAR Subpart 22.10, Service Contract Labor Standards; FAR 52.222-41, Service Contract Labor Standards.

  22. See Eddleman v. United States Dep't of Labor, 923 F.2d 782, 783 (10th Cir. 1991).

  23. See, e.g.In re Universal Life Church, Inc., 128 F.3d 1294, 1298 (9th Cir. 1997) ("{A} civil suit brought pursuant to the Federal False Claims Act is sufficient to satisfy the section 362(b)(4) exception."); In re Commonwealth Cos., Inc., 913 F.2d 518, 526 (8th Cir. 1990) ("{C}ivil actions by the government to enforce the FCA serve to inflict the "sting of punishment" on wrongdoers and, more importantly, deter fraud against the government, which Congress has recognized as a severe, pervasive, and expanding national problem. The police and regulatory interests furthered by enforcement of the FCA are undeniably legitimate and substantial. The fact that the statute's chief purpose is to make the government whole does not reduce the weight of these interests so as to make their vindication insufficient to qualify for the § 362(b)(4) exception from the automatic stay.")

  24. 11 U.S.C. § 525(a).  The Supreme Court has interpreted the word "solely" broadly as applying to government actions regardless of the Government's motive.  F.C.C. v. NextWave Personal Commc'ns Inc., 537 U.S. 293 (2003).

  25. See, e.g.In re Exquisito Servs., Inc., 823 F.2d 151 (5th Cir. 1987) (holding that agency's refusal to exercise an option period was based solely on the contractor's bankruptcy declaration and thus violated 11 U.S.C. § 525(a)); Marine Elec. Ry. Products Div., Inc., 17 B.R. 845 (Bankr. E.D.N.Y. 1982).

  26. FAR 9.103(a) ("Purchases shall be made from, and contracts shall be awarded to, responsible prospective contractors only.").

  27. 41 U.S.C. § 113(1); FAR 9.104-1(a) ("To be determined responsible, a prospective contractor must- (a) have adequate resources to perform the contract, or the ability to obtain them.").

  28. See, e.g.Global Crossing Telecomms., Inc., B-288413.6, et al., June 17, 2002, 2002 CPD ¶ 102 ("While the mere fact that a bidder files a petition in bankruptcy under Chapter 11 of the Bankruptcy Act does not require a finding of nonresponsibility, bankruptcy may nevertheless be considered as a factor in determining that a particular bidder is nonresponsible.").

  29. See, e.g.Bender Shipbuilding & Repair Co. v. United States, 297 F.3d 1358 (Fed. Cir. 2002) (upholding contracting officer's affirmative responsibility determination where contractor would have access to sufficient working capital to perform contract).  A more  complete discussion about bid protest risks in acquisitions of government contractors or their assets is beyond the scope of this article.  Government contractors know, however, that  acquisitions can  disrupt a contractor's business.  A goal of the parties to an acquisition agreement is to limit that disruption.  For example, sellers and buyers may face obstacles competing for task and delivery orders under an indefinite-delivery, indefinite-quantity (IDIQ) contract while a novation is pending, or when the Government delays approving a novation request.  See, e.g.Wyle Labs., B-416528.2, Jan. 11, 2019, 2019 CPD ¶ 19; Engility Corp., B-416650, B-416650.2, Nov. 7, 2018, 2018 CPD ¶ 385.  Companies can also face bid protest risks, if transactions raise questions about the continuing validity of an offeror's proposal or access to the personnel, equipment, financial resources, intellectual property and R&D capabilities, among other assets, described in the offeror's proposal or necessary to meet solicitation requirements.

  30. 41 U.S.C. § 6305(a) ("The party to whom the Federal Government gives a contract or order may not transfer the contract or order, or any interest in the contract or order to another party.  A purported transfer in violation of this subsection annuls the contract or order so far as the Federal Government is concerned, except that all rights of action for breach of contract are reserved to the Federal Government.").

  31. FAR 42.1204(b).

  32. FAR 52.215-19, Notification of Ownership Changes.

  33. The Government can also waive the Anti-Assignment Act's restrictions by accepting the buyer's performance and paying invoices submitted by the buyer.  Westinghouse Elec. Co. v. United States, 56 Fed. Cl. 564, 569 (2003) ("A transfer of contract rights will be upheld when the government recognizes it either expressly as by novations or implicitly as by ratification or waiver." (citing NGC Inv. & Dev., Inc. v. United States, 33 Fed. Cl. 458, 463 (1995)); Tufto Corp. v. United States, 222 Ct. Cl. 277, 280 (1980) (holding that payments to assignee waived Government's right to object to assignment and that contracting officer had authority to waive the Anti-Assignment Act).  Parties should not rely on the waiver exception, which is more often than not the result of an agency oversight or mistake than a conscious, affirmative decision to waive the Anti-Assignment Act.

