Gary Aircraft Corp., Matter of

• Decision Date: 25 February 1983
• Docket Number: No. 81-1391,81-1391
• Citation: 698 F.2d 775
• Parties: 8 Collier Bankr.Cas.2d 186, Bankr. L. Rep. P 69,089, 30 Cont.Cas.Fed. (CCH) 70,845 In the Matter of GARY AIRCRAFT CORPORATION, Debtor. GARY AIRCRAFT CORPORATION, et al., Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 775

698 F.2d 775

8 Collier Bankr.Cas.2d 186, Bankr. L. Rep. P 69,089,

30 Cont.Cas.Fed. (CCH) 70,845

In the Matter of GARY AIRCRAFT CORPORATION, Debtor GARY AIRCRAFT CORPORATION, et al., Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 81-1391.

United States Court of Appeals Fifth Circuit.

Feb. 25, 1983.

Richmond I. McKay, J. Christopher Kohn, Attys., Civ. Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Gilpin, Maynard, Parson, Pohl, Bennett, John H. Bennett, Jr., Houston, Tex., for Gary Aircraft.

Joe Warren Jones, San Antonio, Tex., for creditors committee.

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 Aircraft Corporation ("Gary") flowing from a contract between the government and Gary to overhaul airplane engines. ¹ We hold that the bankruptcy court improperly exercised its jurisdiction in liquidating the contract claims and that it should have deferred jurisdiction for the purpose of liquidation to the Armed Services Board of Contract Appeals.

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, effective 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 furnished property. The first contract, after extensions, expired 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 government'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 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 contained the standard disputes clause, establishing a heirarchy 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. Secs. 321, 322 (1976).

Gary first filed claims 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 scheduled 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. Secs. 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 February 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 convenience 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 findings 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 filed a petition in the Court of Claims for recovery on its claim against the government. Additionally, 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 administrative 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 resolution 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 contract 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 valuation 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 liquidation of these government contract claims. ² 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 mediate between the immovable object and the irresistible 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 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 disputes. 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 disputes clause is as binding as if it were statutorily mandated; 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. Secs. 2202-2774 (1976), which provides the authority to issue the Armed Services Procurement Regulations ("ASPR"). ASPR Sec. 7-203.12, 31 C.F.R. Sec. 7-3.12 (1976), mandates the dispute clause in question. Thus, the dispute clause is, in effect, congressionally mandated. The Court of Claims has held, in fact, that this line of reasoning results in contracts being read as if they contained 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. 444, 11 L.Ed.2d 315 (1963). See also Chris Berg, Inc. v. United States, 426 F.2d 314, 317 (Ct.Cl.1970). ³

We do not agree with the government's analysis. It is worth noting that the Contract Disputes Act of 1978, 41 U.S.C. Secs. 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) (Boards of Contract Appeals "are not statutory creations but are established by administrative regulations. S.Doc. No. 99, 89th Cong., 2d Sess., Operation and Effectiveness of Government Boards of...