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Contractor's Bankrupt, so who do we pay

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We have a contractor that went bankrupt. days prior to bankruptcy an invoice was submitted for the previous month, but not the work done on the current month. Since they have went bankrupt, they have not invoiced for the remaining days? Do we pay the invoice and let DFAS handle it? Does the $ go to the debtors on the bankruptcy? what do we do about the days there was no invoice. The contract is now expired and we want to de-obligate funds and close out. Has anyone had this experience? 

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You pay the contractor.

The bankrupt contractor may continue to perform the contract.  However, if it abandoned its work, a default termination is in order.  Or, if the contractor completed all if it’s performance obligations, you wait for the final invoice and then pay it.

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If you haven't already see FAR Subpart 42.9-Bankruptcy and clause 52.242-13 for policy.  Also, as it states in the FAR and if you haven't already, you need to contact your legal office right away.

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On 11/5/2018 at 7:13 AM, policyguy said:

If you haven't already see FAR Subpart 42.9-Bankruptcy and clause 52.242-13 for policy.  Also, as it states in the FAR and if you haven't already, you need to contact your legal office right away.

 I agree that you should check with an agency attorney as soon as possible.

However  I did not see where FAR Subpart 42.9 –Bankruptcy and clause 52.242 –13 provide any policy guidance concerning progress or final payments to a firm in bankruptcy. 

 I recently did some pro bono home repair work for a couple who are in bankruptcy. I needed to obtain reimbursement for a plumber that we had to hire and for materials that I purchased to repair their flood damaged bathroom and hallway.  In their case, an attorney had been assigned [Edit:as the “Bankruptcy Trustee”] by the Bankruptcy Court to manage all of their financial income and make payments to creditors, including their mortgage company.  I had to provide a lot of documentation to the mortgage company holding their delinquent mortgage in order for them to release their homeowners insurance policy claim proceeds to the couple to reimburse the plumber and me. The checks were two party - for example, to the plumber and to the homeowner.

It’s been been a long time since I handled government contract administration with construction contractors working in Bankruptcy, so I don’t remember how we addressed payments to those firms. Where there were replacement firms hired by the Bonding Company (via Takeover Agreements, etc.) we paid them directly. 

Your government attorney should research and advise you on this matter.

EDIT:  to clarify,  under bankruptcy procedures, a firm’s creditors must be considered and protected to some extent when making payments. The government shouldn’t simply “pay the contractor” as advised above without checking for direction from the legal jurisdiction involved in the bankruptcy. There may likely be a “Bankruptcy Trustee” appointed by a Court to administer payment of proceeds to creditors.

There was in the case of the couple that I helped. The Trustee directed dual signature of the homeowner insurance adjustment check to the bank holding the Mortgage. The Mortgage company then dictated conditions for the homeowner to fulfill before they or their contractors could be reimbursed for repair costs. 

If you are a KO or delegated ACO and have been notified that your contractor has filed for some type of bankruptcy, you’d better find out if there are any legal conditions that would restrict direct payment to the contractor!! 

Edited by joel hoffman
Caution not to simply “pay the [bankrupt] contractor”

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Don’t be a bureaucrat who is more concerned with following standard procedures than determining the correct procedures for non-standard situations. The FAR is not a cookbook that contains recipes for every situation. 

Someone with a business degree or background should know something about bankruptcy or be able to consult with an attorney who knows or can dig for answers. 

Not (specifically) intended for the original poster.  You did ask. But I would verify the answers provided herein. 

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You pay the contractor.

The bankrupt contractor may continue to perform the contract.  However, if it abandoned its work, a default termination is in order.  Or, if the contractor completed all if it’s performance obligations, you wait for the final invoice and then pay it.

If the court has appointed an executor or trustee to receive payments, then the court (or the executor or trustee) will provide a notice of the assignment to the agency.

If it is a construction contract, and laborers or mechanics (or subcontractors representing them) make a claim, there are established procedures for that.  If there is a surety involved (for a performance bond), there are established procedures for that. 

But the original posting did not suggest any of these.

So, you pay the contractor.

Bankruptcy provides a firm with protection from creditors (accounts payable, firms or people to whom it owes money) -- bankruptcy does not provide any excuse to accounts receivable, firms or people who owe money to the firm.

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A bankruptcy might not discharge ALL debts, so one must determine if there are any restrictions on direct payment to the contractor first.  That’s all I am saying. Don’t pay until you find out if there is an assignment or requirement for dual party checks. 

 In my personal example, the employer of the family in bankruptcy had to send his paychecks to the trustee, who paid the family’s recurring bills such as the house payment, utilities, etc. The Trustee required that the insurance company send a two party check to the family. The other party was the  mortgage company, which held the check until all repairs were made to the home from flooding due to broken plumbing .  

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1 hour ago, joel hoffman said:

A bankruptcy might not discharge ALL debts...

But a bankruptcy does not discharge any income stream or accounts receivable.  The Government's payment owed to the contractor is not a debt that the bankruptcy court can discharge.

1 hour ago, joel hoffman said:

...so one must determine if there are any restrictions on direct payment to the contractor first...

I disagree.  If there are any restrictions on direct payment, someone (the trustee?) would have notified the agency with a legal document.  The contracting officer has no duty to go looking.  If there is such an order, but the trustee hasn't filed it with the agency, then the agency need not obey it -- the onus is on the trustee to make the notices to payors (and if there is such an order, the same order will order the contractor to turn over any funds it receives to the trustee).

Let's not make this harder than it has to be.  I cannot imagine a local practice before every payment of searching for bankruptcy trustee orders, but I understand that this is how many contracting offices work.  A contracting officer's job is hard enough with real requirements, so we don't need to add pretend burdens on contracting officers.

Riffen (original poster), Surely by now you have received advice from your legal counsel -- what was your answer?

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