  34. See Ordnance Devices, Inc. v. United States, 50 F.3d 22 (Fed. Cir. 1995) (holding that a buyer "ha{s} no right to have the contracts novated" and explaining that the buyer "took a business risk when it purchased" the seller's assets because it "had no guarantee that the contracts would be novated").

  35. See, e.g., FAR 52.244-2, Subcontracts.

  36. FAR 52.219-14, Limitations on Subcontracting, requires the employees of the small business prime contractor to perform portions of the work.  For example, in non-service construction contracts, employees of the small business prime contractor, or a similarly situated subcontractor, must account for at least 50% of labor costs.  FAR 52.219-4(c).  A subcontractor is similarly situated if it "has the same small business program status as the prime contractor" (e.g., if the prime contractor is a service-disabled, veteran-owned small business ("SDVOSB"), the subcontractor must also be a SDVOSB) and the subcontractor is certified as small for the North American Industry Classification System ("NAICS") Code.  13 C.F.R. § 125.1.

  37. 11 U.S.C. § 363(l).

  38. Id. § 1123(b)(2).

  39. The Bankruptcy Code does not define "executory contract." However, the Supreme Court recently clarified that an executory contract is "a contract that neither party has finished performing."  Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652, 1657 (2019).

  40. 11 U.S.C. § 365(f); see also In re Haggen Holdings, LLC, 739 Fed. App'x 153 (3rd Cir. 2018) (holding anti-assignment provision unenforceable pursuant to 11 U.S.C. § 365); In re Crow Winthrop Operating P'ship, 241 F.3d 1121 (9th Cir. 2001) ("Section 365(f) permits the assignment of contracts by debtors notwithstanding a contractual 'provision . . . that prohibits, restricts, or conditions the assignment.'" (quoting 11 U.S.C. § 365(f)(1)).

  41. Id. § 365(c)(1)(A).

  42. In re Pa. Peer Review Org. Inc., 50 B.R. 640, 645-46 (Bankr. M.D. Pa. 1985) (emphasis added).

  43. 28 U.S.C. § 1408(1).

  44. Other diligence considerations not typically presenting unique issues by a distressed or bankrupt government contractor include assessing whether the target has complied with applicable cybersecurity requirements (e.g., implemented security controls in accordance with National Institute of Standards and Technology (NIST) Special Publication 800-171) and continuing eligibility for small-business-set-aside contracts or other preference programs.

  45. FAR 52.249-14(b).

  46. See, e.g.ARES Technical Servs. Corp., B-415081.2, et al., May 8, 2018, 2018 CPD ¶ 153.

  47. See, e.g., FAR 52.227-14, Rights in Data-General.

  48. See, e.g.Tucker v. Paxson Mach. Co., 645 F.2d 620, 622 (8th Cir. 1981).

  49. See, e.g.United States ex rel. Bunk v. Gov't Logistics N.V., 842 F.3d 261, 273 (4th Cir. 2016) ("As a general rule, a corporation that acquires the assets of another corporation does not also acquire its liabilities." (citing United States v. Carolina Transformer Co., 978 F.2d 832, 838 (4th Cir. 1992)); Berg Chilling Sys., Inc. v Hull Corp., 435 F.3d 455, 464 (3d. Cir. 2006) ("The ordinary rule of successor liability is rooted in corporate law, and it states that a firm that buys assets from another firm does not assume the liabilities of the seller merely by buying its assets." (citations omitted)).

  50. See, e.g.Equal Employment Opportunity Comm'n v. G-K-G, Inc., 39 F.3d 740, 748 (7th Cir. 1994).

  51. Id.

  52. See, e.g.Kessinger v. Grefco, Inc., 875 F.2d 153 (7th Cir. 1989).

  53. United States ex rel. Bunk v. Gov't Logistics N.V., 842 F.3d 261, 276 (4th Cir. 2016) (citations omitted).

  54. 11 U.S.C. § 548(a)(1)(B)(i).

  55. United States v. Carolina Transformer Co., 978 F.2d 832, 838 (4th Cir. 1992).

  56. See, e.g.Fall River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27, 43 (1987); United States v. Carolina Transformer Co., 978 F.2d at 838.

  57. See, e.g.Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 45 (2d Cir. 2003).

  58. Arnold Graphics Indus., Inc. v. Indep. Agent Ctr., Inc., 775 F.2d 38, 42 (2d Cir. 1985).

  59. United States ex rel. Ceas v. Chrysler Grp. LLC, 78 F. Supp.3d 869, 877 (N.D. Ill. 2015).

  60. 11 U.S.C. § 523(a)(2)(A)-(B).

