bankruptcy proceedings and prior to assumption, as well as an anticipatory breach, would appear to be purged.

After assumption, the trustee has two possible courses of action. First, he may continue the bankrupt's plant operations for purposes of completing the contract. As the successor in interest to the original contractor by operation of law, the substitution of the trustee for the original contract or does not run counter to the statute prohibiting the assignment of government contracts.251 Since the trustee has elected to assume an executory contract, all claims by the Navy arising out of the trustee's performance after assumption are chargeable against the bankrupt's estate as administrative expenses. They are, therefore, first priority claims in the priority scheme set forth in section 64(a) of the Bankruptcy Act.252 The second course open to the trustee is to assign the contract to a third person. Section 70(b) of the act authorizes such assignments to be made with court approval. To grant the other party to an executory contract protection against the substitution of an undesirable or irresponsible assignee, the section provides for notice and an opportunity for the other party to be heard.253 Section 70(b) is also noteworthy in expressly relieving the bankrupt's estate from liability for any breach of contract occurring after such an assignment. This second course of action raises a vital question in the case of government contracts-whether an assignment of a contract under section 70(b) of the Bankruptcy Act is rendered invalid by the statute prohibiting the assignment of government contracts. Although this question has not been decided, it would seem that the statutory prohibition against assignments should not be controlling in the bankruptcy context, since the protection of the interests of the Government intended by that prohibition 254 is fully provided for by section 70(b). Furthermore, the opposite result would tend to interfere with the purpose of the Bankruptcy Act, which should be given a broad construction in view of its remedial character.255

If the trustee rejects an executory contract, there is usually no possibility of obtaining continued performance. The trustee is obviously unwilling to perform; and as for the bankrupt contractor, he is in no position to proceed with performance himself. While title to the executory contract will have remained with the bankrupt in this event, title to the bankrupt's operating assets and inventory will have passed to the trustee. A rejection of an executory contract by the trustee constitutes a breach of the contract as of the date of

251 10 COMP. DEC. 159 (1903).

252 30 Stat. 563 (1898), as amended, 11 U.S.C. § 104 (a) (1958). See 3 COLLIER, BANKRUPTCY ¶ 62.15 (14th ed. 1956).

253 4 COLLIER, BANKRUPTCY ¶ 70.43 (14th ed. 1956).

254 Rev. Stat. 3737 (1875), as amended, 41 U.S.C. § 15 (1958).

255 See Guarantee Title and Trust Co. v. Title Guaranty & Surety Co., 224 U.S. 152, 159-160 (1912).

the filing of the petition in bankruptcy,250 and may give rise to a claim against the estate of the bankrupt contractor.

47. Unsecured claims. As far as unsecured claims in bankruptcy arising under Navy contracts are concerned, the proof of claim in the form required by section 57(a) of the Bankruptcy Act,257 is filed by the local United States Attorney. This, however, is only the culmination of a process which begins with the contracting officer. The contracting officer first prepares a detailed report on the claim and forwards it to the Navy Comptroller. The Navy Comptroller then sends the report to the General Accounting Office, where a proof of claim is prepared and sent to the Department of Justice; the latter in its turn instructs the local United States Attorney to file the claim. A vital point here is that the Bankruptcy Act limits the time for filing claims by providing that all claims, in order to be allowed, must be filed with the court within six months after the first date set for the first meeting of creditors.258 In preparing his report, the contracting officer should bear in mind that the review of his report by the several offices concerned, as well as the preparation of the actual proof of claim, by the General Accounting Office for the Department of Justice, consumes time; consequently, he should allow sufficient time for this process to be completed within the prescribed period. 259 An extension of time may be obtained from the court, but only if application for the extension is made before the expiration of the filing period. If the request is reasonable, an extension will be granted, but only for a fixed and stated period of time. Untimely claims will be allowed only against the surplus, if any, remaining in the bankrupt's estate after the payment of all timely claims.260

48. Secured claims. The proof of claims procedure described in the preceding section is intended only for unsecured claims. If a secured creditor files a proof of claim pursuant to section 57(a) of the Bankruptcy Act,201 he may be deemed to have waived his security in order to participate in the general assets of the bankrupt's

256 Bankruptcy Act, 63(c), 52 Stat. 873 (1938), as amended, 11 U.S.C. § 103(c) (1958).

257 30 Stat. 560 (1898), as amended, 11 U.S.C. 93 (1958). Section 57(a) requires that the proof of claim be set forth under oath, in writing, and under the creditor's signature. The proof of claim must state the claim and the consideration for the claim with some specificity, describe the securities (if any) covering the claim, list any payments on account, and state that the claim is justly owing. If the claim is unliquidated in amount, a proof of claim may nonetheless be filed. It will describe the claim as contingent and should be amended after ascertainment of the amount due. See 3 Collier, Bankruptcy pars. 57.03, 57.11, 57.15 (14th ed. 1956).

