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Wednesday, January 23rd, 2013
Government Contractors and Bankruptcy: The Automatic Stay Applies to Government Agencies

“Property of the estate” and the “automatic stay” are two of the Bankruptcy Code’s quintessential concepts.  Upon the filing of a bankruptcy petition, the debtor’s property becomes part of the bankruptcy estate.  The concept of property of the estate under the Code is extremely broad, consisting of all legal or equitable interests of the debtor in property wherever located and by whomever held.  Most issues in bankruptcy begin with practioners asking the question: “Does this involve property of the estate?”

In order to accomplish the Bankruptcy Code’s goal of affording the honest but unfortunate debtor a “fresh start,” the filing of a bankruptcy petition also triggers the automatic stay provided for in § 362 of the Bankruptcy Code.  In general terms, the automatic stay prevents the commencement or continuation of most actions against the debtor or property of the debtor’s estate.  In all cases, actions taken in violation of the automatic stay are invalid and voidable.  In the case of individual debtors, the willful violation of the automatic stay by a creditor or other party may result in an award of actual damages, including costs and attorneys’ fees, and in some cases punitive damages.

Rightly, businesses facing financial distress are concerned with the effect of a bankruptcy filing on their ability to continue to do business with government customers.  Many fear that upon the government customer learning of the bankruptcy filing, the customer will attempt to terminate any contracts on the basis of either default due to the bankruptcy filing or more generally for convenience.  First, a debtor’s interest in a contract is undoubtedly an interest in property, making such contract property of the estate.  Second, the automatic stay specifically prevents any entity from exercising “control” over property of the estate.  As a result, the government may not unilaterally terminate a debtor’s contract simply upon the bankruptcy filing.

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