  61. In re Ward, 857 F.2d 1082, 1083 (6th Cir. 1988) (emphasis added); see also Mayer v. Spannel Int'l, 51 F.3d 670 (7th Cir. 1995); In re Kirsh, 973 F.2d 1454 (9th Cir. 1992).

  62. 11 U.S.C. § 523(a).

  63. Id. 1141(d)(6)(A).

  64. Id.

  65. In re Ward, 857 F.2s at 1082, 1083.

  66. Compare In re Spicer, 155 B.R. 795, 799 (Bankr. D.C. 1993) (finding that fraud was non-dischargeable) with In re Winters, No. 03-40517-L, 2006 WL 3833921, at *1 (W.D. Tenn. Dec. 28, 2006) (holding that FCA fraud liability was dischargeable when the debtor was determined to have "acted in deliberate ignorance or in reckless disregard of the truth or falsity of the information he possessed.").

  67. United States ex rel. Minge v. Hawker Beechcraft, 493 B.R. 696 (Bankr. S.D.N.Y. 2013), rev'd on other grounds, 515 B.R. 416 (S.D.N.Y. 2014).  But see United States ex rel. Ceas v. Chrysler Grp. LLC, 78 F. Supp.3d 869, 877 (N.D. Ill. 2015) (explaining in dicta that 11 U.S.C. § 1141(d)(6)(A) means "FCA claims are not dischargeable in bankruptcy").

  68. Stockton East Water Dist. v. United States, 583 F.3d 1344, 1366 (Fed. Cir. 2009); see also Yankee Atomic Elec. Co. v. United States, 112 F.3d 1569, 1575 (Fed. Cir. 1997) ("When the Government enters into a contract, 'its rights and duties therein are governed generally by the law applicable to contracts between private individuals.'" (quoting United States v. Winstar Corp., 518 U.S. 839, 895 (1996)).

  69. See, e.g.In re Reynolds Mfg. Co., 68 B.R. 219 (W.D. Pa. 1986) (explaining that government contract vesting clauses should be interpreted literally and concluding that title to all supplies that the debtor acquired in performance of a government subcontract vested in the Government); In re Am. Pouch Foods, Inc., 30 B.R. 1015 (Bankr. N.D. Ill. 1983) (ordering debtor "to reassert its claim before either the Board of Contract Appeals or the Court of Claim").

  70. See, e.g.In re Gary Aircraft Corp., 698 F.2d 775 (5th Cir. 1983) ("We hold that a bankruptcy court should defer liquidation of a government contracting dispute to the Board of Contract Appeals" or Court of Federal Claims absent undue delay).  But see In re MacLeod Co., Inc., 935 F.2d 270 (6th Cir. 1991) (explaining that " the apparent lack of discretion possessed by district court judges in such contract disputes is not as inviolable as it would seem at first glance" and "that such discretion should be balanced by countervailing considerations, perhaps most importantly, whether the deferral may cause undue delay").

  71. 11 U.S.C. § 1141(d)(1)(A); see also Rabo Agrifinance, Inc. v. Veifel Farm Partners, 328 Fed. App'x 942 (5th Cir. 2009) (recognizing that, except debts preserved under section 1141(d), pre-confirmation debts are discharged upon plan confirmation); Sw. Marine, Inc., ASBCA No. 47621, 96-2 BCA ¶ 28601 ("Confirmation of a reorganization plan 'discharges' a debtor from debts arising prior to confirmation. . . . In short, a debtor's 'discharge' operates principally as an injunction against post-confirmation action to collect pre-confirmation debts." (citations omitted)).

  72. Id. (citations omitted).

  73. FAR 42.1204(h)(1).

  74. FAR 42.1204(i).

  75. FAR 42.1204(i), Standard Novation Agreement § (b)(2) (emphasis added).

  76. 564 B.R. 534 (Bankr. N.D. Tx. 2017).

  77. NISPOM § 2-301(d).

  78. Under this factor, DCSA considers "whether foreign interests hold a majority or substantial minority position in the company, taking into consideration the immediate, intermediate, and ultimate parent companies."  Id.  A minority position is "substantial," if it accounts for more than 5% of the total ownership interest or more than 10% of the total voting interest.  Id.

  79. A "defense article" is "any item or technical data designated in {22 C.F.R.} § 121.1."  22 C.F.R. § 120.6.

  80. Id. § 122.4(b).

  81. Id. § 120.37.

  82. Id.

  83. 31 C.F.R. § 800.302(b).

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