258 Bankruptcy Act, § 57(n), 30 Stat. 560 (1898), as amended, 11 U.S.C. § 93 (n) (1958).

Where time does not allow for this procedure to be followed, the contracting officer may and should communicate directly with the local United States Attorney.

200 The priority accorded by the Bankruptcy Act to unsecured debts owing the Government is discussed in pars. 35 and 36 supra.

201 See n. 257 supra.

estate.262 A creditor must therefore choose whether or not to avail himself of his security. In cases where the legal validity of the security is doubtful, it may be the better course for the Navy to appear as an unsecured creditor. If, on the other hand, the value of the Navy's security is insufficient to meet its claim, a proof of claim pursuant to section 57 (a) may and should be filed for the unsecured balance.268 The proof of claim should, of course, make it clear that the Government is not waiving its security where that is the Government's intent. The procedure for foreclosing a security interest in property of the bankrupt will depend upon possession of the property at the time of the filing of the petition in bankruptcy. The general rule is that the bankruptcy court acquires jurisdiction over all property in the possession of a bankrupt at the time of the filing of the petition.264 If the secured property was within the possession of the bankrupt and came within the jurisdiction of the bankruptcy court, an intervening petition must be filed in the bankruptcy proceedings.265 Otherwise, the ordinary legal remedies for foreclosure of a security interest in property will prevail.

49. Government-owned property in the possession of a bankrupt. The proof of an unsecured claim and the intervening petition to reach secured assets deal only with money claims against the bankrupt, and they should therefore be carefully distinguished from a claim to specific property based upon the Government's assertion of title. All property within the possession of the bankrupt at the time of the filing of the petition in bankruptcy falls within the jurisdiction of the bankruptcy court.268 If the Government has a valid claim of title to any such property, it may petition the bankruptcy court and obtain reclamation.267 In such a situation, the contracting officer should report the matter to counsel for his procuring activity, who will see that the Department of Justice is requested to file the necessary petition. It is worthy of mention here that the Government's petition for reclamation in bankruptcy proceedings is not subject to counterclaim because of the doctrine of sovereign immunity. In the words of one court "A claim of title made by the Government in court is not a concession that its title may be sub

263 In re O'Gara Coal Co., 12 F. 2d 426 (7th Cir. 1926). Waiver, however, is not "an invariable result flowing from the application of any rigid statutory rule," but will be determined in the light of surrounding circumstances. United States Nat'l. Bank v. Chase Nat'l. Bank, 331 U.S. 28, 35-36 (1947).

263 For an excellent general discussion of secured claims in bankruptcy, see 3 COLLIER, BANKRUPTCY 57.07 (14th ed. 1956).

264 Thompson v. Magnolia Petroleum Co., 309 U.S. 478 (1940).

205 The intervening petitioner must support his allegation that he is entitled to the security by proof. Bolling v. Bowen, 118 F. 2d 59 (4th Cir. 1941).

206 Thompson v. Magnolia Petroleum Co., supra n. 47.

207 Reclamation proceedings are discussed generally in 4 COLLIER, BANKRUPTCY | 70.39 (14th ed. 1956).

jected to demands or liens without congressional consent." 288 In the case of its money claims, however, a trustee in bankruptcy may counterclaim by way of recoupment so long as the counterclaim arises out of the same transaction that gave rise to the principal claim. The theory behind this rule is that the Government, in asserting its money claim, has consented as a matter of equity to the counterclaim. The trustee's recovery is limited to the amount of the Government's claim since the Government may not be considered to have consented to a counterclaim that results in an affirmative judgment against it.260

50. Corporate reorganizations and arrangements. Except for the chapters bearing upon ordinary bankruptcy, the only chapters of the Bankruptcy Act that impinge with frequency upon Navy procurement are Chapters X and XI. These chapters deal, respectively, with corporate reorganizations and arrangements. While ordinary bankruptcy seeks the liquidation and distribution of the bankrupt's assets to his creditors, Chapters X and XI seek the resuscitation of the debtor as a going concern. Speaking very broadly, Chapter X is employed by the corporation with numerous stockholders and bondholders among the general public, particularly if there is to be a revamping of the internal corporate structure; Chapter XI, by the smaller corporation or other business organization where little or no public interest is involved.

As in the case of ordinary bankruptcy, the thorniest problem raised by Chapters X and XI is that of the assumption or rejection of an executory contract.270 Under Chapters X and XI, the decision to assume or reject an executory contract is made, not by the trustee, receiver, or debtor in possession, though his recommendation is important, but by the judge or court in his or its discretion.271 This

208 In re Greenstreet, Inc., 209 F. 2d 660 (7th Cir. 1954). As an alternative theory, In re Kansas City Journal-Post Co., 144 F. 2d 791, 805-806 (8th Cir. 1944), suggested the proposition that a petition for reclamation, because it raises only the question of title to specific property, does not constitute a submission to the equitable jurisdiction of the bankruptcy court. This alternative theory, of course, is applicable to both private parties and the Government.

