U.S., Dept. of Air Force v. Carolina Parachute Corp.

• Citation: 907 F.2d 1469
• Decision Date: 12 July 1990
• Docket Number: No. 89-2500,89-2500
• Parties: 23 Collier Bankr.Cas.2d 620, 17 Fed.R.Serv.3d 102, 36 Cont.Cas.Fed. (CCH) 75,903 UNITED STATES of America, DEPARTMENT OF THE AIR FORCE, Plaintiff-Appellee, v. CAROLINA PARACHUTE CORPORATION, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 1469

907 F.2d 1469

23 Collier Bankr.Cas.2d 620, 17 Fed.R.Serv.3d 102,

36 Cont.Cas.Fed. (CCH) 75,903

UNITED STATES of America, DEPARTMENT OF THE AIR FORCE Plaintiff-Appellee, v. CAROLINA PARACHUTE CORPORATION, Defendant-Appellant.

No. 89-2500.

United States Court of Appeals Fourth Circuit.

Argued March 5, 1990.

Decided July 12, 1990.

Bonnie Kay Donahue, argued (Edwin R. Gatton, on brief), Ivey, Ivey & Donahue, Greensboro, N.C., for defendant-appellant.

Richard Lee Robertson, Asst. U.S. Atty., Greensboro, N.C., Brian Lloyd Kessler, argued Contract Law Div., Office of the Judge Advocate Gen., U.S. Air Force, Washington, D.C. (Robert H. Edmunds, Jr., U.S. Atty., on brief), Greensboro, N.C., for plaintiff-appellee.

Before SPROUSE, CHAPMAN and WILKINS, Circuit Judges.

WILKINS, Circuit Judge:

The district court, 108 B.R. 100, reversed the bankruptcy court and allowed the United States of America, Department of the Air Force, to begin proceedings to terminate certain executory contracts with Carolina Parachute Corporation. The issues raised are (1) whether a bankruptcy court order confirming a reorganization plan is res judicata to a party who, although on notice of the proceeding, neither makes an objection to the proposed plan nor appeals the order confirming it; (2) whether the automatic stay, 11 U.S.C.A. Sec. 362 (West 1979 & Supp.1990), terminates upon confirmation of a reorganization plan; and (3) whether the bankruptcy court had jurisdiction to enjoin the government from interfering with the reorganization plan, and if so, whether this injunction was issued in accordance with Rule 65 of the Federal Rules of Civil Procedure. We affirm in part, vacate in part, and remand to the district court.

I.

In 1986 the government entered into three contracts with Carolina Parachute providing for the production of drag chute canopies and other items related to parachutes. Pursuant to Federal Acquisition Regulations, each contract incorporated by reference a "Default" clause and a "Termination for Convenience of the Government" clause. See 48 C.F.R. Sec. 52.249-8 (1989); 48 C.F.R. Sec. 52.249-2 (1989). The Default clause granted the government the right to terminate a contract in the event of specified breaches by a contractor. 48 C.F.R. Sec. 52.249-8. The Termination for Convenience clause provided, in part: "The Government may terminate performance of work under this contract in whole or, from time to time, in part if the Contracting Officer determines that a termination is in the Government's interest." 48 C.F.R. Sec. 52.249-2.

Carolina Parachute has manufactured parachutes and related items for the government since 1979. The government suspended progress payments and, as a result, on October 21, 1987, Carolina Parachute was forced to file a Chapter 11 bankruptcy petition for reorganization under the United States Bankruptcy Code, 11 U.S.C.A. Secs. 101, et seq. (West 1979 & Supp.1990). The automatic stay of section 362, which generally prevents third parties from taking action that could affect the property of the bankruptcy estate, immediately went into effect. Carolina Parachute remained in possession of its property and operated its business of manufacturing parachutes and related items as a debtor in possession.

From October 21, 1987, until March 21, 1988, Carolina Parachute's production was interrupted while alternative operating capital was obtained as required by the government before it would resume progress payments. On July 17, 1988, after a complete audit of Carolina Parachute's accounting system, the government resumed progress payments. From the resumption of production in March 1988 through November 1988, Carolina Parachute delivered goods ordered by the government valued in excess of $771,000.

On September 2, 1988, Carolina Parachute filed its Debtor's Plan of Reorganization and Disclosure Statement with the bankruptcy court. On October 21, 1988, the bankruptcy court issued an Order Approving Disclosure Statement with Modifications and set November 9, 1988, as the last day for filing objections to the plan. A hearing for confirmation of the reorganization plan was scheduled for November 10, 1988.

