lord and the municipality were not sufficiently specific and perfected, on the date of the debtor's voluntary assignment, to affect the priority of the United States in spite of a determination by the Virginia courts to the contrary.230 After examining the action taken by the lien claimants, the Court stated that "it is a matter of federal law as to whether a lien created by state statute is sufficiently specific and perfected to raise questions as to the applicability of the priority given the claims of the United States by an Act of Congress. ... A state court's characterization of a lien as specific and perfected, however conclusive as a matter of state law, cannot operate by itself to impair or supersede a long-standing Congressional declaration of priority." Finally, describing these liens as a warning of more perfect liens to come, the Court suggested that possibly an actual distraint, accompanied by transfer of title or possession, might serve to perfect the claimed liens.

"231

41. Summary. The long line of decisions of the Supreme Court involving the priority statute indicates that the Court generally looks with suspicion upon lien holders who have neglected to assert their rights until after the debtor has become insolvent. Conversely, it has recognized the superior rights of those who, before the insolvency of the debtor occurs, have taken affirmative action to protect their interests. In the present state of the law, it would appear that little less than complete divestment of a debtor's title to or possession of specific property, prior to the crucial time at which the priority of the United States attaches, would be effective to defeat a claim of the United States.232

B. Procedures for the Collection of Debts

42. Administrative procedures within the Navy. The indebtedness of a contractor to the Navy may arise in a variety of ways. It may stem, for example, from a direct loan, an erroneous overpayment, a retroactive price reduction pursuant to the terms of the contract, or an obligation to pay rent. Or, when a contractor fails without excusable cause to complete his contract and the contract is then terminated for default, the Navy may seek the recovery of any excess costs that may be involved in repurchasing against the account of the defaulting contractor.233 Again, when a contractor

230 United States v. Waddill Co., 323 U.S. 353 (1945).

231 Id. at 356-357.

232 United States v. Gilbert Associates, Inc., 345 U.S. 361 (1953). This case involved a lien of a town property tax that had been foreclosed by advertisement and sale before the federal priority arose. The state court ruled that the town tax llen was sufficiently specific and perfected to defeat the federal priority under the rules established by the Supreme Court. Petition of Gilbert Associates, Inc., 97 N.H. 411, 90 A. 2d 499 (1952). However, the Government took the case to the Supreme Court, which pointed out that the taxpayer "had not been divested by the Town of either title or possession. The Town, therefore, had only a general, unperfected lien." United States v. Gilbert Associates, Inc., 345 U.S. 361, 366 (1953).

233 The recovery of excess costs is discussed in Ch. 16 infra.

commits a breach of contract, there may well be recoverable damages. In each of these situations the initial responsibility for the collection of the debt rests with the contracting officer (or disbursing officer in the case of an erroneous overpayment), who makes a formal demand upon the contractor for cash payment of the indebtedness within 30 days from the date of demand.234 If within this 30-day period the contractor shows that immediate repayment would impair his ability to continue operations or perform defense contracts or subcontracts, and if orderly collection within 90 days can be effected, the contracting officer may agree to a payment plan with the contractor that would defer ultimate collection for a period up to 90 days after the date of demand. If the contractor seeks a stretch-out of more than 90 days, however, the plan must be approved by the Navy Comptroller. Any deferred payment plan must be expressed in a written agreement that will protect the interests of the Government. Usually, such agreements provide for acceleration of the maturity of the indebtedness in the event of default or commission of an act of bankruptcy by the contractor. If payments are to be made beyond the initial 90-day period, the agreement must impose a 5 percent interest charge on such payments, commencing on the 91st day.

43. Setoff. During the 30-day period after the initial demand is made on the contractor or while a deferred payment plan is under consideration, the contracting officer may direct the disbursing officer to withhold payments otherwise due the contractor under Navy contracts. This action is fully sanctioned by law, which has always recognized a creditor's "justified refusal to pay what he owes until he is paid what is due him." 235 If within 30 days after the date of the initial demand the debt has not been satisfied or a deferred payment plan has not been agreed upon, the contracting officer must report the indebtedness to the Office of the Navy Comptroller. From this moment collection of the debt becomes the responsibility of that Office. The Navy Comptroller may set off moneys owing by the Navy to a contractor against the contractor's indebtedness to the Navy, even though wholly different contracts are involved. "It would be folly," the Supreme Court has said, "to require the Government to pay under the one contract what it must eventually recover for a breach of the other.” 236 The Comptroller General has also

234 The formal instructions governing the Navy's administrative procedures for the collection of debts are set forth in SecNav Inst. 7810.4 (Mar. 17, 1955).