209 Bull v. United States, 295 U.S. 247 (1935); United States v. United States Fidelity and Guaranty Co., 309 U.S. 506 (1940). There is substantial authority, though the point is not free from doubt, that the subject matter of the counter-claim may be an independent transaction. See United States v. Roth, 164 F. 2d 575 (2d Cir. 1948). The effect of 28 U.S.C. § 2406 (1958) which requires prior disallowance by the General Accounting Office, on a trustee's counterclaim is discussed in 3 MOORE, FEDERAL PRACTICE 13.26 (2d ed. 1948).

270 For a detailed discussion of the treatment of executory contracts in corporate reorganization proceedings, see 6 COLLIER, BANKRUPTCY 3.23 (14th ed. 1956); in arrangement proceedings, 8 COLLIER, BANKRUPTCY ¶ 3.15 (14th ed. 1956).

27 The power of the judge to reject executory contracts in Chapter X proceedings is prescribed by the Bankruptcy Act, § 116(1), 52 Stat. 885 (1938), 11 U.S.C. § 516(1) (1958); the power of the court in Chapter XI proceedings, by the Bankruptcy Act, § 313(1), 52 Stat. 906 (1938), 11 U.S.C. § 713 (1) (1958). It should be noted that under section 116(1) this power can be exercised only by the judge before whom the reorganization proceedings are pending; under section 313(1), by the court as an entity, and thus by either the referee or the judge before whom the proceedings are pending.

decision is made in the light of what is deemed to be in the consequent advantage of the debtor's estate. In the case of Chapter X, "contracts in the public authority" may not be rejected.27 The term "contracts in the public authority" has not been judicially defined, but this exception seems to have been designed to cover contracts with a public agency where a public interest is involved, such as contracts to provide utility services or other essential public facilities. It is most probable that Navy supply contracts are not "contracts in the public authority" within the meaning of Chapter X.273

There is no prescribed period within which an executory contract must be assumed or rejected under Chapters X and XI. The settled rule is that the trustee, received, or debtor in possession shall recommend a course of action to the court within a reasonable time after approval of the petition for reorganization or arrangement. Alternatively, a period within which there will be an assumption or rejection is sometimes fixed by order of the judge or court. However, both assumption and rejection must be express, either by order of the judge or court or by the provisions of a confirmed plan of reorganization or arrangement, and upon notice to the other contracting party. Hence the failure of the judge or court to assume an executory contract within a reasonable or previously fixed time after approval of the petition for reorganization or arrangement does not constitute rejection. Accordingly, if there is such a failure, it is clearly incumbent upon Navy procurement officers to request, through counsel, that the court be petitioned to act. In this connection, it should be noted that denial of a petition for rejection does not constitute assumption, nor does it foreclose the possibility of future rejection. However, once assumed, a contract is thereafter binding on the debtor's estate, unless assigned to a third party.274 As in the

If the judge or court fails to act, the plan of reorganization or arrangement may provide for rejection. The Bankruptcy Act, § 216(4), 52 Stat. 896 (1938), 11 U.S.C. § 616(4) (1958); the Bankruptcy Act, § 357(2), 52 Stat. 910 (1938), 11 U.S.C. § 757(2) (1958). The plan, of course, is subject to approval and confirmation by the judge or court. The right to assume an executory contract may be implied from the express power to reject. Moreover, it should be remembered that the judge or court has the broad powers of an equity court, which includes the power to authorize the assumption of an executory contract. See 6 COLLIER, BANKRUPTCY | 3.23, note 39 (14th ed. 1956). See also In re Chase Commissary Corp., 11 F. Supp. 288 (S.D.N.Y. 1935).

272 Bankruptcy Act, § 116(1), 52 Stat. 885 (1938), 11 U.S.C. § 516(1) (1958). 973 See the discussion in 6 COLLIER, BANKRUPTCY ¶ 3.23 (9) (14th ed. 1956). 274 There is, however, one area of serious conflict as to the binding effect of an assumption of an executory contract by order of the judge or court. As stated in n. 271 supra, the Bankruptcy Act permits the rejection of an executory contract in a plan of reorganization or arrangement. One view holds that the prior order of the judge or court assuming an executory contract precludes later rejection in the plan; the other, that the authority to reject an executory contract in the plan is an affirmative grant of power that cannot be foreclosed by a prior order of the judge or court. See 6 COLLIER, BANKRUPTCY 3.24 (3)-(4) (14th ed. 1956), which discusses this problem and, more generally, the effect of an assumption of an executory contract. While this discussion is in the context of Chapter X, it is equally applicable to Chapter XI.