On November 9, 1988, the government filed a Motion for Modification of Automatic Stay to allow it to terminate its contracts with Carolina Parachute. ¹ In this motion the government stated that Carolina Parachute "is currently in default under each of its contracts" and that all of the "contracts are subject to the Anti-Assignment Act." A hearing on this motion was scheduled for December 13, 1988.

The confirmation hearing was held as scheduled on November 10, 1988. The plan expressly included the assumption by Carolina Parachute of "[a]ll prime and sub U.S. Government fixed price contracts for the manufacture of parachutes and related items." Despite notification of the confirmation hearing, the government did not attend and did not file an objection to the plan. See Bankruptcy Rule 3020(b) (discussing procedures for filing an objection). At the hearing, Carolina Parachute presented uncontroverted evidence relating to the current and future status of the government contracts. The bankruptcy court found that Carolina Parachute "is not in default under the terms of any of the ... Contracts contended to be in default by the U.S. Government in the Brief filed along with its Motion for Modification of the Automatic Stay." The court also found that Carolina Parachute, by negotiating delivery extensions in return for consideration, had "cur[ed] any asserted default of those Contracts based upon delivery deficiencies with said cure being by and with the consent of the U.S. Government." The bankruptcy court entered an order confirming the plan of Carolina Parachute without addressing the government's contention that the contracts were subject to the Anti-Assignment Act. 41 U.S.C.A. Sec. 15 (West 1987). The government did not appeal the confirmation order.

As scheduled, on December 13, 1988, the bankruptcy court held a hearing on the government's motion to modify the automatic stay. Following another hearing on December 23, 1988, the court entered an order denying the government's motion and enjoining the government "from interfering in any way with the Debtor's Consummation of the Debtor's confirmed Plan of Reorganization." In part, the order stated:

The Government has failed to appeal this Court's Confirmation of the Debtor's Plan of Reorganization, and thus its express assumption of the Contracts in question, within the applicable appeal period. This Court's Order Confirming the Debtor's Plan of Reorganization is thus a final Order, and under the doctrine of collateral estoppel or under the doctrine of res judicata, the Government is precluded from re-litigating the issue of whether the Debtor-in-Possession may assume the Defense Contracts in question.

The bankruptcy court grounded the injunctive portion of its order on its equitable powers under 11 U.S.C.A. Sec. 105.

The government appealed to the district court asserting that the Anti-Assignment Act prevented assumption of the contracts. The district court, without addressing the preclusive effect of the confirmation order, held that the interplay between the Anti-Assignment Act and 11 U.S.C.A. Sec. 365(c)(1) (which precludes the assumption of executory contracts when a party other than the debtor is excused from performance by applicable law) required reversal of the December 23, 1988, order of the bankruptcy court. The district court remanded to the bankruptcy court with instructions to lift the automatic stay as to the government. ² Carolina Parachute appealed. ³

II.

As part of a reorganization plan, the debtor in possession, subject to the approval of the court, may assume certain executory contracts. 11 U.S.C.A. Sec. 365. ⁴ A contract is executory under this provision "if performance is due to some extent on both sides." Lubrizol Enters. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1045 (4th Cir.1985), cert. denied, 475 U.S. 1057, 106 S.Ct. 1285, 89 L.Ed.2d 592 (1986). When a debtor in possession assumes an executory contract, it takes the "contracts cum onere, that is, subject to existing burdens." In re Chicago, R.I. & Pac. R.R., 860 F.2d 267, 272 (7th Cir.1988). In other words, "a debtor may not assume the favorable aspects of a contract ... and reject the unfavorable aspects of the same contract." Lee v. Schweiker, 739 F.2d 870, 876 (3d Cir.1984); see Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1311 (5th Cir.1985). An executory contract may not be assumed when the debtor is in default unless the debtor takes the remedial steps specified in section 365(b)(1). Neither may a debtor assume an executory contract if "applicable law excuses a party, other than the debtor, to such contract ... from accepting performance from ... an entity other than the debtor or the debtor in possession [and] ... such party does not consent to such assumption." 11 U.S.C.A. Sec. 365(c)(1). Thus, unless otherwise barred by the terms of section 365, a reorganization plan may provide for the assumption of an executory contract. 11 U.S.C.A. Sec. 1123(b)(2).

Here, the government, desiring to begin proceedings to terminate the contracts with Carolina Parachute, asserted two grounds in its motion to modify the automatic stay that it contended justified the termination of those contracts. First, the government claimed that the Anti-Assignment Act, which prevents the transfer of government contracts from the original contracting party to third parties, prevented the assumption of the contracts. This statute states in part:

No contract or order, or any interest therein, shall be transferred by the party to whom such contract or order is given to any other party, and any such transfer shall cause the annulment of the contract or order transferred, so far as the United States are concerned.

41 U.S.C.A. Sec. 15. As supporting authority for its...