235 United States v. Munsey Trust Co., 332 U.S. 234, 240 (1947).

236 Barry v. United States, 229 U.S. 47, 53 (1913). See also Sutton v. United States, 256 U.S. 575 (1921). It should be noted that as a general proposition this rule today applies only when the Government's payee will be the contractor himself. By virtue of the Act of May 15, 1951, 65 Stat. 41, 41 U.S.C. § 15 (1952), and the no-setoff contract clause which the act authorizes, it may not be possible to set off moneys due under a Navy contract against a contractor's independent debts to the Government after the contractor has assigned those moneys to a bank or lending institution.

had frequent occasion to recognize the right of the United States to resort to setoff.237 If there are no moneys owing a contractor, or if they are insufficient to liquidate the contractor's indebtedness, the Navy Comptroller will report the debt to the Navy Regional Accounts Office, Washington, D.C., which in turn reports the debt to the Chief of Finance, Department of the Army, who maintains a government-wide list of contractors indebted to the United States. This list, called the Consolidated Hold-Up List, enables the Navy to have moneys owing a contractor by another government agency applied against the contractor's indebtedness under Navy contracts. The Consolidated Hold-Up List is published quarterly, with interim supplements. All revisions to it for debts arising under Navy contracts are reported by the Navy Regional Accounts Office, Washington. When all attempts to liquidate a contractor's indebtedness through setoff or agreement prove unavailing, the Navy Comptroller refers the matter to the General Accounting Office.

44. The General Accounting Office and the Department of Justice. The Department of the Navy has no authority to settle or compromise an indebtedness to the Government except where specifically authorized by statute. During World War II, such authority was granted by the First War Powers Act of 1941 238 and the Contract Settlement Act of 1944.239 The General Accounting Office is authorized to settle and adjust all claims by the United States,240 and is required by statute to superintend the recovery of all debts finally certified by it to be due the United States.241 If the debtor fails to remit the sum demanded by the General Accounting Office, or to make satisfactory arrangements for payment, the matter is usually referred to the Department of Justice for appropriate proceedings, including suit, if necessary, for the collection or compromise of the debt.242

C. Collection of Debts Under the Bankruptcy Act

45. In general. Insolvency statutes present a special problem for the collection of debts. In simplest terms, an insolvency statute may be characterized as one that seeks the orderly administration

2377 COMP. GEN. 186 (1927); 14 id. 849 (1935); 19 id. 785 (1940). The Government's claim, however, must be liquidated before it is allowable in setoff. 21 id. 894 (1942). But see 37 COMP. GEN. 808 (1958).

238 55 Stat. 838 (1941), 50 U.S.C. App. § 601 (1958).

3958 Stat. 649 (1944), 41 U.S.C. § 101 (1958).

240 42 Stat. 24 (1921), 31 U.S.C. § 71 (1958). This authority includes not only the right but the duty to set off moneys due a contractor by the Government against the contractor's indebtedness to the Government. See the cases cited in n. 237 supra.

241 28 Stat. 206 (1894), as amended, 31 U.S.C. 93 (1958). For a comprehensive treatment of the part played by the General Accounting Office in the administration of government claims, see Foster, The General Accounting Office and Government Claims. 16 J.D.C. BAR ASS'N. 193, 275, 321, (1949).

242 Exec. Order No. 61665 (1933), note foll. 5 U.S.C. 124-132 (1958). See 7 COMP. GEN. 193, 194 (1927).

and liquidation of a debtor's estate, provides for a ratable distribution of the debtor's assets to his creditors, and discharges a debtor from his debts to the extent that his assets are insufficient to meet them-with or without the assent of the debtor and his creditors. At the present time the only insolvency statute in force is the Bankruptcy Act. The Supreme Court has ruled that "the enforcement of state insolvency systems, whether held to be in pursuance of statutory provisions or otherwise, would necessarily conflict with the National purpose to have uniform laws on the subject of bankruptcies throughout the United States," and for this reason, it has held state insolvency statutes invalid.243 The Bankruptcy Act, of course, is remedial in nature; it is designed both to relieve the insolvent debtor from the onus of his debts and to assist creditors in the administration and liquidation of the debtor's assets.244 In order to deal comprehensively with the debtor and his creditors, the Bankruptcy Act has become long, detailed, and complex; therefore, it requires careful study when proceedings under it are instituted by or against a Navy contractor. The sections that follow briefly discuss the act's pertinence to Navy contract law: first, ordinary bankruptcy and its effect upon uncompleted Navy contracts, the Navy's secured and unsecured claims against a bankrupt, and government-owned property in the possession of a bankrupt; and second, the effect of Chapters X and XI of the act, which deal with corporate reorganizations and arrangements, respectively.

