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  • Question

    What steps should I take to closeout a contract of a contractor who went into bankruptcy? How do I verify the contractor filed bankruptcy?


    Answer

    According to DCMA's Guidegook, it offers the following guidance:
    The ACO should coordinate with counsel on any closeout action. The final contract price should be established at the amount previously paid to the contractor and any excess funds deobligated at the ACRN level.
     
    In accordance with FAR 42.9, when notified of bankruptcy proceedings, agencies must, as a minimum --
     

    • Furnish the notice of bankruptcy to Office of General Counsel and other appropriate agency offices (e.g., contracting, financial, property) and affected buying activities;
     
    • Determine the amount of the Government's potential claim against the contractor (in assessing this impact, identify and review any contracts that have not been closed out, including those physically completed or terminated);
     
    • Take actions necessary to protect the Government's financial interests and safeguard Government property; and

    • Furnish pertinent contract information to the Office of General Counsel representing the Government.
     
    If you discover that the contractor is bankrupt, contact the Office of General Counsel prior to taking any action in furtherance of contract closeout.  A thorough review of the contract and the status of bankruptcy are required. 
     
    Once a bankruptcy petition is filed, an automatic stay goes into effect.  This stay generally precludes any action to collect from the debtor or that would interfere with the debtor’s property interests.  Contracts can be considered property of the bankrupt estate. Contract closeout actions could interfere with this property interest and violate the stay.  Consequently, contract closeout actions should generally not be initiated without relief from the stay.  Violation of the stay can subject responsible parties to contempt citations.   DCMA legal offices have been successful in getting relief from stays by working with bankruptcy trustees. 
     
    Another reason for immediate coordination with the legal office is that any claim against the contractor must be filed with the court in the form of a Proof of Claim.  With the filing of a bankruptcy petition, the court usually will set a date by which the Proof of Claim must be filed (the Bar Date).  Potential claims against the contractor must be compiled and analyzed to determine whether a Proof of Claim is in the best interests of the Government and, if so, that information must be provided to DFAS.  DFAS has the responsibility for preparing the Proof of Claim and providing it to the cognizant U.S. Attorney for filing with the bankruptcy court.  If the Government doesn’t file a timely proof of claim (a form filed by DFAS establishing us as a creditor), we’re not going to get any money back.  If we missed deadline for filing proof of claim, send 1797 to DFAS seeking write-off (debt not collectible).
     

    • If the ACO sees a contractor going south financially – accelerate contract closeout efforts.
    • If the ACO would like to close out contracts after stay issued, contact trustee through counsel for relief from stay.
    • If contracts have been fully performed/paid, inform trustee that we intend to close contracts.
    • The ACO may be able to leave open just a few contracts by year/color of money & close the rest but consult Counsel before taking any action.

    Two types of Bankruptcy the ACO might encounter are:
     
    Chapter 7 – liquidation – non-exempt items sold by trustee; proceeds distributed to creditors or
    Chapter 11 – corporate debt reorganization in which reorganization plan must be approved by a majority of creditors.


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