46. Executory contracts of the Navy. Uncompleted contracts present the thorniest problem in bankruptcy proceedings. Under section 70(a) of the Bankruptcy Act,245 the trustee in bankruptcy is vested with the bankrupt's title to almost all of the bankrupt's property as of the time at which the petition in bankruptcy is filed. The major exceptions to this rule are executory contracts, under which performance has not been completed, and leases. Under section 70(b),246 the trustee must assume or reject such contracts within 60 days after the debtor's adjudication as a bankrupt. This 60-day period is designed to afford the trustee ample time to appraise what is usually a chaotic state of affairs and determine intelligently which

243 International Shoe Co. v. Pinkus, 278, U.S. 261, 268 (1929). Proceedings under the Bankruptcy Act, however, should be carefully distinguished from the composition of debts at common law and the assignment of a debtor's assets for the benefit of creditors, whether at common law or pursuant to state statute. While the composition and the assignment for the benefit of creditors, like bankruptcy proceedings, seek an orderly payment of debts, both require the assent of a debtor and his creditors; neither can alter the rights of nonassenting creditors. Because of this voluntary feature, neither is repugnant to the Bankruptcy Act. Johnson v. Star, 287 U.S. 527 (1933). And, unlike bankruptcy proceedings, neither presents the Navy with special procedures for the collection of debts.

244 Stellwagen v. Clum, 245 U.S. 605 (1918); In re Day Lumber Co., 8 F. 2d 146 (W.D. Wash. 1925).

245 30 Stat. 565 (1898), as amended, 11 U.S.C. § 110(a) (1958). 246 52 Stat. 880 (1938), as amended, 11 U.S.C. § 110 (b) (1958).

course is in the best interest of the bankrupt's estate. However, the court may extend or reduce this period upon a showing of cause. It is important to note that only after the trustee elects to assume an executory contract does title in that contract vest in the trustee.247 Assumption can be made only by the trustee at his discretion; thereafter, notification of the assumption must be made to the other party to the contract, although no particular form of notice is required. If the trustee remains silent during the prescribed period, his silence will be deemed a rejection.248

Usually, the intervention of bankruptcy is preceded by a failure on the part of the contractor to make satisfactory progress in the performance of his Navy contract or to meet his delivery date. This failure, of course, makes the contract subject to termination for default. The subsequent institution of bankruptcy proceeding by or against the contractor will not of itself deprive the Government of its right to terminate for default, although this right may be considered to have been waived if the contracting officer neglects to take appropriate and timely action.249 A special rule would seem to prevail, however, where the contractor is not in default of contract performance at the time of his adjudication as a bankrupt, but subsequently contract performance is halted while the trustee determines whether assumption or rejection is in the best interest of the estate. While this work stoppage may constitute a failure to make satisfactory progress or may lead to a failure to meet an established delivery date, it should not confer upon the Government the right to terminate for default. According to one legal authority, an "important effect of assumption is to purge any anticipatory breach of contract based on the fact of bankruptcy itself." 250 It is consonant with this principle that the right accorded the trustee by section 70(b) to assume an executory contract shall be paramount, unless the terms of the executory contract expressly provide that bankruptcy shall give the Government the option to terminate the contract for default. In order to minimize the effect of this rule, the Government may, of course, move the court to reduce the 60-day period for assumption or rejection. Its only other remedy before the expiration of the assumption period would be to terminate the executory contract for the convenience of the Government. If the trustee elects to assume an executory contract, a default occurring after the institution of

247 See Palmer v. Palmer, 104 F. 2d 161, 163 (2d Cir. 1939), cert. denied, 308 U.S. 590 (1939), which involved the assumption of a lease under section 70(b).

248 In re Pagliaro, 99 F. Supp. 548 (N.D. Cal. 1951), aff'd per curiam sub nom. Costello v. Gordon, 196 F. 2d 1017 (9th Cir. 1952).

240 Appeal of Television Equipment Corp., ASBCA No. 1060 (1954); Appeal of Lane Iron Works, ASBCA No. 2413 (1955).

250 4 COLLIER, BANKRUPTCY 70.43 (14th ed. 1956). This section of the treatise contains an excellent general discussion of the status of executory contracts in ordinary bankruptcy.